Will High Prepayments Mar AGNC Investment (AGNC) Q3 Earnings?

Zacks Equity Research
·5 min read

AGNC Investment Corp. AGNC is scheduled to report third-quarter 2020 results on Oct 26, after the closing bell. The company’s net spread and dollar roll income per common share is expected to have declined year over year, while net interest income (NII) is expected to have improved.

In the last reported quarter, this Bethesda, MD-based mortgage real estate investment trust (mREIT), posted net spread and dollar-roll income (excluding estimated catch-up premium amortization cost) of 58 cents per share. The figure beat the Zacks Consensus Estimate of 46 cents. Moreover, NII of $295 million rose significantly from the second-quarter 2019 reported tally of $123 million. AGNC Investment primarily focuses on leveraged investments in agency mortgage backed securities (MBS).

Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate on three occasions and missed on the other. It has a trailing-four quarter earnings surprise of 14.6%, on average, for the said period. The graph below depicts this surprise history:

AGNC Investment Corp. Price and EPS Surprise

 

AGNC Investment Corp. Price and EPS Surprise
AGNC Investment Corp. Price and EPS Surprise

AGNC Investment Corp. price-eps-surprise | AGNC Investment Corp. Quote

Let’s see how things are shaping up prior to this announcement.

The health of the mortgage market has continued to improve since lows observed in March. The Federal Reserve has been a major benefactor in stabilizing the mortgage market with its continued MBS purchase efforts and low target interest rates. In fact, given the strong correlation between Federal Reserve's target rate and repo rates, cost of funds is expected to have taken a significant dive in the third quarter.

These are good reasons to believe that the July-September period was a strong quarter for Agency MBS market. As such AGNC Investment is likely to be a major beneficiary given its significant exposure to Agency MBS in its investment portfolio. In fact, given the favorable environment for Agency MBS, the company is expected to have increased its investment in such securities during the third quarter.

In fact, decline inaverage Agency repo cost during the quarter is expected to have reduced interest expenses related to AGNC Investment’s outstanding repurchase agreements, thereby driving net interest margin. In fact, management’s outlook for average repo cost for the third quarter is 0.40%. This will lift net interest margin, which stood at 1.68% as of second-quarter end.

For the September-end quarter, NII estimate is pegged at $374 million that indicates year-over-year growth of 214.3%.

However, a modest decline in mortgage rates during the third quarter is expected to have driven mortgage prepayments. In fact, the company reported actual conditional prepayment rate (“CPR”) of 24% as of July 1, higher than June’s CPR of 22%.

This is likely to lead to an increase in net premium amortization in the September-end quarter for AGNC Investment’s agency portfolio. Due to this, the company is likely to see a sequential decline in interest income and average asset yield.

Given the high refinancing activity during the quarter, we anticipate AGNC Investment to have continued its asset portfolio strategy of investments in generic low-coupon MBS and higher-coupon specified-pool MBS that have favorable prepayment characteristics.

Further, AGNC Investment’s exposure to interest rate swaps (fixed-rate pay) is expected to have continued creating headwinds in the form of higher net periodic interest expenses. This is likely to mitigate net decline in borrowing costs.

During the second quarter, the company paid 0.39% and received 0.13%, on an average, on its interest rate swaps. With $42.1 billion of pay-fixed swaps as of second-quarter end, the trend is expected to have continued in the September-end quarter, thereby increasing cost of funds for the company.

Also, the company’s activities during the quarter were inadequate to gain analysts’ confidence. As such, the Zacks Consensus Estimate of net spread and dollar roll income per common share is unchanged at 54 cents in the past month, indicating a decline of 8.5% from the year-ago reported figure.

Earnings Whispers

Our proven model does not show that AGNC Investment is likely to beat estimates this quarter. This is because a stock needs to have the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. That is not the case here, as you will see below.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: AGNC Investment’s Earnings ESP is 0.00%.

Zacks Rank: The company currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks That Warrant a Look

Here are some stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a surprise this quarter:

Lexington Realty Trust LXP, set to report quarterly numbers on Nov 5, currently has an Earnings ESP of +1.33% and a Zacks Rank of 3.

National Storage Affiliates Trust NSA, slated to release third-quarter earnings on Nov 5, has an Earnings ESP of +2.44% and a Zacks Rank of 2 at present.

Ventas, Inc. VTR, slated to release third-quarter earnings on Nov 6, has an Earnings ESP of +2.03% and a Zacks Rank of 3 at present.

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