AGNC Investment’s Q2 2017 And 7/21/2017 BV Projection (Includes MTGE And NLY BV Projection) – AGNC Investment Corp. (NASDAQ:AGNC)

Focus of Article:

The focus of this article is to provide a detailed projection of AGNC Investment Corp.’s (AGNC) book value (“BV”) per common share as of 6/30/2017. Prior to results being provided to the public on 7/26/2017 (via the company’s quarterly press release), I would like to analyze AGNC’s BV as of 6/30/2017 and provide readers a general direction on how I believe this recent quarter has panned out. A previous three-part article I wrote laid the ground works for this BV projection. In that article, I projected/analyzed AGNC’s income statement (technically speaking, the company’s “consolidated statement of comprehensive income”) for the second quarter of 2017. The links to that three-part projection article are provided below:

AGNC Investment Corp.’s Q2 2017 Income Statement Projection – Part 1 (Including Current Recommendation)

AGNC Investment Corp.’s Q2 2017 Income Statement and EPS Projection – Part 2

AGNC Investment Corp.’s Q2 2017 Income Statement and EPS Projection – Part 3

By understanding the trends that occurred within AGNC’s operations during the second quarter of 2017, one can apply this information to sector peers as well. As such, the discussion/analysis below is not solely applicable to AGNC but to the fixed-rate agency mortgage real estate investment trust (mREIT) sector as a whole. This includes, but is not limited to, the following fixed-rate agency mREIT peers: 1) Arlington Asset Investment Corp. (AI); 2) ARMOUR Residential REIT Inc. (ARR); 3) Cherry Hill Mortgage Investment Corp. (CHMI); 4) CYS Investments Inc. (CYS); 5) Annaly Capital Management Inc. (NLY); and 6) Orchid Island Capital Inc. (ORC). Technically speaking, several years ago AI changed its “entity status” from a REIT to a C-Corp. per the Internal Revenue Code (“IRC”). However, AI still maintained many “mREIT-like” characteristics including the type of investments held by the company and the amount of annual dividend distributions paid to shareholders.

In addition, the following hybrid mREIT companies had at least a modest portion of each company’s MBS portfolio in fixed-rate agency MBS (also typically having higher durations): 1) Dynex Capital Inc. (DX); 2) Invesco Mortgage Capital Inc. (IVR); 3) MFA Financial Inc. (MFA); 4) AG Mortgage Investment Trust Inc. (MITT); 5) MTGE Investment Corp. (MTGE); 6) Two Harbors Investment Corp. (TWO); and 7) Western Asset Mortgage Capital Corp. (WMC). As such, the analysis below is not solely applicable to one company but more so the agency/hybrid mREIT sector as a whole. This article will also include a brief BV discussion/projection regarding AGNC’s affiliate MTGE and the company’s sector peer NLY.

Overview of AGNC’s Projected BV as of 6/30/2017:

Due to the fact that several figures needed to project/calculate AGNC’s BV as of 6/30/2017 come directly from the company’s consolidated statements of comprehensive income, Table 1 is provided below. Table 1 shows AGNC’s consolidated statements of comprehensive income from a three-months ended time frame. Using Table 1 below as a reference, one must add certain account figures from the first and second quarters of 2017 for purposes of projecting a suitable BV as of 6/30/2017.

Table 1 – AGNC Three-Months Ended Consolidated Statements of Comprehensive Income

(Source: Table created entirely by myself, partially using data obtained from AGNC’s quarterly investor presentation slides)

Having provided Table 1 above, we can now begin to calculate AGNC’s projected BV as of 6/30/2017. This projection will be calculated in Table 2 below. There will not be an identical sheet AGNC provides that matches the data within Table 2. I have gathered specific information derived from multiple tables/charts for a more detailed analysis of AGNC’s BV as of 6/30/2017. AGNC, through the company’s quarterly investor presentation slides (see link above), only provides the public with a “Book Value Roll Forward” slide. This specific slide uses information based only on a quarterly time frame. I perform a more detailed quarterly BV calculation/analysis based on the entire year.

Table 2 – AGNC Three-Months Ended BV Projection (BV as of 6/30/2017)

(Source: Table created entirely by myself, including all calculated figures and projected valuations)

Using Table 2 above as a reference, let us take a look at the calculation for AGNC’s projected BV as of 6/30/2017. Unless otherwise noted, all figures below are for the “six-months ended” time frame. Let us take a look at the following figures in corresponding order to the “Ref.” column shown in Table 2 (next to the June 30, 2017 column): A) Operations; B) Other Comprehensive Income (Loss) (OCI/(OCL)); C) Stockholder Transactions; and D) Capital Share Transactions.

