Now that the worst effects of the coronavirus pandemic appear to be over for mortgage real estate investment trusts (mREITs), investors are starting to wonder whether it is time to reenter the sector. Pretty much all of the mREITs that entered forbearance with their creditors have exited, deleveraged, cut dividends, and are now back in growth mode. One of the first mREITs to recover was AGNC Investment (AGNC 0.10%). Is the stock a buy?
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Mortgage REITs are not your typical REIT
Mortgage REITs have a different business model from the typical REIT. Most REITs invest directly in property, rent it out, and pay investors what is left after expenses. Mortgage REITs generally don't own property; they own real estate debt. There are commercial mREITs like Blackstone Mortgage Trust (BXMT +0.46%), which own securities backed by commercial mortgages, but most mREITs invest in securities backed by residential mortgages.
There are several flavors of residential mREITs: agency REITs, nonagency REITs, and lenders. AGNC in an agency REIT, which means it invests in mortgage-backed securities guaranteed by the U.S. government.
Agency REITs trade at smaller discounts to book value
As an agency REIT, AGNC Investment bears almost no credit risk. If the borrower doesn't make the mortgage payment, the servicer or the government will ensure that AGNC gets paid.
These sort of securities trade in a very liquid market, and generally are low-volatility assets. This means that the interest on the securities is lower (less risk means less return) and therefore the REIT will use more leverage.
It also means that these stocks generally trade pretty close to book value. AGNC's book value per share as of June 30 was $14.92, and the stock has traded at about a 7% discount to book value since. Other mREITs trade at much bigger discounts to book value. For example, MFA Financial (MFA +0.10%) trades at a 38% discount to book value, and Invesco Mortgage Capital (IVR +0.60%) trades at a 19% discount.
Other stocks in the sector could be close to buys
Given the volatility in the mREIT sector last spring, many became favorites of the Robinhood crowd. In fact, many of these stocks that had been given up for dead are still trading at big discounts to book value, and are increasing dividend payouts.
Investors looking for more risk and potential return will probably find more opportunities in the sector laggards. Stocks like MFA Financial and Invesco Mortgage are not flashing buy signals quite yet, but if the companies report that borrowers are making their mortgage payments, they deserve a serious look.
AGNC will appeal most to conservative income investors
AGNC Investment is going to appeal primarily to income investors who have a low risk tolerance. It pays a monthly dividend of $0.12 per share, which works out to a 10% dividend yield. On its second-quarter earnings conference call, the company admitted that it probably didn't need to cut its dividend in retrospect.
AGNC has also been buying back stock at a discount to book. It is trading with a 6% discount to book value, which should increase when the company announces third-quarter earnings. For conservative income investors, AGNC is worth having in their portfolio. In fact, AGNC is one of my CAPS picks.
