AGNC Investment Corp. Q4 FY2024 earnings call

• Favorable investment themes in 2024 continued to support the outlook for agency mortgage-backed securities. The Fed shifted to a more accommodative stance, leading to eased interest rate volatility and a steepened yield curve. In 2025, supply and demand for agency MBS is well balanced, and agency spreads are expected to remain in an attractive trading range.
• AGNC generated a positive economic return of 13.2% in 2024. In the fourth quarter, there was a comprehensive loss of $0.11 per common share due to higher interest rates and modestly wider spreads.
• The company opportunistically raised $511 million of common stock through an at-the-market offering program in the fourth quarter, with total accretive common equity issuance for the year at approximately $2 billion.
• Average and ending leverage for the fourth quarter was unchanged at 7.2 times tangible equity. Unencumbered cash and agency MBS made up 66% of tangible equity at quarter end.
• In the fourth quarter, the investment portfolio totaled $73.3 billion as of December 31st, with asset growth concentrated later in the quarter. The portfolio composition shifted to higher coupons, reducing holdings in 4.5s and lower coupons while adding to higher coupons.
• The non-agency securities portfolio ended the quarter at $884 million, down slightly from the previous quarter. Approximately $12 billion in longer-term mostly treasury-based hedges were added during the quarter, increasing the hedge ratio to funding liabilities to 91%.

For the fourth quarter, AGNC had a comprehensive loss of $0.11 per common share. Economic return on tangible common equity was negative 0.6% for the quarter, composed of $0.36 of dividends declared per common share and a $0.41 decline in tangible net book value per share. For the full year, economic return was a positive 13.2%, driven by a monthly dividend totaling $1.44 per common share and a $0.29 decline in tangible net book value per share. In the fourth quarter, AGNC opportunistically raised $511 million of common stock through its at-the-market offering program. Total issuance of accretive common equity for the year was approximately $2 billion. Average and ending leverage for the fourth quarter was unchanged at 7.2 times tangible equity. As of late last week, tangible net book value per common share was up about 1% for January or largely unchanged after deducting the monthly dividend accrual. Net spread and dollar roll income declined by $0.06 to $0.37 per common share in the fourth quarter due to a 30 basis point narrowing of the net interest rate spread. The average projected life CPR for the portfolio at quarter end decreased to 7.7% from 13.2% at the end of the third quarter, with actual CPRs averaging 9.6% up from 7.3% in the third quarter. Unencumbered cash and agency MBS were $6.1 billion or 66% of tangible equity at the end of the quarter.

• The outlook for agency mortgage-backed securities in 2025 is very favorable. The supply and demand outlook for agency MBS is well balanced with upside demand possible.
• The current monetary policy stance provides a positive underlying investment foundation for high quality fixed income instruments like agency mortgage-backed securities, particularly at current valuation levels.
• Agency spreads are expected to remain in their current attractive trading range, creating a favorable investment backdrop for AGNC in 2025.

• Uncertainty in the Fed's monetary policy path.
• Concerns regarding fiscal policy, deficit spending, and the magnitude of future treasury issuance due to the US presidential election.
• Interest rate volatility, which could impact agency spreads.
• Uncertainty surrounding the future structure of the GSEs and the government's involvement in the housing finance system.
• Potential volatility in the repo market, which could affect funding costs and mortgage spreads.

Q: Hey, everyone. Good morning. Actually I wanted to ask first just ask first about equity issuance. Can you just talk about the potential magnitude of equity issuance this year? If spreads are similar, your book value premium remains the way it is and just thoughts on, is there a level of balance sheet where it gets too big or just conceptually how you're thinking about that?

A: Sure. Appreciate the call, the question, Bose. Yes, as you know, we were active using our ATM this last quarter and I'll start with talking about the approach this last quarter and how it is a little bit different than some of our previous quarters because I think it's informative to your question. In this last quarter, for example, the opportunity, the attractiveness of the equity issuance was more pronounced early in the quarter, whereas mortgages were more attractive later in the quarter. I point that out because it differs a little bit from the previous quarters where we were very active in raising capital and deploying those proceeds almost simultaneously. This quarter, we took a more opportunistic approach in that the capital raises were done early in the quarter. And as Chris mentioned, some of our capital deployment was at more gradual pace later in the quarter. It was one of the reasons why there's a little bit of a negative impact from a net spread and dollar roll income. But we'll continue to approach the capital issuance and our capital management from the perspective of doing it opportunistically. Obviously, we look at the accretion benefit and book value benefit. You look back over the course of the year, it was all of our capital raises really were significant contributors to book value for our existing shareholders, and deploying those proceeds, as you say, in this market is really attractive. You look at where mortgage spreads are today ranging from 150 basis points to 170 basis points depending on hedge mix and so forth. You're talking about attractive ROEs, particularly now that we've gone through some of the uncertainty of the fourth quarter. The last point I'll make is that obviously from, you look at AGNC scale today, we are really comfortable with our scale and operating efficiency. Really happy with that. Our operating costs are still, I think, the lowest in the industry. I expect them to remain in that 1% to 1.25% range. The liquidity of our stock is outstanding, gives shareholders the great opportunity to enter our space in a very liquid easy way. So there's no need to grow for the sake of growing, I guess, is my final point. We'll do so when we believe that it is in the benefit of our existing shareholders and approach that activity throughout the remainder, throughout this year, just like we do every other year and do so very opportunistically. I'll pause there.

