AGNC Investment Corp. annual report, FY2019

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AGNC Investment Corp. — FY2019 Form 10-K

Reporting period: Year ended December 31, 2019. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. AGNC is an internally managed mortgage REIT that primarily invests in leveraged Agency residential mortgage-backed securities (RMBS), funded mainly through repurchase agreements. It targets risk-adjusted returns through monthly dividends and tangible book-value growth.

Financial results and position

  • Full-year earnings: Net interest income was $693 million, down from $776 million in 2018. Net income was $688 million, compared with $129 million; diluted EPS was $1.16 versus $0.21. Net income available to common stockholders was $628 million.
  • Sources of reported income: Net investment-security gains were $3.442 billion, including $2.014 billion of unrealized gains through net income and $1.040 billion of unrealized gains through other comprehensive income. These gains were partly offset by a $2.324 billion net loss on derivatives and other securities. Comprehensive income was $1.728 billion, versus a $469 million loss in 2018.
  • Spread earnings and margins: Net spread and dollar-roll income was $1.97 per common share, versus $2.40 in 2018; excluding catch-up premium amortization, it was $2.16 versus $2.35. Net interest spread, excluding catch-up amortization and including TBA activity and swaps, was 1.18%, down from 1.27%. GAAP net interest margin is not separately stated in the filing text.
  • Cash flow: Operating activities provided $1.180 billion; investing activities used $14.218 billion; financing activities provided $12.800 billion. Cash, cash equivalents and restricted cash totaled $1.282 billion at year-end. These cash flows reflect substantial investment purchases and financing turnover.
  • Balance sheet and leverage: Total assets were $113.082 billion, including $100.442 billion of investment securities at fair value; total liabilities were $102.041 billion and stockholders’ equity was $11.041 billion. Repurchase agreements and other debt were $89.410 billion on the selected-data basis. Tangible net book value per common share was $17.66, up from $16.56; net book value per common share was $18.63, versus $17.54. Year-end tangible net book value “at risk” leverage was 9.4x, up from 9.0x; the annual average was 9.7x.
  • Liquidity and funding: Year-end unrestricted cash was $0.8 billion and unpledged securities were approximately $4.8 billion. Repo borrowings used to fund investments were $89.1 billion, with a 2.17% weighted-average rate and 55 days’ weighted-average remaining maturity. The weighted-average collateral haircut was about 4.4%; 38% of repo funding was sourced through FICC. Management stated it believed liquidity and capital resources were adequate.
  • Dividends and capital: Common dividends declared were $2.00 per share for 2019, down from $2.16 in 2018. AGNC issued $190 million of common stock through its at-the-market program and repurchased 6.9 million shares for $103 million. Preferred stock had a $963 million aggregate liquidation preference at year-end.

Changes, management commentary and outlook

  • Long-term rates fell during 2019: the 10-year Treasury yield ended at 1.92%, versus 2.68% at the end of 2018. The Fed cut rates three times and added liquidity to funding markets after September repo-market disruption.
  • Management reported an 18.7% tangible economic return for 2019, comprising a $1.10 increase in tangible book value per common share and $2.00 of dividends. It attributed performance to specified-pool selection and hedge repositioning.
  • Interest income rose to $2.842 billion from $1.949 billion, but interest expense increased to $2.149 billion from $1.173 billion. Average investment portfolio size expanded, while higher funding costs and premium amortization pressured spread income. Actual portfolio CPR averaged 11.4%, versus 8.7% in 2018; year-end projected CPR was 10.8%, versus 7.9%.
  • Management expected repo funding to return to more normal levels relative to the federal funds rate in 2020, citing Fed liquidity measures. The filing does not provide quantified earnings, dividend, leverage or book-value guidance.
  • Principal risks: High leverage and short-term repo reliance expose AGNC to refinancing, collateral and margin-call risk. Other material risks include mortgage-spread widening (which hedges generally do not cover), interest-rate and prepayment/extension volatility, hedge-model uncertainty, counterparty exposure, credit losses on non-Agency/CRT investments, and changes to GSE support or REIT and Investment Company Act qualification. The filing’s modeled sensitivity estimates a 14.8% decline in tangible net book value per common share for an instantaneous 100-basis-point rate increase, and a 14.0% decline for a 25-basis-point spread widening; these are static-portfolio estimates, not forecasts.
  • Unusual and subsequent items: AGNC redeemed its Series B preferred stock for $175 million in November 2019 and issued Series D and E preferred stock during 2019. After year-end, it issued $575 million of Series F preferred stock (net proceeds $557 million) and declared monthly common dividends of $0.16 per share. A derivative lawsuit settlement became final; AGNC received approximately $25.6 million in February 2020, and plaintiff attorneys were awarded approximately $9.8 million in fees.

Important facts for investors to verify

  • Reconcile GAAP earnings and cash flows with the non-GAAP spread and dollar-roll measures, especially the impact of fair-value movements and hedge results.
  • Review repo maturity, FICC funding concentration, collateral haircuts, and available liquidity against the 9.4x year-end at-risk leverage.
  • Assess whether falling or rising rates, prepayment speeds, and mortgage-spread movements could materially change asset yields, book value, and dividend capacity.
  • Confirm the sustainability of the $0.16 monthly common dividend against estimated taxable income, REIT distribution requirements, and preferred-dividend obligations.
  • Review the assumptions behind the filing’s modeled rate and spread sensitivities and the accounting estimates for mortgage prepayments and premium amortization.