Rising US Housing Demand And Digital Underwriting Will Unlock Opportunities

Key Takeaways

• Expansion in home equity lending and vertical integration with Arc Home are driving revenue growth, profitability, and improved efficiency through technology and streamlined processes.
  
• Strong securitization execution, prudent leverage, and data-driven credit discipline position the company for stable returns and resilience in volatile markets.
  
• Exposure to higher borrowing costs, credit risk, declining mortgage demand, stricter regulation, and fintech disruption threatens future profitability and growth prospects.

Catalysts

Operates as a residential mortgage real estate investment trust in the United States.

• AG Mortgage Investment Trust is aggressively expanding in the home equity lending market, a segment experiencing rapid growth due to ongoing U.S. household formation and constrained housing supply. This exposure is expected to drive revenue growth and increase net interest income as home equity volumes and loan origination opportunities accelerate with demographic trends.
  
• The company’s vertical integration with Arc Home streamlines mortgage origination, leveraging technology and data-driven processes to deliver higher gain-on-sale margins and faster volume growth. As Arc Home’s lock volumes increased fifty percent year over year and returned to profitability, its contribution to overall earnings available for distribution is set to rise, supporting a sustained improvement in net income.
  
• Robust execution in securitization and capital markets, demonstrated by multiple successful home equity and agency loan deals, provides access to competitively priced funding and positions AG Mortgage Investment Trust to rapidly scale its investment portfolio. This ability to rotate capital into high-return asset classes should lift both revenue and risk-adjusted earnings in a capital-constrained environment.
  
• Ongoing technological innovation and the adoption of data-driven analytics are enhancing underwriting discipline and credit selection, resulting in lower default rates and a portfolio currently showing only 1.3 percent serious delinquencies and average loan-to-values of 59 percent. These improvements are forecast to drive higher net margins and reduce credit loss volatility over time.
  
• With prudent leverage and strong liquidity, AG Mortgage Investment Trust is well positioned to capitalize on periods of market volatility and benefit from any future stabilization or growth in mortgage demand, allowing it to deploy capital efficiently into segments that yield the strongest returns, thereby supporting more consistent earnings and potential dividend increases.

AG Mortgage Investment Trust Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on AG Mortgage Investment Trust compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming AG Mortgage Investment Trust's revenue will grow by 4.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 32.8% today to 34.0% in 3 years time.
• The bullish analysts expect earnings to reach $31.3 million (and earnings per share of $1.17) by about May 2028, up from $26.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 64.5x on those 2028 earnings, up from 8.2x today. This future PE is greater than the current PE for the US Mortgage REITs industry at 12.4x.
• Analysts expect the number of shares outstanding to grow by 0.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

AG Mortgage Investment Trust Future Earnings Per Share Growth

Risks

• Rising interest rates and structural inflation, if persistent, could significantly increase AG Mortgage Investment Trust’s borrowing costs and compress net interest margins, thereby reducing future earnings and impacting profitability.
  
• The company’s increasing capital allocation into home equity loans and non-agency assets raises its exposure to credit-sensitive products, heightening the risk of credit losses and impairments during economic downturns, which could negatively affect net income and the sustainability of dividends.
  
• Demographic shifts and affordability issues leading to declining U.S. homeownership rates threaten long-term mortgage demand, reducing the pool of assets available for investment, which could constrain revenue growth opportunities for AG Mortgage Investment Trust.
  
• Ongoing regulatory scrutiny and elevated compliance costs in financial markets may raise operating expenses and reduce operational flexibility, putting downward pressure on net margins and limiting the company’s ability to maintain current profitability levels over the long term.
  
• Technological disruption from fintech lenders and alternative financing models is increasing competition, which could lead to yield compression on target mortgage assets and erode AG Mortgage Investment Trust’s market share, ultimately resulting in revenue and earnings pressure.

Valuation

• The assumed bullish price target for AG Mortgage Investment Trust is $48.62, which represents two standard deviations above the consensus price target of $15.71. This valuation is based on what can be assumed as the expectations of AG Mortgage Investment Trust's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $52.5, and the most bearish reporting a price target of just $8.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $92.1 million, earnings will come to $31.3 million, and it would be trading on a PE ratio of 64.5x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $7.27, the bullish analyst price target of $48.62 is 85.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.