AGNC Investment Corp. — Q2 2019 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2019. AGNC is an internally managed mortgage REIT investing primarily in leveraged Agency residential mortgage-backed securities (RMBS), funded mainly with repurchase agreements. It also holds credit risk transfer and non-Agency mortgage securities. Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
- Q2 earnings: Net loss was $444 million, or $0.85 per common share, versus net income of $293 million, or $0.70 per share, in Q2 2018. For the first half, net loss was $179 million, or $0.38 per share, versus income of $717 million, or $1.76 per share, in 2018.
- Interest income and spread: Q2 GAAP net interest income fell to $123 million from $177 million a year earlier, while interest expense rose to $570 million from $237 million. Management’s non-GAAP net interest spread, excluding catch-up premium amortization and including TBA and swap effects, was 1.00%, versus 1.35% in Q2 2018. Net spread and dollar roll income excluding catch-up amortization was $0.49 per common share, versus $0.63.
- Valuation and hedging: Q2 other gain (loss), net was a loss of $547 million, compared with a gain of $134 million a year earlier. Investment-security sale and fair-value gains contributed $132 million and $759 million, respectively; derivative and other-security losses were $1.438 billion. The quarter also included $940 million of net losses from interest-rate-swap termination fees and variation-margin settlements. Other comprehensive income was $379 million.
- Returns and dividends: Q2 economic return on tangible common equity was negative 0.9%, including dividends; first-half return was 6.4%. Tangible book value per common share was $16.58 at June 30, compared with $16.56 at year-end 2018. Common dividends declared were $0.50 per share in Q2 and $1.04 for the first half.
- Assets, leverage and capital: Investment securities at fair value were $93.3 billion, up from $84.3 billion at year-end; including net TBA positions, the reported investment portfolio was $104.4 billion. Total assets were $106.6 billion and stockholders’ equity was $10.3 billion. Repurchase agreements were $86.3 billion; tangible net book value “at risk” leverage was 9.8x, up from 9.0x at year-end. The portfolio was 98% Agency RMBS and TBAs by fair value.
- Liquidity and cash flow: Cash and cash equivalents were $870 million and restricted cash was $789 million at quarter-end. For the first half, operating cash flow was $564 million, investing cash flow was negative $10.8 billion, and financing cash flow was positive $10.4 billion; cash, cash equivalents and restricted cash increased by $139 million to $1.659 billion. Management reported $0.9 billion of unrestricted cash and approximately $4.4 billion of unpledged securities available for liquidity needs.
Material changes versus comparable periods
- Interest-rate declines and greater prepayment expectations lifted security values but also increased premium amortization costs and contributed to hedge losses. Q2 investment-security fair-value gains and OCI gains did not offset the reported derivative and other-security loss.
- Average investment portfolio size, including TBAs, increased 45% year over year in Q2. Repurchase-agreement funding rose from $75.7 billion at year-end to $85.1 billion excluding Treasury repo; its weighted-average rate declined from 2.79% to 2.64%.
- Forecast lifetime CPR rose to 12.4% from 7.9% at year-end; actual average CPR was 10.0% in Q2. Management said higher prepayments and funding costs contributed to sequential declines in net spread and dollar roll income per share.
- AGNC issued $227 million of Series D preferred stock and sold 11.4 million common shares through its at-the-market program for $190 million net proceeds during the first half. Common shares outstanding were 547.8 million at June 30, versus 536.3 million at year-end.
Outlook, management commentary, risks and contingencies
- No specific earnings or spread guidance was provided. Management said it generally expects leverage within 6x–12x tangible stockholders’ equity, subject to market conditions and its risk assessment.
- Management described weaker global growth, trade uncertainty and benign inflation as contributing to falling rates and expectations of monetary easing. It noted that the Federal Reserve cut its benchmark rate by 25 basis points on July 31, 2019, and announced changes to its balance-sheet runoff. Management emphasized specified-pool selection to manage prepayment exposure and said it had adjusted hedges, including adding shorter-term swaps and payer swaptions.
- Key exposures include interest-rate and yield-curve changes, mortgage-spread widening, faster or slower prepayments, extension risk, repo refinancing and margin calls, TBA settlement and liquidity, credit losses on CRT/non-Agency securities, and counterparty performance. The filing’s modeled June 30 sensitivity indicates a 10-basis-point spread widening could reduce tangible book value per share by about 5%; a 100-basis-point rate decline could reduce it by 11.7%. These are static-model estimates, not forecasts.
- AGNC disclosed a proposed settlement of stockholder derivative litigation providing for an aggregate $35.5 million payment to the Company on behalf of the defendants, subject to court approval and possible reduction for attorneys’ fees. A final approval hearing was set for October 15, 2019. The filing reported no material change to previously disclosed risk factors.
- After quarter-end, the board declared a $0.16 per-share monthly common dividend payable August 9, 2019, and authorized up to $1 billion of common-stock repurchases through December 31, 2020. Repurchases are intended only when the price is below management’s estimate of tangible book value per share. Management stated it believed liquidity was sufficient, while noting repo financing may not be renewable on favorable terms or at all.
Important facts for investors to verify
- Reconcile GAAP losses with non-GAAP spread and dollar roll income, and assess the effects of swap termination/variation-margin items and fair-value accounting.
- Track CPR assumptions, actual prepayments, premium amortization, and their effects on asset yields, book value and dividend capacity.
- Monitor leverage, repo maturities and counterparties, collateral haircuts, margin-call liquidity and TBA settlement obligations.
- Compare taxable income with declared distributions; first-half estimated taxable income available to common stockholders was $0.68 per share, subject to tax-return adjustments.
- Confirm court approval and final terms of the derivative-litigation settlement, and monitor execution of the post-quarter dividend and stock-repurchase authorization.