Move Past The January BV Loss For AGNC. February Is Covering It.

| About: AGNC Investment (AGNC)
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Summary

The latest values from AGNC indicate BVs were down for the first month.

I regularly model out the impact of BV changes for the various mREITs and I’m seeing AGNC recovering that BV in February.

If the Federal Reserve raises rates 3 times in 2017 it will be a disaster.

The price-to-book ratios a year ago were pricing in all of these risks and more, but today the market doesn’t care about risk.

AGNC Investment Corp. (AGNC) declared their BV for the end of January 2017 at $20.81. That was down from $21.17 at the end of the year, but I think things will be look a little better now. Not good enough for me to jump to the bull camp from the neutral camp, but still better than investors might expect upon seeing another decline in BV.

Calculating BV

I had the following calculations based on rates from 02-02-2017:

This was based on total returns since the start of Q3 2016. Near the bottom you’ll see the correction for $.05, which is how much I missed the Q4 values by. By my estimates, their February 2nd book value would’ve run $20.93. That is slightly higher than the $20.81 they declared, but prices were also up ever so slightly for February 2nd. For instance, the 30-Year FNMA 3.5 was trading at 102.05% of par at the end of January and 102.09% of par when I took my measurements. The difference is tiny, but it still explains part of the difference between $20.81 and $20.93.

How Can You Do It?

The technique I’m using here involves pulling data on every position the REIT carries and revaluing every last one of them. Then adjust for shares outstanding, net interest accrual, and dividends paid to find an estimate of current book value.

It all relies on publicly available information, so the process is entirely legal. This is simply the way professional analysts do their research on mortgage REITs.

Higher or Lower?

Since then, I have rebuilt my model to work on the Q4 positions rather than continuing to extrapolate from the Q3 2016 positions. Add in movements in yields and prices since 02-02-2017 and I expect book value today to be slightly higher. In a nutshell, if you’re worried about the loss of BV declared for January, try not to sweat it too much. Absent another change in rates over the next week, February should see that BV recover.

Beware - it is entirely possible that rates will move significantly within the next week and blow up this calculation.

What Determines The Gain or Loss of Book Value?

The major factor, beyond the level of the dividend, is the movement in rates (up or down) and the movement in spreads from RMBS to LIBOR swaps (wider or narrower).

If rates move down, AGNC’s book value should grow. If they move up, book value should suffer.

Yes, that means if the Federal Reserve raises rates 3 times this year, it will be a big setback for AGNC and for several other mortgage REITs. A year ago, the mREITs priced for that kind of disaster. Now, the discounts have disappeared.

If the RMBS to LIBOR swap spread widens, book value goes down but the company is in a great position to simply hedge and lock in the wider spreads. Consequently, if book value suffered from a wider spread between these instruments I would be more willing to buy at a higher price-to-book value ratio.

Dividends

AGNC pays one of the most conservative dividends among the agency RMBS mREITs. However, they are still exposed to the risk of significant changes in the interest rate environment. If rates continue to climb, it will create a significant problem. The last couple quarters AGNC has more than covered their dividend on net interest spread plus drop income (similar to normalized Core EPS from other mREITs).

A higher rate on borrowing through repurchase agreements could be created by the Federal Reserve moving rates higher. If borrowers prepay faster, it will also drive down the yield on assets, though that seems unlikely unless the Federal Reserve stalls out. AGNC is unlikely to have to deal with both of these problems at once.

Conclusion

AGNC Investment Corp. declared a loss on book value for the first month of the quarter, but it shouldn’t be indicative of their performance so far for the first quarter. Their portfolio is currently positioned with significant duration exposure. That increases their ability to produce net interest income, but they are exposed to risk from rates moving higher. A year ago, these problems were all priced into the discount to book value. Today, the market doesn’t show the same level of risk aversion.

If you’re interested in the preferred shares, I recently put together a piece showing how I evaluate preferred shares. AGNCP and AGNCB are both featured in the charts.

If you want to learn more about investing in high yield instruments, specifically mortgage REITs and their preferred shares, check out the reviews from my subscribers. The Mortgage REIT Forum averages 3 articles per week. One provides updated book value estimates for several mortgage REITs and includes my ratings (adjusted each week). The second article rates the different preferred shares and shows investors which ones are offering the best bargains. The third is used to highlight individual stocks and market failures or to provide a sneak preview on the articles I’m planning to publish over the next couple weeks. If you’re ready to take the plunge with a free trial, proceed straight to the Mortgage REIT Forum.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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

Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. This article is prepared solely for publication on Seeking Alpha and any reproduction of it on other sites is unauthorized. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.