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Focus of Article

The focus of this article is to provide a detailed projection of AGNC Investment Corp.’s (NASDAQ:AGNC) book value (“BV”) per common share as of 3/31/2017. Prior to results being provided to the public on 4/26/2017 (via the company’s quarterly press release), I would like to analyze AGNC’s BV as of 3/31/2017 and provide readers a general direction on how I believe this recent quarter has panned out. A previous three-part article I wrote laid the ground works for this BV projection. In that article, I projected/analyzed the company’s income statement (technically speaking, its “consolidated statement of comprehensive income”) for the first quarter of 2017. The links to that three-part projection article are provided below:

AGNC Investment Corp.’s Q1 2017 Income Statement Projection – Part 1 (Including Current Recommendation)

AGNC Investment Corp.’s Q1 2017 Income Statement and EPS Projection – Part 2

AGNC Investment Corp.’s Q1 2017 Income Statement and EPS Projection – Part 3

By understanding the trends that occurred within AGNC’s operations during the first quarter of 2017, one can apply this information to sector peers as well. As such, the discussion/analysis below is not solely applicable to AGNC but to the fixed-rate agency mortgage real estate investment trust (mREIT) sector as a whole. This includes, but is not limited to, the following fixed-rate agency mREIT peers: 1) Arlington Asset Investment Corp. (NYSE:AI); 2) ARMOUR Residential REIT Inc. (NYSE:ARR); 3) Cherry Hill Mortgage Investment Corp. (NYSE:CHMI); 4) CYS Investments Inc. (NYSE:CYS); 5) Annaly Capital Management Inc. (NYSE:NLY); and 6) Orchid Island Capital Inc. (NYSE:ORC). Technically speaking, several years ago, AI changed its “entity status” from a REIT to a C-Corp. per the Internal Revenue Code (“IRC”). However, AI still maintained many “mREIT-like” characteristics, including the type of investments held by the company and the amount of annual dividend distributions paid to shareholders.

In addition, the following hybrid mREITs had at least a modest portion of each company’s MBS portfolio in fixed-rate agency MBS (also typically having higher durations): 1) Dynex Capital Inc. (NYSE:DX); 2) Invesco Mortgage Capital Inc. (NYSE:IVR); 3) MFA Financial Inc. (NYSE:MFA); 4) AG Mortgage Investment Trust Inc. (NYSE:MITT); 5) MTGE Investment Corp. (NASDAQ:MTGE); 6) Two Harbors Investment Corp. (NYSE:TWO); and 7) Western Asset Mortgage Capital Corp. (NYSE:WMC). As such, the analysis below is not solely applicable to one company but more so the agency/hybrid mREIT sector as a whole.

This article will also include a brief BV discussion regarding AGNC’s affiliate MTGE and the company’s sector peer NLY. This includes a BV projection as of 3/31/2017 for both companies.

Overview of AGNC’s Projected BV as of 3/31/2017

Due to the fact that several figures needed to project/calculate AGNC’s BV as of 3/31/2017 come directly from the company’s consolidated statements of comprehensive income, Table 1 is provided below. Table 1 shows the company’s consolidated statements of comprehensive income from a three months ended time frame. Using Table 1 below as a reference, one must add certain account figures from the first quarter of 2017 for purposes of projecting a suitable BV as of 3/31/2017.

Table 1 – AGNC Three Months Ended Consolidated Statements of Comprehensive Income

(Source: Table created entirely by myself, partially using data obtained from AGNC’s quarterly investor presentation slides)

Having provided Table 1 above, we can now begin to calculate AGNC’s projected BV as of 3/31/2017. This projection will be calculated in Table 2 below. There will not be an identical sheet the company provides that matches the data within Table 2. I have gathered specific information derived from multiple tables/charts for a more detailed analysis of AGNC’s BV as of 3/31/2017. The company, through its quarterly investor presentation slides(see link above), only provides the public with a “Book Value Roll Forward” slide. This specific slide uses information based only on a quarterly time frame. I perform a more detailed quarterly BV calculation/analysis based on the entire year.

