AGNC Investment Corp. 10-K Analysis & Summary – 2/21/2025

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AGNC Investment Corp.

10-K

Annual report

Filing date:

02/21/2025

TLDR:

AGNC Investment Corp.’s 2024 Form 10-K indicates improved financial performance with increased profitability metrics. However, the company remains highly leveraged, posing risks in a rising interest rate environment.

ELI5:

AGNC, a company that invests in mortgages, had a better year in 2024, making more money. But they also borrowed a lot of money, which could be risky if interest rates go up.

Accession #:

0001423689-25-000007

Published on

March 16, 2025

Analyst Summary

Comprehensive Income increased to $0.84 per diluted common share in 2024 from $0.30 in 2023.
Net Spread and Dollar Roll Income decreased to $1.88 per diluted common share in 2024 from $2.61 in 2023.
Net Interest Rate Spread averaged 2.42% in 2024, down from 3.06% in 2023.
Average and ending “at risk” leverage for 2024 was 7.2x tangible stockholders’ equity.
Unencumbered Assets: $6.1 billion in cash and unencumbered Agency RMBS, representing 66% of tangible stockholders’ equity.
Operating Profit Margin increased to 128.69% in 2024 from 119.65% in 2023.
Net Profit Margin increased to 29.26% in 2024 from 7.59% in 2023.
Return on Assets (ROA) increased to 0.98% in 2024 from 0.22% in 2023.
Return on Equity (ROE) was 8.84% in 2024.
Basic and Diluted EPS increased to $0.93 in 2024 from $0.05 in 2023.
Debt-to-Equity Ratio increased to 8.02 in 2024 from 7.67 in 2023.
Debt-to-Assets Ratio increased to 0.89 in 2024 from 0.88 in 2023.
Interest Coverage Ratio increased to 1.30 in 2024 from 1.07 in 2023.
Revenue Growth was 44.49% in 2024.
Net Income Growth was 456.77% in 2024.
EPS Growth was 1760% in 2024.

Opportunities and Risks

Favorable Market Conditions: The current market environment for Agency RMBS offers attractive return opportunities due to wide spreads relative to benchmark rates.
Potential Increase in Bank Demand: Easing regulatory constraints on banks could increase demand for Agency RMBS, supporting valuations.
Common Stock Issuance at a Premium: The ability to raise capital through common stock issuance at a premium to tangible net book value provides book value accretion for common stockholders.
Spread Risk: As a levered investor in Agency RMBS, AGNC is inherently exposed to spread risk, which can significantly impact tangible net book value.
Interest Rate and Spread Volatility: Elevated volatility can affect liquidity, increase costs, and impair risk management effectiveness.
Fed’s Participation in the Agency Mortgage Market: Changes in the Fed’s balance sheet and monetary policy can impact Agency RMBS values and spreads.
Reliance on Short-Term Borrowings: AGNC’s dependence on short-term borrowings exposes it to funding risks and potential increases in borrowing costs.
Cybersecurity Incidents: Although no material cybersecurity incidents have been identified, the increasing sophistication of cyber threats poses a risk to operations.

Potential Implications

Company Performance

Monitor Net Interest Spread: Closely track the net interest spread and its components to assess the impact of hedging strategies and borrowing costs on profitability.
Evaluate Risk Management Effectiveness: Continuously evaluate the effectiveness of risk management strategies, particularly in managing spread risk and interest rate volatility.
Assess Macroeconomic Impact: Monitor potential policy changes and GSE reform initiatives to understand their impact on the Agency RMBS market and AGNC’s business.
Enhance Cybersecurity Measures: Continue to enhance cybersecurity defenses to mitigate the risk of operational disruptions and data breaches.

AGNC Investment Corp. (AGNC) SEC Filing Report – Form 10-K (2024)

Executive Summary

This report analyzes AGNC Investment Corp.’s 2024 Form 10-K, focusing on financial performance, risk factors, and key strategic elements. AGNC, a mortgage REIT, primarily invests in Agency RMBS. The report assesses the company’s ability to generate stockholder returns, manage risks, and maintain its REIT status. The overall assessment is cautiously optimistic, given the favorable market conditions for Agency RMBS, but acknowledges the persistent macroeconomic uncertainties. A “Hold” recommendation is appropriate, pending further clarity on the impact of potential policy changes and continued effective risk management.

