2 Overpriced Preferred Shares From AG Mortgage Investment Trust – AG Mortgage Investment Trust, Inc. 8.25% PFD SER A (NYSE:MITT.PA)

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

Jim Cramer likes to say there is always a bull market somewhere.

That may be true, but being spread too thin (covering too many sectors) means terrible analysis on high volume rather than great analysis on a tiny niche. There will be weeks where we tell investors it would be best to just sit on dry powder and wait for more opportunities to arise.

We put a huge emphasis on accuracy. Having 20 opinions where 12 are right just isn’t our style. We’d rather have fewer ratings and better accuracy.

We are also not in the business of timing when to jump out of a bubble. If we can tell something is a bubble, we would like to head for the doors sooner rather than later. If we think we know when a bubble will pop, it may be appropriate for a “short target” article.

Sometimes there are very few or no great opportunities in a sector. A recent example is early January 2018. Preferred shares are a key part of this service, but most were overvalued. We had a couple of weekly articles telling subscribers there wasn’t much worth buying because prices were high despite rapidly climbing Treasury yields. The prices came falling down a few weeks later and resulted in several buy alerts.

Most authors always want to have a buy rating. It’s easier to run a service that just pumps out buy ratings. Ethically, we can’t do that. If we don’t like the price on a security, we want to say it plainly. If you’re ever unsure of our opinion on something, ask in the comment section. We’re happy to give a clear answer using all the currently available information.

MITT preferred shares – not so bullish

AG Mortgage Investment Trust (MITT) has a couple of preferred shares we are bearish on. We expect them to underperform several of the other mortgage REIT preferred shares over the next year despite having more risk. However, it is most likely that the total return (including dividends) will still be positive. Therefore, we are marking our rating as “neutral” even though we expect other mortgage REIT preferred shares to deliver superior risk-adjusted returns.

Source: The REIT Forum

If investors insist on using the MITT preferred shares, use MITT-A (MITT.PA) rather than MITT-B (MITT.PB). MITT-A has a materially higher stripped yield, a higher coupon rate, and a smaller premium to call value.

Shares are callable immediately, so the huge potential loss on MITT-B (just over $1.00!) is quite undesirable.

This isn’t an endorsement of MITT-A.

Both shares rallied recently. For MITT-B, the rally was absurd. The stripped price ended $.47 higher. This is an exceptional opportunity to dump the shares at a 7.68% stripped yield. Investors could swap out of this and take a much more attractive preferred share.

For a better idea of where our price ranges are, here are our quick trading prices:

MITT-B is well into the sell range by $1.23. On the other hand, MITT-A is only $0.38 outside of our sell range. If investors had to choose a share, MITT-A is the clear winner. As a reminder, we believe both shares will underperform many of their peers.

Risks for MITT

While this article focuses on the preferred shares, we will touch on MITT for a moment using slides from their latest presentation.

Like many mortgage REITs, MITT’s net interest margin struggled:

That is pretty standard, though. Their higher risk rating is tied to their choice of assets, which includes a significant allocation to residential investments and more single-family rental properties than investors expect in a mortgage REIT:

None of these factors are deal breakers, but combining them with the external management agreement and MITT’s smaller size compared to Two Harbors (TWO), Annaly Capital Management (NLY), or AGNC Investment Corp. (AGNC), their preferred shares look riskier than the preferred shares of the other mortgage REITs. We don’t like reaching for yield, especially when credit spreads are fairly thin throughout the market.

Since we aren’t focused on MITT’s common shares in this article, we are only referencing valuation for the preferred shares. We are not applying any ratings to MITT’s common shares in this article.

Final thoughts

MITT-A is $0.38 and MITT-B is $1.23 away from the range where we believe they should trade. They would both have to drop significantly to enter our buy ranges which are under $24.32 for MITT-A and under $23.82 for MITT-B.

However, the difference between the 2 shares is material and MITT-A is better relative to MITT-B. MITT-A carries a higher stripped yield and has a worst-cash-to-call of -$0.61. MITT-B has a lower yield and comes with a worst-cash-to-call of -$1.01.

We don’t think investors should buy either share. But if you do, make sure it’s not MITT-B.

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Disclosure: I am/we are long AGNCN, NLY, NLY-F, TWO. 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.

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