AG Mortgage Investment Trust (NYSE:MITT) is a REIT that focuses on investing, acquiring and managing a vast portfolio of various financial assets. Among those financial assets are residential mortgage backed securities from the government sponsored entities, commercial mortgage loans, residential mortgage loans and commercial mortgage back securities, among others. The common stock has been hammered in the past year on concerns over rising rates and the common stock dividend has been slashed substantially in an attempt to save cash. With the common stock falling precipitously and coming out of favor with income investors, I'll offer an alternative for your income portfolio from MITT. In this article, we'll take a look at MITT's Series A Cumulative Redeemable Preferred Stock (MITT-A, may differ depending on your broker) to see if it is a better fit for you than the common stock that is fraught with risks.
MITT-A is a traditional preferred stock, meaning it has no stated maturity date and no debt issue backing it. Issued at $25 per share, the annualized dividend of $2.0625 paid out in quarterly installments gives this preferred a coupon yield of 8.25%. However, shares of have traded down to $22.32 as of this writing, giving this preferred a current yield of 9.2%. This is obviously a very strong current yield and I believe it reflects market participants' angst regarding MITT's ability to sustain its cash flow in a rising interest rate environment.
Beginning in August of 2017 MITT has the option to call MITT-A at any time, redeeming it for the full $25 call price. This means that, should MITT redeem it at that time, holders would be entitled to receive not only the accrued dividends up to that point, but also $2.68 per share in capital gains. Given that MITT uses fairly expensive sources of funding, just like its competitors, I don't think it will be able to refinance this preferred at a lower rate in 2017 so in my opinion, a call at that time seems unlikely. However, it could happen at some point in the future and it is something to keep in mind. With the strong capital gain that would accrue if such an event occurred, I'm not sure holders would complain anyway.
A major positive for MITT-A that I believe makes it a far safer issue to own is the fact that it is cumulative. This means that even if MITT misses dividend payments on MITT-A, it is obligated to make them up. Unlike the common dividend, which has no such guarantees, MITT-A's distributions are guaranteed barring a bankruptcy event as even if MITT postpones dividends on MITT-A, it has no choice but to pay them eventually. MITT-A dividends are also senior to common dividends so if MITT really gets into trouble and needs to save cash, it will cut the common dividend in order to make sure it can service its more senior obligations, such as MITT-A. This all means that dividends on MITT-A are far more secure than those of the common.
Unfortunately, even though this preferred pays dividends and not interest payments, since it was issued by a REIT it is ineligible for the favorable dividend tax treatment. Thus, holders of MITT-A in a taxable account will potentially be subject to materially lower after-tax yields on MITT-A than a similar preferred that is eligible for the preferential tax treatment. This could be a sizable negative and if you intend to hold MITT-A in a taxable account, make sure you understand the implications of doing so for your particular tax situation. If, however, you are holding MITT-A in a retirement account, it doesn't matter.
I think the principal risk in owning MITT-A is that of the parent company's financial condition. While interest rate risk is inherent for any security and MITT-A is certainly not immune to it, I think MITT-A trades more as a proxy for the market's belief that the parent can continue to function and pay its bills in a rising rate environment. The common stock has already been punished and the dividend has been cut, realizing the market's fears. While I don't believe the preferred dividends are in any danger of being missed I also don't think the common stock is a good investment at this point. MITT has some issues with its portfolio in a rising rate environment given the paper it holds and the leverage it employs and as a result, I still wouldn't touch the common stock. However, I don't think MITT is going out of business and as such, MITT-A represents an opportunity to pick up a great yield that I believe to be safe given the information available right now.
Make no mistake; MITT-A is riskier than many other preferreds. MITT's business model is one that uses leverage make money on interest rate spreads and when those spreads collapse, so does revenue and profit. I wouldn't go near the common stock at this point because more dividend cuts could be on the horizon but with MITT-A, you've got an opportunity to get more than a 9% dividend that is cumulative and senior to the common stock dividend. While less favorable for a taxable account, MITT-A still represents an opportunity to take advantage of the selloff in REITs and lock in a yield that I believe you can collect for years to come.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may initiate a position in MITT-A at any time.