Company Overview

AGNC Investment Corp. is a leading mortgage REIT focused on investing in Agency RMBS. The company aims to provide stable, long-term returns to stockholders through monthly dividend distributions. AGNC is internally managed and primarily funds its investments through repurchase agreements. The current market environment is increasingly favorable for Agency RMBS, driven by the Fed’s shift towards accommodative monetary policy.

Detailed Analysis

Management’s Discussion and Analysis (MD&A)

Management expresses optimism about the Agency RMBS market in 2025, citing attractive return opportunities due to wide spreads relative to benchmark rates. They anticipate a stable supply of Agency RMBS, aligning with investor demand. However, they acknowledge macroeconomic uncertainties related to potential policy changes and GSE reform.

Financial Statement Analysis

Key Ratios and Trends

Comprehensive Income: Increased to $0.84 per diluted common share in 2024 from $0.30 in 2023.
Net Spread and Dollar Roll Income: Decreased to $1.88 per diluted common share in 2024 from $2.61 in 2023, primarily due to a narrowing net interest rate spread.
Net Interest Rate Spread: Averaged 2.42% in 2024, down from 3.06% in 2023, driven by higher swap costs and a shift towards Treasury-based hedges.
Leverage: Average and ending “at risk” leverage for 2024 was 7.2x tangible stockholders’ equity, compared to 7.4x and 7.0x, respectively, for 2023.
Unencumbered Assets: $6.1 billion in cash and unencumbered Agency RMBS, representing 66% of tangible stockholders’ equity.

Visual Aids

Market Information Summary

Metric	Dec 31, 2023	Dec 31, 2024	Change
Target Federal Funds Rate (Upper Band)	5.50%	4.50%	-100 bps
SOFR Rate	5.38%	4.49%	-89 bps
10-Year U.S. Treasury	3.88%	4.57%	+69 bps
30-Year Mortgage Rate	6.56%	6.86%	+30 bps

Mortgage and Credit Spreads

Spread	Dec 31, 2023	Dec 31, 2024	Change
30-Year Agency Current Coupon Yield to 5-Year U.S. Treasury Spread	140 bps	145 bps	+5 bps
CRT M2	206 bps	137 bps	-69 bps
CMBS AAA	118 bps	72 bps	-46 bps

Red Flags and Uncommon Metrics

Narrowing Net Interest Spread: The decrease in net interest spread raises concerns about future profitability, especially if borrowing costs continue to rise.
Increased Use of Treasury-Based Hedges: While diversifying hedging strategies, the shift towards Treasury-based hedges impacts the reported net interest spread, potentially masking the true cost of funds.

Risk and Opportunity Assessment

Risks

Spread Risk: As a levered investor in Agency RMBS, AGNC is inherently exposed to spread risk, which can significantly impact tangible net book value.
Interest Rate and Spread Volatility: Elevated volatility can affect liquidity, increase costs, and impair risk management effectiveness.
Fed’s Participation in the Agency Mortgage Market: Changes in the Fed’s balance sheet and monetary policy can impact Agency RMBS values and spreads.
Reliance on Short-Term Borrowings: AGNC’s dependence on short-term borrowings exposes it to funding risks and potential increases in borrowing costs.
Cybersecurity Incidents: Although no material cybersecurity incidents have been identified, the increasing sophistication of cyber threats poses a risk to operations.

Opportunities

Favorable Market Conditions: The current market environment for Agency RMBS offers attractive return opportunities due to wide spreads relative to benchmark rates.
Potential Increase in Bank Demand: Easing regulatory constraints on banks could increase demand for Agency RMBS, supporting valuations.
Common Stock Issuance at a Premium: The ability to raise capital through common stock issuance at a premium to tangible net book value provides book value accretion for common stockholders.

Conclusion and Actionable Insights

AGNC Investment Corp. is navigating a complex market environment with both opportunities and risks. While the current conditions favor Agency RMBS investments, macroeconomic uncertainties and inherent risks associated with leverage and interest rate volatility require careful monitoring.

Overall Assessment: Hold

Recommendations:

Monitor Net Interest Spread: Closely track the net interest spread and its components to assess the impact of hedging strategies and borrowing costs on profitability.
Evaluate Risk Management Effectiveness: Continuously evaluate the effectiveness of risk management strategies, particularly in managing spread risk and interest rate volatility.
Assess Macroeconomic Impact: Monitor potential policy changes and GSE reform initiatives to understand their impact on the Agency RMBS market and AGNC’s business.
Enhance Cybersecurity Measures: Continue to enhance cybersecurity defenses to mitigate the risk of operational disruptions and data breaches.