A) Operations:

– Increase in Net Common Equity From Operations Estimate of $56 Million; Range ($194) – $306 Million

– Confidence Within Range = Moderate to High

– See Red Reference “A” in Table 2 Above Next to the June 30, 2017 Column

This “net increase (decrease) in net common equity from operations” figure consists of the following amounts that come directly from AGNC’s consolidated statement of comprehensive income (see Tables 1 and 2 above): 1) net interest income; 2) total other income (loss); 3) total expenses; and 4) excise tax.

Due to the fact I discussed these amounts in my previous three-part AGNC consolidated statement of comprehensive income projection article (see links near the top), further discussion of this figure is redundant/unwarranted.

B) Other Comprehensive Income (Loss) (OCI/(OCL)):

– Increase in Net Common Equity From Other Comprehensive Income (OCI) Estimate of $205 Million; Range $5 – $405 Million

– Confidence Within Range = Moderate to High

– See Red Reference “B” in Table 2 Above Next to the June 30, 2017 Column

This “net increase (decrease) in net common equity from OCI/(OCL)” figure consists of the following accounts that come directly from AGNC’s consolidated statement of comprehensive income (see Tables 1 and 2 above): 1) unrealized gain (loss) on available-for-sale (“AFS”) securities, net; and 2) unrealized gain (loss) on derivative instruments, net (upon reclassification to interest expense).

Due to the fact I also discussed these accounts in my previous three-part AGNC consolidated statement of comprehensive income article (see links near the top), further discussion of this figure is redundant/unwarranted as well.

C) Stockholder Transactions:

– Decrease in Net Common Equity From Stockholder Transactions Estimate of ($381) Million; Range ($391) – ($371) Million

– Confidence Within Range = High

– See Red Reference “C” in Table 2 Above Next to the June 30, 2017 Column

This “net increase (decrease) in net common equity from stockholder transactions” figure is AGNC’s dividend distributions for the first and second quarters of 2017. This figure includes activity in relation to the following types of outstanding shares of stock: 1) common; and 2) preferred.

1) Common Stock:

Prior to projecting AGNC’s common stock dividend distributions for the second quarter of 2017, let us first discuss how the number of the company’s outstanding shares of common stock could change during any given quarter. AGNC has the following four events/programs which could impact the number of outstanding shares of common stock the company has when monthly dividends are declared: 1) public offering of shares (“bulk” issuance); 2) at-the-market (“ATM”) offering program; 3) dividend reinvestment/direct stock purchase program; and 4) stock repurchase program.

On 5/2/2017, AGNC priced the company’s previously announced public offering of 24.5 million shares of common stock for gross proceeds of $503 million. In addition, AGNC granted the underwriters the option to purchase an additional 3.7 million shares of the company’s common stock (within 30 days). I am projecting the underwriters’ option was fully exercised. As such, I am projecting AGNC’s outstanding shares of common stock increased 28.2 million shares from the company’s recent public offering of shares.

Even though AGNC’s stock price throughout the quarter traded slightly-modestly above its “tangible” BV as of 3/31/2017 ($19.31 per share), I am making the assumption there was no activity within the company’s ATM offering or dividend reinvestment/direct stock purchase programs during the second quarter of 2017. My reasoning is mainly due to the May 2017 equity offering described above.

When it comes to AGNC’s repurchase program, this was created in October 2012 and was fairly recently amended in October 2016 to allow AGNC to repurchase up to $1 billion of the company’s outstanding shares of common stock through 12/31/2017. As of 3/31/2017, AGNC had $1 billion remaining under the company’s stock repurchase program. AGNC intends to buyback outstanding shares of common stock only when the repurchase price is materially accretive to CURRENT tangible BV. Since AGNC’s stock price traded modestly-materially above the company’s “tangible” BV as of 3/31/2017 throughout the second quarter of 2017, I believe management did not repurchase any outstanding shares of common stock.

The dividend declared on AGNC’s common stock for the second quarter of 2017 totaled $0.54 per share. This was an unchanged dividend when compared to the prior quarter. When calculated, I am projecting AGNC had dividend distributions to common shareholders of ($189) million for the second quarter of 2017. When combined, I am projecting AGNC had dividend distributions to common shareholders of ($368) million for the six-months ended 6/30/2017. Now let us project the preferred stock dividend distributions.

