Business context and reporting period
AGNC Investment Corp. (the registrant was named American Capital Agency Corp. in this filing) filed an annual report for the year ended December 31, 2011. AGNC is an externally managed REIT that invests primarily, with substantial leverage, in agency mortgage-backed securities (MBS), funded mainly through short-term repurchase agreements. Its stated objectives are to preserve net asset value and generate returns for shareholders through quarterly dividends.
Key financial metrics
| Metric | FY 2011 / December 31, 2011 | FY 2010 / December 31, 2010 |
|---|---|---|
| Interest income | $1.109 billion | $253.0 million |
| Net interest income | $824.3 million | $177.0 million |
| Net income | $770.5 million; $5.02 per share | $288.1 million; $7.89 per share |
| Comprehensive income | $1.149 billion; $7.50 per share | $200.3 million; $5.49 per share |
| Net interest rate spread | 2.30% | 2.33% |
| Economic cost of funds | 1.00% (non-GAAP) | 1.11% (non-GAAP) |
| Investment portfolio, at fair value | $54.683 billion | $13.510 billion |
| Total assets | $57.972 billion | $14.476 billion |
| Repurchase agreements and other debt | $47.735 billion | $11.753 billion |
| Stockholders’ equity / NAV per share | $6.212 billion / $27.71 | $1.572 billion / $24.24 |
| Leverage | 7.6:1 average; 7.9:1 at year-end including unsettled trades | 8.0:1 average; 7.8:1 at year-end including unsettled trades |
| Dividends declared | $5.60 per share | $5.60 per share |
Operating cash flow was $1.016 billion; investing cash flow was negative $39.258 billion and financing cash flow was positive $39.436 billion. Year-end unrestricted cash was $1.367 billion, with $2.2 billion of unpledged agency securities available for liquidity after unsettled trades. The filing reports no conventional profit-margin measure.
Material changes versus the prior comparable period
- Portfolio fair value grew about fourfold, while total assets rose from $14.5 billion to $58.0 billion, supported by $4.09 billion of net proceeds from follow-on offerings and increased borrowings.
- Interest income and net income rose substantially, but basic and diluted earnings per share fell from $7.89 to $5.02 as the weighted-average share count increased from 36.5 million to 153.3 million.
- Average asset yield declined from 3.44% to 3.19%; average net interest spread edged down from 2.33% to 2.30%. Average cost of funds declined on the company’s non-GAAP measure.
- Net gains on MBS sales increased to $473.0 million from $92.0 million, while the company recorded a $446.6 million net loss on derivatives and other securities, compared with a $38.4 million gain in 2010.
- Comprehensive income increased, primarily reflecting $1.029 billion of unrealized MBS gains, partly offset by $650.2 million of unrealized derivative losses. NAV per share nevertheless increased to $27.71.
- The weighted-average expected MBS life fell from 5.7 years to 3.5 years. AGNC reported actual portfolio prepayments of 9% CPR for 2011, versus 19% in 2010, while its year-end projected life CPR assumption rose from 12% to 14%.
Outlook, management commentary, risks and unusual items
- Management described 2011 as volatile, citing historically low interest rates, the U.S. sovereign credit downgrade, Federal Reserve policy, European market turmoil and changes to the Home Affordable Refinance Program (HARP 2.0). It repositioned the portfolio toward lower-loan-balance and HARP securities to mitigate prepayment exposure; these represented about 65% of the portfolio at year-end.
- No formal earnings or dividend guidance was provided. The company expected to distribute remaining 2011 taxable income in 2012. Subsequent to year-end, the board declared a first-quarter 2012 dividend of $1.25 per share, payable April 27, 2012.
- AGNC discontinued hedge accounting for interest-rate swaps effective September 30, 2011, to increase financing flexibility. The change did not affect NAV, but changed where and when certain swap costs and fair-value movements were reported. At year-end, $690.8 million of deferred swap losses remained in accumulated OCI; $204.6 million was expected to be reclassified to interest expense over the next 12 months.
- Key risks include high leverage; short-term repo renewal and margin-call exposure; changes in funding costs, interest rates, MBS spreads and prepayments; hedge ineffectiveness and counterparty risk; and potential changes to Fannie Mae and Freddie Mac. The filing also identifies possible SIFI designation and related regulatory requirements as a risk.
- Interest-rate sensitivity estimates, based on a static portfolio and parallel yield-curve shocks, projected net interest income changes of -3.1% for a 100-basis-point increase and -13.2% for a 100-basis-point decrease. Estimated portfolio-value changes including derivatives were -0.9% and -0.8%, respectively; the filing cautions that actual results may differ and that the portfolio-value estimates exclude the amplifying effect of leverage on equity.
- AGNC reported no legal proceedings as of December 31, 2011 and no MBS other-than-temporary impairment charges in 2011, 2010 or 2009. The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether current earnings and dividends remain supported by net interest income as asset yields, funding costs and the net interest spread change.
- How prepayment speeds, HARP-related refinancing and the 14% projected CPR assumption affect premium amortization, asset yields and portfolio value.
- Repo maturity, haircuts, collateral and available liquidity, including the ability to meet margin calls and refinance borrowings under stressed market conditions.
- The current scale and valuation of derivative exposures, deferred swap losses, hedge performance and collateral requirements.
- Changes in NAV per share and share count, including the effects of future equity issuance and dividend policy.
- Any developments in GSE guarantees, REIT or Investment Company Act compliance, and possible SIFI designation.