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 3/31/2019. Prior to results being provided to the public on 4/24/2019 (via the company’s quarterly press release), I would like to analyze its BV as of 3/31/2019 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 first quarter of 2019. The links to that three-part projection article are provided below:

AGNC Investment’s Q1 2019 Income Statement And Earnings Projection – Part 1 (Includes Current Recommendation)

AGNC Investment’s Q1 2019 Income Statement And Earnings Projection – Part 2 (March Volatility Negatively Impacted Hedges)

AGNC Investment’s Q1 2019 Income Statement And Earnings Preview – Part 3 (Late Rally In MBS Pricing)

By understanding the trends that occurred within the company’s operations during the first quarter of 2019, 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) Annaly Capital Management Inc. (NLY); and 5) Orchid Island Capital Inc. (ORC). Technically speaking, AI’s 2018 “entity status” was not a REIT per the Internal Revenue Code (“IRC”) but a C-Corporation. However, AI still maintained many “mREIT-like characteristics”, including the type of investments held by the company, similar risk management strategies, and the amount of dividend distributions paid to shareholders. Beginning in 2019, AI has “switched back” to a REIT entity per the IRC.

In addition, the following hybrid mREIT companies had at least a modest portion of each company’s investment portfolio in fixed-rate agency MBS (which typically have higher durations): 1) Chimera Investment Corp. (CIM); 2) Dynex Capital Inc. (DX); 3) Invesco Mortgage Capital Inc. (IVR); 4) MFA Financial Inc. (MFA); 5) AG Mortgage Investment Trust Inc. (MITT); 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 fixed-rate agency/hybrid mREIT sector as a whole.

Overview of AGNC’s Projected BV as of 3/31/2019

Due to the fact that several figures needed to project/calculate AGNC’s BV as of 3/31/2019 come directly from the company’s consolidated statements of comprehensive income, Table 1 is provided below. Table 1 shows the company’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 quarter of 2019 for purposes of projecting a suitable BV as of 3/31/2019.

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

(Source: Table created by me, 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 3/31/2019. This projection will be calculated in Table 2 below. The company, through its 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. As such, there isn’t an identical sheet AGNC provides that matches the data within Table 2.

Table 2 – AGNC Three Months Ended BV Projection (BV as of 3/31/2019)

AGNC Three-Months Ended BV Projection (BV as of 3/31/2019)

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

Using Table 2 above as a reference, unless otherwise noted, all figures are for the “three 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 March 31, 2019 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 ($9) Million; Range ($209)-$191 Million
  • Confidence Within Range = Moderate to High
  • See Red Reference “A” in Table 2 Above Next to the March 31, 2019 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 that 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))

  • Decrease in Net Common Equity From Other Comprehensive Income (OCI) Estimate of $390 Million; Range $190-$590 Million
  • Confidence Within Range = Moderate to High
  • See Red Reference “B” in Table 2 Above Next to the March 31, 2019 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 (designated as cash flow hedges).

Due to the fact that 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 ($298) Million; Range ($323)-($273) Million
  • Confidence Within Range = High
  • See Red Reference “C” in Table 2 Above Next to the March 31, 2019 Column

This “net increase (decrease) in net common equity from stockholder transactions” figure is the company’s dividend distributions for the first quarter of 2019. This figure includes activity in relation to the following types of outstanding shares of stock: 1) common; and 2) preferred.

1) Common Stock:

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 accounted/accrued for: 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.

AGNC did not have a “bulk” issuance of common stock during the first quarter of 2019. I am also assuming the company did not have any material amount of ATM common stock issued during the quarter. This is mainly due to the fact it aggressively raised capital when MBS pricing was suppressed back in 2018 (currently less attractive opportunities).

Furthermore, I am assuming there was no notable activity within the company’s dividend reinvestment/direct stock purchase programs during the first quarter of 2019. When it comes to its repurchase program, AGNC intends to buyback outstanding shares of common stock only when the repurchase price is materially accretive to CURRENT tangible BV. This program was created in October 2012 and was amended in October 2016 to allow AGNC to repurchase up to $1 billion of its outstanding shares of common stock through 12/31/2017. This share repurchase plan has expired and has not been replaced (through 4/12/2019). As such, I believe management did not repurchase any outstanding shares of common stock during the first quarter of 2019.

