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AG Mortgage Investment Trust, Inc. (NYSE:MITT) is a mortgage real estate investment trust (REIT). It focuses on investing in, acquiring and managing a diversified portfolio of residential mortgage assets, and financial assets. It also invests in residential mortgage-backed securities (RMBS) issued or guaranteed by a government-sponsored enterprise. The fund performed well and paid a strong dividend prior to the covid-19 pandemic.
Post-pandemic, the fund has not performed that well. Interest rate hikes are expected to cause further pain to the REIT. Despite all of this, I am expecting that MITT will be able to generate good returns for its investors by this year.
Growth Plan of AG Mortgage Investment Trust
MITT is a very small REIT with a market capitalization of $172.25 million, and long term assets of almost $2 billion. Such a low asset base doesn’t help a mortgage REIT grow fast. However, this REIT has the support of a large, reputable investment management firm specializing in debt and real estate. MITT is externally managed by AG REIT Management, LLC, a subsidiary of Angelo, Gordon, and CO., which has access to $50 billions of funds.
MITT plans to leverage on its affiliate, Arc Home, and other origination partners to deploy capital into non-agency and agency-eligible loans. MITT has a 45% ownership interest in Arc Home, through which it plans to increase its funding volumes. The mortgage REIT plans to continue its strong purchasing pace in 2022 with $1.2bn year-to-date purchases and a current pipeline of $500.8mm.
MITT’s investment portfolio comprises non-qualifying mortgages loans, government-sponsored entity non-owner occupied loans, re/non-performing loans, land related financing, and agency residential mortgage-backed securities; and commercial investments. MITT is hopeful that sufficient liquidity, in-place financing lines, and cash generated from future securitizations will support its business plan throughout 2022.
Dividend and Price Performance
The company was incorporated in 2011, and since then it has paid a dividend in almost every quarter. Before the pandemic, it generated a high yield in the range of 11 percent to 16 percent. The pandemic year was a disruption, but yield seems to be slowly picking up. However, dividend has fallen significantly due to a decline in interest income, which seems to have triggered a panic decrease in the payout ratio. The payout ratio is now very low – in fact, it is lower than industry standards. Therefore, such a low dividend is probably sustainable.
Prior to the pandemic, MITT’s stock traded mostly in the range of $45 to $55 for almost four years. The price reached a bottom low of $4.38 during March 2020, and then recovered up to $13.5 during November, 2021. The price has again come down to a level between $6 and $7.5 in June 2022. Book value per share of MITT stands at $13.68. This means that the stock is trading at a deep discount to its book value.
If the company remains fundamentally strong, we can expect the stock to trade at least somewhere near its book value by the end of this year. Thus, it seems that it’ll take a long time for this stock to trade at the pre-pandemic level.
Future Expectations
During May, 2022, the Federal Reserve (“FED”) raised interest rates by 50 basis points. The United States is witnessing its worst-ever inflation in the past 40 years, and the FED has planned a series of interest rate hikes in order to control the inflation. Expectations are growing that the U.S. central bank will hike interest rates by a whopping 3 percentage points this year. Higher interest rates will increase the cost of mortgage loans. This will most likely curb the demand for mortgaged properties, and will ultimately impact the revenue and earnings of this mortgage REIT.
MITT generates its revenue primarily from interest income and income from affiliates, such as Arc Home. Despite the interest rate hikes, Arc Home is expected to continue growth in originations. Total originations are forecasted in the range of $4.5 billion to $6.5 billion for the year 2022 (compared to $4.4 billion in 2021). Non agency originations (non-QM loans, QM loans, jumbo loans, and agency-eligible loans sold to non-agency investors) are forecasted in the range of $3.5 billion to $5.0 billion. This is a huge growth from $1.7 billion non-agency originations in 2021. This gives me some confidence that the price of MITT will not keep falling.
MITT plans to expand its delegated correspondent channel in Q2 2022, partnering with brokers and top originators to drive funding growth. MITT also purchased $0.4 billion of loans from Arc Home during Q1 2022 representing 41% of MITT’s total loan purchases. It is expected mortgage REITs will experience an overall decline in origination volume. However, MITT management claims that decline in demand for new mortgage loans may benefit them, as it’ll free up more capacity in the securitization markets to execute with increased efficiency. As a result, the return on equities (ROE) will increase.
Investment Thesis
MITT has targeted a ROE in the range of 14 percent to 25 percent post securitization. This, the company may not be able to achieve. Higher interest rates should not only reduce the volume of new mortgage loans, but also may reduce the interest spread, as MITT will try to reduce the burden of its customers in order to grow for the time being. However, this mortgage REIT is capable of delivering long-term earnings growth.
So, despite interest rate hikes and unfavorable economic scenarios, I expect MITT to trade somewhere near its book value of $13.68 per share. However, if there wasn’t an almost 100% dilution in the last 5 years, I would expect the dividend to have been stronger.
Valuation in mortgage REITS is primarily dependent on its dividend yield and book value. Considering both these aspects, the current price is in no way justified. The price should surely increase by the end of this year. However, as I said earlier, it’ll take a long time for this stock to trade at the pre-pandemic level. The continuing interest rate hikes and looming recession will have an inverse impact on this REIT. Despite this, I expect that AG Mortgage Investment Trust Inc. will be able to generate sufficient returns for its investors.
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