AG Mortgage Investment Trust, Inc. (NYSE: MITT) is a mortgage real estate investment trust (REIT). It focuses on investing, acquiring and managing a diversified portfolio of residential mortgage and financial assets. It also invests in residential mortgage-backed securities (RMBS) issued or guaranteed by a public company. The fund performed well and paid a strong dividend before the covid-19 pandemic.
After the pandemic, the fund did not perform so well. Interest rate hikes are expected to cause further difficulties for the REIT. Despite all this, I expect MITT to be able to generate good returns for its investors by this year.
AG Mortgage Investment Trust Growth Plan
MITT is a very small REIT with a market capitalization of $172.25 million and long-term assets of nearly $2 billion. Such a weak asset base does not help a mortgage REIT grow quickly. However, this REIT is backed by a large, reputable investment management firm that specializes in debt and real estate. MITT is managed externally by AG REIT Management, LLC, a subsidiary of Angelo, Gordon, and CO., which has access to $50 billion in funds.
MITT plans to leverage its subsidiary, Arc Home, and other origination partners to deploy capital in non-agency and agency-eligible loans. MITT has a 45% stake in Arc Home, through which it plans to increase its financing volumes. The Mortgage REIT expects to continue its strong buying pace in 2022 with purchases of $1.2 billion year-to-date and a current pipeline of $500.8 million.
MITT’s investment portfolio includes non-qualifying mortgages, non-occupied government-sponsored loans, re/non-performing loans, land-linked financing, and agency residential mortgage-backed securities; and business investments. MITT hopes that sufficient liquidity, funding lines in place and cash generated from future securitizations will support its business plan through 2022.
Dividend and price performance
The company was incorporated in 2011 and since then has paid a dividend almost every quarter. Before the pandemic, it generated a high return in the range of 11-16%. The pandemic year was a disruption, but performance appears to be slowly picking up. However, the dividend fell significantly due to lower interest income, which appears to have triggered a panic drop in the payout rate. The payout ratio is now very low – in fact, it is below industry standards. Therefore, such a low dividend is likely sustainable.
Prior to the pandemic, MITT shares traded mostly between $45 and $55 for nearly four years. The price reached a low of $4.38 in March 2020 and then rallied as high as $13.5 in November 2021. The price fell back to a level between $6 and $7.5 in June 2022. The book value per MITT share is $13.68. This means the stock is trading at a steep discount to its book value.
If the company remains fundamentally sound, we can expect the stock to be trading at least somewhere near its book value by the end of this year. So, it looks like it will take a long time for this stock to trade at the pre-pandemic level.
In May 2022, the Federal Reserve (“FED”) raised interest rates by 50 basis points. The US is experiencing its worst inflation in 40 years and the Fed has scheduled a series of interest rate hikes to control inflation. There is growing expectation that the US central bank will raise interest rates by 3 percentage points this year. Higher interest rates will increase the cost of mortgage loans. This will most likely dampen demand for mortgaged properties and 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 interest rate hikes, Arc Home is expected to continue production growth. Total issuance is expected to be between $4.5 and $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 expected to range from $3.5 billion to $5.0 billion. This is a huge growth from $1.7 billion from non-agency origins in 2021. This gives me some confidence that the price of MITT will not continue to decline.
MITT plans to expand its delegated correspondent channel in Q2 2022, partnering with leading brokers and originators to drive funding growth. MITT also purchased $0.4 billion in loans from Arc Home during the first quarter of 2022, representing 41% of total MITT loan purchases. Mortgage REITs are expected to experience an overall decline in origination volume. However, MITT management says lower demand for new mortgages could benefit them, as it will free up more capacity in securitization markets to execute with greater efficiency. As a result, the return on equity (ROE) will increase.
MITT has targeted an ROE of around 14 to 25% after the securitization. This, the company may not be able to achieve. Higher interest rates should not only reduce the volume of new mortgages, but also reduce the interest spread as MITT attempts to reduce the burden on its customers in order to expand for the time being. However, this mortgage REIT is capable of generating long-term earnings growth.
So, despite interest rate hikes and adverse economic scenarios, I expect MITT to trade somewhere near its book value of $13.68 per share. However, if there hadn’t been nearly 100% dilution over the past 5 years, I would expect the dividend to have been stronger.
The valuation of mortgage REITs depends primarily on its dividend yield and book value. Considering these two 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 will take a long time for this stock to trade at the pre-pandemic level. Continued interest rate hikes and the impending recession will have an adverse effect on this REIT. Despite this, I expect AG Mortgage Investment Trust Inc. to be able to generate sufficient returns for its investors.