Table 2 – AGNC Three Months Ended BV Projection (BV as of 3/31/2017)

(Source: Table created entirely by myself, including all calculated figures and projected valuations)

Using Table 2 above as a reference, let us take a look at the calculation for AGNC’s projected BV as of 3/31/2017. Unless otherwise noted, all figures below are for the “three months ended” time frame. Let us take a look at the following figures in corresponding order to the “Ref.” column shown in Table 2 (next to the March 31, 2017, column):

A) Operations

B) Other Comprehensive Income (Loss) (OCI/(OCL))

C) Stockholder Transactions

D) Capital Share Transactions

A) Operations

– Increase in Net Common Equity From Operations Estimate of $145 Million; Range ($105)-$395 Million

Confidence Within Range = Moderate to High

– See Red Reference “A” in Table 2 Above, Next to the March 31, 2017, Column

This “net increase (decrease) in net common equity from operations” figure consists of the following amounts that come directly from the company’s consolidated statement of comprehensive income (see Tables 1 and 2 above): 1) net interest income; 2) total other income (loss); 3) total expenses; and 4) excise tax.

Due to the fact that I discussed these amounts in my previous three-part AGNC consolidated statement of comprehensive income projection article (see links near the top), further discussion of this figure is redundant/unwarranted.

B) Other Comprehensive Income (Loss) (OCI/(OCL)):

– Increase in Net Common Equity From Other Comprehensive Income (OCI) Estimate of $51 Million; Range ($199)-$301 Million

Confidence Within Range = Moderate to High

– See Red Reference “B” in Table 2 Above, Next to the March 31, 2017, Column

This “net increase (decrease) in net common equity from OCI/(OCL)” figure consists of the following accounts that come directly from the company’s consolidated statement of comprehensive income (see Tables 1 and 2 above): 1) unrealized gain (loss) on available-for-sale (“AFS”) securities, net; and 2) unrealized gain (loss) on derivative instruments, net (upon reclassification to interest expense).

Due to the fact that I also discussed these accounts in my previous three-part AGNC consolidated statement of comprehensive income article (see links near the top), further discussion of this figure is redundant/unwarranted as well.

C) Stockholder Transactions

Decrease in Net Common Equity From Stockholder Transactions Estimate of ($187) Million; Range ($197)-($177) Million

Confidence Within Range = High

– See Red Reference “C” in Table 2 Above, Next to the March 31, 2017, Column

This “net increase (decrease) in net common equity from stockholder transactions” figure is AGNC’s dividend distributions for the first quarter of 2017. This figure includes activity in relation to the following types of outstanding shares of stock: 1) common; and 2) preferred.

1) Common Stock

a) First quarter of 2017

Prior to projecting its common stock dividend distributions for the first quarter of 2017, let us first discuss how the number of the company’s outstanding shares of common stock could change during any given quarter. AGNC has the following three programs which could impact the number of outstanding shares of common stock the company has when monthly dividends are declared: 1) at-the-market (“ATM”) offering program; 2) dividend reinvestment/direct stock purchase program; and 3) stock repurchase program.

Even though AGNC stock price throughout the quarter traded near its “tangible” BV as of 12/31/2017 ($19.50 per share), I am making the assumption there was no activity within the company’s ATM offering or dividend reinvestment/direct stock purchase programs during the first quarter of 2017. If the company did go ahead and issue some shares of common stock during the first quarter of 2017, then its dividend distributions would be towards the lower end of my projected range.

When it comes to AGNC’s repurchase program, this was created in October 2012 and recently allowed the company to repurchase up to $2 billion of its outstanding shares of common stock through 12/31/2016. However, in October 2016, this existing repurchase program was terminated and replaced with a new program which allowed AGNC to repurchase up to $1 billion of its outstanding shares of common stock through 12/31/2017. As of 12/31/2016, the company had $1 billion remaining under its stock repurchase program. AGNC intends to buy back outstanding shares of common stock only when the repurchase price is materially accretive to CURRENT tangible BV. As discussed above, since the stock price throughout the first quarter of 2017 traded near the company’s “tangible” BV as of 12/31/2017 ($19.50 per share), I believe management did not repurchase any outstanding shares of common stock.