AGNC Investment Corp. Financial Analysis (Year Ended December 31, 2024)

1. Financial Ratio and Metric Analysis

Profitability

Gross Profit Margin: Not applicable. AGNC is a REIT, not a typical retail/manufacturing company.
Operating Profit Margin:
- Ratio/Metric: (Net Income + Interest Expense) / Revenue Proxy = ($863 + $2931) / $2949 = 128.69%
- Trend: Previous year (Net Income + Interest Expense) / Revenue Proxy = ($155 + $2287) / $2041 = 119.65%
- Industry: REITs generally have high operating profit margins due to their business model.
Net Profit Margin:
- Ratio/Metric: Net Income / Interest Income = $863 / $2949 = 29.26%
- Trend: Previous year Net Income / Interest Income = $155 / $2041 = 7.59%
- Industry: The industry average varies, but a healthy REIT typically has a net profit margin above 20%.
Return on Assets (ROA):
- Ratio/Metric: Net Income / Total Assets = $863 / $88,015 = 0.98%
- Trend: Previous year Net Income / Total Assets = $155 / $71,596 = 0.22%
- Industry: REITs generally have lower ROAs than other industries due to their asset-heavy nature.
Return on Equity (ROE):
- Ratio/Metric: Net Income / Total Stockholders’ Equity = $863 / $9,762 = 8.84%
- Industry: A good ROE for a REIT is typically in the range of 8-12%.
Earnings Per Share (EPS) – Basic and Diluted:
- Ratio/Metric: Basic EPS = $0.93, Diluted EPS = $0.93
- Trend: Previous year Basic EPS = $0.05, Diluted EPS = $0.05
- Industry: EPS varies widely among REITs.

Liquidity

Current Ratio:
- Ratio/Metric: Current Assets / Current Liabilities = ($505 + $1266 + $205 + $17137) / ($60798 + $64 + $74 + $94 + $143 + $16676) = $18,113 / $77,850 = 0.23
- Trend: Previous year Current Assets / Current Liabilities = ($518 + $1253 + $185 + $11618) / ($50426 + $80 + $210 + $362 + $115 + $10894) = $13,574 / $62,087 = 0.22
- Industry: A current ratio below 1 is common for REITs, as they rely heavily on debt financing.
Quick Ratio (Acid-Test Ratio):
- Ratio/Metric: (Current Assets – Inventory) / Current Liabilities = ($505 + $1266 + $205 + $17137) / ($60798 + $64 + $74 + $94 + $143 + $16676) = $18,113 / $77,850 = 0.23 (Assuming no inventory)
- Trend: Previous year (Current Assets – Inventory) / Current Liabilities = ($518 + $1253 + $185 + $11618) / ($50426 + $80 + $210 + $362 + $115 + $10894) = $13,574 / $62,087 = 0.22 (Assuming no inventory)
- Industry: Similar to the current ratio, a low quick ratio is typical for REITs.
Cash Ratio:
- Ratio/Metric: (Cash + Restricted Cash) / Current Liabilities = ($505 + $1266) / ($60798 + $64 + $74 + $94 + $143 + $16676) = $1771 / $77,850 = 0.02
- Trend: Previous year (Cash + Restricted Cash) / Current Liabilities = ($518 + $1253) / ($50426 + $80 + $210 + $362 + $115 + $10894) = $1771 / $62,087 = 0.03
- Industry: A very low cash ratio is common for REITs.

Solvency/Leverage

Debt-to-Equity Ratio:
- Ratio/Metric: Total Liabilities / Total Stockholders’ Equity = $78,253 / $9,762 = 8.02
- Trend: Previous year Total Liabilities / Total Stockholders’ Equity = $63,339 / $8,257 = 7.67
- Industry: REITs typically have high debt-to-equity ratios.
Debt-to-Assets Ratio:
- Ratio/Metric: Total Liabilities / Total Assets = $78,253 / $88,015 = 0.89
- Trend: Previous year Total Liabilities / Total Assets = $63,339 / $71,596 = 0.88
- Industry: A high debt-to-assets ratio is common for REITs.
Interest Coverage Ratio (Times Interest Earned):
- Ratio/Metric: EBIT / Interest Expense = (Net Income + Interest Expense + Income Tax Expense) / Interest Expense = ($863 + $2931 + $0) / $2931 = 1.30
- Trend: Previous year EBIT / Interest Expense = (Net Income + Interest Expense + Income Tax Expense) / Interest Expense = ($155 + $2287 + $0) / $2287 = 1.07
- Industry: A low interest coverage ratio is common for REITs.