2) Preferred Stock:

The dividend declared on AGNC’s “Series A Preferred Stock” (AGNCP) and “Series B Preferred Stock” (AGNCB) for the second quarter of 2017 was $0.50 per share and $0.484375 per depositary share, respectively. As such, this was an unchanged dividend when compared to the prior quarter. There were still 6.9 and 7.0 million outstanding shares of AGNCP and AGNCB as of 6/28/2017, respectively (ex-dividend date). When calculated, I am projecting AGNC had dividend distributions to AGNCP and AGNCB shareholders of ($3.5) and ($3.4) million for the second quarter of 2017, respectively. When combined, I am projecting AGNC had dividend distributions to preferred shareholders of ($13.7) million (rounded) for the six-months ended 6/30/2017.

After combining the common and preferred stock dividend distributions for the first and second quarters of 2017, I am projecting AGNC’s total “distributions to stockholders from estimated REIT taxable income/undistributed taxable income (“UTI”)” and decrease in net common equity from stockholder transactions was ($381) million (rounded) for the six-months ended 6/30/2017 (see red reference “C” in Table 2 above).

D) Capital Share Transactions:

– Increase in Net Common Equity From Capital Share Transactions Estimate of $555 Million; Range $475 – $575 Million

– Confidence Within Range = High

– See Red Reference “D” in Table 2 Above Next to the June 30, 2017 Column

As stated earlier, on 5/2/2017 AGNC priced the company’s previously announced public offering of 24.5 million shares of common stock for gross proceeds of $503 million. In addition, AGNC granted the underwriters the option to purchase an additional 3.7 million shares of the company’s common stock (within 30 days). I am projecting the underwriters’ option was fully exercised. This calculates to additional gross proceeds of approximately $75 million. After accounting for all offering costs and the underwriters’ discount, I am projecting AGNC’s net proceeds from the company’s May 2017 equity offering was approximately $555 million.

In addition, I am making the assumption no additional shares of common stock were issued under AGNC’s ATM offering or dividend reinvestment/direct stock purchase programs during the second quarter of 2017. Also, since there were no additional preferred stock equity offerings during the second quarter of 2017, the following figures should have no activity: 1) issuance of preferred stock; and 2) preferred stock $25,000 per share liquidation preference.

Since AGNC officially internalized the company’s management structure through its acquisition of American Capital Mortgage Management (“ACMM”) last year, management may be partially compensated through the issuance of common stock subject to certain vesting options. As such, AGNC may have some minor amount of equity issuance through the following accounts: 1) issuance of restricted stock; and/or 2) issuance of common stock under stock-based compensation program. However, due to the immaterial impact such restricted stock and/or stock-based compensation would represent, I have projected no amount within these two accounts during the second quarter of 2017. Any actual amount of restricted stock and/or stock-based compensation during the second quarter of 2017 (through the issuance of new shares) would only have a fractional per share impact to AGNC’s BV as of 6/30/2017.

Regarding AGNC’s “repurchases of common stock” figure, as stated earlier I am making the assumption management did not purchase any outstanding shares of common stock under the company’s stock repurchase program during the second quarter of 2017. Therefore, I am projecting AGNC had a “net common equity from capital share transactions” figure of $555 million for the six-months ended 6/30/2017 (see red reference “D” in Table 2 above).

MTGE’s Projected BV as of 6/30/2017:

When compared to AGNC, I am projecting MTGE had a slightly more favorable BV per share fluctuation (percentage wise) for the second quarter of 2017. Each company’s agency MBS and derivatives portfolios as of 3/31/2017 had several similarities which were discussed in my three-part AGNC income statement projection article (see links near the top). However, it should also be noted MTGE had a much larger non-agency MBS portfolio (with an attractive cost basis) and has recently “branched out” to invest in skilled nursing facilities and seniors housing. In comparison, AGNC has a very minor investment in AAA non-agency MBS and no exposure to the healthcare sector.

