Business context and reporting period
AGNC Investment Corp. filed this unaudited Form 10-Q for the quarter ended September 30, 2023. It is an internally managed mortgage REIT investing primarily in leveraged Agency residential mortgage-backed securities (RMBS), funded mainly with short-term repurchase agreements. Its returns depend on asset yields, financing and hedge costs, and changes in mortgage-security values.
Financial and operating metrics
| Metric | Q3 2023 / September 30, 2023 | Comparison |
|---|---|---|
| Interest income; interest expense | $593 million; $646 million | Q3 2022: $373 million; $196 million |
| Net interest income | $(53) million | Q3 2022: $177 million |
| Net loss; loss per common share | $(392) million; $(0.68) | Q3 2022: $(666) million; $(1.31) |
| Comprehensive loss attributable to common stockholders | $(636) million | Q3 2022: $(1.064) billion |
| Common dividend declared | $0.36 per share | Unchanged from Q3 2022 |
| Investment portfolio | $59.3 billion | $59.5 billion at December 31, 2022 |
| Repurchase agreements; total liabilities | $52.1 billion; $62.5 billion | Repo: $36.3 billion at December 31, 2022 |
| Stockholders’ equity; tangible book value per common share | $7.45 billion; $8.08 | $7.87 billion; $9.84 at December 31, 2022 |
| Net book value per common share | $8.89 | $10.76 at December 31, 2022 |
For the first nine months of 2023, net loss was $257 million and loss available to common stockholders was $349 million, versus losses of $1.751 billion and $1.827 billion, respectively, in the prior-year period. Net cash used in operating activities was $87 million; investing activities used $16.172 billion and financing activities provided $15.807 billion. Cash, cash equivalents and restricted cash ended the period at $1.882 billion.
Management’s non-GAAP net spread and dollar roll income, excluding “catch-up” premium amortization, was $0.65 per common share in Q3, down from $0.84 a year earlier. The corresponding net interest spread was 3.03%, compared with 2.97%. These non-GAAP measures are supplementary and are not substitutes for GAAP results.
Material changes and management commentary
- Higher short-term rates drove up financing costs: Q3 GAAP interest expense rose to $646 million from $196 million a year earlier. The weighted-average repo rate was 5.47% at quarter-end, versus 4.31% at December 2022.
- Management cited a sharp rise in rates and volatility, wider Agency RMBS spreads, increased Treasury issuance, restrictive monetary policy and geopolitical risks. During Q3, 10-year Treasury yields rose 73 basis points, and Agency RMBS spreads widened approximately 20–25 basis points across most coupons.
- The company reported a Q3 economic loss of 10.1%, including $0.36 of dividends declared and a $1.31 decline in tangible net book value per common share. Agency-security fair-value losses and realized sale losses were partly offset by gains on derivatives and other investments.
- The portfolio shifted toward higher coupons; the weighted-average coupon on fixed-rate Agency RMBS and TBAs increased to 4.71% from 4.42% at June 30. Net TBA exposure fell to $2.4 billion from $10.3 billion at June 30, as AGNC favored specified pools.
- Quarter-end “at-risk” leverage was 7.9x tangible equity, up from 7.2x at June 30. The hedge portfolio was $63.2 billion, or 116% of funding liabilities; the estimated duration gap narrowed to 0.2 years from 0.4 years.
- Unencumbered assets were approximately $3.7 billion, or 53% of tangible equity, including $3.6 billion of cash and Agency RMBS. AGNC said it met all margin requirements and believed liquidity and capital were sufficient. Repo haircuts averaged approximately 3.7%.
Outlook, risks and unusual items
Management gave no specific earnings or financial guidance. It cautioned that elevated interest-rate and spread volatility could hurt near-term results, while expressing a favorable longer-term view of Agency RMBS and citing the depth and liquidity of repo financing. It believes current spreads may support attractive earnings, with potential book-value appreciation if spreads tighten.
Key risks include spread widening, rising or volatile rates, extension and prepayment risk, hedge effectiveness, margin calls, short-term funding renewal and counterparty performance. AGNC’s modeled sensitivity at September 30 estimated that a 25-basis-point spread widening would reduce tangible book value per common share by 5.9%; a 50-basis-point widening by 29.7%. These are model estimates assuming a static portfolio and no interest-rate changes, not forecasts.
During Q3, AGNC issued 44.7 million common shares through its at-the-market program for net proceeds of $432 million. In October, it established a new ATM program authorizing up to $1.25 billion of common-stock sales through December 31, 2024. The filing reports no material change to previously disclosed risk factors, no material litigation, and effective disclosure controls.
Important facts for investors to verify
- How higher repo rates and other funding costs affect future GAAP earnings and the non-GAAP spread-and-dollar-roll measure.
- Whether Agency RMBS spreads stabilize or widen further, and the resulting impact on tangible book value and collateral requirements.
- Whether the hedge portfolio continues to offset rate risk as asset duration and prepayment assumptions change.
- Repo renewal, haircut and counterparty conditions, including AGNC’s liquidity available to meet potential margin calls.
- Share issuance under the new ATM program, including its effect on per-share book value and existing shareholders.
- Dividend sustainability relative to taxable income, cash needs and the REIT distribution requirement.