Mortgage Market Headwinds Will Restrict Origination Yet Build Resilience

Key Takeaways

• Expansion into home equity and fintech-enhanced origination boosts growth potential, but exposes earnings to credit risks and market volatility.
  
• Prudent capital management supports flexibility, yet legacy assets and industry competition may constrain returns and portfolio performance.
  
• Heightened exposure to market and credit risks, increased leverage, and weak housing demand threaten profitability, stability, and sustainable earnings growth.

Catalysts

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

• While AG Mortgage Investment Trust has capitalized on demographic tailwinds such as increased household formation and persistent housing undersupply, persistent rate volatility and modest pullbacks in purchase activity threaten to limit top-line growth, which could constrain origination volumes and ultimately hold back growth in net interest income.
  
• The ongoing expansion into home equity loans and partnerships with nonbank originators demonstrate AG Mortgage's ability to capture opportunities from suburban migration trends and housing market shifts; however, concentration in newer asset classes like home equity, especially if underwriting standards relax or regional housing corrections broaden, could increase credit losses and pressure earnings in the medium term.
  
• The company's vertically integrated platform with Arc Home leverages fintech advances to support origination and cost efficiencies, which has led to breakeven profitability and incremental gains in earnings available for distribution; despite this, reliance on consistent origination growth and stable gain on sale margins leaves the platform exposed to reduced consumer activity and margin compression, potentially capping improvements in overall earnings.
  
• AG Mortgage's disciplined approach with low leverage and prudent capital recycling gives flexibility for opportunistic acquisitions and asset rotation, which can protect book value and boost net margins under normal conditions; still, slow-moving legacy commercial loans and episodic refinancing or forbearance events may tie up capital and modestly dilute returns on equity in the near term.
  
• Although broader industry trends such as the reopening of securitization capital markets and increased mortgage product innovation should foster long-term portfolio growth, heightened competition for attractive loans and the risk of fintech-driven disintermediation could limit fee income and net interest spreads, challenging the company's ability to consistently lift its return on equity.

AG Mortgage Investment Trust Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on AG Mortgage Investment Trust compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming AG Mortgage Investment Trust's revenue will grow by 5.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 32.8% today to 37.1% in 3 years time.
• The bearish analysts expect earnings to reach $35.2 million (and earnings per share of $1.2) by about July 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 bearish analyst cohort, the company would need to trade at a PE ratio of 9.5x on those 2028 earnings, up from 8.8x today. This future PE is lower than the current PE for the US Mortgage REITs industry at 11.6x.
• 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 11.6%, as per the Simply Wall St company report.

AG Mortgage Investment Trust Future Earnings Per Share Growth

Risks

• The company has noted signs of regional pullbacks in housing markets and an uptick in delinquencies in certain cohorts of recent mortgage originations, which could increase credit losses and result in higher loan loss provisions, thereby reducing net income over time.
  
• Securitization market volatility and wider spreads observed in recent periods can negatively impact the value of retained securities and book value, while increasing funding costs, which may compress net interest margins and limit future profitability.
  
• Although leverage remains below peers, the company has indicated a willingness to increase leverage as legacy financings roll off, which could amplify earnings volatility and create solvency risks during periods of market stress, ultimately affecting net margins and earnings stability.
  
• The heavy strategic focus on expanding exposure to home equity loans and non-agency mortgage assets increases concentration risk, and any downturn in the performance of these asset classes could lead to write-downs and pressure on revenue growth.
  
• Slowing consumer home purchase demand and persistently low origination volumes, as mentioned for Arc Home, could limit the top-line growth needed to improve profitability, hampering earnings and earnings available for distribution in future quarters.

Valuation

• The assumed bearish price target for AG Mortgage Investment Trust is $8.0, which represents the lowest price target estimate amongst analysts. 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 more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $9.0, and the most bearish reporting a price target of just $8.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $94.9 million, earnings will come to $35.2 million, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 11.6%.
• Given the current share price of $7.8, the bearish analyst price target of $8.0 is 2.5% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
• 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.