Introduction section by Colorado Wealth Management Fund.
Article section by Scott Kennedy.
Bringing More of Scott’s Work to Our Website
The REIT Forum is a service produced by Michael Vanloon (better known as Colorado Wealth Management Fund) and Scott Kennedy. After intense consideration, I decided to launch our service through Substack. Since then, we’ve seen great success. Substack enables us to give readers real-time alerts with entire articles delivered directly to their inboxes.
You’re probably used to seeing the “from” field saying: “ColoradoWealthManagementFund from The REIT Forum”.
In some of our future e-mails, it may say:
“Scott Kennedy from The REIT Forum”.
That will simply mean we’ve updated the backend of the website for Scott Kennedy to directly post his articles.
I want to make browsing our work as simple as possible for readers. This will be another step in that direction.
For the moment, I’ll be posting Scott’s work. The following articles are a direct copy and paste from Scott. While we get the back end set up, there is a delay in getting the articles posted. Rest assured that it should be solved soon.
Finding Our Positions
I posted a subscriber-exclusive article with links to our Google Sheets. You can always access our positions there. Scott’s positions are updated each week. CWMF’s positions are usually updated on the same day as the trade.
Disclosures
Related to the stocks in this article:
CWMF is long: RITM-D, GPMT-A, DX-C, EFC-A, RITM-C, EFC-B, PMT-C, PMT-B, AGNCP, CIM-D, RITM-B, RITM, SLRC, GPMT, RC.
Scott Kennedy is long: RITM, RC, SLRC, GPMT, ARCC, GBDC, RITM-D, MITT-B, MITT-C, GAINL, ECCC.
The rest of this post is from Scott Kennedy.
Summary
This 4th earnings assessment article reviews AGNC’s BV and core earnings equivalent performance during Q4 2023.
This article also discusses how AGNC’s quarterly change in BV and core earnings equivalent “matched up” to expectations. Earnings remain a key driver to stock performance.
AGNC’s BV was a very minor-minor outperformance while its core earnings equivalent was a modest underperformance.
No change in AGNC’s percentage recommendation ranges or risk rating. AGNC is currently deemed notably overvalued (STRONG SELL).
AGNC reported a good quarter regarding BV gains but its core earnings equivalent was a bit disappointing. AGNC continues to trade at the largest premium in the sector (negative factor/catalyst).
Introduction:
Hi subscribers. For new members, my name is Scott Kennedy and currently I fully cover 20 mortgage real estate investment trust (mREIT) and 15 business development company (“BDC”) common stocks within this Investing Group regarding research/data, subscriber questions, weekly projected book values/net asset values (BV/NAV), and common stock recommendation ranges. Colorado (“CO”) Wealth Management handles the mREIT preferred stocks and he and his team handles all other applicable REIT sectors outside the mREIT sector. CO also provides some mREIT common stock and BDC articles from time-to-time which are more of an “overview/introduction” discussion; typically based either on my or our combined research/data. This also includes some macroeconomic trends and data. My name is always attached to all Investing Group articles I personally wrote so there is no confusion for subscribers.
This REIT Forum article is part of a series of articles over a span of 6-7 weeks which will analyze my previously projected BV/NAV and core earnings (or core earnings equivalent)/net investment income (“NII”) figures and compare these metrics to each mREIT’s and BDC’s actual reported results, respectively. For readers who are familiar with my public mREIT and/or BDC articles, these types of articles are beneficial to readers who desire to pursue a more active investing strategy and/or want more “real time” thoughts/analysis.
I hope my services/contributions ultimately help enhance a subscriber’s total investment returns or minimize their total investment losses within the mREIT and BDC sectors. At the very least, I hope subscribers will gain more insight into the mREIT and BDC sectors by reading my/our exclusive REIT Forum articles.
1) AGNC’s BV and Net Spread + Dollar Roll Income Q4 2023 Performance (Projected Versus Actual Results):
On 1/22/2024, AGNC Investment Corp. (AGNC) reported the company’s earnings results for the fourth quarter of 2023. Table 1 below provides AGNC’s BV and earnings summary.