Q: Good morning, Peter. I was hoping you could talk about your dividend outlook. I know you just mentioned that you don't view EAD as representative, but kind of how you are seeing the economics of the mark-to-market returns and how that compares to kind of the current dividend level?

A: Sure. Well, the first thing we look at from a dividend perspective is what is the total cost of capital hurdle rate, if you will, versus our expected return at current valuation levels of the portfolio. When you think about the total cost of capital, I think that's really critical as you think about what is the cost to run our business to pay our common dividends, to pay our preferred stock dividends, and our operating expenses as the numerator in that equation. The denominator is our total capital base, which is about $9.2 billion. If you look at our actual expenses in the fourth quarter and annualize those versus our capital base, it would tell you that our hurdle rate is around 16.5%, maybe 16.7% to be precise. And the question is, what do we compare that to? And the relevant comparison is what is our expected, if you will, gross ROE at current valuation levels. Using a combination of spreads because they're obviously always changing as a single point instead. But I use a blended spread, that is a blend between treasury-based hedges and swap-based hedges. And I'll give you three points in time 150 basis points, 160 basis points and 170 basis points. They sort of have the range of, those are spreads that I think are indicative of today's valuations. And those would translate to gross ROEs of somewhere between 17% and 18.5%. So, said another way, if we were to deploy capital today and we would expect to earn spreads in that range or ROEs on a go-forward basis of somewhere between 17% and 18.5%. And that aligns very well with our total cost of capital and that's one of the reasons why, in looking at it that way, we've been able to maintain our current dividend. So I think we're going out about 58 months. So that's the way we look at it and I think it's still well aligned at today's valuations.

Q: Thank you. Good morning, everyone. Just first on the hedge ratio and hedges continuing the recent conversation, but you decreased the hedge ratio meaningfully in the third quarter, but increased it to 91% in the fourth quarter. So one just curious when you added more hedges in the quarter, was it leading up to the election? And then just thoughts and views on the hedge ratio today and outlook going into or kind of continuing through 2025, also with your view of lower ball expected. Thanks.

A: Yes, thank you for the question. We did increase obviously fairly significantly back to 91% from 72%. But it goes back to the question that I just answered as a starting point, which is that we obviously expected more interest rate volatility as we went into the presidential election. And clearly there was a lot of uncertainty and still is about fiscal policy and tariffs and what that might mean for monetary policy and what that might mean for treasury issuance. But we had an 80 basis point move higher in the 10-year treasury in the fourth quarter. And the reason why we were so active in rebalancing and kept our duration gap essentially unchanged quarter-over-quarter, 0.2% to 0.3% and that's not always the case with respect to our delta hedging and our rebalancing, but we were so active in doing so this quarter because we didn't expect rates to whipsaw back the other way. From our perspective right now, the backup in rates particularly in the 10-year moving up to the 4.5% to 4.3% quarter range appears to be sort of a better valuation for that part of the curve, given all of the uncertainty about the strength of the economy and potential sources of inflation or deflation as it may be. But we felt like being active in delta hedging was really important because we don't expect rates to drop materially from here. We expect long-term rates to remain stable. So therefore, we did add a lot of hedges and we did so, particularly by adding mostly, in fact, almost exclusively treasury-based hedges because of our uncertainty about what swap spreads would do during the quarter. So over time, we may rotate out of those. As Chris indicated, that likely will be the case. But that's why we were so active in rebalancing and keeping our duration gap lows because we didn't want -- we didn't expect rates to whipsaw back.

Q: Hey, thanks. Good morning, guys. If we tease apart the projection for prepayment speeds, can you maybe share roughly what mortgage rate you were assuming in that projection and how you might and how it's maybe changed in the start of the year? And then how you might compare or characterize the reinvestment risk that you face with prepays and spreads at these levels versus once speeds have been faster.