The dividend declared on AGNC’s common stock for the first quarter of 2017 totaled $0.54 per share. This was an unchanged dividend when compared to the prior quarter. When calculated, I am projecting AGNC had dividend distributions to common shareholders of ($180) million for the first quarter of 2017 or for the three months ended 3/31/2017. Now let us project the preferred stock dividend distributions.

2) Preferred Stock

a) First quarter of 2017

The dividend declared on AGNC’s “Series A Preferred Stock” (AGNCP) and the company’s “Series B Preferred Stock” (AGNCB) for the first quarter of 2017 was $0.50 per share and $0.484375 per depositary share, respectively. As such, this was an unchanged dividend when compared to the prior quarter. There were still 6.9 and 7.0 million outstanding shares of AGNCP and AGNCB as of 3/29/2017, respectively (ex-dividend date). When calculated, I am projecting AGNC had dividend distributions to AGNCP and AGNCB shareholders of ($3.5) and ($3.4) million for the first quarter of 2017, respectively. When combined, I am projecting the company had dividend distributions to preferred shareholders of ($6.8) million (rounded) for the three months ended 3/31/2017.

After combining the common and preferred stock dividend distributions for the first quarter of 2017, I am projecting AGNC’s total “distributions to stockholders from estimated REIT taxable income/undistributed taxable income (“UTI”)” and decrease in net common equity from stockholder transactions was ($187) million for the three months ended 3/31/2017 (see red reference “C” in Table 2 above).

D) Capital Share Transactions

– Decrease in Net Common Equity From Capital Share Transactions Estimate of $0 Million; Range ($50)-$150 Million

– Confidence Within Range = Moderate to High

– See Red Reference “D” in Table 2 Above, Next to the March 31, 2017, Column

As stated earlier, I am making the assumption no additional shares of common stock were issued under AGNC’s ATM offering or dividend reinvestment/direct stock purchase programs during the first quarter of 2017. Also, since there were no additional preferred stock equity offerings during the first quarter of 2017, the following figures should have no activity: 1) issuance of preferred stock; and 2) preferred stock $25,000 per share liquidation preference. Since AGNC officially internalized the company’s management structure through its acquisition of American Capital Mortgage Management (“ACMM”) last year, management may be partially compensated through the issuance of common stock subject to certain vesting options. As such, the company may have some minor amount of equity issuance through the following accounts: 1) issuance of restricted stock; and/or 2) issuance of common stock under stock-based compensation program. However, due to the immaterial impact such restricted stock and/or stock-based compensation would represent, I have projected no amount within these two accounts during the first quarter of 2017. Any actual amount of restricted stock and/or stock-based compensation during the first quarter of 2017 (through the issuance of new shares) would only have a fractional per share impact on AGNC’s BV as of 3/31/2017.

Regarding AGNC’s “repurchases of common stock” figure, as stated earlier I am making the assumption management did not purchase any outstanding shares of common stock under the company’s stock repurchase program during the first quarter of 2017. Therefore, I am projecting AGNC had a “net common equity from capital share transactions” figure of $0 for the three months ended 3/31/2017 (see red reference “D” in Table 2 above).

MTGE’s Projected BV as of 3/31/2017

When compared to AGNC, I am projecting MTGE had a fairly similar BV per share fluctuation (percentage-wise) for the first quarter of 2017. Each company’s agency MBS and derivatives portfolios as of 12/31/2016 had several similarities, which were discussed in my three-part AGNC income statement projection article (see links near the top).

MTGE also had a sizable non-agency MBS portfolio as of 12/31/2016 when compared to AGNC (proportionately speaking). MTGE’s and AGNC’s non-agency MBS portfolio comprised 40% and less of 1% of each company’s entire MBS portfolio, respectively. MTGE had a total non-agency MBS portfolio of $1.29 billion as of 9/30/2016. This balance decreased to $1.13 billion as of 12/31/2016. When compared to MTGE’s agency MBS portfolio of $2.80 billion, management decreased the proportional share of the company’s non-agency MBS portfolio by (4%) during the fourth quarter of 2016.

With the continued flat to slight appreciation in real estate prices and a continued relatively minor net change in mortgage delinquencies and foreclosures (low credit risk), most non-agency MBS pools experienced relatively unchanged price fluctuations during the first quarter of 2017 (similar to most agency MBS coupons).

