Stocks in mortgage real estate investment trusts (mREITs) sold in September AGNC Investment Corporation (AGNC -4.02%) According to data provided by S&P Global Market Intelligence, the stock fell nearly 30%.
REITs offer an easier way for investors to invest in real estate as they do not have to purchase the actual property themselves. They buy stocks like any other stock, and management implements different types of investment strategies. To qualify as a REIT, a company must pay at least 90% of its taxable income as dividends to shareholders. Mortgage REIT is simply his REIT that invests in mortgages and MBS.
Like most stock markets, mortgage REITs have suffered as the Federal Reserve aggressively increased its overnight benchmark lending rates. MBS spreads widened as mortgage rates exploded and outperformed Treasury yields.
YCharts 30-Year Mortgage Interest Rate Data
AGNC invests about 71% of its investment portfolio in agency MBS. That is, they are guaranteed by a government-sponsored agency. fannie mae When freddie mac.
According to AGNC’s second quarter regulatory filings, a 0.50% increase in MBS is projected to reduce tangible net book value per common share by 31%. This is because the value of MBS is inversely proportional to interest rates, so the higher the yield, the lower the value of the bond, which hurts the book value of AGNC.
At the end of the second quarter, tangible net book value per share of AGNC common stock was $11.43, down $1.69 from the end of the first quarter. Given that MBS spreads continued to widen in Q3, there could be more pain. MREITs can trade based on multiples of their book value, so a drop in book value can lead to a drop in stock price.
With many REITs, including AGNC, trading below book value, this could certainly be an opportunity to enter at the right time. Additionally, AGNC currently pays an annual dividend yield of nearly 17.5%.
However, MBS spreads may continue to widen as the Federal Reserve is currently in the process of quantitative tightening (QT). The Federal Reserve can make a full sale.
As more MBS flood the market, supply increases and demand decreases, the value of MBS decreases, and the yield on MBS increases. MBS spreads widened the last time the Fed tried QT.
Now there are many moving parts and many unknowns. For now, unless you’re really confident in the trajectory of the Fed’s rate hikes and QT, I’d recommend staying on the sidelines for now. AGNC could be an attractive opportunity in the near future if there is more clarity.
Bram Berkowitz has no positions in any of the mentioned stocks. The Motley Fool has no positions in any of the companies mentioned. The Motley Fool’s U.S. headquarters has a disclosure policy.