The dividend declared on AGNC’s common stock for the first quarter of 2019 totaled $0.54 per share. This was an unchanged dividend per share rate when compared to the prior quarter. When calculated, I am projecting the company had dividend distributions to common shareholders of ($290) million for the first quarter of 2019 and for the three months ended 3/31/2019. Now let us project the preferred stock dividend distributions.

2) Preferred Stock:

The dividend accrued for/declared on AGNC’s “Series B Preferred Stock” (AGNCB) and “Series C Preferred Stock” (AGNCN) for the first quarter of 2019 was $0.484375 and $0.4375 per depository share, respectively. When calculated, I am projecting the company had total dividend distributions to AGNCB and AGNCN shareholders of ($9) million for the first quarter of 2019 and for the three months ended 3/31/2019.

After combining the common and preferred stock dividend distributions for the first quarter of 2019, I am projecting AGNC’s total decrease in net common equity from stockholder transactions was ($298) million (rounded) for the three months ended 3/31/2019 (see red reference “C” in Table 2 above).

D) Capital Share Transactions

  • Increase in Net Common Equity From Capital Share Transactions Estimate of $5 Million; Range $0-$200 Million
  • Confidence Within Range = High
  • See Red Reference “D” in Table 2 Above Next to the March 31, 2019 Column

As stated earlier, AGNC did not have a bulk issuance of common stock during the first quarter of 2019. I am also assuming the company did not have any material amount of ATM common stock issued during the quarter. This is mainly due to the fact that it aggressively raised capital when MBS pricing was suppressed back in 2018 (currently less attractive opportunities).

Since AGNC officially internalized the company’s management structure through its acquisition of American Capital Mortgage Management (“ACMM”) in 2016, 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/capital proceeds through the following accounts: 1) issuance of restricted stock; and/or 2) issuance of common stock under stock-based compensation program. I have projected a minor amount of equity was generated from these two sources during the first quarter of 2019. Any actual amount of restricted stock and/or stock-based compensation (through the issuance of shares) would likely only have a fractional per share impact on the company’s BV as of 3/31/2019.

Regarding AGNC’s “repurchases of common stock” figure, as stated earlier I am assuming management did not purchase any outstanding shares of common stock under the company’s stock repurchase program during the first quarter of 2019 (since the program no longer existed during the quarter).

When all of the above figures are combined, I am projecting the company had a “net common equity from capital share transactions” figure of $5 million for the three months ended 3/31/2019 (see red reference “D” in Table 2 above).

NLY’s BV as of 3/31/2019

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. Beginning several years ago, NLY diversified its investment portfolio by allocating more capital into commercial debt/real estate, preferred equity, corporate debt, residential whole loans, mortgage servicing rights (“MSR”), and middle market (“MM”) lending. NLY’s added diversification should result in reduced volatility during certain interest rate cycles (reduction in duration). In addition, it acquired a variable-rate agency mREIT, Hatteras Financial Corp. (NYSE:HTS), in 2016 and acquired a hybrid mREIT, MTGE Investment Corp. (NASDAQ:MTGE), in September 2018. Generally speaking, most of these asset classes, when compared to fixed-rate agency MBS, experienced less favorable price fluctuations (but still net increases) during the first quarter of 2019 when compared to most fixed-rate agency MBS coupons (especially specified pools). However, 83% of NLY’s investment portfolio was still comprised of fixed-rate agency MBS as of 12/31/2018 (based on FMV).

As of 12/31/2018, AGNC and NLY had a hedging coverage ratio of 94% and 91%, respectively. As such, I believe AGNC and NLY had a similar type of valuation loss during the first quarter of 2019 when it comes to each company’s derivatives instruments (proportionately speaking). However, I also believe each of its net valuation losses within the derivative instruments were “trumped” by each company’s MBS/investment portfolio’s net valuation gain. As discussed throughout various mREIT articles over the past several months, this is due to the notably more “positive” relationship that existed between MBS/asset pricing and derivative instrument valuations during the first quarter of 2019 when compared to the prior quarter (reduction in spread/basis risk).

When taking all quarterly activities into consideration (including additional data not discussed within this specific article), I am projecting NLY will report the following BV per common share as of 3/31/2019:

NLY’s Projected BV as of 3/31/2019 = $9.55 Per Common Share (Range $9.25-$9.85 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 3/31/2019:

AGNC’s Projected Non-Tangible BV as of 3/31/2019 = $17.70 Per Common Share (Range $17.30-$18.10 Per Common Share)

This projection is a $0.16 per common share increase from AGNC’s BV as of 12/31/2018. This increase can be attributed to two factors. The first factor is in relation to the activity within the company’s consolidated statement of comprehensive income. I am projecting AGNC will report a net loss of ($9) million for the first quarter of 2019, while reporting OCI of $390 million. When both figures are combined, I am projecting the company will report comprehensive income of $381 million for the first quarter of 2019.

