AGNC's book value drops 17% as a Treasury sell-off hits mortgage bonds

AGNC Investment Corp.'s tangible net book value fell 16.9% in the third quarter to $7.13 a share, the mortgage REIT said on Monday, Oct. 19, as a jump in Treasury yields cut the value of the government-guaranteed mortgage bonds it owns by more than its hedges made up for.

What AGNC reported

AGNC Investment Corp. is a mortgage real estate investment trust that borrows to buy home-loan bonds guaranteed against credit losses by Fannie Mae, Freddie Mac or Ginnie Mae. In results for the quarter ended Sept. 30, released after the market closed on Monday, it reported tangible net book value of $7.13 a share, down $1.45, or 16.9%, from $8.58 at the end of June.

Book value is a central measure for a mortgage REIT, whose assets are mostly bonds valued at market prices. It is roughly what the company's bonds and hedges are worth, minus what it owes, for each share; the tangible version also leaves out goodwill and the claims of preferred shareholders. At $7.13, AGNC's book value was also about 14% below the $8.28 it reported a year earlier.

Counting the 36 cents a share it paid in dividends, AGNC's economic return for the quarter was negative 12.7%, compared with a positive 6.7% in the second quarter. The company posted a net loss of $1.36 billion, or $1.17 a share, against net income of $806 million a year earlier. Including other losses recorded directly in equity, the comprehensive loss was $1.28 a share.

Why mortgage bonds fell

AGNC's results track the bond market. The 10-year Treasury yield rose from 4.44% on June 30 to 5.29% on Sept. 30, according to Treasury Department data, and bond prices fall when yields rise. Chief Executive Peter Federico said pressure built "particularly in the final weeks of September, as fixed income investor sentiment turned decidedly bearish, interest rates increased sharply, and interest rate volatility spiked." He said Agency mortgage bonds were the worst-performing sector of the Bloomberg U.S. Aggregate Bond Index during the quarter.

AGNC recorded $5.02 billion of unrealized losses on securities it marks to market through earnings. Its hedges offset part of that: interest-rate swaps produced $2.05 billion of net gains and Treasury positions another $1.23 billion. Together, those hedge gains of about $3.28 billion covered roughly two-thirds of the securities losses.

Income held up, leverage rose

The trust's main income measure, net spread and dollar roll income, was 37 cents a share, down from 40 cents in the second quarter. That still covered the monthly dividend of 12 cents a share, or 36 cents for the quarter. The net interest spread narrowed to 1.86% from 2%, while the combined cost of funds rose to 3.09% from 2.89%.

Leverage also rose. AGNC's "at risk" leverage rose to 7.9 times tangible book value at the end of September from 7.4 times at the end of June. The company said it held $6.3 billion of unencumbered cash and Agency mortgage bonds, equal to 57% of its tangible equity, and that its hedges covered 90% of its funding liabilities, up from 73%.

AGNC also sold 97.6 million new shares through its at-the-market program during the quarter for net proceeds of $992 million, or about $10.16 a share after costs by TickerGrove's calculation, well above the $7.13 book value at quarter-end. Chief Financial Officer Bernice Bell said the company used heavy trading after AGNC was added to the S&P MidCap 400 index to issue stock "at a significant premium to tangible net book value per common share." The share count rose to about 1.26 billion from 1.16 billion at the end of June.

How the stock traded

AGNC shares fell 3.2% in Monday's regular session, before the results came out, to close at $8.44, according to Yahoo Finance data. They touched $8.39 during the day, their lowest level in at least a year, and were at about $8.32 in after-hours trading at 7:45 p.m. ET.

Even after the drop, the stock closed about 18% above the new book value of $7.13. The 12-cent monthly dividend works out to $1.44 a year, or about 17% of Monday's closing price.

What management sees ahead

Federico said Agency mortgage bonds look more attractive at current prices, with mortgage spreads to benchmark rates "approaching the upper end of their multi-year trading range." He also said prepayment risk has fallen because higher rates leave fewer homeowners with a reason to refinance, and that low mortgage originations have kept supply and demand in balance. AGNC holds its stockholder call at 8:30 a.m. ET on Tuesday, Oct. 20.