AGNC Investment Corp. (NASDAQ: AGNC) is a real estate investment trust, or REIT, that focuses on mortgages and related financial instruments, as opposed to owning physical commercial properties. In this article, we'll take a closer look at how AGNC makes its money, recent developments investors should know about, long-term and recent stock and dividend performance, and more.
AGNC Investment Corp. company profile
AGNC Investment Corp., more commonly known simply as AGNC, is a mortgage REIT.
Specifically, AGNC primarily invests in agency mortgage-backed securities (hence the company's name), which refers to mortgages backed by Fannie Mae, Freddie Mac, and other government-sponsored enterprises. These have an advantage over other types of mortgages, as borrowers have to meet specific underwriting criteria for one of these agencies to purchase the loans.
The general idea behind AGNC's business is that the company purchases mortgage-backed securities that pay interest, and it finances these purchases by borrowing at lower short-term interest rates. The difference between the two is the profit. As a simplified example, if AGNC can buy mortgages that pay 3% interest and can borrow money at 1% interest to fund the purchases, the 2% difference between these rates, net of expenses, would be its profit.
Obviously, no investor is going to buy a REIT for a 2% return on their investment. So, mortgage REITs like AGNC use considerable amounts of leverage (borrowed money) to amplify their returns. A 2% interest rate spread isn't a great return -- but if AGNC borrows five times the money investors have put in or more, the effective return on invested capital can become 10% or greater.
As of September 30, 2020, AGNC's investment portfolio consisted of $97.6 billion of mortgages, most of which were agency mortgage-backed securities, or agency MBSs. 79% of the portfolio consists of 30-year mortgages, while most of the rest is made up of 15-year loans.
Because of record-low mortgage rates, a relatively high leverage ratio is necessary to achieve attractive returns. At the end of the third quarter of 2020, AGNC had a leverage ratio of 8.8 times its tangible book value.
AGNC Investment Corp. news
The COVID-19 pandemic hit the mortgage REIT industry hard in the early stages of the outbreak, and AGNC was no exception. As CEO Gary Kain explained, "The volatility and lack of liquidity we experienced in mid-March in Agency mortgage-backed securities reached levels I had never witnessed over the span of my 30-year career."
As I'll discuss more in the next section, mortgage REITs typically don't fare well in unstable environments. Fortunately, swift action by the Federal Reserve helped to stabilize the mortgage market, but the stock remains lower for the year.
AGNC has been repurchasing significant amounts of stock in 2020 to take advantage of the discount to book value. In the third quarter alone, the company repurchased 2% of its outstanding shares. AGNC's tangible book value as of November 30, 2020, was $16.30, and the stock was still trading for a significant discount to this amount. In simple terms, AGNC is buying back its own assets for less than they're worth, which can be a very effective way to create shareholder value over the long run.
One major news item that AGNC shareholders should be aware of is that its CEO and CIO Gary Kain, who has been with the company since 2009 (and has been CEO since 2016), recently announced that he would step down from his role and assume the position of Executive Chairman, effective July 1, 2021. Current President and COO Peter Federico will be taking over as CEO after that date.
AGNC Investment Corp. stock price
It's important for investors to understand the dynamics of how mortgage REITs work and how it affects their stock prices over time. As we discussed, the general idea of AGNC's business is to borrow money at short-term interest rates to buy mortgages that pay higher long-term rates and profit from the difference.
Mortgage REITs thrive when interest rates are stable. When interest rates spike, short-term borrowing costs rise, and the mortgage REIT's profit margin can evaporate. Conversely, when rates plunge, borrowers often prepay their mortgages (by refinancing), which effectively lowers the long-term rates the mortgage REIT is getting. There's more to it than that, and most mortgage REITs use various hedging instruments to somewhat protect from these swings, but the reality is that mortgage REITs do best when rates are stable.
That brings us to AGNC's stock price and returns. For much of the past three years, interest rates were quite stable and predictable. As you can see in the chart below, AGNC's stock price also was quite stable in 2018 and much of 2019. That all changed when the COVID-19 pandemic hit -- March and April 2020 were literally the opposite of stability. And mortgage REITs plunged. The stock price has since recovered some, but not all of its losses -- after all, mortgage rates are much lower now than in pre-pandemic times -- but the point is that when interest rates become volatile or unpredictable, you can bet mortgage REITs will as well.