AG Mortgage Investment Stock: Generates High Yield (NYSE: MITT)

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AG Mortgage Investment Trust, Inc. (NYSE: MINE) is an investment trust for mortgage real estate (REIT). It focuses on investing, 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 entity. The fund performed well and paid a strong dividend before the covid-19 pandemic.

After the pandemic, the fund did not perform so well. The increase in interest rates is expected to cause additional pain to REITs. Despite all this, I expect that MITT will be able to generate a good return 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 low asset base does not help mortgage REITs grow rapidly. However, this REIT has the support of a large, reputable investment management company specializing 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.

MITT plans to use its affiliate, Arc Home and other home partners to invest in non-agency eligible loans. MITT has a 45% stake in Arc Home, through which it plans to increase funding. The mortgage REIT plans to continue its strong buying pace in 2022 with purchases of $ 1.2 billion since the beginning of the year and a current line of $ 500.8 million.

MITT’s investment portfolio includes unqualified mortgage loans, government-sponsored ownerless entities, re-servicing / non-servicing loans, land-based financing, and agency-backed residential mortgage-backed securities; and commercial investment. MITT hopes that sufficient liquidity, available financial lines and cash generated by future securitisations will support its 2022 business plan.

Dividend and price presentation

The company was established in 2011 and has since paid dividends almost every quarter. Before the pandemic, it generated high returns in the range of 11% to 16%. The year of the pandemic was a turmoil, but yields seem to be rising slowly. However, the dividend fell sharply due to a drop in interest income, which seems to have caused a panicked reduction in the payout ratio. The payout ratio is now very low – in fact, lower than industry standards. Therefore, such a low dividend is likely to be sustainable.

Prior to the pandemic, MITT shares had been trading mostly in the $ 45 to $ 55 range for almost four years. The price reached its lowest level of $ 4.38 in March 2020 and then recovered to $ 13.5 in November 2021. The price fell again to a level between $ 6 and $ 7.5 in June 2022. The book value per share of MITT totaled $ 13.68. This means that the shares are traded at a deep discount to their book value.

If the company remains fundamentally strong, we can expect the shares to be traded at least somewhere close to their book value by the end of this year. Thus, it appears that it will take a long time for these stocks to trade at pre-pandemic levels.

Future expectations

In May 2022, the Federal Reserve (“FED”) raised interest rates by 50 basis points. The United States has witnessed its worst inflation in 40 years, and the Fed is planning a series of interest rate hikes to control inflation. Expectations are rising that the US central bank will raise interest rates by an incredible 3 percentage points this year. Higher interest rates will increase the cost of mortgages. This is likely to limit the demand for mortgaged properties and will ultimately affect the revenues and profits of this mortgage REIT.

MITT generates its revenue primarily from interest income and affiliate revenue, such as Arc Home. Despite the increase in interest rates, Arc Home is expected to continue to grow in the originals. Total generation is projected to range from $ 4.5 billion to $ 6.5 billion in 2022 (compared to $ 4.4 billion in 2021). Outputs outside agencies (non-QM loans, QM loans, large loans and eligible loans sold to non-agency investors) are projected to range from $ 3.5 billion to $ 5.0 billion. This is a huge increase of $ 1.7 billion in origin in 2021. This gives me some confidence that the price of MITT will not continue to fall.

MITT plans to expand its delegated correspondent channel in the second quarter of 2022 by partnering with brokers and top initiators to stimulate funding growth. MITT also purchased $ 0.4 billion in loans from Arc Home in the first quarter of 2022, representing 41% of MITT’s total loan purchases. Mortgage REITs are expected to experience a general decline in the volume of initiations. However, MITT management argues that the decline in demand for new mortgages may benefit them, as it will free up more capacity in securitization markets to perform more efficiently. As a result, the return on equity (ROE) will increase.

Investment thesis

MITT targets ROE in the range of 14% to 25% after securitization. This, the company may fail to achieve. Higher interest rates should not only reduce the volume of new mortgage loans, but also reduce the interest rate spread, as MITT will try to reduce the burden on its customers to grow at the moment. However, this REIT mortgage is able to provide long-term profit growth.

So, despite rising interest rates and adverse economic scenarios, I expect MITT to trade somewhere near its book value of $ 13.68 per share. However, if there has been no almost 100% dilution in the last 5 years, I would expect the dividend to be stronger.

The valuation of mortgage REITs depends primarily on its dividend yield and book value. Given both aspects, the current price is in no way justified. The price should certainly rise by the end of this year. However, as I said earlier, it will take a long time for these stocks to trade at pre-pandemic levels. The continuing rise in interest rates and the impending recession will have the opposite effect on this REIT. However, I expect that AG Mortgage Investment Trust Inc. will be able to generate sufficient returns for its investors.

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