AGNC Investment Corp. Q4 FY2024 earnings call

• Favorable investment themes for agency mortgage-backed securities continued in 2024 with Fed shifting to neutral rates, easing inflation and yield curve steepening. • AGNC generated positive economic return of 13.2% in 2024 driven by monthly dividend, but had negative economic return of 0.6% in fourth quarter due to higher rates and wider spreads. • Opportunistically raised $511 million of common stock in fourth quarter through at-the-market offering, with total issuance of accretive common equity for the year at ~$2 billion. • Added ~$2 billion in agency MBS in fourth quarter, with portfolio totaling $73.3 billion as of December 31st, moving up in coupon, reducing 4.5s and lower coupons by ~$6 billion and adding ~$8 billion in 5% higher coupons. • Concluded quarter with non-agency securities portfolio at $884 million, added ~$12 billion in longer-term mostly treasury-based hedges, hedge ratio to funding liabilities increased to 91%, with treasury-based hedges at 53% of hedge portfolio on dollar duration basis. • Discussed US housing finance system and GSE conservatorships, emphasizing need for careful change to preserve current functionality and housing affordability.

In 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, with $0.36 of dividends declared per common share and a $0.41 decline in tangible net book value per share. 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. Average and ending leverage for the fourth quarter was unchanged at 7.2 times tangible equity. Unencumbered cash and agency MBS were $6.1 billion or 66% of tangible equity. Projected life CPR for the portfolio decreased to 7.7% from 13.2% in the third quarter, with actual CPRs averaging 9.6% up from 7.3% in the third quarter. 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 net interest rate spread to just above 190 basis points.

• Outlook for agency mortgage-backed securities remains favorable with well-balanced supply and demand, agency spreads expected to remain in attractive trading range. • Expect to approach capital issuance and management opportunistically, considering accretion benefit and book value benefit. • Hedge ratio may rotate back to swap-based hedges as swap spreads stabilize, potentially picking up additional carry. • Dividend outlook aligned with total cost of capital hurdle rate and expected gross ROE in range of 17% to 18.5% based on current valuations. • Leverage to be managed based on attractive and stable mortgage spreads and interest rate volatility conditions.

• Monetary policy and interest rate volatility could cause spreads to move outside trading range, impacting returns. • Uncertainty around US housing finance system changes, including GSE conservatorships, could create spread volatility. • Potential for higher repo costs over reporting periods due to Fed draining bank reserves, though not a limiting factor for demand. • Bank regulation uncertainty and potential impact on bank appetite for mortgage-backed securities, though current outlook is for less onerous regulation.

Q: Bose George asked about equity issuance magnitude and ROE math with treasury futures vs swaps.

A: Peter Federico discussed opportunistic equity issuance, capital management, and explained ROE math considering treasury and swap-based hedges and spread ranges.

Q: Doug Harter asked about dividend outlook and volatility cost.

A: Peter Federico talked about dividend outlook aligned with cost of capital and expected ROE, and volatility impact on ex-ante/ex-post returns.

Q: Crispin Love asked about hedge ratio and agency MBS demand.

A: Peter Federico explained hedge ratio change due to election-related uncertainty and treasury-based hedges, and discussed agency MBS demand from money managers, bank demand, and supply outlook.

Q: Trevor Cranston asked about leverage target and TBA vs spec pools.

A: Peter Federico talked about leverage consistency and attractive spreads, and Christopher Kuehl discussed shifting to higher coupons and TBA vs spec pools relative value.

Q: Eric Hagen asked about prepayment speeds and bank repo impact.

A: Peter Federico discussed prepayment risk management and bank regulation impact on repo and mortgage spreads.

Q: Jason Stewart asked about futures impact and ATM timing.

A: Peter Federico and Bernie Bell discussed disclosure on treasury carry and impact of ATM timing on book value.

Q: Harsh Hemnani asked about risks to spread base case.

A: Peter Federico and Christopher Kuehl discussed risks from monetary policy, housing policy, and bank securities growth on spreads.