For years, satirical late night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.
What AG Mortgage Investment Trust does
AG Mortgage Investment Trust is a mortgage real estate investment trust that invests in agency (government-backed) and non-agency (non-government backed) mortgage-backed securities and other real estate-related securities and assets. As of the first quarter, 73.5% of its investment portfolio was tied up in agency residential-MBSes, with the remaining 26.5% made up on non-agency RMBSes, commercial loans, commercial MBSes, and other asset-backed securities.
In the first-quarter, AG Mortgage Investment Trust reported net income of $0.49 per share and declared a quarterly dividend of $0.80. Book value declined slightly to $23.16 by the end of the quarter. Furthermore, net interest margin stood at 2.25% with a leverage ratio of 5.38.
Whom it competes against
If you feel a bit overwhelmed by the earnings reports of mortgage REITs, then I'll make it much simpler. There are only three truly important factors: What's the Fed doing? How high is the leverage ratio? And is this an agency-only, or agency & non-agency mREIT?
The actions of the Federal Reserve have bearing on the entirety of the mREIT sector whether they're agency or non-agency backed. The reason is that Operation Twist -- a program that saw the U.S. central bank sell short-term U.S. Treasuries in favor of buying a corresponding amount of long-term U.S. Treasuries -- and its monthly MBS bond-buying program have worked to artificially keep lending rates low. These rates work in mREITs' favor by allowing them to borrow at historically low levels, then lever up on relatively tight margins to reap big gains from the rate at which they lend. However, recent strong data from the U.S. economy, including a five-year low in the unemployment rate, may indicate the Fed wants to pare back its bond-buying programs in the near future, which could cause rates to rise, and mREITs to lose their bountiful spreads.
These spreads are what have allowed mREITs to pay out double-digit yields for years now. However, with spreads tightening as mortgage rates hit their highest levels in two years, dividend cuts are beginning to cycle through the sector. American Capital Agency (NASDAQ:AGNC), Annaly Capital Management (NYSE:NLY), and American Capital Mortgage Investment (NASDAQ: MTGE) all recently cut their dividends in lieu of smaller investment profits.
Other important factors relate to whether or not an mREIT invests in riskier non-agency assets and what their leverage ratio is. Agency-only mREITs like American Capital Agency and Annaly Capital often carry much lower net interest margins than their non-agency counterparts, but they can really pack on the leverage since their MBSes are protected in case of default by the government.
In contrast, non-agency mREITs often have to be more careful with their leverage since loan defaults actively impact their bottom-line profit, and rapidly rising interest rates, such as what we saw over the past few weeks, can trigger MBS and other security sales at a loss. In return for more risk, non-agency securities pay out higher yields. Take, for example, Invesco Mortgage Capital (NYSE:IVR), a buyer of agency and non-agency RMBSes, which delivered what might seem like an uninspiring 1.64% net interest margin in the first quarter with a leverage ratio of 6.4. Now compare that to agency-only mREIT Annaly Capital, whose net interest margin fell 80 basis points from the year-ago period in the first quarter to just 0.91%, but with a higher leverage ratio of 6.6.
Factoring all of those variables in, I have decided to make a CAPScall of outperform on AG Mortgage Investment Trust.
I am perfectly aware of the negatives surrounding the mREIT sector, which includes the imminent paring back of the Fed's bond-buying program, but I also can't ignore that these businesses are money-making machines that have survived, and even thrived, in much higher interest rate environments. The Fed has been quite forthcoming with its intentions to keep the Fed Funds target lending rate near historic lows through 2015, which gives these mREITs another two-and-a-half years of very good monetary policy visibility.
Valuation is another key factor that attracts me to AG Mortgage Investment. Historically, purchasing mREITs well below their net book value has proven to be a profitable venture. It's certainly hard to argue with history, and AG Mortgage Investment sits at just 76% of its book value.
And of course, where would we be if we didn't discuss AG Mortgage Investment's delectable dividend? Although I'm not sold it'll be able to maintain its current payout of $0.80 per quarter, as of now, it's one of the few mREITs that hasn't yet had to lower its dividend. It's currently yielding an annualized 18.2% -- enough to make any income investor drool. Also, AG Mortgage's leverage ratio is a lot lower than many of its peers, putting it in better shape should it need to shed some of its assets.