Scott Kennedy’s mREIT + BDC Earnings Series: Assessing AG Mortgage Investment’s And TriplePoint Venture Growth’s Performance For Q1 2024
Summary
This earnings assessment article reviews MITT’s and TPVG’s BV/NAV and core earnings/EAD/NII performance during Q1 2024 and compares results to expectations. Earnings remain a driver to stock performance.
MITT’s BV modestly exceeded my/our expectations (within range; top end) while its core earnings/EAD was a notable outperformance. This mainly related to a larger-than-anticipated increase in MITT’s net interest income.
Therefore, MITT received a 2.5% recommendation range “upgrade” due to the projected increase in core earnings/EPS. No change in risk/performance rating though. MITT is currently deemed notably undervalued (STRONG BUY).
TPVG’s NAV largely matched my/our expectations (well within range; minor decrease) while its NII was a minor underperformance (within range; modest decrease).
Non-Accrual percentages modestly increased while PIK income continued to increase (correctly anticipated). No change in TPVG’s percentage recommendation ranges or risk/performance rating. TPVG is currently deemed modestly overvalued (SELL).
Formatting Change to this Article Series
We have recently changed the format of this earnings-related article series (less wording, more visual images). This process remains ongoing and future changes will likely occur.
1) MITT:
Commentary
Quarterly BV Fluctuation: Modest Outperformance (4.7% Variance).
Core Earnings/EAD: Notable Outperformance ($0.053 Variance).
A nice “bounce back” quarter regarding AG Mortgage Investment Trust’s MITT 0.00%↑ BV in my opinion. MITT recorded a nearly 4% quarterly BV increase versus my projection of a very minor (1%) decrease. So, while I correctly projected MITT would report the least severe BV decline within the hybrid mREIT sub-sector for Q1 2024, the company was able to record a minor – modest increase. As a refresher, MITT typically has reported above average “swings” in both BV and core earnings (in both directions) over the past couple of years. This happened once again this particular quarter, mainly due to the recent impacts from the Western Asset Mortgage Capital (WMC) merger. Let us briefly discuss how MITT’s sub-portfolios performed when compared to my expectations.
First, MITT continued to “churn out” some agency-eligible and non-agency, residential mortgage investments through the use of the company’s originator affiliate/subsidiary, Arc Home. Arc Home is mainly an originator and servicer of non-agency residential home loans. During 2021, Arc Home began to directly sell loans to MITT to more rapidly and efficiently expand the company’s investment portfolio.
Second, MITT also continued to deploy capital into the company’s investment pipeline outside Arc Home. MITT also opportunistically began to build back the company’s agency residential MBS sub-portfolio during Q1 2024. This was a bit of a surprise after MITT moved completely away from this segment late last year. Third, MITT also added some derivatives to hedge the company’s agency residential MBS sub-portfolio which benefited from both a BV and core earnings/EAD perspective as rates/yields moved higher during Q1 2024.
Fourth, MITT’s legacy commercial loan sub-portfolio (from the WMC merger) held up better than I expected during Q1 2024. Simply put, no notable credit issues which was a bit of a positive surprise from a BV perspective. Finally, once again, MITT refrained from repurchasing any common or preferred stock during Q1 2024. While disappointing, this was correctly anticipated on my end as MITT continued to use available capital for investments as levered returns remain attractive in the current environment.
Moving on, MITT’s core earnings/EAD continued to experience rapid growth during Q1 2024 which was a surprise. I assumed MITT’s recent notable increase in the number of outstanding shares of common stock from the WMC merger in December 2023 would negatively impact the company’s core earnings/EAD during Q1 2024. However, MITT was able to defy this assumption via better-than-expected net interest income growth (partially due to keeping borrowing costs relatively unchanged), “keeping a lid on” operational cost increases, and growing current period hedging income with the aforementioned increase in derivative instruments.
A risk/performance rating of 4.5 for MITT remains appropriate in the current environment/over the foreseeable future (“higher-for-longer” regarding rates/yields) since this mREIT continues to employ very high GAAP leverage (which is what drives FMV/BV fluctuations; though recourse leverage remains low). Credit risk remains low – fairly low but this is something I expect to slightly – modestly increase during 2024 (which is always monitored/already factored into the modeling).
BV Performance (Actual Vs. Estimated)
Change or Maintain
BV/NAV Adjustment (BV/NAV Used Interchangeably): Our projection for current BV/NAV per share was adjusted: Up $0.50 (To Account for the Actual 3/31/2024 BV/NAV Vs. Prior Projection). Price targets have already been adjusted to reflect the change in BV/NAV. The update is included in the card below and the subscriber spreadsheets.
Percentage Recommendation Range (Relative to CURRENT BV/NAV): 2.5% Upgrade (Due to Continued Improvement of Core Earnings/EAD).
Risk/Performance Rating: No Change. Remains at 4.5.