When taking all quarterly activities into consideration (including additional data not discussed within this specific article), I am projecting MTGE will report the following BV per common share as of 3/31/2017:

MTGE’s Projected BV as of 3/31/2017 = $19.30 Per Common Share (Range $18.80-19.80 Per Common Share)

NLY’s Projected BV as of 3/31/2017

As was highlighted in my three-part AGNC income statement projection article (see links near the top of this article), I discussed certain subtle differences between AGNC’s and NLY’s agency MBS portfolio. Furthermore, it was discussed that each company had a different strategy regarding derivative instruments going into the first quarter of 2017. As of 12/31/2016, AGNC had a hedging coverage ratio of 91%, whereas NLY only had a hedging coverage ratio of 53%. As such, NLY was more vulnerable if mortgage interest rates/U.S. Treasury yields modestly-materially increased during the first quarter of 2017. Simply put, this did not occur.

As such, NLY’s lower hedging coverage ratio at the start of the first quarter of 2017 was an advantage for the company when compared to AGNC. In addition, it should also be noted, management has recently broadened NLY’s investment portfolio by allocating more capital into commercial debt/real estate, preferred equity, corporate debt, and most recently, middle market (“MM”) lending. Also, NLY recently acquired a variable-rate agency mREIT, Hatteras Financial Corp. (NYSE:HTS). Generally speaking these asset classes, when compared to fixed-rate agency MBS, performed slightly more favorably during the first quarter of 2017.

When taking all quarterly activities into consideration (including additional data not discussed within this specific article), I am projecting NLY will report the following BV per common share as of 3/31/2017:

NLY’s Projected BV as of 3/31/2017 = $11.30 Per Common Share (Range $10.90-11.70 Per Common Share)

Conclusions Drawn

To sum up all the information discussed above, I am projecting AGNC will report the following BV per common share as of 3/31/2017:

AGNC’s Projected BV as of 3/31/2017 = $21.20 Per Common Share (Range $20.70-21.70 Per Common Share)

This projection is a $0.03 per common share increase from the company’s BV as of 12/31/2016. This minor increase can be attributed to two factors. The first factor is in relation to the activity within AGNC’s consolidated statement of comprehensive income. I am projecting the company will report net income of $145 million for the first quarter of 2017, while reporting OCI of $51 million. When both figures are combined, I am projecting it will report comprehensive income of $196 million for the first quarter of 2017.

The second factor is in relation to the activity within AGNC’s equity section of the balance sheet. The company paid for/accrued dividend distributions totaling ($0.54) per common share during the first quarter of 2017. In addition, AGNC paid for/accrued dividend distributions in regards to holders of the company’s outstanding shares of preferred stock.

When combined, these two factors account for a projected quarterly BV increase of $0.03 per common share. When calculated, I am projecting the company’s BV per common share had an increase of 0.12% during the first quarter of 2017. I am also projecting AGNC generated an “economic return” (dividends paid/accrued for and net change in BV) of 2.55% for the first quarter of 2017.

Contrary to the general trend witnessed during the prior quarter, there was a more “neutral/muted” relationship between MBS prices and derivative instrument valuations during the first quarter of 2017 (“option adjusted spreads”; OAS). As such, I believe most mREIT peers will report only a minor (less than 5%) fluctuation in quarterly BV. With that being said, I believe most mREIT stock prices have already “priced in” this more neutral/muted relationship when it comes to sector valuations.

I believe four key factors to analyze within the fixed-rate agency mREIT sector this quarter are the following: 1) each company’s proportion of 15-year MBS holdings versus 30-year MBS holdings; 2) each company’s hedging coverage ratio; 3) each company’s proportion of long-term derivative instruments versus short-term derivative instruments; and 4) each company’s proportion of specified pools (for instance, HARP and LLB securities). Dependent upon these factors, I believe results will slightly vary across the fixed-rate agency mREIT sector for the first quarter of 2017.

