On 10th June 2022, the same day as poor CPI numbers were released, MBS went “no-bid.” which is likely to lead to -ve marks in the future for MBS. The agency mortgage REITs are leveraged MBS.
•Third largest listed mortgage REIT behind Annaly (NLY) and Starwood (STWD, less residential focused). NLY raise equity last month as spreads continued to widen and after disclosing a 15% drop in book value.
•Of the ~$70b portfolio, of which ~$50b is in agency MBS, and the majority of the remainder in other TBA mortgage positions. Of the agency MBS >90% is in 30 year fixed agency mortgages, with <1% in ARMs.
•Owners of the stock greatly value the monthly dividend, currently AGNC is paying 12c, which has been constant since March 2020 when liquidity in the mortgage supply chain put huge stress on the industry before the Fed stepped in (the whole industry is similarly paying 10-15% lower annualized DPS since pre-covid).
•Liabilities are largely made up of repos.
•Assets/equity is 8.25x, but the industry standard self-reported leverage level is 7.5x (tangible net book value “at risk” leverage, peaked at 9.5x during covid).
•AGNC is currently on 0.8x p/b, since 2010 the mean has been 0.96x with -1/+1s.d. at 0.8/1.1x. Since 2015 however, this has been a mean of 0.92x and -1/+1 s.d. at 0.81x/0.97x – so I think an estimate of ~0.95x is fair.
•(this is written pre-FOMC on 15th June 2022), assuming 75bps hike and 30Y MBS spreads expanding to ~1.5% (well below covid peak of 1.9%) this should be ~35% downside to book value.
•Therefore we are looking at ~25% downside in the stock – not this would put the stock on a naïve dividend yield of 18%, but I think this will come with a capital raise similar to NLY, or lacking that, a dividend cut.
•Fed steps in to protect the agency RMBS market. Note in the link posted at the top of the piece, there has not been much incentive to do this as long as the market is operating in an orderly fashion (i.e. no massive equity destruction, just high rates).
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise do not hold a material investment in the issuer's securities.