AGNC Investment Corp. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; balance-sheet comparisons are with December 31, 2016. AGNC is an internally managed mortgage REIT investing primarily in leveraged Agency residential mortgage-backed securities (RMBS), funded mainly through repurchase agreements. Figures are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial results and position
| Metric | Q2 / June 30, 2017 | Prior comparable / December 31, 2016 |
|---|---|---|
| Interest income | $293 million | $318 million in Q2 2016 |
| Net interest income | $181 million | $217 million in Q2 2016 |
| Net income (loss) | $24 million; $0.05 per common share | $(135) million; $(0.43) per share in Q2 2016 |
| Comprehensive income | $145 million | $247 million in Q2 2016 |
| Dividends declared per common share | $0.54 | $0.60 in Q2 2016 |
| Assets / liabilities | $56.7 billion / $49.0 billion | $56.9 billion / $49.5 billion at Dec. 31, 2016 |
| Common-stockholder NAV per share | $20.80; tangible NAV $19.25 | $21.17; tangible NAV $19.50 at Dec. 31, 2016 |
| Investment portfolio | $46.6 billion securities at fair value; $17.3 billion net long TBA position | $46.5 billion securities; $11.2 billion net long TBA position at Dec. 31, 2016 |
| Borrowings and leverage | $39.1 billion repo; $0.4 billion consolidated VIE debt; tangible “at risk” leverage 8.1x | $37.9 billion repo and $3.0 billion FHLB advances at Dec. 31, 2016; tangible “at risk” leverage 7.7x |
For the six months, net income was $100 million versus a $907 million loss in 2016; net income available to common stockholders was $86 million versus a $921 million loss. Net interest income was $379 million versus $413 million. AGNC reported $437 million of six-month net spread and dollar roll income, a non-GAAP measure, or $1.25 per common share; excluding estimated “catch-up” premium amortization, it was $445 million, or $1.31 per share. These measures include TBA dollar-roll income and swap costs and are not GAAP earnings.
Six-month cash flow: $679 million provided by operating activities, $958 million provided by investing activities and $1.723 billion used in financing activities; cash and cash equivalents ended at $1.122 billion. At June 30, unrestricted cash was $1.1 billion and management reported approximately $2.8 billion of unpledged securities available for liquidity needs. Repo weighted-average funding cost was 1.27%, up from 0.98% at year-end; weighted-average remaining maturity was 154 days.
Material changes and management commentary
- Q2 returned to GAAP profitability compared with a loss in Q2 2016, while interest income and net interest income declined. For the first half, GAAP net income also improved substantially from the prior-year loss.
- Management attributed lower interest income mainly to a smaller average investment portfolio, partly offset by higher asset yield. Average asset yield was 2.66% in Q2 2017 versus 2.46% a year earlier; Q2 net premium amortization was $96 million versus $134 million.
- Management internalized operations in July 2016. Q2 2017 operating expenses were $16 million versus $40 million in Q2 2016, which included $25 million of management fees. The company now incurs internal compensation and operating costs.
- During the first half, the Fed raised its policy rate by 50 basis points. AGNC said Agency RMBS modestly underperformed its hedges; tangible NAV per share fell 1.3% from year-end. Six-month economic return on tangible common equity, including dividends, was 4.3%.
- The portfolio remained predominantly Agency exposure. CRT securities increased to $572 million from $164 million at year-end; these and other non-Agency assets carry credit risk not covered by Agency guarantees. AGNC issued 24.5 million common shares in May for net proceeds of $503 million.
Outlook, risks and contingencies
- Management said it expected to maintain a high interest-rate hedge ratio over the near to intermediate term. Hedges equaled 98% of funding liabilities and the net TBA position at quarter-end; net duration gap was 0.4 years. Management described a general leverage range of six to eleven times tangible equity, subject to market conditions; quarter-end tangible “at risk” leverage was 8.1x.
- Management anticipated Fed balance-sheet reduction, including reduced reinvestment of Agency RMBS proceeds, beginning in the second half of 2017. It said further spread widening could reduce NAV, while expressing the view that the market had largely priced in reduced Fed support. This is management’s assessment, not a guarantee.
- Interest-rate sensitivity estimates for a static portfolio showed tangible NAV down 3.5% under an instantaneous +50-basis-point rate shock and down 9.2% under +100 basis points. A 25-basis-point widening in mortgage spreads was estimated to reduce tangible NAV by 12.3%. The filing cautions that actual results may differ materially and spread risk is generally not hedged.
- Key exposures include short-term repo rollover and margin-call risk, collateral haircuts, liquidity demands from TBA settlement, mortgage prepayment and extension risk, spread changes, leverage, and credit/counterparty risk. AGNC said it had met margin requirements at quarter-end and believed available liquidity was adequate, but financing availability and terms are not assured.
- AGNC intends to distribute 100% of taxable income, subject to applicable limits; REIT status requires distribution of at least 90% of taxable income. Estimated first-half taxable income available to common stockholders was $76 million, or $0.22 per share, below GAAP earnings measures in some respects and subject to adjustment.
- The board declared a subsequent monthly common dividend of $0.18 per share on July 13, payable August 7, 2017. Two stockholder derivative lawsuits related to former management-agreement renewals and management internalization were disclosed; the company said it believed they lacked merit and accrued no liability.
Most important facts for investors to verify
- Reconcile GAAP earnings and dividend coverage with non-GAAP net spread and dollar roll income, taxable income estimates, and the effects of premium amortization and TBA transactions.
- Track common and tangible NAV per share, share issuance, dividends, and tangible “at risk” leverage; confirm the leverage definition includes net TBA exposure.
- Monitor repo funding costs, maturities, collateral haircuts, margin requirements, liquidity resources, and the company’s reliance on continued access to short-term financing.
- Assess exposure to mortgage-spread widening, interest-rate shocks, prepayment/extension changes, Fed balance-sheet policy, and the effectiveness and cost of hedges.
- Review the credit quality and performance of CRT and non-Agency holdings, litigation developments, and subsequent dividend declarations.