Which mREIT Dominates? AGNC vs. STWD in the Income Game

The mREIT sector is a high-octane arena for income hunters, but not all players are created equal. Today, we pit two titans head-to-head: AGNC Investment Corp. (AGNC), the mortgage REIT kingpin, and Starwood Property Trust (STWD), the diversified real estate dynamo. With interest rates at a crossroads and dividends under the microscope, which one offers the best risk-adjusted income play? Let's dive into the data.

AGNC: High-Yield Thrills, Rate Risk Chills

AGNC's 4.3% dividend yield (based on a $33 stock price) is a siren song for income seekers. But don't get swept away by the siren—this yield comes with a catch. AGNC's business model hinges on mortgage-backed securities (MBS), which are highly sensitive to interest rate fluctuations.

• Leverage Bomb: AGNC's “at-risk” leverage ratio is a jaw-dropping 7.5x, meaning a small rate spike can amplify losses.
• Hedging Half-Measures: While swaps and short Treasury positions mitigate some risk, their $47.8B notional interest rate swaps (fixed pay rate 1.91%, floating 4.40%) leave them exposed to widening MBS spreads.
• Net Income Volatility: Q1 2025 net income was just $0.02 per share—before a $0.16 book value hit from widening spreads. Their dividend of $0.36 per share relies heavily on other comprehensive income (OCI), a volatile metric tied to mark-to-market swings.

STWD: Stability in a Diversified Portfolio

STWD's 9.2% dividend yield (at a stock price of ~$10.88) isn't just higher—it's backed by a fortress balance sheet. Their 2.25x debt-to-equity ratio and $1.5B liquidity buffer make them a rock in stormy markets.

• Diversified Income Machine: STWD's revenue streams span commercial loans ($14.5B), infrastructure ($2.8B), and residential real estate, reducing reliance on any single asset class.
• Interest Rate Hedge: 84% of their debt is non-mark-to-market, insulating them from rate swings. Their $500M infrastructure CLO at SOFR + 173bps locks in low costs.
• Net Income Resilience: Q1 2025 distributable earnings hit $0.45 per share, with a 85% payout ratio comfortably covered by funds from operations.

The Rate Sensitivity Showdown

• AGNC's Rate Exposure: A 1% rate hike could shrink their net interest spread by ~20%, as their swaps and hedges are out of sync with current 5.5% SOFR rates.
• STWD's Steady Hands: With 30% of loans outside the U.S. and 84% of debt fixed-rate, STWD's income is less tied to Fed policy.

Valuation & Macro Trends

• AGNC's Valuation Quandary: Trading at ~$33 vs. a $8.25 tangible book value, AGNC's premium reflects hope for rate cuts. But with a 2.4% economic return on equity, it's pricey for a leveraged play.
• STWD's Bargain Basement: At $10.88 vs. a $14.20 book value, STWD trades at a discount to equity. Its $160M embedded gains in affordable housing add upside.

Final Verdict: STWD Wins the Income War

While AGNC's yield is tempting, its 7.5x leverage and rate exposure make it a rollercoaster ride. STWD's 9.2% yield, 2.25x leverage, and diversified income streams offer higher safety and stability in a volatile rate environment.

Action Plan: For investors seeking income without the heartburn, STWD is the clear winner. Pair it with a Fed rate cut bet (expected by late 2025), and you've got a recipe for steady gains. AGNC's high yield is a trap unless rates drop fast—something I'm not betting on yet.

Bottom Line: Ditch the leverage-laden gamble and grab STWD while it's still discounted. Your portfolio will thank you.

Data as of May 26, 2025. Past performance ≠ future results. Consult a financial advisor before investing.