Agnc Investment Corp. · NASDAQ:AGNC
Agnc Investment — American Capital Agency — Investor Day (September 2014)
61 slides from Agnc Investment's investor day presentation, Sep 30, 2014
Slide 1: 2014 Mortgage REIT Day
© 2014 American Capital Agency Corp. All Rights Reserved. © 2014 American Capital Mortgage Investment Corp. All Rights Reserved. 2014 MORTGAGE REIT DAY OCTOBER 1, 2014
Slide 2: Safe Harbor Statement
2 This presentation contains statements that, to the extent they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). All such forward-looking statements are intended to be subje
Slide 3: AGNC: The Value Proposition
© 2014 American Capital Agency Corp. All Rights Reserved. © 2014 American Capital Mortgage Investment Corp. All Rights Reserved. AGNC: THE VALUE PROPOSITION OCTOBER 1, 2014
Slide 4: Safe Harbor Statement
2 This presentation contains statements that, to the extent they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). All such forward-looking statements are intended to be subje
Slide 5: AGNC Summary
* As of June 30, 2014 unless otherwise indicated 1. As of July 30, 2014 2. “Net Asset Value” and “Total Equity Capital” are net of the 8.000% Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”) liquidation preference of $173 million and the 7.750% Series B Cumulative Redeemab
Slide 6: MTGE Summary
Summary American Capital Mortgage Investment Corp. is an externally managed mortgage REIT formed to invest throughout the total mortgage market including both agency and non-agency sectors Our Investment Objective ♦ Provide attractive risk-adjusted returns to our investors over the long-term through
Slide 7: The Value Proposition for Investors
Industry leading economic returns over a wide range of economic and interest rate environments Actively managed asset selection, hedging, and funding strategies designed to balance risk and return objectives and mitigate book value exposure to large changes in interest rates Industry leading disclos
Slide 8: Industry Leading Performance
INDUSTRY LEADING PERFORMANCE
Slide 9: Volatile rates and changing prepayment landscape
7 ♦ While short term repo rates haves remained low since the crisis, we have experienced substantial volatility in both intermediate and longer term interest rates Three episodes where 5 and 10 year rates have increased over 100 bps ♦ The mortgage market has seen dramatic changes with respect to t
Slide 10: AGNC's Cumulative Economic Return
-2.3% 60.6% 32.7% 37.4% 32.2% -12.5% 15.2% 175.9% 18.0% -50% -25% 0% 25% 50% 75% 100% 125% 150% 175% 200% IPO - Dec 2008 Annualized 2009 2010 2011 2012 2013 2014 YTD ITD ITD Annualized 1. Not Annualized 8 AGNC’S CUMULATIVE ECONOMIC RETURN (QUARTERLY DIVIDENDS PLUS CHANGES IN BOOK VALUE) HAS TOTALED
Slide 11: AGNC Annual Economic Return Peer Comparison
9 ♦ AGNC’s total economic return of 206% since Dec 2008 exceeded the industry peer average by more than double AGNC’s total economic return exceeded that of the second best performer by nearly 70% ♦ AGNC has exceeded its peer average in every full year of its existence (and Q2’14 YTD) ♦ AGNC has b
Slide 12: AGNC Total Stock Return
* Agency REIT Peer Index includes NLY, CMO, HTS, ANH, ARR and CYS Source: SNL Financial; 5/14/08 – 6/30/14. Total return of a security over a period, including price appreciation and the reinvestment of dividends. Dividends are assumed to be reinvested at the closing price of the security on the ex-
Slide 13: Economic Return versus Hedge Fund Indices
