AG Mortgage Investment Trust: Risks Are Growing

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About: AG Mortgage Investment Trust, Inc. (MITT), Includes: AGNC, NLY
by: Achilles Research
Summary

AG Mortgage Investment Trust has slumped lately, in-line with other mortgage REITs in the sector.

Shares are now priced at a larger discount to book value.

However, I don't think the drop constitutes a buying opportunity.

An investment in MITT yields 12.7 percent.

AG Mortgage Investment Trust's (MITT) shares have dropped lately, but the correction does not present a buying opportunity for investors, in my opinion. The mortgage real estate investment trust underearned its dividend with core earnings in the last two quarters, and AG Mortgage Investment Trust's dividend yield as risen to 12.7 percent, indicating that investors have become more wary of the mortgage REIT. Shares are now priced at a 10 percent discount to accounting book value.

AG Mortgage Investment Trust - Portfolio Overview

AG Mortgage Investment Trust is a mortgage REIT with an equity value of just $518 million. The mortgage real estate investment trust invests in agency residential mortgage-backed securities, commercial real estate debt, and single-family rental properties.

Agency residential mortgage-backed securities made up ~60 percent of AG Mortgage Investment Trust's investment portfolio (on a net carrying value basis) at the end of the March quarter whereas residential and commercial investments accounted for a combined ~36 percent of net carrying value. Single-family rental properties represented just ~3 percent of MITT's total $4.1 billion portfolio value.

Here's an up-to-date portfolio snapshot.

Source: AG Mortgage Investment Trust Investor Presentation

AG Mortgage Investment Trust borrows money and invests it into higher-yielding mortgage securities. The mortgage REIT makes a profit on the spread between funding costs and the yield on its mortgage investments.

Due to higher funding costs throughout 2018, the mortgage REIT's net interest margin has fallen from 2.69 percent in Q1-2018 to 2.1 percent in Q1-2019.

Source: Achilles Research

Growing Risk To The Dividend

There are two reasons why I am now more concerned about AG Mortgage Investment Trust's dividend coverage: 1. The mortgage REIT underearned its dividend payout with core earnings in the last two quarters, and 2. The trend in the sector is towards dividend cuts.

As to the first point, AG Mortgage Investment Trust earned $0.45/share in core earnings in Q1-2019 and, thus, did not cover its $0.50/share dividend. The core earnings payout ratio rose to 111.4 percent in the first quarter 2019, which was a further deterioration from the previous quarter's 106.4 percent payout ratio.

Source: Achilles Research

As to the second point, distribution cuts, Annaly Capital Management, Inc. (NLY) and AGNC Investment Corp. (AGNC), the two largest mortgage real estate investment trusts in the United States, pre-announced dividend cuts in the last two months due to a flattening yield curve and compressing debt yields.

Due to rising market concerns over the sustainability of mortgage REITs' dividends, yields have soared in the sector lately.

Chart Data by YCharts

Book Value Discount

AG Mortgage Investment Trust, thanks to the sell-off in the high-yield mortgage REIT sector, now sells for a discount to accounting book value.

Despite the growing gap between AG Mortgage Investment Trust's share price and accounting book value, I no longer recommend MITT for high-yield investors (my previous recommendation was "Buy" for investors with a high risk tolerance).

AG Mortgage Investment Trust's last reported book value was $17.44/share. Since shares sell for $15.78 at the time of writing, the market valuation implies a 0.9x book value. MITT's P/B-ratio is at the lower end in its peer group.

Chart Data by YCharts

Downside Catalyst

Mortgage REITs have come under pressure lately as the yield curve inverted further. An inverted yield curve means that short-term yields exceed long-term yields, which does not make much sense economically. An inverted yield curve is often seen as a precursor to a U.S. recession. Growing pressure on AG Mortgage Investment Trust's net interest margin going forward and, in the worst case scenario, a dividend cut, would be major negative catalysts for a downside move. Risks have definitely grown for AG Mortgage Investment Trust amid the sector downturn.

Your Takeaway

Despite the increasing book value discount, I am not a buyer of AG Mortgage Investment Trust and also no longer recommend the mortgage REIT to income investors with an above-average risk tolerance. Major U.S. mortgage real estate investment trusts are slashing their dividends on the back of compressing yields and other mortgage REITs could be dragged into this hole, too. AG Mortgage Investment Trust underearned its payout for two quarters in a row, and the dividend yield is approaching 13 percent, indicating that the market has rightfully turned more cautious on MITT.

Disclosure: I am/we are long NLY, AGNC. 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.