mREITS, or real estate investment trusts that specialize in creating or investing in real estate- related mortgages, are often viewed as a riskier investment than traditional equity REITs. But higher risk doesn't mean they aren't worthwhile investments for the right investor. AGNC Investment Corp. (NASDAQ: AGNC), the second-largest mREIT by market capitalization, has huge market reach in the world of residential mortgage debt. If you're considering investing in AGNC, find out if it's a buy in today's market.
A look at AGNC Investment Corp. today
AGNC invests and trades in agency mortgage-backed securities (MBS), among other securities. The company purchases the agency-issued debt, receiving a set interest rate for the repayment of principal and interest, then leverages that debt at a lower interest rate to purchase more debt securities, earning a spread, or profit, from the difference.
The company's credit risk transfer (CRT) business, the model of leveraging its holdings to purchase more mortgage securities, has increased to its highest level in over a year at $79.27 billion and making up 55% of its credit portfolio. The remaining portion of the company's portfolio is allocated to residential mortgage-backed securities (RMBS at 26%) and commercial mortgage-backed securities (CMBS at 19%), of which 80% are 30-year fixed loans.
Improving metrics undervalued share price
Over the past few quarters, AGNC's cost for swap has decreased while its income per share has increased. AGNC's net spread increased 33% year over year; however, its average asset yield has steadily declined. This is no surprise given the low-interest-rate environment we're currently experiencing and the increased number of prepayments from borrowers refinancing loans. Prepayments are a major concern for mREITs, especially in a low-interest-rate environment because they are purchasing debt with the intention to hold the debt to its fruition to receive a return. When a loan is paid back early, mREITs don't earn their full return and often incur losses because of it.
AGNC has significantly improved its debt ratios over the past year, with its current hedged portfolio covering 98% of its funding liabilities as of March 2021 and decreasing its leverage ratio to 7.7x, a big improvement from its 9.4x leverage ratio the same quarter of the year prior. Its tangible net book value at quarter end was $17.72, and share prices are trading below that, meaning there is a gap between how the company values itself at and how the market values it.
Dividends have remained at $0.12 per month since the start of the pandemic, when initial concern over the housing and mortgage market resulted in a cutback in dividend payouts. Meaning investors right now can achieve an 8.4% return. But a dividend increase could happen in the future as AGNC seems to be making notable improvements to its balance sheet that will ultimately help shareholder value and allow for the opportunity to increase dividends without jeopardizing debt ratios. There is still a lot of uncertainty about where the mortgage market could be headed as moratoriums expire, but AGNC seems to be in a strong position currently with a slightly undervalued stock -- making a good fit for investors with a higher risk tolerance.