1. AGNC economic return assumes dividend reinvestment for comparability purposes. Dividends assumed to be reinvested on the last day of the quarter declared at the quarter- end NAV. 2. Source: Preqin. Based on the average monthly returns of hedge funds focusing on mortgage-backed securities. The mon
Slide 14: Strong Risk Management
STRONG RISK MANAGEMENT
Slide 15: Risk Management Overview
13 ♦ We utilize a comprehensive approach to risk management that emphasizes careful asset selection, upfront hedging with Treasuries, swaps and swaptions and ongoing portfolio rebalancing ♦ We adjust the size and type of our hedge instruments based on the risks inherent in our assets for a given mar
Slide 16: AGNC Historical Economic Return Volatility
16.9% 15.6% 13.8% 7.4% 8.1% 8.9% 5.5% 9.4% 12.9% 8.5% 5.8% 8.2% 9.4% 5.5% 14.7% 1.2% -4.6% -8.2% 2.2% -2.7% 5.1% 9.9% -12.0% -7.0% -2.0% 3.0% 8.0% 13.0% 18.0% 23.0% Q1 '09 Q2 '09 Q3 '09 Q4 '09 Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4
Slide 17: Worst Quarterly Economic Return Relative to Peers
15 ♦ AGNC’s industry leading returns have been accompanied by less quarterly downside than its peers AGNC’s weakest quarter in any given year has always been better than the industry average AGNC’s economic return in its worst quarter was stronger than the weakest quarter of every peer in every
Slide 18: Scale and Liquidity
SCALE AND LIQUIDITY
Slide 19: Operating expenses and trading volume
♦ AGNC’s total operating expenses are approximately 1.56% of equity, which is low in comparison to other actively managed, levered fixed-income investors, such as hedge funds where fees are typically 1.5% of funds under management plus a 20% incentive fee 4 ♦ AGNC’s operating expenses as a percent o
Slide 20: Transparent, Shareholder Focused Management Team
TRANSPARENT, SHAREHOLDER FOCUSED MANAGEMENT TEAM
Slide 21: Disclosure and Transparency
19 ♦ Detailed breakdowns of assets, liabilities and hedges ♦ Estimates of asset duration by coupon and product type ♦ Duration gap estimates for multiple rate scenarios ♦ Estimates of mortgage spread risk ♦ AGNC also announced that it will begin disclosing monthly estimates of its NAV and will switc
Slide 22: Management Is Shareholder Focused
Source: Company filings; calculation based on 12/31/2012 common shares outstanding + follow-on issuance. 1. Agency peer group represents agency MBS focused REITs (In random order: NLY, CMO, HTS, ANH, ARR, CYS) 2. Hybrid REIT peer group represents residential agency and non-agency MBS focused REITs (
Slide 23: Management Is Shareholder Focused (Continued)
21 ♦ AGNC significantly repositioned its portfolio in 2013 away from lower coupon 30 year MBS despite the negative implications for management fee income AGNC incurred net realized losses on MBS sales of $1.4B, which effectively reduced its management fee base by 14% ♦ AGNC/MGTE senior executive c
Slide 24: Conclusion
Industry leading economic returns over a wide range of economic and interest rate environments Actively managed asset selection, hedging, and funding strategies designed to balance risk and return objectives and mitigate book value exposure to large changes in interest rates Industry leading disclos
Slide 25: Risk Management Overview
© 2014 American Capital Agency Corp. All Rights Reserved. RISK MANAGEMENT OVERVIEW OCTOBER 1, 2014
Slide 26: Safe Harbor Statement
NASDAQ: AGNC 2 This presentation contains statements that, to the extent they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). All such forward-looking statements are intende
Slide 27: Risk Management Overview
