mREIT AG Mortgage Investment Trust (MITT) has priced their previously announced baby bond.
The issue priced at a lofty 9.50% for 1.2 million shares (bonds)–there is a provision for 180,000 over allotment shares.
Egan-Jones rates the issue BBB-.
The issue will trade under ticker MITN–it will be a week or 10 days before exchange trading occurs.
The pricing term sheet can be read here.
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The amount of recent junk issues coming out is staggering. Just using Tim’s new issues page I did a quick scan and the last 14 new issues only 3 are investment grade. I am excluding things like ET-I.
Something just feels off buying a lot of this recent stuff. I think ALL-J was the last real gift the market gave to us. I made sure to buy a 1000+ shares of that one. Otherwise I just take a “taste” of the IG rated recent issues. They can blow up and I would barely notice portfolio wise.
Maine, I guess I will just stick with the lenders doing the site development and construction loans and the builders.
That is just one step up from the suppliers selling the picks and shovels.
Something I learned when we studied the Gold Rush in elementary school
Chatting with Maine on another thread – it is noteworthy that mREITS have a tendency to raise capital continuously. This is commonly done via ATM issuance of common. However, non agency players tend to be trading at significant discounts to book value, so common equity sales at these prices destroy book value. So one might ask the question why would an mREIT issue a baby bond with ~9% coupon, and it would seem that the common equity window is closed to them due to discounts to book. Therefore baby bonds are a good option.
As we know, with mREITS one typically looks at 2 key metrics – book value and earnings available for distrubtion. Some numbers on MFA, RWT and MITT which are all issuing baby bonds now:
MFA book value $13.84, share price $11.52, EAD $.4, Common Dividend $.35
RWT book value $8.77, share price $7.04, EAD $.09, common dividend $.16
MITT book value $11.37, share price $6.40, EAD $0.1, common dividend $.18
One is free to compare to ABR, NLY, CIM and AGNC (NLY and AGNC have very different business models).
RWT and MITT are simply not earning their dividends. MITT in particular trades at about 56% of book value. With RWT and MITT one must really wonder what they are doing generally and if they are issuing 9%+ fixed coupon debt to finance the common equity dividend? It would seem that a high coupon baby bond in an mREIT that is trading significantly below book and is not earning it’s dividend is a no go.
I’ll buy a few the first day
I’m just wondering how they can make a buck borrowing at 9.5%! Is this business model that profitable?
It’s a good question as it doesn’t really pass the common sense sniff test. They will likely use it to pay of the old WMC note that is maturing, but it could also make economic sense. I am basing this off memory, so forgive me of the details are off, but here is how I could get comfortable with this type of financing:
They take the funds and provide non-qm mortgages to self employed folks, ~70% LTV, good credit, heavy California. You can find details in their latest presentation. See page 9 of the Q3 presentation for data. https://www.agmortgageinvestmenttrust.com/static-files/153d69d2-6a2f-446a-b2d2-2f421ee56289
Say they get 8% on the mortgage. They then borrow on a warehouse line at ~6% and lever it up 4x.
Just assume the original amount is $100m for explanatory sakes.
So now we have $400m getting 8%, or $32m a year.
For liabilities, we have $100m paying 9.5% and $300m paying 6%. That’s a total of $27.5, or weighted average cost of 6.9%.
That results in a diff of $4.5M or 4.5% on the original capital.
They then bundle the mortgages into a security and sell off 80% to investors, keeping the lower rated and equity tranches. the beauty of these securitizations is that they are non-recourse and non mark to market. note: this doesn’t always show up in the consolidated financials making it confusing. The cost of funding is generally lower so the 4.5% diff increases, with the yield on the lower rated tranches generally around 15%.
If there are minimal foreclosures/losses, then it generally works out. The issuer also has the optionality to call back the securitized tranches early if they become in the money. This has the potential for significant upside if rates drop a lot.
I am generally comfortable with the economics of this process in the current environment IF the collateral is truly owner occupied housing with ~70% LTVs. It has become a lot harder to fudge the house value since 08/09. I also don’t foresee a 30% downturn in housing, we simply don’t have enough, and replacement cost is increasing. It is becoming more lucrative to be a mortgage lender as the banks gradually step away. It also depends on many important factors such as the mortgage spread and underwriting abilities. lastly, I believe mortgage spreads are one of the best plays out there now, just look any any large buyside 2024 outlook/ positioning.
Now, when I do the same analysis for commercial RE or transitional housing, or even small business loans, I get much more nervous.
trust me, i hate a lot of these financial shenanigans. A lot needs to go right to avoid issues. but they can make sense at times. The worst are the CEF’s that borrow no matter what. their loss, our gain. Using leverage when opportunities are good can be smart if structured correctly.
Maine, Thanks for your description of how they make money paying such high premiums for borrowing. AG Mortgage has quite the history dating back to the two guys who originally founded it, John Angelo and Michael Gordon. One interesting tidbit is AG Mortgage does not have any actual employees! They actually employees of TPG Angelo Gordon. It is a somewhat tangled web……
Hmmm…they offered 2 mil shares, printed just 1.2 with handsome terms to lure buyers.
Poor Ag/TPG! maybe someday their reputation will recover.