Looking ahead to the second quarter of 2017, mortgage interest rates have net decreased (through 4/21/2017) when compared to the end of the prior quarter. The fixed-pay rate on interest rate swaps, U.S. Treasury yields, and the forward LIBOR curve have also net decreased through 4/21/2017 (when compared to 3/31/2017). In addition, it should be noted the relationship between agency MBS pricing and derivative instrument valuations has been relatively neutral/muted through the first three weeks of April (similar trend when compared to the first quarter of 2017).

Through a detailed analysis that will be omitted from this particular article, I am projecting AGNC’s BV as of 4/21/2017 has fluctuated ($0.25)-$0.15 per common share when compared to the company’s BV as of 3/31/2017. This projection excludes the April 2017 monthly dividend of $0.18 per common share (ex-dividend is 4/26/2017).

My BUY, SELL, or HOLD Recommendation:

From the analysis provided above, including additional factors not discussed within this article, I currently rate AGNC as a SELL when I believe the company’s stock price is trading at less than a (5.0%) discount to my projected BV as of 3/31/2017, a HOLD when trading at or greater than a (5.0%) but less than a (15.0%) discount to my projected BV as of 3/31/2017, and a BUY when trading at or greater than a (15.0%) discount to my projected BV as of 3/31/2017. My SELL range is a slight improvement when compared to PART 1 of my AGNC income statement projection article (approximately three weeks ago), due to the modest price increases in most fixed-rate agency MBS coupons during the first three weeks of April 2017.

Therefore, I currently rate AGNC as a SELL, since the stock is trading at or less than a (5.0%) discount to my projected BV as of 3/31/2017. My current price target for AGNC is approximately $20.15 per share. This is currently the price where my recommendation would change to a HOLD. The current price where my recommendation would change to a BUY is approximately $18.00 per share.

Along with the data presented within this article, this recommendation considers the following mREIT catalysts/factors: 1) projected future MBS price movements; 2) projected future derivative valuations; and 3) projected near-term dividend per share rates. This recommendation also considers the high probability of multiple Fed Funds Rate increases by the FOMC during 2017 (this is a more hawkish view when compared to most of last year) due to recent macroeconomic trends/events.

Final Note: Each investor’s BUY, SELL, or HOLD decision is based on one’s risk tolerance, time horizon, and dividend income goals. My personal recommendation will not fit each reader’s current investing strategy. The factual information provided within this article is intended to help assist readers when it comes to investing strategies/decisions.

On 9/12/2016 and 10/7/2016, I directly increased my position in AGNC at a weighted average purchase price of $18.985 and $18.745 per share, respectively. Each purchase had the same approximate monetary value. On 2/23/2017, I sold approximately 25% of my entire AGNC position (accumulated over seven years) at a weighted average price of $19.645 per share, as my price target at the time of $19.55 per share was met. On 3/17/2017, I sold approximately 15% of my existing AGNC position at a weighted average price of $19.684 per share. On 3/20/2017, I sold approximately 30% of my existing position at a weighted average price of $19.805 per share. On 3/28/2017, I sold my remaining position in AGNC at a weighted average price of $19.945 per share. As of the date of this article, I have “re-deployed” some of my AGNC cash proceeds into several private equity opportunities.

On 11/27/2015, I initiated a position in AGNCB – the Series B preferred stock. On 12/7/2015, 12/9/2015, 12/14/2015, 1/14/2016, and 1/20/2016, I selectively increased my position in the same. When combined, my AGNCB position has a weighted average purchase price of $23.215 per share. This weighted average per share price excludes all dividends received/reinvested. I currently hold (personally and through affiliated entities) 0.71% of the outstanding shares of AGNCB.

Each AGNC/AGNCB trade was disclosed to readers in “real time” (that day) via the StockTalks feature of Seeking Alpha. All trades/investments I have performed over the past few years have been disclosed to readers in real time (that day at the latest) via the StockTalks feature of Seeking Alpha. Through this resource, readers can look up all my prior disclosures (buys/sells) regarding all companies I cover here at Seeking Alpha (see my profile page for a list of all stocks covered).

Disclosure: I am/we are long AGNCB, MTGE.

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

Additional disclosure: I currently have no position in AGNC, AI, ARR, CHMI, CYS, DX, IVR, MFA, MITT, NLY, ORC, TWO, or WMC.

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