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AG Mortgage Investment Trust: Rare Sighting From Preferred Shares

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About: AG Mortgage Investment Trust, Inc. (MITT), MITT.PA, MITT.PB
by: Colorado Wealth Management Fund
Summary

MITT has three preferred shares that come with a risk rating of 4.

Normally these shares are within our sell range.

Investors who are willing to accept a risk rating of 4 may be interested in MITT-A if it falls a bit more in price.

MITT-A currently has the best valuation when compared to MITT-B and MITT-C.

This research report was produced by The REIT Forum with assistance from Big Dog Investments.

We've spent a lot of time being bearish on some preferred shares.

Not today!

However, beware the risks.

AG Mortgage Investment Trust (MITT) has three preferred shares:

Source: The REIT Forum's preferred share spreadsheet

MITT-A (MITT.PA) and MITT-B (MITT.PB) are back to reasonable valuations. No more reason for a bear case. MITT-C (MITT.PC) is a newer preferred share.

These preferred shares carry a risk rating of "4" on a scale from 1 to 5.

When we exclude call risk, we can focus on two other sources of risk:

The first source of risk is the chance that the company's financial position becomes worse. If the company has a relatively defensive strategy, this won't be a major concern for them. Companies that are believed to be taking on more risk will also usually have more volatility in their preferred share prices.

The second source of risk comes from market perception. If the market perceives that a company takes on more risk, their preferred share price will exhibit the same volatility as if they were actually taking that risk. This is very important because it means even a company on solid footing could still see their preferred share price plunge. When investors want lower risk in their portfolio, they usually want two things: stable cash flows and a stable account balance.

We've found preferred shares provide an excellent opportunity for investors to get a high yield with lower volatility. We cover preferred shares frequently and today's picks come from our latest preferred share article for subscribers: "Preferred Shares Week 172."

MITT's preferred shares

While MITT's preferred shares come with a higher risk rating, they do have stripped yields around 8%:

Investors should be looking at the stripped price instead of the recent price. All three of these shares have $0.23 of accumulated dividend. If you were to purchase shares today, you would still get the full dividend amount on the ex-dividend date.

We see MITT-A as being the clear winner when compared to MITT-B and MITT-C.

MITT-A is only $0.29 away from our buy range. MITT-B and MITT-C are both over $0.70 away from our buy range.

Risks

MITT-A and MITT-B do not have any more call protection on the calendar except for the 30-day notice a company would give on a call:

MITT-C does have several years of call protection on the calendar, but it comes with the lowest yield. Further, these aren't securities that we would be comfortable holding for many years. When we assign a preferred share with a risk rating of 4, we are mostly looking at it as a trading security. If any of these prices come down into our buy range, we would consider purchasing them.

MITT could use more common equity compared to preferred equity. And by more, we mean a lot more. The "Market capitalization / Preferred Share Liquidation" gives us a good picture of how much of MITT's capital structure was funded by preferred shares. We would like to see this number at around 5.00 for us to not consider it a material risk. Currently, this number is at 1.82. You can get to that number by taking the company's market capitalization and dividing it by the call value of all outstanding preferred shares. If a liquidation were to occur, even though it's a very small chance, preferred shareholders could be taking a loss.

Final thoughts

MITT's preferred shares have regularly been in our sell range. Investors find them attractive because of their high yield. However, that higher yield comes with additional risk. Therefore, we are looking for a higher yield to make them investable. Even when they come into our buy range, we'd be looking to purchase them and then sell on a nice price bump. For buy-and-hold investors, we advise exercising caution with these shares.

MITT-A is currently the most interesting and has a stripped yield of 8.19%. It's also only $0.29 away from our buy range. MITT-A doesn't have any call protection left on the calendar, but after accounting for dividend accrual, shares are trading at $25.19. If an investor purchased shares today and MITT were to call them right away, they'd be looking at a negative worst-cash-to-call of -$0.18. Given the risks coming with MITT-A, we would be interested in shares of MITT-A if they were trading a bit below their call value of $25 after accounting for dividend accrual.

Disclosure: I/we 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.