AGNC Investment Corp. (NASDAQ:AGNC) is a leading real estate investment trust (REIT) that specializes in investing in agency residential mortgage-backed securities (Agency MBS). Headquartered in Bethesda, Maryland, AGNC has established itself as a prominent player in the mortgage REIT industry, leveraging its expertise to generate favorable long-term returns for its shareholders.

Company Overview and History

AGNC Investment Corp. was organized in Delaware on January 7, 2008 and commenced operations on May 20, 2008 following the completion of its initial public offering. The company is a leading provider of private capital to the U.S. housing market, enhancing liquidity in the residential real estate mortgage markets and facilitating home ownership in the U.S. AGNC primarily invests in Agency residential mortgage-backed securities (Agency RMBS) for which the principal and interest payments are guaranteed by a U.S. Government-sponsored enterprise (GSE) or a U.S. Government agency. The company also invests in other types of mortgage and mortgage-related securities, such as credit risk transfer (CRT) securities and non-Agency residential and commercial mortgage-backed securities, where repayment of principal and interest is not guaranteed by a GSE or U.S. Government agency.

Throughout its history, AGNC has faced various challenges, including navigating changes in U.S. monetary policy and interest rates in 2014, which impacted the performance of its investment portfolio. The company also had to manage the risk of the cost of its variable rate liabilities increasing during periods of rising interest rates. To mitigate these risks, AGNC has utilized a variety of derivative instruments, including interest rate swaps, swaptions, and U.S. Treasury securities and futures contracts. Despite these challenges, AGNC has maintained its position as a leading provider of private capital to the U.S. housing market, generating favorable long-term stockholder returns with a substantial yield component. The company has consistently distributed 100% of its taxable income to shareholders on a timely basis to maintain its qualification as a real estate investment trust (REIT).

Financials

AGNC's financial performance has been notable, with the company reporting quarterly revenue of $154 million and quarterly net income of $122 million in its most recent quarter. The company's quarterly operating cash flow stood at $79 million, which was also its quarterly free cash flow. These numbers underscore AGNC's ability to generate consistent cash flows and maintain a strong financial foundation.

In terms of quarterly data, AGNC has demonstrated resilience in its operations. For the latest quarter, the company reported a comprehensive loss of $0.11 per common share, reflecting the challenges faced in the prevailing market environment. However, the company's economic return on tangible common equity for the quarter was negative 0.6%, with a decline of $0.41 in its tangible net book value per share. This performance was influenced by higher interest rates and modestly wider spreads during the period.

Despite the quarterly headwinds, AGNC's full-year economic return for 2024 was a positive 13.2%, driven by its consistent monthly dividend totaling $1.44 per common share and a modest $0.29 decline in tangible net book value per share. This resilience underscores the company's ability to navigate challenging market conditions and continue delivering value to its shareholders.

For the three months ended September 30, 2024, AGNC reported net interest income of $64 million and other net gains of $440 million, driven by $106 million in net gains on the sale of investment securities and $1.74 billion in net unrealized gains on investment securities. The company's net income for this period was $346 million, with net income available to common stockholders of $313 million, or $0.39 per basic and diluted common share. Comprehensive income available to common stockholders was $513 million, or $0.63 per diluted common share.

Liquidity

AGNC's liquidity position remains strong, with the company concluding the latest quarter with unencumbered cash and Agency MBS of $6.1 billion, or 66% of its tangible equity. This significant liquidity buffer provides the company with the flexibility to capitalize on investment opportunities and weather potential market turbulence.

The company's leverage ratio has remained relatively stable, with an average and ending leverage of 7.2 times tangible equity for the fourth quarter of 2024. This conservative approach to leverage management helps AGNC maintain a prudent risk profile and ensures its ability to adapt to changing market dynamics.

Investment Strategy and Portfolio Management

AGNC's investment strategy has evolved over time, with the company actively managing its portfolio composition. During the latest quarter, the company continued to shift its holdings towards higher-coupon Agency MBS, reducing its exposure to lower-coupon securities. This strategic repositioning reflects AGNC's proactive approach to optimizing its asset allocation and aligning its portfolio with the prevailing market conditions.

The company's hedging practices have also been a focus, as AGNC has made adjustments to its hedging strategy to mitigate interest rate risks. The company increased its treasury-based hedges to 53% of its overall hedge portfolio on a dollar duration basis, seeking to better align its interest rate exposure with the prevailing market environment.

AGNC operates in several key product segments:

1. Agency Residential Mortgage-Backed Securities (Agency RMBS): This is AGNC's primary investment focus, where it invests primarily in Agency RMBS on a leveraged basis. As of September 30, 2024, AGNC's investment portfolio included $68.04 billion in Agency RMBS, representing the largest portion of its total $68.94 billion investment securities portfolio.

2. Credit Risk Transfer (CRT) Securities: AGNC invests in CRT securities, which are risk-sharing instruments issued by the GSEs. As of September 30, 2024, AGNC held $620 million in CRT securities.

3. Non-Agency Mortgage-Backed Securities (Non-Agency MBS): AGNC's investment portfolio also includes non-Agency residential and commercial mortgage-backed securities. As of September 30, 2024, AGNC held $273 million in non-Agency RMBS and $258 million in CMBS.

4. Other Mortgage Credit Investments: AGNC has a small allocation to other mortgage credit investments, which it accounts for under the equity method of accounting. As of September 30, 2024, these investments totaled $61 million.

AGNC's investment portfolio had a weighted average yield of 4.68% as of September 30, 2024, excluding the impact of catch-up premium amortization adjustments. The company's tangible net book value per common share was $8.82 as of the end of the third quarter.

Market Outlook and Conclusion

Looking ahead, AGNC's outlook for the agency mortgage-backed securities market remains favorable. The company anticipates that the supply and demand dynamics for Agency MBS will remain reasonably well-balanced, supported by factors such as stable mortgage rates, potential increased bank demand, and the continued appeal of these securities as a diversification tool for investors.

For 2025, AGNC expects the supply of agency MBS to be similar to 2024, which was just over $210 billion, and reasonably well aligned with investor demand. The company also anticipates agency spreads to remain in their current attractive trading range, with current coupon to 5-10 year treasuries trading in a 135-155 basis point range for 80% of 2024.

Despite the challenges faced in the fourth quarter of 2024, AGNC's long-term track record of delivering value to shareholders, its prudent risk management practices, and its favorable market outlook position the company as a resilient player in the mortgage REIT sector. As AGNC navigates the evolving market landscape, investors will likely continue to monitor the company's ability to adapt and capitalize on opportunities that arise.