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AG Mortgage Investment Trust, Inc. (MITT): Diversifying Its Portfolio and Enhancing Earnings Power
Published on September 24, 2024 | Ticker: MITT

AG Mortgage Investment Trust, Inc. (MITT) is a residential mortgage REIT that has recently taken significant steps to strengthen its investment portfolio and improve its financial performance. With the acquisition of Western Asset Mortgage Capital Corporation (WMC) in December 2023, MITT has expanded its asset base and diversified its revenue streams, positioning the company for continued growth and success.

Financial Highlights

For the full year 2023, MITT reported net income of $53,784,000 and revenue of $274,706,000. The company's annual operating cash flow and free cash flow both stood at $49,011,000. These robust financial results demonstrate MITT's ability to generate consistent and reliable returns for its shareholders.

In the first quarter of 2024, MITT continued to deliver strong performance. The company reported net income available to common stockholders of $16,304,000, or $0.55 per diluted share. MITT's book value per share increased to $10.84, while its adjusted book value per share reached $10.58, representing a 3.7% increase from the end of 2023. The company's earnings available for distribution (EAD) for the quarter was $0.21 per share, comfortably covering its $0.18 per share dividend.

Business Overview

MITT's primary focus is on investing in a diversified portfolio of residential mortgage-related assets, including non-agency loans, agency-eligible loans, and re- and non-performing loans. The company also has exposure to commercial loans and commercial mortgage-backed securities (CMBS) through its acquisition of WMC.

MITT's investment strategy is centered on acquiring and securitizing newly-originated residential mortgage loans, primarily through its ownership interest in Arc Home, a residential mortgage loan originator. The company finances its loan portfolio through a combination of short-term financing arrangements and long-term, non-recourse securitizations, aiming to optimize its capital structure and mitigate interest rate risk.

The WMC Acquisition

The acquisition of WMC in December 2023 was a transformative event for MITT. The transaction increased the company's investment portfolio by $1.2 billion, primarily consisting of securitized non-agency loans. This strategic move has enhanced MITT's scale, diversified its asset base, and provided opportunities for operational synergies.

As part of the acquisition, MITT and its external manager, AG REIT Management, LLC, a wholly-owned subsidiary of TPG Angelo Gordon, entered into an amendment to the existing management agreement. This amendment includes a reduction in the base management fee and a waiver of certain expense reimbursements, further aligning the interests of the manager and MITT's shareholders.

Operational and Financial Performance

MITT's operational and financial performance in the first quarter of 2024 highlights the benefits of the WMC acquisition. The company's net interest income, inclusive of the interest earned on its hedge portfolio, increased by $4.1 million compared to the prior-year period, driven by the addition of the WMC portfolio. At the same time, MITT's operating expenses only increased by $1.4 million, demonstrating the realization of the anticipated synergies.

The company's economic leverage ratio stood at 1.4x as of March 31, 2024, down from 1.5x at the end of 2023, reflecting MITT's prudent approach to managing its capital structure. The company's total liquidity, comprising cash and cash equivalents and unencumbered agency RMBS, amounted to $140 million, providing ample flexibility to fund future investments and manage its liabilities.

Geographic and Asset Diversification

MITT's investment portfolio is geographically diversified, with significant exposure to key markets such as California, New York, Florida, and Texas. This diversification helps mitigate concentration risk and provides the company with exposure to various regional economic trends.

In terms of asset composition, MITT's portfolio includes securitized non-agency loans, residential mortgage loans, commercial loans, and real estate securities. The company's non-agency RMBS and legacy WMC CMBS portfolios are also well-diversified, with investments across various credit ratings and collateral types.

Outlook

MITT's management team remains optimistic about the company's growth prospects. The continued strength in the housing market, coupled with the company's ability to leverage its origination platform and securitization capabilities, is expected to drive further portfolio growth and earnings power.

The company's pipeline of new investments, including $284 million in loans from Arc Home and other third-party originators, suggests that MITT will be able to maintain its momentum in deploying capital and generating attractive risk-adjusted returns. Additionally, the company's recent issuance of $35 million in senior unsecured notes has addressed a portion of the legacy WMC convertible notes, further strengthening its capital structure.

Risks and Challenges

As with any investment, MITT faces a range of risks and challenges that investors should consider. These include interest rate risk, credit risk, prepayment risk, and basis risk, all of which the company actively manages through its hedging strategies and portfolio diversification efforts.

The company's reliance on external financing, such as repurchase agreements and securitized debt, also exposes it to liquidity risk, which MITT mitigates by maintaining a prudent level of leverage and a reasonable cushion of cash and unencumbered assets.

Conclusion

AG Mortgage Investment Trust, Inc. has demonstrated its ability to navigate the evolving market environment and deliver strong financial performance. The acquisition of WMC has been a transformative event, enhancing the company's scale, diversifying its asset base, and improving its earnings power. With a focus on newly-originated residential mortgage loans, a prudent approach to leverage, and a commitment to operational efficiency, MITT appears well-positioned to continue generating attractive risk-adjusted returns for its shareholders.

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