When taking all quarterly activities into consideration (including additional data not discussed within this specific article), I am projecting MTGE will report the following BV per common share as of 6/30/2017:

MTGE’s Projected BV as of 6/30/2017 = $19.55 Per Common Share (Range $19.05 – $20.05 Per Common Share)

NLY’s BV as of 6/30/2017:

As was highlighted in my three-part AGNC income statement projection article (see links near the top of this article), I discussed several differences between AGNC’s and NLY’s investment portfolio. Furthermore, it was discussed each company had a different strategy regarding derivative instruments going into the second quarter of 2017 (most notably the difference between each company’s hedging coverage ratio as of 3/31/2017). Simply put, NLY’s lower hedging coverage ratio at the start of the second quarter of 2017 was an advantage for the company when compared to AGNC. In addition, it should also be noted management has recently broadened NLY’s investment portfolio by allocating more capital into commercial debt/real estate, preferred equity, corporate debt, and most recently middle market (“MM”) lending. Furthermore, NLY recently acquired a variable-rate agency mREIT, Hatteras Financial Corp. (HTS). Generally speaking these asset classes, when compared to fixed-rate agency MBS, performed similarly during the second quarter of 2017.

On 7/17/2017, along with NLY’s announcement of a July 2017 equity offering, the company provided preliminary results to the public regarding its second quarter of 2017. Along with several other operating performance metrics, NLY announced an estimated BV as of 6/30/2017 of $11.19 per common share. Within the following MBS pricing article dated 6/20/2017, I projected NLY’s BV as of 6/16/2017 was $11.30 per common share (when INCLUDING the quarterly dividend accrual of $0.30 per common share which had yet to occur as of 6/16/2017; ex dividend date was 6/28/2017):

Annaly Capital And CYS Investments: MBS Pricing For Q2 2017 (Includes Current BV Projections)

Due to the negative relationship that existed between most MBS prices and derivative instrument valuations during the last two weeks of the quarter, I projected NLY’s BV as of 6/30/2017 was $11.20 per common share (prior to management providing quarterly results; several readers privately asked for my projection which I provided as support). As such, I believe NLY’s preliminary estimated BV as of 6/30/2017 was basically an exact match to my projected BV.

NLY’s Projected BV as of 6/30/2017 (Prior to Management’s Disclosure of Preliminary Results on 7/17/2017) = $11.20 Per Common Share (Range $10.80 – $11.40 Per Common Share)

NLY’s Estimated BV as of 6/30/2017 Per Management’s Disclosure of Preliminary Results on 7/17/2017 = $11.19 Per Common Share

Conclusions Drawn:

To sum up all the information discussed above, I am projecting AGNC will report the following BV per common share as of 6/30/2017:

AGNC’s Projected BV as of 6/30/2017 = $20.72 Per Common Share (Range $20.22 – $21.22 Per Common Share)

This projection is a ($0.26) per common share decrease from AGNC’s BV as of 3/31/2017. This minor decrease can be attributed to two factors. The first factor is in relation to the activity within AGNC’s consolidated statement of comprehensive income. I am projecting AGNC will report a net loss of ($20) million for the second quarter of 2017 while reporting OCI of $159 million. When both figures are combined, I am projecting AGNC will report comprehensive income of $139 million for the second quarter of 2017.

The second factor is in relation to the activity within AGNC’s equity section of the balance sheet. AGNC paid for/accrued dividend distributions totaling ($0.54) per common share during the second quarter of 2017. In addition, AGNC paid for/accrued dividend distributions in regards to holders of the company’s outstanding shares of preferred stock. Furthermore, AGNC’s May 2017 equity offering resulted in some minor dilution.

When combined, these two factors account for a projected quarterly BV decrease of ($0.26) per common share. When calculated, I am projecting AGNC’s BV per common share had a decrease of (1.24%) during the second quarter of 2017. I am also projecting AGNC generated an “economic return” (dividends paid/accrued for and net change in BV) of 1.37% for the second quarter of 2017.

Similar to the prior quarter, there was a more “neutral/muted” relationship between MBS prices and derivative instrument valuations during the second quarter of 2017 (“option adjusted spreads”; OAS). As such, I believe most mREIT peers will report only a minor (less than 5%) fluctuation in quarterly BV. With that being said, I believe most mREIT stock prices have already “priced in” this more neutral/muted relationship when it comes to sector valuations.

I believe four key factors to analyze within the fixed-rate agency mREIT sector this quarter are the following: 1) each company’s proportion of 15-year MBS holdings versus 30-year MBS holdings; 2) each company’s hedging coverage ratio; 3) each company’s proportion of long-term derivative instruments versus short-term derivative instruments; and 4) each company’s proportion of specified pools (for instance HARP and LLB securities). Dependent upon these factors, I believe results will slightly vary across most of the fixed-rate agency mREIT sector for the second quarter of 2017.