Activity/Efficiency

Asset Turnover:
- Ratio/Metric: Revenue Proxy / Average Total Assets = $2949 / (($88015 + $71596) / 2) = $2949 / $79805.5 = 0.04
- Trend: Previous year Revenue Proxy / Average Total Assets = $2041 / (($71596 + $51748) / 2) = $2041 / $61672 = 0.03
- Industry: REITs generally have low asset turnover ratios.

Valuation

Price-to-Earnings Ratio (P/E):
- Ratio/Metric: Market Cap / Net Income = (Shares Outstanding * Stock Price) / Net Income = (897.4 * $25.11) / $863 = $22,533.71 / $863 = 26.11
- Trend: Not enough information to calculate previous P/E
- Industry: P/E ratios for REITs can be misleading due to depreciation and other non-cash charges.
Price-to-Book Ratio (P/B):
- Ratio/Metric: Market Cap / Book Value of Equity = (Shares Outstanding * Stock Price) / Total Stockholders’ Equity = (897.4 * $25.11) / $9762 = $22,533.71 / $9762 = 2.31
- Trend: Not enough information to calculate previous P/B
- Industry: P/B ratios for REITs can be misleading due to depreciation and other non-cash charges.
Price-to-Sales Ratio (P/S):
- Ratio/Metric: Market Cap / Revenue Proxy = (Shares Outstanding * Stock Price) / Interest Income = (897.4 * $25.11) / $2949 = $22,533.71 / $2949 = 7.64
- Trend: Not enough information to calculate previous P/S
- Industry: P/S ratios for REITs can be misleading due to depreciation and other non-cash charges.
Enterprise Value to EBITDA (EV/EBITDA):
- Ratio/Metric: (Market Cap + Total Debt – Cash) / (Net Income + Interest Expense + Taxes + Depreciation & Amortization) = ($22,533.71 + $59426 – $1771) / ($863 + $2931 + $0 + $123) = $80,188.71 / $3917 = 20.47
- Trend: Not enough information to calculate previous EV/EBITDA
- Industry: EV/EBITDA is a more useful valuation metric for REITs than P/E.

Growth Rates

Revenue Growth:
- Ratio/Metric: (Current Revenue – Previous Revenue) / Previous Revenue = ($2949 – $2041) / $2041 = 44.49%
Net Income Growth:
- Ratio/Metric: (Current Net Income – Previous Net Income) / Previous Net Income = ($863 – $155) / $155 = 456.77%
EPS Growth:
- Ratio/Metric: (Current EPS – Previous EPS) / Previous EPS = ($0.93 – $0.05) / $0.05 = 1760%

Other Relevant Metrics

Average Tangible Net Book Value “At Risk” Leverage: The company highlights this non-GAAP metric, which was 7.2:1 at the end of 2024, compared to 7.0:1 at the end of 2023. This metric reflects the company’s leverage relative to its tangible equity, excluding goodwill and other intangible assets. It is a key indicator of the company’s risk profile.
Economic Return on Tangible Common Equity: The company reported an economic return on tangible common equity of 13.2% for 2024, compared to 3.0% in 2023 and -28.4% in 2022. This metric is a non-GAAP measure that adjusts net income for certain non-cash items and provides a more comprehensive view of the company’s profitability.
Net Spread and Dollar Roll Income per Common Share: The company reported net spread and dollar roll income per common share of $1.88 for 2024, compared to $2.61 in 2023 and $3.12 in 2022. This metric is a non-GAAP measure that adjusts net income for certain non-cash items and provides a more comprehensive view of the company’s profitability.

2. Commentary

AGNC Investment Corp. demonstrated a significant improvement in financial performance in 2024 compared to 2023. The company’s profitability metrics, including net profit margin, ROA, ROE, and EPS, all showed substantial increases. This improvement was driven by a combination of increased interest income and gains on derivative instruments. However, the company remains highly leveraged, as indicated by its high debt-to-equity and debt-to-assets ratios, which could pose risks in a rising interest rate environment.