AGNC Posts 7% Book Value Drop in Q2

AGNC Investment Corp. (AGNC 2.29%), a real estate investment trust (REIT) focused on investing in Agency mortgage-backed securities (MBS), reported its second quarter results on July 21, 2025. The main story from the earnings release was a tangible net book value (TNBV) decline of 7.0% and net spread earnings that fell short of expectations. For the quarter, the company posted non-GAAP earnings per share of $0.38, below the $0.41 analyst estimate, and reported revenue of $830 million, which was less than the $862.75 million estimate. Compared to the same period last year, TNBV per share decreased from $8.40 to $7.81 and non-GAAP EPS dropped from $0.53 to $0.38. Although revenue was higher year-over-year, profitability and book value both declined, reflecting broader headwinds in the mortgage REIT market. The quarter’s results show stability in core operations but ongoing pressure on margins and capital, as well as an increasingly narrow buffer between earnings and dividend obligations.

Source: Analyst estimates for the quarter provided by FactSet.

Business Overview and Key Focuses

AGNC Investment Corp. operates as a mortgage REIT, which means it invests mainly in securities backed by U.S. government agencies such as Fannie Mae, Freddie Mac, and Ginnie Mae. The company’s strategy centers on profiting from the difference, or spread, between the yield it earns on these mortgage-backed securities and the cost it pays to borrow funds ("leverage") to purchase them. To maintain its REIT tax status, AGNC must pay most of its taxable income as dividends to shareholders.

The company’s success depends on carefully managing interest rate risk, funding strategies, and stringent compliance with complex regulatory requirements. Recent business focuses have included keeping strong liquidity buffers, managing leverage levels, adapting hedging strategies to volatile market conditions, and maintaining dividend coverage. Key areas under scrutiny include spread changes between Agency MBS and Treasuries, the regulatory environment for REITs and banks, and shifting investor demand for mortgage-backed assets.

Quarter in Detail: Financial and Strategic Developments

During the quarter, AGNC faced a challenging market as interest rate swings and negative sentiment toward Agency MBS drove significant spread widening. This means the difference in yield between government bonds and mortgage-backed securities expanded, putting pressure on book values and income. The annualized net interest spread—which captures the difference between asset yields and funding costs—declined to 2.01% from 2.12% in the prior quarter. While average asset yields held nearly flat at 4.83% (excluding some TBA, or "to be announced," contracts), the cost of funds edged up to 2.86%, contributing to margin compression.

Net spread and dollar roll income, an important non-GAAP measure that accounts for recurring interest and hedging income, came in at $0.38 per share, almost matching the $0.36 quarterly dividend but leaving little buffer. Comprehensive income to common shareholders—a broader measure that includes unrealized gains and losses—dropped to a loss of $0.13 per share, compared to income of $0.12 per share in the previous quarter. Tangible net book value, which is the value per share after excluding intangible assets and goodwill, fell by $0.44 to $7.81, a 7.0% year-over-year decline, mainly due to market-driven price changes on the company's investment portfolio.

Leverage, which measures the ratio of borrowed funds to tangible equity, ticked up slightly to 7.6 times at quarter-end, compared to 7.5 times three months earlier. While this is at the higher end of AGNC's preferred range, the company maintained a robust liquidity position, with $6.4 billion in unencumbered cash and Agency MBS, covering 65% of tangible equity. The company also raised $799 million by issuing new shares through its at-the-market (ATM) program, potentially accretive if invested at favorable prices, but dilutive if market values fall further.

AGNC’s risk management remained focused on using interest rate swaps and short positions in U.S. Treasuries to hedge its funding costs. By the end of June, its notional swap hedge stood at $45.1 billion and Treasury shorts at $20.0 billion, with hedges covering 89% of its repurchase and TBA liabilities. The company adjusted its hedge mix, aiming over time toward a balance between swaps and Treasury hedges due to ongoing volatility in both markets. The portfolio remained heavily weighted to 30-year fixed-rate Agency MBS—these accounted for 96% of assets—with attention paid to selecting pools with built-in protections against early loan repayments ("prepayment protection"), helping to stabilize cash flows even as the average constant prepayment rate ticked up from 7.0% to 8.7%.

No one-time events or asset sales of significant impact were noted, and the $0.36 per share dividend was unchanged from the prior quarter and year-ago period. The steady dividend reflects AGNC’s REIT status requirement, but with narrowing coverage from current earnings, future payout levels will likely depend on stabilization or improvement in spreads and book value trends.

Looking Ahead: Management Outlook and Investor Watchpoints

Management maintained a constructive tone for the future, citing high mortgage spreads and potential regulatory changes that could increase demand from banks for Agency MBS. According to leadership, “We continue to have a favorable outlook for levered and hedged Agency MBS investments. Mortgage spreads to benchmark rates remain elevated by historical standards… an extremely favorable return environment.” However, no specific earnings or dividend guidance for the upcoming quarter or fiscal year was given.

For investors, important watchpoints remain: the trajectory of book value per share, movements in net interest spreads, liquidity buffer levels, and the impact of any new regulatory or policy decisions on bank demand for Agency MBS. Persistent book value declines, even with solid risk management, emphasize the importance of these metrics. The declared dividend was held steady, but the narrowing gap to distributable earnings means continued close monitoring will be necessary in the coming quarters.

Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.