Description

Thesis

AG Mortgage Investment Trust, Inc. (“MITT”) Series B perpetual cumulative redeemable preferred stock is an attractive discounted fixed income instrument that I expect to generate a 20-25% total return over the next 12 months. MITT Series B preferred is a $25 par instrument that carries a 8.00% cash dividend rate and trades at $19 per share, or 76% of par.

The opportunity exists because MITT recently completed a credit-enhancing balance sheet transformation that is underappreciated by the market. I believe MITT’s positive transformation will become more readily apparent after the company reports a couple of clean quarters following its stock-for-stock merger with WMC and this could lead to a re-rating of its preferred shares.

Assuming MITT Series B preferred trade in line with fixed rate preferreds issued by its mortgage REIT peers, MITT Series B preferreds will generate an approximately 20-25% total return with $2 per share of dividends (50c per quarter) and $1.75 - $2.50 per share of capital appreciation.

Company overview

MITT is an externally managed mortgage REIT that primarily invests in residential credit assets. MITT was written up as a relative value short by rapper in June 2020. At the time, “MITT [was] one of only 2 mortgage reits still struggling to meet margin calls and in the midst of margin forbearance agreements.” Since then, the company has:

• Survived its 2020 financing scare
• Turned dividends to its common and preferred back on
• Completed a reverse stock split
• Completed a preferred-for-common stock exchange
• Exited its commercial real estate loan portfolio
• Issued ~$100 million in common stock (excluding recent merger consideration)
• In November 2023, TPG Inc. completed the acquisition of MITT’s external manager, Angelo Gordon
• In December 2023, completed the acquisition of another publicly traded mortgage REIT, Western Asset Mortgage Capital Corporation (“WMC”), in a stock-for-stock transaction.

Today, MITT’s investment portfolio is heavily weighted towards high FICO, non-agency residential credit, financed on a non-recourse basis.

Source: MITT December 2023 investor presentation

The WMC merger

In June 2023, WMC announced a merger with a private REIT in which the external manager to the private REIT would take control of WMC. In July 2023, MITT submitted a competing proposal to WMC and was ultimately successful. The transaction closed in December 2023 and WMC shareholders received as consideration in the transaction, 1.498 shares of MITT common stock per share of WMC stock, and a $7.0 million cash contribution from TPG Angelo Gordon. MITT issued approximately 9.2 million shares to former WMC shareholders.

This had the effect of MITT effectively issuing $100 million of common stock, providing significant credit enhancement to MITT preferreds as WMC did not have any preferred outstanding. Pro forma for the WMC transaction, MITT has approximately 29.4 million shares outstanding. I estimate MITT’s ratio of preferred equity to total equity declined from 50% to 41% as a result of the transaction.

In addition, MITT has indicated that it will realize $5-7 million in annual G&A savings due to the WMC transaction. This will provide meaningful incremental cash flow support independent of investment performance relative to MITT’s $18 million of annual preferred dividend payments.

Despite the benefits of the WMC transaction to MITT preferred, MITT preferred has continued its middling trading performance. Below are 3-month and 3-year price charts of MITT Series B preferred compared to other mortgage REIT fixed-rate preferred issuances.

Comparables

Below is a selection of fixed rate preferred issued by mortgage REITs. The MITT Series B preferred trades at the widest spread and near the lowest dollar price of its peer group. The MITT Series B preferred also trades at a significantly wider spread than its recently issued (January 2024) baby bond as compared to PMT and MFA (also recently issued).

I believe the CIM Series A preferred is good trading comparable as CIM has a similar balance sheet profile in terms of investments, financing and preferred to equity ratio as compared to MITT post WMC transaction. If MITT Series B preferred were to trade in line with CIM Series A preferred, this would result in a 1-year total return of approximately 25%.

If MITT Series B preferred were to trade in-line with the spread between MFA baby bonds relative to MFA Series B preferred, this would result in a 1-year total return of approximately 20%.

Catalyst

1. MITT reports 4Q results and files pro forma balance sheet
2. MITT demonstrates G&A cost savings