A: Yes. So the -- our CPR projections are simply based off of the spot, the forward curve as of the end of the year. Just more generally speaking, with respect to prepayment risk, I'd say the fourth quarter was probably the most interesting set of reports that we've had since COVID. October and November, in particular, mortgage rates approached basically hit 6% in September. We had a pretty sizable portion of the float and higher coupons that had an incentive to refinance and speeds were very fast in October and exceeded most model expectations. But with the sharp selloff in rates, November speeds then came in materially slower under most model expectations. And so it's likely October speeds were impacted by very high pull-through rates. But I'd say even still, net-net, when you look at the two months together, the response was the steepest we've had really since COVID. And so into a sustained rally, we're certainly not betting on a benign prepayment response. It's clear lenders are going to be very aggressive soliciting easy-to-refi borrowers. But again, prepayment risk is very manageable through asset selection and diversification. And asset selection doesn't mean just owning the highest-quality pools with the most prepayment protection. In fact, it often doesn't depending on where pay-ups are valued. It's very impactful to just avoid the worst pools or the fastest collateral. And so again, active management was -- is key across various rate scenarios.

Q: Thank you. Good morning, Peter. Thanks for the color on earnings. That does a good walk through. Bernie, just I missed the point on futures and what that would have added if it was in that spread and dollar roll income on a comparable basis to the quarter.

A: Yes. Bernie mentioned that, I think your question was about treasuries. Is that correct?

Q: Right.

A: I didn't hear. Yes, Bernie mentioned that this last quarter we added a page in some disclosure in the back of our presentation, I forget what page it is exactly. Bernie Bell: It's on page 24.

A: On page 24. That shows you the sort of the pay side of the equation, what we're paying and where our repo rates were. And if you look at that, we concluded that it was probably around $0.04 of earnings that if we had, if net spread and dollar roll income included that, it would be something like about $0.04. Obviously, because one of the challenges with that measure is because we use futures, that carry component has to be sort of imputed, if you will. So we had to come up with a methodology that's one of the shortcomings of it. But nonetheless, to give you an order of magnitude, we think it's in that range of around $0.04 this last quarter.

Q: Thank you. Good morning, Harsh. You've mentioned that your base case for spreads is that they remain within the trading range that they have been in for some time. What in your mind are the risks to that base case that could drive spreads either higher from your outside that trading range or lower?

A: Well, I would -- yes, you're right. And they have been remarkably stable and I think we're going on about seven quarters maybe of this trading range, which I find to be really encouraging. I think mortgages are given the little bit of a backup, mortgages in the middle of the range obviously feels a little bit better to us than being at the tight end of the range. But I would say that there's probably two primary risks. One is relates to monetary policy and in interest rates in general. If the interest rates become extremely volatile, meaning if interest rates were to move materially higher than we anticipate or materially lower than we anticipate. Chris mentioned it could trigger refinance activity if they were to rally for some unforeseen reason or we could have interest rates back up because of, for example, concerns about deficit spending and treasury issuance. Those could put pressure on fixed income broadly and they could put pressure on mortgage spreads. So that would be one. And then obviously, all of the discussion, it's why我 included in my prepared remarks the extra discussion about housing policy, if you will. Obviously there is more interest in the GSEs and the GSE's conservatorship today than there was prior to the Trump administration. And so there is some uncertainty about that outcome. We believe in the end that all of the great attributes of the current system, I think people will come together and agree that they need to be preserved. I don't think from a political perspective, from a homeownership perspective, from an economic perspective, from a Fed perspective, that anybody would conclude that they don't want all of these features that we have today. And then that means also then if you want to preserve those features given the size of the market, it's likely that the government is going to have to remain involved. How that structured to be determined, what they get compensated for that to be determined. But there could be some uncertainty as people have opinions in ideological differences about that, that could create some spread volatility. So spreads may be a little higher than they would otherwise be. They may be a little wider than they otherwise would be. Could move us in that range to your question. But in the end, I think they will come back into the range. And at this spread range, I think mortgages offer a lot of value. They offer value if you're investing in treasury securities and they offer value if you're investing in investment grade corporate debt, which is not always the case. So mortgages to us look like a great asset class and cheap at this valuation level. Christopher Kuehl: I'll just add. I think Peter covered the what could surprise to the wider side. The other side of the equation, I think, look, to the extent that bank securities growth is much stronger than anticipated, that's a possibility on a looser regulatory outlook going forward. I mean, overseas activity could also surprise to the extent that the Fed and BOJ policy continues to move in opposite directions that reduces FX hedging costs for banks in Japan. And so, look, there's a lot of things that are unknowns and could surprise to the tighter side as well. But again, our base case is pretty firmly rooted and maybe unchanged to maybe modestly tighter spreads for this year.