Looking ahead to the third quarter of 2017, mortgage interest rates first increased and then recently have reversed course (through 7/21/2017). The fixed-pay rate on interest rate swaps and U.S. Treasury yields have also seem the same trend through 7/21/2017 (when compared to 6/30/2017) . However, the forward LIBOR curve has remained relatively unchanged. In addition, it should be noted the relationship between agency MBS pricing and derivative instrument valuations has been slightly positive through the first three weeks of July (minor tightening of spreads).

Through a detailed analysis that will be omitted from this particular article, I am projecting AGNC’s BV as of 7/21/2017 has fluctuated ($0.10) – $0.30 per common share when compared to the company’s BV as of 6/30/2017. This projection excludes the July 2017 monthly dividend of $0.18 per common share (ex-dividend is 7/27/2017).

My BUY, SELL, or HOLD Recommendation:

From the analysis provided above, including additional catalysts/factors not discussed within this particular article, I currently rate AGNC as a SELL when I believe the company’s stock price is trading at less than a (2.5%) discount to my projected BV as of 6/30/2017, a HOLD when trading at or greater than a (2.5%) but less than a (10.0%) discount to my projected BV as of 6/30/2017, and a BUY when trading at or greater than a (10.0%) discount to my projected BV as of 6/30/2017. These ranges are unchanged when compared to PART 1 of my income statement projection article (approximately three weeks ago).

Therefore, I currently rate AGNC as a SELL (however fairly close to my HOLD range) since the stock is trading at less than a (2.5%) discount to my projected BV as of 6/30/2017. My current price target for AGNC is approximately $20.25 per share. This is currently the price where my recommendation would change to a HOLD. The current price where my recommendation would change to a BUY is approximately $18.65 per share.

Along with the data presented within this article, this recommendation considers the following mREIT catalysts/factors: 1) projected future MBS price movements; 2) projected future derivative valuations; and 3) projected near-term dividend per share rates. This recommendation also considers the high probability of multiple Federal (“Fed”) Funds Rate increases by the FOMC during 2017-2018 (this is a more hawkish view when compared to most of last year) due to recent macroeconomic trends/events. This also considers the eventual “wind-down” of the Fed’s balance sheet.

Final Note: Each investor’s BUY, SELL, or HOLD decision is based on one’s risk tolerance, time horizon, and dividend income goals. My personal recommendation will not fit each reader’s current investing strategy. The factual information provided within this article is intended to help assist readers when it comes to investing strategies/decisions.

During January-March 2014, I initiated (and subsequently add to) a position in MTGE at a weighted average purchase price of $18.47 per share. On 3/4/2016 and 4/8/2016, I directly increased my position in MTGE at a weighted average purchase price of $14.36 and $14.47 per share, respectively. These two combined purchases had the same approximate monetary value of my combined 2014 purchases. My entire MTGE position had a weighted average purchase price of $16.443 per share. On 6/15/2017, I sold my entire MTGE position at a weighted average price of $19.09 per share as my price target of $19.10 was met that day. My MTGE total return (when including change in stock price and dividends received/gains on reinvested dividends), was 45.4%. My 2016 purchases were disclosed, at the time, to readers in subsequent AGNC articles over the following several months. My 2017 sale was disclosed to readers in “real time” (that day) via the StockTalks feature of Seeking Alpha.

On 11/27/2015, I initiated a position in AGNCB; Series B preferred stock. On 12/7/2015, 12/9/2015, 12/14/2015, 1/14/2016, and 1/20/2016 I selectively increased my position in AGNCB. When combined, my AGNCB position has a weighted average purchase price of $23.215 per share. This weighted average per share price excludes all dividends received/reinvested. I currently hold (personally and through affiliated entities) 0.71% of the outstanding shares of AGNCB. Each AGNCB trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.

On 7/21/2017, I imitated a position in AGNCP; Series A preferred stock. My AGNCP position has a weighted average purchase price of $25.325 per share. I currently hold (personally) 0.35% of the outstanding shares of AGNCP. This AGNCP trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.

All trades/investments I have performed over the past few years have been disclosed to readers in real time (that day at the latest) via the StockTalks feature of Seeking Alpha. Through this resource, readers can look up all my prior disclosures (buys/sells) regarding all companies I cover here at Seeking Alpha (see my profile page for a list of all stocks covered).

Disclosure: I am/we are long CHMI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I currently have no position in AGNC, AI, ARR, CYS, DX, IVR, MFA, MITT, MTGE, NLY, ORC, TWO, or WMC. I am currently long AGNCB and AGNCP.

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