Table 1 – AGNC Q4 2023 BV and Earnings Summary
Source: Taken Directly from the REIT Forum’s © Analytical Spreadsheets/Data
I provided the following commentary in regards to AGNC’s results for the fourth quarter of 2023:
“Hi subscribers. I was able to review AGNC's Q4 2023 earnings results. AGNC reported a non-tangible and tangible BV as of 12/31/2023 of $9.46 and $8.70 per common share (6.4% and 7.7% increase), respectively, versus my prior projection of $9.35 and $8.60 per common share (5.2% and 6.4% increase), respectively. As such, each BV projection was a very minor - minor (greater than a 1.0% but less than a 2.5%) outperformance when compared to my expectations. Both sets of projections were well within my projected ranges ($8.90 - $9.80 per common share regarding non-tangible BV; $8.15 - $9.05 per common share regarding tangible BV).
I would point out the extreme volatility, especially for the agency mREIT model, during the fourth quarter of 2023. BVs notably decreased during September 2023 (some peers in excess of 15%) which quickly “reversed course” during November - December 2023. In my personal opinion, any quarterly BV variance at or within 4% this particular quarter should really be considered an accurate estimate (larger “cone” per se). In addition, as a reminder, the current subscriber spreadsheets are based on CURRENT BVs. For example, currently each company’s BV estimate as of 1/19/2024. I am comparing 12/31/2023 BV projections versus actual results. Something to mention for newer subscribers. So, a 1.2% and 1.3% quarterly non-tangible and tangible BV outperformance, respectively, should be considered a very accurate projection.
Nonetheless, let us take a deeper look into AGNC’s income statement to see where some variances arose. AGNC reported total interest income of $640 million during the fourth quarter of 2023. In comparison, I projected total interest income of $600 million. Most subscribers would equate this as a slight outperformance regarding AGNC’s “true” interest income. However, I would point out this account has 2 important sub-accounts. When broken out, AGNC reported “true” cash/coupon interest income of $656 million while reporting premium amortization expense of ($16) million. In comparison, I projected AGNC would report true cash/coupon interest income of $730 million while reporting premium amortization expense of ($130) million. As such, some deviations, versus my expectations, arose here. When calculated, this was a true cash/coupon interest income underperformance of ($74) million which is key to partially understanding AGNC’s modest core earnings equivalent underperformance. Let us discuss some factors impacting both sub-accounts and why they differed from my expectations.
First, AGNC slightly lowered the size of the company’s on-balance sheet fixed-rate agency MBS sub-portfolio during the fourth quarter of 2023. In comparison, with continued very attractive (low) MBS prices, along with AGNC continuing to raise capital through the company’s at-the-market (“ATM”) equity offering program, I anticipated a continued on-balance sheet fixed-rate agency MBS sub-portfolio increase. Second, AGNC was very “bullish” regarding the company’s conditional/constant prepayment rate (CPR”) expectations. As discussed in prior AGNC income statement projection and earnings assessment articles, this specific account/figure is highly “subjective/open to managerial judgement”. It is a prepayment/lifespan estimate of AGNC’s entire mortgage-backed securities (“MBS”) portfolio. Even though AGNC’s lifetime CPR expectations increased from 8.3% as of 9/30/2023 to 11.4% as of 12/31/2023, management actually recorded a lifetime CPR BENEFIT of $16 million during the fourth quarter of 2023. This is VERY odd and goes against common logic in my professional opinion. In every quarter since I have covered AGNC on Seeking Alpha (since 2013), when this mREIT has reported a 2%+ increase in the company’s lifetime CPR estimate, a “true-up” expense adjustment has been recorded. This quarter, when a 3.1% lifetime CPR estimate increase was recorded by AGNC, the company performed a minor “true-down” expense adjustment. Simply put, something I strongly disagree with. I have called AGNC out in the past regarding this specific account regarding being too aggressive at times. In most cases, the company makes more prudent/less aggressive assumptions that more align to my original projection the following quarter. I believe this will occur next quarter. As a reminder, this specific figure is reversed out when reconciling back to AGNC’s core earnings equivalent metric (discussed later). Just something to quickly highlight.