AGNC Investment Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. AGNC is an internally managed mortgage REIT that primarily invests in leveraged Agency residential mortgage-backed securities (RMBS), funded mainly through repurchase agreements. It seeks returns through monthly dividends and tangible book-value growth.
Financial results and key metrics
| Metric | Q1 2018 | Comparable period / prior date |
|---|---|---|
| Interest income | $431 million | $296 million in Q1 2017 |
| Net interest income | $225 million | $198 million in Q1 2017 |
| Net income / income available to common | $424 million / $415 million | $76 million / $69 million in Q1 2017 |
| Basic and diluted EPS | $1.06 | $0.21 in Q1 2017 |
| Comprehensive income (loss) available to common | $(206) million | $115 million in Q1 2017 |
| Common dividend declared | $0.54 per share | $0.54 in Q1 2017 |
| Net interest margin, excluding catch-up premium amortization | 1.26% | 1.51% in Q1 2017; 1.36% in Q4 2017 |
| Total economic cost of funds | 1.68% | 1.23% in Q1 2017 |
| Investment portfolio, including TBAs, at fair value | $69.3 billion | $72.8 billion at December 31, 2017 |
| Total assets / total liabilities / stockholders’ equity | $69.2 billion / $60.9 billion / $8.3 billion | $70.4 billion / $61.6 billion / $8.8 billion at December 31, 2017 |
| Net book value / tangible net book value per common share | $20.03 / $18.63 | $21.09 / $19.69 at December 31, 2017 |
| At-risk leverage | 8.2x tangible equity | 8.1x at December 31, 2017 |
Cash provided by operating activities was $288 million, compared with $390 million in Q1 2017. Investing activities provided $1.287 billion and financing activities used $1.580 billion. Cash, cash equivalents and restricted cash totaled $1.358 billion at quarter-end, down $5 million during the quarter.
Repurchase agreements were $49.0 billion at March 31, with a weighted-average interest rate of 1.82% and 109 weighted-average days to maturity. Consolidated VIE debt was $336 million. The net TBA position, included in management’s mortgage-borrowing and leverage measures, was $13.5 billion at cost.
Material changes and management commentary
- Interest rates and spreads rose during the quarter: the 10-year Treasury yield increased 33 basis points, while Agency RMBS spreads widened by close to 10 basis points. Management identified wider Agency spreads as the primary driver of the quarter’s negative economic return.
- Economic return was negative 2.6%, reflecting a 5.4% decline in tangible book value and $0.54 of dividends declared per common share. Tangible book value per share fell to $18.63 from $19.69.
- Management increased its interest-rate hedge position to 103% of funding liabilities by quarter-end, from 97% of Agency repo, TBA positions and other debt at year-end, and increased the use of swaptions. Net duration gap was 0.5 years versus 0.1 years at year-end.
- Higher funding costs weighed on spread income: average total cost of funds rose to 1.68%, while average net interest margin declined to 1.26%. Net spread and dollar-roll income excluding catch-up premium amortization was $0.60 per diluted share, down from $0.64 in Q1 2017.
- The portfolio remained predominantly Agency RMBS: Agency securities and TBAs represented 99% of the portfolio, with 30-year and 15-year fixed-rate Agency RMBS representing 78% and 18%, respectively. Forecast lifetime CPR declined to 7.6% from 8.4% at year-end.
- GAAP net income should be read alongside the substantial valuation movements: investment securities recorded a combined $1.146 billion net loss across earnings and other comprehensive income, while derivative and other securities recorded a $738 million net gain. Unrealized available-for-sale losses drove much of the comprehensive loss; AGNC reported no OTTI charges for the quarter.
Outlook, risks and contingencies
Management said it continued to favor leveraged Agency RMBS and could view further meaningful spread widening as an opportunity to increase leverage. It stated that it expected leverage generally to remain within 6x–12x tangible equity, while noting that market conditions could lead to operation outside that range. No specific earnings or book-value guidance was provided.
Management reported $1.0 billion of unrestricted cash and approximately $3.5 billion of unpledged securities available for margin calls and other needs, and said it had met all margin requirements. It nevertheless cautioned that repo renewal, collateral haircuts, asset-price declines, margin calls and TBA settlements could pressure liquidity. At March 31, approximately 90% of fixed-rate Agency RMBS was eligible for TBA delivery; the company also had a $13.6 billion net long TBA position.
Interest-rate sensitivity estimates, assuming a static portfolio, indicated tangible net asset value declines of 3.9% for a 50-basis-point rate increase and 9.8% for a 100-basis-point increase. A 10-basis-point widening in MBS spreads was estimated to reduce tangible net asset value by 5.4%; a 25-basis-point widening by 13.4%. Management cautioned that models and assumptions may not predict actual results. Risks include rate, prepayment, extension, spread, liquidity and credit risk, as well as counterparty and financing risks.
Three stockholder derivative lawsuits remain pending; AGNC said it believes the claims lack merit and had not accrued a loss contingency. The filing reported no material changes to previously disclosed risk factors. Subsequent to quarter-end, AGNC declared a $0.18 monthly common dividend payable May 9, 2018. On May 2, AGNC amended its MTGE management agreement in connection with MTGE’s proposed acquisition by Annaly; the expected third-quarter closing was subject to customary conditions. AGNC expected to manage MTGE through closing and a short transition and would receive a $41.7 million termination fee in addition to regular management fees.
Important facts for investors to verify
- How the quarter’s fair-value losses, derivative gains and hedge settlements reconcile to GAAP income, comprehensive loss and the reported decline in tangible book value.
- Whether funding-cost increases, repo renewal terms, collateral haircuts and margin requirements affect liquidity or the ability to sustain the common dividend.
- Whether hedge coverage and sensitivity estimates remain effective as rates, mortgage spreads and prepayment speeds change; the disclosed sensitivities assume a static portfolio.
- Whether the proposed MTGE transaction closes as expected and the $41.7 million termination fee and transition arrangements are realized as described.
- Developments in the stockholder derivative lawsuits and any changes to reported contingencies or risk factors.