The second factor is in relation to the activity within AGNC’s equity section of the balance sheet. The company paid for/accrued dividend distributions totaling ($0.54) per common share during the first quarter of 2019. In addition, it paid for/accrued dividend distributions in regards to holders of the company’s outstanding shares of preferred stock.

When combined, these two factors account for a projected quarterly BV net increase of $0.16 per common share. When calculated, I am projecting AGNC’s non-tangible BV per common share had an increase of 0.9% during the first quarter of 2019. I am also projecting the company generated an “economic return” (dividends paid/accrued for and net change in BV) of 4.0% for the first quarter of 2019. I am projecting it will report the following tangible BV per common share as of 3/31/2019:

AGNC’s Projected Tangible BV as of 3/31/2019 = $16.75 Per Common Share (Range $16.40-$17.10 Per Common Share)

I believe all agency mREIT peers will report a minor (less than 5%) fluctuation in quarterly BV. The same holds true for basically all hybrid/multipurpose mREIT peers as well.

A more “muted” relationship between MBS pricing and derivative instrument valuations has occurred during the second quarter of 2019 (through 4/12/2019). Through a detailed analysis that will be omitted from this particular article, I am projecting AGNC’s BV as of 4/12/2019 has remained relatively unchanged when compared to the company’s BV as of 3/31/2019. This projection excludes the April 2019 monthly dividend of $0.18 per common share (ex-dividend is 4/29/2019).

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 or greater than a 2.5% premium to my projected non-tangible CURRENT BV (BV as of 4/12/2019; $17.70 per share), a HOLD when trading at less than a 2.5% premium through less than a (5%) discount to my projected non-tangible CURRENT BV, and a BUY when trading at or greater than a (5%) discount to my projected non-tangible CURRENT BV. These ranges are unchanged when compared to my last AGNC article (PART 3 of my income statement projection analysis).

Therefore, I currently rate AGNC as a HOLD (however close to a SELL), since the stock is trading at less than a 2.5% premium through less than a (5%) discount to my projected non-tangible CURRENT BV. As such, I currently believe the company is appropriately valued from a stock price perspective (not overvalued, not undervalued). My current price target for AGNC is approximately $18.20 per share. This is currently the price where my HOLD recommendation would change to a SELL. The current price where my recommendation would change to a BUY is approximately $16.85 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 recent four Fed Funds Rate increases by the FOMC during 2018 (this was a more “hawkish” tone/rhetoric when compared to most of 2017) and the more recent dovish tone/rhetoric regarding overall monetary policy due to recent macroeconomic trends/events. This also considers the “wind-down”/decrease of the Fed’s balance sheet through gradual “runoff”/partial non-reinvestment (which began in October 2017 and which has increased spread/basis risk) and the recent announcement of “easing” of this wind-down starting in May 2019 (which should partially reduce spread/basis risk).

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.

Current/Recent mREIT Sector Stock Disclosures

On 1/31/2017, I initiated a position in New Residential Investment Corp. (NRZ) at a weighted average purchase price of $15.10 per share. On 6/29/2017, 7/7/2017, and 12/21/2018, I increased my position in NRZ at a weighted average purchase price of $15.775, $15.18, and $14.475 per share, respectively. When combined, my NRZ position has a weighted average purchase price of $14.912 per share. This weighted average per share price excludes all dividends received/reinvested. Each NRZ trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha. I currently have a BUY recommendation on NRZ.

On 6/29/2017, I initiated a position in CHMI at a weighted average purchase price of $18.425 per share. On 10/6/2017, 10/26/2017, 11/6/2017, 1/29/2018, and 10/12/2018, I increased my position in CHMI at a weighted average purchase price of $18.015, $18.245, $17.71, $17.145, and $17.235 per share, respectively. When combined, my CHMI position has a weighted average purchase price of $17.585 per share. This weighted average per share price excludes all dividends received/reinvested. Each CHMI trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha. I currently have a HOLD recommendation on CHMI.

