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 13.2% economic return in 2024, but had slightly negative economic return in Q4 due to sharp increase in interest rates and modestly wider agency spreads. • In Q4, raised $511 million of common stock through at-the-market offering program at a premium to tangible net book value, bringing total issuance of accretive common equity for the year to approximately $2 billion. • Added approximately $2 billion in agency MBS in Q4, with portfolio composition moving up in coupon, reducing holdings in 4.5s and lower coupons, adding in higher coupons. • Added close to $12 billion in longer-term mostly treasury-based hedges during Q4, increasing hedge ratio to 91%. • Discussed US housing finance system and GSE conservatorships, emphasizing need to preserve current functionality and avoid disruptive outcomes.

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. 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. The portfolio totaled $73.3 billion as of December 31st, with $884 million in non-agency securities portfolio. 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.

• Expect agency spreads to benchmark rates to remain in the same well-defined trading range in 2025. • Outlook for agency mortgage-backed securities remains favorable with balanced supply and demand, and potential for upside demand. • Will continue to approach capital issuance and management opportunistically, considering accretion benefit and book value benefit. • Expect interest rate volatility to remain relatively low going forward, which should translate to lower hedge costs, though market conditions can change. • Leverage will be managed based on attractive and stable mortgage spreads and interest rate volatility conditions.

• Interest rate volatility could cause actual results to differ from forecast, affecting ex-ante and ex-post returns. • Uncertainty around fiscal policy, deficit spending, and magnitude of future treasury issuance due to US presidential election could overshadow investment sentiment. • Potential disruption to the housing finance system if changes to GSE conservatorships are done hastily without thoughtful consideration, harming housing affordability. • Volatility in repo market during reporting periods could lead to slightly higher costs, though not a limiting factor for demand.

Q: Asks about potential magnitude of equity issuance this year and balance sheet considerations.

A: Peter mentions opportunistic approach to equity issuance, looking at accretion benefit and book value benefit, and being comfortable with current scale.

Q: Asks about ROE math when funding with treasury futures versus swaps.

A: Peter explains that treasury-based hedges have less carry, and as swap spreads stabilize, they may rotate into swap-based hedges, affecting ROE.

Q: Asks about dividend outlook and comparison of mark-to-market returns to current dividend level.

A: Peter says they look at total cost of capital hurdle rate versus expected return at current portfolio valuations, with gross ROEs expected to be between 17% and 18.5% aligning with total cost of capital.

Q: Asks about volatility and cost of volatility in the equation.

A: Peter says interest rate volatility is expected to be lower going forward, but market conditions change, and ability to raise capital at accretive level can offset some hedge costs.

Q: Asks about hedge ratio increase in Q4 and outlook for hedge ratio in 2025.

A: Peter says they were active in rebalancing hedges due to uncertainty before election, and may rotate out of treasury-based hedges as swap spreads stabilize.

Q: Asks about agency MBS demand outlook.

A: Peter says supply and demand for agency MBS is fairly balanced, with potential for bank demand if regulation is less onerous.

Q: Asks about portfolio additions, leverage target, and relative value views of TBAs versus spec pools.

A: Peter says leverage has been consistent, and Chris mentions shifting holdings to higher coupons, with TBA valuations still attractive.

Q: Asks about prepayment speeds projection and reinvestment risk.

A: Peter says prepayment speeds were impacted by rate changes, and active management is key.

Q: Asks about impact of bank regulation on bank appetite and repo market.

A: Peter says bank regulation is likely less onerous, and repo market has capacity, though may have slightly higher costs during reporting periods.

Q: Asks about impact of ATM timing on earnings.

A: Peter says raising capital at accretive level and deploying gradually later in the quarter allowed investing at attractive levels.

Q: Asks about risks to base case of spreads remaining in trading range.

A: Peter says risks include monetary policy and interest rate volatility, and uncertainty around housing policy and GSE conservatorships