NASDAQ: AGNC 3 ♦ As an investor in agency MBS, the two biggest risks we face are: Interest rate risk, or the risk that changes in interest rates adversely impact our net asset value (“NAV”) Spread risk, or the risk that changes in the spread between agency MBS and swap or Treasury hedges adverse
Slide 28: Managing Spread Risk
NASDAQ: AGNC 4 ♦ As an investor in agency MBS, spread risk is a risk that is inherent to our business Mortgage spread risk can be mitigated, not eliminated, through a combination of asset selection and leverage management ♦ Through asset selection we can adjust our exposure to mortgage spread risk
Slide 29: Negative convexity in agency MBS
NASDAQ: AGNC 5 ♦ In order to fully measure the interest rate risk in an agency MBS, it is imperative to capture both the duration and convexity characteristics of the instrument ♦ As an investor in agency MBS, we have sold interest rate options to the homeowner that give them the ability to either p
Slide 30: Duration gap example
NASDAQ: AGNC Refer to the supplemental slide later in this presentation for further discussion on Duration Gap. 6 ♦ On a quarterly basis we disclose our estimated net duration gap, which represents the net duration risk of our assets, liabilities and hedges ♦ The calculation of duration gap for a mo
Slide 31: AGNC's Historical Duration Gap
NASDAQ: AGNC Refer to the supplemental slide later in this presentation for further discussion on Duration Gap. 1. Durations are expressed in years. 7 ♦ Over the last three years we have generally managed our duration gap within a band of +/- 1 year ♦ Our duration gap tends to be correlated with the
Slide 32: Impact of Extension Risk on Duration Gap
NASDAQ: AGNC Refer to the supplemental slide later in this presentation for further discussion on Duration Gap. 1. Durations are expressed in years. The +100 bps sensitivity analysis assumes an instantaneous parallel shift in interest rates and no further rebalancing actions. 8 ♦ The homeowner’s opt
Slide 33: Quantifying the Role of Swaptions
NASDAQ: AGNC (3.0)1 . Net Duration Gap Net Duration Gap (Rates +100 bps) Net Duration Gap (Rates +100 bps w/out swaptions) Refer to the supplemental slide later in this presentation for further discussion on Duration Gap. 1. Durations are expressed in years. The +100 bps sensitivity analysis assumes
Slide 34: Impact of Prepayment Risk on Duration Gap
NASDAQ: AGNC Refer to the supplemental slide later in this presentation for further discussion on Duration Gap. 1. Durations are expressed in years. The -100 bps sensitivity analysis assumes an instantaneous parallel shift in interest rates and no further rebalancing actions. 10 ♦ The homeowner’s op
Slide 35: Balancing Both Prepayment and Extension Risk
NASDAQ: AGNC (3.0)1 . Net Duration Gap Net Duration Gap (Rates +100 bps) Net Duration Gap (Rates -100 bps) Refer to the supplemental slide later in this presentation for further discussion on Duration Gap. 1. Durations are expressed in years. The +/-100 bps sensitivity analysis assumes an instantane
Slide 36: Interest rate and spread sensitivity disclosure
NASDAQ: AGNC 1. Interest rate and MBS spread sensitivity are derived from models that are dependent on inputs and assumptions provided by third parties as well as by our investment team and, accordingly, actual results could differ materially from these estimates. 2. Estimated change as a percentage
Slide 37: Using Leverage to Quantify Interest Rate Risk
NASDAQ: AGNC Refer to the supplemental slide later in this presentation for further discussion on Duration Gap. 13 ♦ “Spot” duration gap times a portfolio’s leverage will not provide a robust measure of interest rate risk ♦ “Average” duration gap includes the effect of negative convexity and provide
