Mortgage – AGNC Funding Corp.: What You Must Know

AGNC Funding Corp. (NASDAQ: AGNC) is an actual property funding belief, or REIT, that focuses on mortgages and associated monetary devices, versus proudly owning bodily business properties. On this article, we’ll take a better have a look at how AGNC makes its cash, latest developments buyers ought to find out about, long-term and up to date stock and dividend efficiency, and extra.

AGNC Funding Corp. firm profile

AGNC Funding Corp., extra generally recognized merely as AGNC, is a mortgage REIT.

Particularly, AGNC primarily invests in company mortgage-backed securities (therefore the corporate’s identify), which refers to mortgages backed by Fannie Mae, Freddie Mac, and different government-sponsored enterprises. These have a bonus over different sorts of mortgages, as debtors have to fulfill particular underwriting standards for certainly one of these companies to buy the loans.

The final thought behind AGNC’s enterprise is that the corporate purchases mortgage-backed securities that pay curiosity, and it funds these purchases by borrowing at decrease short-term rates of interest. The distinction between the 2 is the revenue. As a simplified instance, if AGNC should buy mortgages that pay 3% curiosity and might borrow cash at 1% curiosity to fund the purchases, the two% distinction between these charges, internet of bills, can be its revenue.

Clearly, no investor goes to purchase a REIT for a 2% return on their funding. So, mortgage REITs like AGNC use appreciable quantities of leverage (borrowed cash) to amplify their returns. A 2% rate of interest unfold is not an incredible return — but when AGNC borrows 5 occasions the cash buyers have put in or extra, the efficient return on invested capital can grow to be 10% or larger.

As of September 30, 2020, AGNC’s funding portfolio consisted of $97.6 billion of mortgages, most of which have been company mortgage-backed securities, or company MBSs. 79% of the portfolio consists of 30-year mortgages, whereas many of the relaxation is made up of 15-year loans.

Due to record-low mortgage charges, a comparatively excessive leverage ratio is important to attain enticing returns. On the finish of the third quarter of 2020, AGNC had a leverage ratio of 8.Eight occasions its tangible guide value.

AGNC Funding Corp. information

The COVID-19 pandemic hit the mortgage REIT business laborious within the early phases of the outbreak, and AGNC was no exception. As CEO Gary Kain defined, “The volatility and lack of liquidity we skilled in mid-March in Company mortgage-backed securities reached ranges I had by no means witnessed over the span of my 30-year profession.”

As I will talk about extra within the subsequent part, mortgage REITs sometimes do not fare properly in unstable environments. Happily, swift motion by the Federal Reserve helped to stabilize the mortgage market, however the stock stays decrease for the yr.

AGNC has been repurchasing important quantities of stock in 2020 to benefit from the low cost to guide value. Within the third quarter alone, the corporate repurchased 2% of its excellent shares. AGNC’s tangible guide value as of November 30, 2020, was $16.30, and the stock was nonetheless buying and selling for a big low cost to this quantity. In easy phrases, AGNC is shopping for again its personal belongings for lower than they’re worth, which is usually a very efficient strategy to create shareholder value over the long term.

One main information merchandise that AGNC shareholders ought to pay attention to is that its CEO and CIO Gary Kain, who has been with the corporate since 2009 (and has been CEO since 2016), lately introduced that he would step down from his function and assume the place of Govt Chairman, efficient July 1, 2021. Present President and COO Peter Federico can be taking up as CEO after that date.

AGNC Funding Corp. stock price

It is vital for buyers to know the dynamics of how mortgage REITs work and the way it impacts their stock costs over time. As we mentioned, the final thought of AGNC’s enterprise is to borrow cash at short-term rates of interest to purchase mortgages that pay greater long-term charges and revenue from the distinction.

Mortgage REITs thrive when rates of interest are secure. When rates of interest spike, short-term borrowing prices rise, and the mortgage REIT’s revenue margin can evaporate. Conversely, when charges plunge, debtors usually prepay their mortgages (by refinancing), which successfully lowers the long-term charges the mortgage REIT is getting. There’s extra to it than that, and most mortgage REITs use varied hedging devices to considerably shield from these swings, however the actuality is that mortgage REITs do greatest when charges are secure.

That brings us to AGNC’s stock price and returns. For a lot of the previous three years, rates of interest have been fairly secure and predictable. As you’ll be able to see within the chart beneath, AGNC’s stock price additionally was fairly secure in 2018 and far of 2019. That each one modified when the COVID-19 pandemic hit — March and April 2020 have been actually the alternative of stability. And mortgage REITs plunged. The stock price has since recovered some, however not all of its losses — in spite of everything, mortgage charges are a lot decrease now than in pre-pandemic occasions — however the level is that when rates of interest grow to be unstable or unpredictable, you’ll be able to wager mortgage REITs will as properly.