AG Mortgage: A High Yielding Relatively Risky mREIT At A Risk Adjusted Price (NYSE:MITT)

~ by Snehasish Chaudhuri, MBA (Finance)

AG Mortgage Investment Trust, Inc. (NYSE:MITT) is a real estate investment trust (REIT), that invests, acquires and manages a diversified portfolio of residential mortgage assets, and other real estate-related securities. Once a well performing stock, MITT has failed to perform since the covid-19 pandemic hit the market during March, 2020. The pandemic has been followed by Russia’s invasion of Ukraine, which has resulted in record-high inflation, multiple hikes in interest rates and an increased risk of recession. While MITT used to trade around $50 prior to the pandemic, post-pandemic it traded mostly around $10, and off late has come down to a level of $4. Further interest rate hikes are expected to cause further pain to this mREIT. However, there also lies an opportunity for investors to make good money, as I don’t think it can get much worse.

An Overview of AG Mortgage Investment Trust, Inc.

Incorporated in 2011, AG Mortgage Investment Trust, Inc. primarily invests in agency-backed residential mortgage-backed securities (RMBS). The company also deals in non-qualifying mortgage loans, government-sponsored entity non-owner occupied loans, re/non-performing loans, land related financing, and commercial investments. MITT restructured its portfolio in 2021 and reduced the exposure to commercial investments. In order to focus on core activities it liquidated almost all non-core assets. Like most mREIT, MITT is mostly owned by common people. 58 percent is held by the public, whereas 26 percent is owned by financial institutions.

In my last coverage on 28th June, I mentioned that “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, the 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.” Since then, AG Mortgage Investment Trust, Inc. has been able to sustain its quarterly payout of $0.21 for another 2 quarters, and has been able to generate an average yield of 12 percent this year. However, contrary to my expectations, price has dropped drastically. The price dropped by almost 55 percent to $3.53 and then has again started rising.

Yield Remains Strong, as Price Dips. But Is the pay-out Sustainable?

Given the low price, lower than even during the pandemic period crash in March 2020, the investment decision comes down to primarily two things. Firstly, is there any chance of the company going bankrupt? And secondly, is the pay-out sustainable? I don’t think things can get worse than this. The stock is trading at its historical low. The company at present is running on loss, as it is accounting for its unrealized losses. Else the company would have made profit. In fact, last year, the profit was positive. The management, too, is quite optimistic about the company’s future. They repurchased 1.4 million shares for an average price of $7.70 per share in the second quarter of 2022. MITT’s board has authorized a further buy-back budget of $15 million.

However, when it comes to the pay-out, there are doubts. The company increased its payout in Q3, 2021, and is paying $0.21 for the past 5 quarters. Once the unrealized losses are absorbed, the company will hopefully be in a position to generate such payout on a steady basis. As I am not expecting a huge price rise, not at least beyond $10 anytime in the near future, the yield is expected to remain strong. However, risk remains high for this fund. The current macroeconomic situation has the potential to jeopardize all the future income potential and price stability of AG Mortgage Investment Trust, Inc.

Impact of Monetary Tightening and the Fear of Economic Recession

AG Mortgage Investment Trust, Inc. performed well and paid a strong dividend prior to the covid-19 pandemic. Post-pandemic, the fund has not performed that well, and after witnessing a series of volatility, is currently trading at $4.3. There is a popular belief that mREITs work best when interest rates are on the rise, because it helps in enhancing the interest rate spreads. However, rising interest rates have proved to be a bane under the current economic situation. It has resulted in rising cost of borrowings, and thus decreased demand for mortgage loans. Origination of less mortgage loans have reduced the capacity of micro-cap mREITs like MITT to acquire more assets. Also, there lies a scope for existing assets to generate lower yields than the current level.

During the past 6 months, the Federal Reserve raised interest rates tripled, totaling almost 2 percent. In response to this, US 10-year, 20-year, and 30-year treasury notes rose beyond 4.2 percent. Just a year ago, these rates were within 2 percent. The current level of high inflation, if continued for an extended period, will severely impact this mortgage REIT, which earns its revenue through interest income. The FED will remain aggressive in order to bring down inflation, and may further hike interest rate by another 1.25 percent before the year ends. On top of that, an economic recession in the United States will make things worse. However, the high interest rates will discourage prepayment of mortgage loans, which will ultimately enhance the interest income of AG Mortgage Investment Trust, Inc.

Investment Thesis

In my last coverage I was hopeful that the price will move closer to its book value. I am not that hopeful anymore. The multiple interest rate hikes, coupled with a likely recession, will be a major hindrance for this stock to generate an excessively high revenue, and resulting profit. The payout, however, is sustainable to a large extent, if not fully. In my opinion, AG Mortgage Investment Trust, Inc. can’t get much worse than this.

Lack of revenue and profit will force the market price to remain low. All this will result in a strong yield but risk will still be very high. Fed’s aggressive monetary policy will always put pressure on spread, which the company has not hedged, and it won’t be feasible to hedge too for such a small cap mortgage REIT. So, investors should cautiously proceed about buying this stock. At present my call will be to ‘HOLD’ for the existing investors, and wait for some concrete positives before accumulating this stock.