Slide 38: Conclusion
NASDAQ: AGNC 14 ♦ We provide very substantial disclosures, which are intended to help investors better understand our exposure to interest rate risk and to mortgage spread risk ♦ We utilize a comprehensive and disciplined approach to risk management that continuously evolves with market conditions a
Slide 39: A Deep Dive into Financing and Dollar Rolls
© 2014 American Capital Agency Corp. All Rights Reserved. A DEEP DIVE INTO FINANCING AND DOLLAR ROLLS OCTOBER 1, 2014
Slide 40: Safe Harbor Statement
NASDAQ: AGNC 2 This presentation contains statements that, to the extent they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). All such forward-looking statements are intende
Slide 41: Discussion Overview
NASDAQ: AGNC 3 ♦ Financing Summary: Peter Federico Repo funding highlights Funding differences for on and off balance sheet assets ♦ The Tradeoff Between Specified Pools and Dollar Rolls: Chris Kuehl MBS prepayment environment Specified pools versus TBAs in the current environment ♦ Accounti
Slide 42: Financing Summary: Peter Federico
FINANCING SUMMARY PETER FEDERICO
Slide 43: AGNC's Liquidity Position
NASDAQ: AGNC 5 ♦ Significantly increased our excess repo funding capacity to about double our current outstanding repo balance ♦ Reduced funding concentration by adding counterparties and reducing our exposure to the largest banks Less than 12% with top 5 counterparties as of 6/30/14, compared to
Slide 44: Repo vs Dollar Roll Funding
NASDAQ: AGNC 6 IN THE CURRENT ENVIRONMENT, TBA ASSETS FUNDED IN THE DOLLAR ROLL MARKET OFFER SIGNIFICANTLY BETTER CARRY THAN THE SAME ASSETS FUNDED IN THE REPO MARKET AND HELD ON-BALANCE SHEET REPO VS DOLLAR ROLL FUNDING ♦ In this hypothetical example, the net interest income for one month on a 30 y
Slide 45: The Tradeoff Between Specified Pools and Dollar Rolls: Chris Kuehl
THE TRADEOFF BETWEEN SPECIFIED POOLS AND DOLLAR ROLLS CHRIS KUEHL
Slide 46: Prepayment Environment
NASDAQ: AGNC Source: Morgan Stanley 1. FNMA 2011 30 year cohorts exclude specified pools, CMOs and FED holdings; FNMA MLB cohorts represent 30 year 2011 original loan balances > $85k and ≤ $110k 8 PREPAYMENT ENVIRONMENT REFINANCING ACTIVITY REMAINS MUTED FOR MOST OF THE MARKET 0 2 4 6 8 10 12 14 1 M
Slide 47: Today's Prepayment Environment Reduces Need for Specified Pools
NASDAQ: AGNC 9 HYPOTHETICAL YIELD SENSITIVITY – 30 YEAR 4% MBS ♦ In 2012 – 2013, TBA delivery risk was high ♦ TBA delivery likely prepaying around 30% CPR, resulting in relatively unattractive returns ♦ Today, prepayment speed differences between generic TBA MBS and specified pools have largely conv
Slide 48: Accounting Treatment and Tax Implications of Dollar Rolls: Bernice Bell
ACCOUNTING TREATMENT AND TAX IMPLICATIONS OF DOLLAR ROLLS BERNICE BELL
Slide 49: Accounting and tax treatment of TBA dollar rolls
NASDAQ: AGNC ♦ TBA dollar roll transactions are accounted for as a series of derivative transactions under GAAP TBA contracts are reported at fair value, net of the forward price to be paid or received, in derivative assets/liabilities on our consolidated balance sheet Dollar roll income and any
Slide 50: Capital loss carry forwards and dividend implications
NASDAQ: AGNC ♦ As of June 30, 2014, AGNC had $3.89 per common share of unutilized capital loss carry forwards Incurred as a result of repositioning the portfolio in 2013, which generated significant realized losses for tax purposes ♦ Since dollar roll income is treated as capital gains for tax pur
