CryptoCurrency
Is It Time to Buy AGNC as Its Book Value Starts to Climb?
AGNC Investment (NASDAQ: AGNC), a real estate investment trust (REIT), appears to have turned a corner recently.
Although the stock hasn’t set the world on fire, it’s up about 20%, a welcome reversal from past years. On top of that, it currently pays out a nice monthly dividend that is good for a forward yield of almost 14%.
With the REIT recently reporting its third-quarter results, let’s dig into it and see where the stock may be headed.
AGNC isn’t like a typical REIT that buys properties and leases them to tenants. Instead, it borrows money to buy mortgages on real estate that have been bundled into bond-like securities known as mortgage-backed securities (MBS). This type of REIT, known as a mortgage REIT (mREIT) profits when what it earns on the MBS is greater than what it must pay to borrow.
AGNC’s biggest issue the past few years was the result of rapid Federal Reserve interest rate increases and widening spreads between mortgage and Treasury yields. The spread went from narrow to wide, depressing the appeal and value of MBS compared to Treasuries. This could be seen in AGNC’s book value (TBV), or essentially the value of its MBS portfolio, which declined 45% from the end of 2021 until the end of 2023.
However, AGNC’s TBV has started to bounce back. It increased by 5%, or $0.42, sequentially to $8.82 in the third quarter. It was the third time in four quarters that the mREIT has seen its TBV rise, bouncing back from a low of $8.08 set in the year-ago third quarter.
Because TBV represents the value of an mREIT’s portfolio, this is the metric by which these stocks are generally valued and perhaps the most important metric to track.
Another plus is signs that the yield curve, a graph that tracks yields of different Treasury bonds based on when they mature, shows signs of normalizing. Typically, the curve slopes upward to the right, indicating that bonds maturing further in future have higher yields. But for much of the past two years, the curve has been inverted, with shorter-maturity securities yielding more than longer-dated bonds. This poses a problem for banks and companies like AGNC, which typically borrow short-term funds to invest in long-term securities.
On the negative side, AGNC’s average net interest spread fell to 2.21%, compared to 3.03% a year ago and 2.69% in the second quarter. The company also saw an increase in prepayments, with its constant prepayment rate (CPR) edging up to 7.3% from 7.1% in the third quarter. What’s more, it forecast additional increases in prepayments. This means AGNC is now expecting more homeowners to start paying off their loans more quickly, typically through refinancing or increased moving activity. This is a risk to mREITs because when homeowners refinance, they have to replace higher yielding mortgages with those that yield less.
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