On 8/23/2017, I initiated a position in TWO’s Series B preferred stock, (TWO.PB). On 8/24/2017, I increased my position in TWO.PB. When combined, my TWO.PB position had a weighted average purchase price of $25.283 per share. On 4/1/2019 and 4/2/2019, I sold my entire position in TWO.PB at a weighted average sales price of $25.635 per share. All TWO-B trades were disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.

On 8/31/2017, I initiated a position in CHMI’s Series A preferred stock, (CHMI.PA). On 9/12/2017, I increased my position in CHMI-A. When combined, my CHMI-A position has a weighted average purchase price of $25.198 per share. Each CHMI-A trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha. I currently have a HOLD recommendation on CHMI.PA.

On 1/29/2018, I initiated a position in TWO at a weighted average purchase price of $15.155 per share. This weighted average per share price excludes all dividends received/reinvested. This TWO trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha. I currently have a HOLD recommendation on TWO.

On 10/26/2018, I re-entered a position in ORC at a weighted average purchase price of $6.388 per share. On 12/18/2018 and 12/20/2018, I increased my position in ORC at a weighted average price of $6.215 and $5.845 per share, respectively. When combined, my ORC position had a weighted average purchase price of $5.992 per share. On 1/25/2019, I sold my entire position in ORC at a weighted average sales price of $7.027 per share as my price target, at the time, of $7.00 per share was met. This calculates to a non-annualized realized gain of 17.3% and a non-annualized total return (when including weighted average dividends received) of 19.1%. These ORC trades were disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.

On 3/8/2018, I initiated a position in New York Mortgage Trust, Inc. (NYMT) Series D preferred stock, (NYMTN). On 4/6/2018, 4/27/2018, 10/12/2018, 12/7/2018, 12/18/2018, and 12/21/2018 I increased my position in NYMTN. When combined, my NYMTN position has a weighted average purchase price of $22.379 per share. This weighted average per share price excludes all dividends received/reinvested. Each NYMTN trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha. I currently have a BUY recommendation on NYMTN.

On 10/12/2018, I initiated a position in Granite Point Mortgage Trust, Inc. (GPMT) at a weighted average purchase price of $18.155 per share. This weighted average per share price excludes all dividends received/reinvested. This GPMT trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha. I currently have a BUY recommendation on GPMT.

On 10/12/2018, I initiated a position in MITT at a weighted average purchase price of $16.83 per share. This weighted average per share price excludes all dividends received/reinvested. This MITT trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha. I currently have a HOLD recommendation on MITT.

All trades/investments I have performed over the past several years have been disclosed to readers in real time (that day at the latest) via the StockTalks feature of Seeking Alpha (which cannot be changed/altered). 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). Through StockTalk disclosures, at the end of March 2019 I had an unrealized/realized gain “success rate” of 87.5% and a total return (includes dividends received) success rate of 100% out of 40 total positions (updated monthly; multiple purchases/sales in one stock count as one overall position until fully closed out [no realized total losses]). I encourage other Seeking Alpha contributors to provide real time buy and sell updates for their readers which would ultimately lead to greater transparency/credibility.

Final Note: I am currently “teaming up” per se with Colorado Wealth Management to provide additional data/insight within the mREIT sector. While I currently cover 20 mREIT peers (which includes having detailed modeling/valuation projections for each company), due to time constraints via my professional career and analysis of other stocks/sectors, I cannot provide detailed coverage for each mREIT company in a quarterly “solo” article. As such, through this new collaboration, I am providing intra-quarter CURRENT BV per share projections on all 20 mREIT stocks I currently cover. This consists of weekly BV projections for all agency mREIT companies I cover (including AGNC) and monthly BV projections for all hybrid/multipurpose mREIT companies I cover. I also provide some brief commentary/overall thoughts on most mREIT’s reported quarterly earnings. A list of all stocks I cover at Seeking Alpha (SA) is provided within my profile page. This very informative (and “premium”) information/projections are provided through Colorado’s existing SA Marketplace service. This new service will only have a minimal impact to my existing mREIT coverage and no impact on my existing business development (“BDC”)/other sector coverage. This will also not impact my real-time stock purchases and sales disclosures which I provide to readers, for free, through the StockTalks feature of SA.

Disclosure: I am/we are long CHMI, CHMI.PA, GPMT, MITT, NRZ, NYMTN, TWO. 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, AGNCB, AGNCN, AI, ARR, CIM, DX, IVR, MFA, MORL, NLY, NYMT, ORC, REM, TWO.PB, or WMC.

Source link

2019-04-18