Slide 51: What Does the Future Hold for AGNC & MTGE
© 2014 American Capital Agency Corp. All Rights Reserved. © 2014 American Capital Mortgage Investment Corp. All Rights Reserved. WHAT DOES THE FUTURE HOLD FOR AGNC & MTGE OCTOBER 1, 2014
Slide 52: Safe Harbor Statement
2 This presentation contains statements that, to the extent they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). All such forward-looking statements are intended to be subje
Slide 53: Introduction
3 ♦ The post financial crisis period has been a favorable “cyclical” environment for the mortgage REIT space ♦ We believe that the bulk of the benefits of the structural changes to the mortgage market landscape stemming from the changes to the GSEs have yet to be realized because: FED MBS purchase
Slide 54: Fed involvement in agency MBS and GSE portfolios
Source: Nomura Securities, Morgan Stanley Inc. 4 THE FED’S INVOLVEMENT IN AGENCY MBS HAS SIGNIFICANTLY DELAYED THE TIMING OF “STRUCTURALLY” WIDER SPREADS DUE TO SMALLER GSE PORTFOLIOS AGNC MBS: GSE/GOVERNMENT AGENCY MBS HOLDINGS $0.0 $0.5 $1.0 $1.5 $2.0 $2.5 1Q 2007 2Q 2007 3Q 2007 4Q 2007 1Q 2008 2
Slide 55: Agency MBS: lack of gross and net supply
-$200 -$150 -$100 -$50 $0 $50 $100 $150 $200 $250 1 Q 2 0 0 0 3 Q 2 0 0 0 1 Q 2 0 0 1 3 Q 2 0 0 1 1 Q 2 0 0 2 3 Q 2 0 0 2 1 Q 2 0 0 3 3 Q 2 0 0 3 1 Q 2 0 0 4 3 Q 2 0 0 4 1 Q 2 0 0 5 3 Q 2 0 0 5 1 Q 2 0 0 6 3 Q 2 0 0 6 1 Q 2 0 0 7 3 Q 2 0 0 7 1 Q 2 0 0 8 3 Q 2 0 0 8 1 Q 2 0 0 9 3 Q 2 0 0 9 1 Q 2 0 1
Slide 56: Agency MBS: Valuation Considerations
Source: CitiVelocity 6 FED HOLDINGS, LACK OF SUPPLY, INVESTOR UNDERWEIGHTS, FAVORABLE FINANCING, AND RELATIVE VALUE CONSIDERATION VERSUS OTHER FIXED-INCOME ASSETS SHOULD CONTINUE TO SUPPORT AGENCY SPREADS OVER THE NEAR TERM AGENCY MBS: VALUATION CONSIDERATIONS Composite Spreads – Relative Value 0 50
Slide 57: Mortgage Credit: Shrinking Supply
1. Source: CoreLogic, 1010data; Legacy Non-Agency Outstanding UPB for deals issued prior to 2010 and reported in CoreLogic Database 7 ♦ The legacy non-agency MBS space continues to contract due to defaults, prepayments, and scheduled amortization Averaging 15% year over year declines with the tren
Slide 58: Mortgage Credit: GSE Credit Sales Will Be Material
Source: Bloomberg, CoreLogic 1010data, and Intex; Credit Bonds Sold: Bonds issued with AA and lower ratings 8 ♦ GSE risk sharing transactions are the major source of credit risk to the market, not jumbo or non-agency originations GSE’s have sold credit risk off of approximately $308B of mortgage l
Slide 59: MSR opportunity
9 ♦ Opportunities in the new origination MSR landscape have developed relatively slowly Significant capital was raised targeting MSR investments over the last 2 years in anticipation of bank sales and attractive returns. This capital will likely be largely invested over the remainder of 2014 Ban
Slide 60: AGNC outlook: near, intermediate and longer term
10 ♦ Near term: Little incentive currently to reduce leverage as agency MBS technicals remain favorable and investment returns competitive given dollar roll financing advantages Active management and willingness to reposition the portfolio as market conditions dictate ♦ Intermediate picture: L
Slide 61: MTGE outlook: near, intermediate and longer term
11 ♦ Near term: Little incentive to reduce agency leverage Maintenance of current legacy non-agency portfolio Opportunistic investment in GSE risk transfer securitizations Focus on improving operating efficiencies of servicing operation and diversification of MSR holdings ♦ Intermediate pict
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