AG Mortgage Investment Trust (MITT) Q4 2019 Earnings Call Transcript

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AG Mortgage Investment Trust (MITT -2.06%)
Q4 2019 Earnings Call
Feb 28, 2020, 9:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the AG Mortgage Investment Trust fourth-quarter 2019 earnings call. My name is Brandon, and I'll be your operator for today. [Operator instructions] Please note this conference is being recorded. And I will now turn it over to Raul Moreno.

You may begin, sir.

Raul Moreno -- Secretary and General Counsel at AG Mortgage Investment Trust Inc.

Thank you, Brandon. Good morning, everyone, and welcome to the fourth-quarter 2019 earnings call for AG Mortgage Investment Trust, Inc. Before we begin, please note that the information discussed on today's conference call may contain forward-looking statements. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the Risk Factors section in our most recent SEC filings.

The company's actual results may differ materially from these statements. We encourage you to read the disclosure regarding forward-looking statements contained in our earnings release, in our earnings presentation and in our SEC filings. During the call today, we will refer to certain non-GAAP financial measures. Please refer to our SEC filings for reconciliations to the most comparable GAAP measures.

We will also reference the earnings presentation that was posted to our website after the market closed yesterday. To view the slide presentation, turn to our website, www.agmit.com and click on the Q4 2019 earnings presentation link on the home page. Again, welcome, and thank you for joining us today. With that, I would like to turn the call over to our CEO, David Roberts.

David Roberts -- Chief Executive Officer

Thanks, Raul, and good morning to everyone. We are very pleased with MITT's performance in the fourth quarter. Core earnings were $0.52 per share and book value per share rose by 2.6%. TJ and Brian will provide further detailed comments on our financial results for the quarter and for the year.

During the quarter, we continued to rotate more of the portfolio into credit investments, both residential and commercial. This is consistent with our long-term strategy of leveraging the Angelo Gordon credit and real estate engines that have 85 investment professionals, who touch upon the wide range of MITT's opportunity set in credit. An important example is our activities in non-QM. In 2019, we successfully launched our non-QM platform and completed three securitizations under our GCAT securitization program for MITT and other Angelo Gordon funds.

Our GCAT securitization platform is already well known to the market based on our many past whole loan securitizations. This calendar year, we've already come to market with our first of what we would expect to be many non-QM securitizations transactions this year. We have a slide in our presentation, Slide 5, that shows the total return to a MITT shareholder over the period from our IPO in July of 2011 to the end of 2019, and we compare that to the FTSE Mortgage REIT Index. Both calculations assume reinvestment of dividends.

The MITT cumulative return is 125% versus the index's cumulative return of 103%. We also have a slide, Slide 6, that looks at the two key related metrics of price-to-book ratio and dividend yield. As of year end, MITT traded at a steeper discount-to-book and had a higher dividend yield than our peer group. Looking forward, we intend to address this through continuing to execute on our differentiated credit strategy in which we leverage the AG platform as well as providing greater clarity in communicating what we believe to be a very good and appropriate strategy in this environment.

Before turning the call over to TJ, I'll end my remarks by saying that I'm very proud to be part of both Angelo Gordon and our MITT team.

TJ Durkin -- Chief Investment Officer

Thank you, David. Good morning, everyone. On Slide 8 of our presentation, we walk through our 2019 fiscal year highlights. We reported $2.39 of net income per share and $1.70 of core earnings per share while producing an economic return on equity of 13.4%.

During the year, we launched our non-QM securitization program by issuing three rated deals throughout the course of the year. Additionally, we issued our first rated RPL deal this summer, further expanding our securitization footprint away from just our historical unrated three-year step-up structures. And finally, on capital raising, we are very pleased we were able to access the equity capital markets in February 2019 for the first time in seven years. And we are able to follow up thereafter with our preferred capital raise in September, raising a net total of $177 million in 2019.

Turning to Slide 10. As David mentioned, the investment portfolio performed well in the fourth quarter. After several challenging quarters for the Agency MBS and rate markets, those headwinds faded and some even turn to tailwinds during the fourth quarter. A return to more normalized funding markets and a third Federal Reserve rate cut helped boost net interest margins for levered investors such as ourselves.

The modest rise in longer-term rates, the resulting steeper yield curve and declining implied volatility further helped create an environment where Agency MBS valuations could tighten along with other spread product. Our core earnings in the quarter were $0.52 per share, including a $0.02 retrospective adjustment. After accounting for a onetime positive $0.05 impact due to a discounted security paying off earlier than expected, our run rate core came in at $0.45, covering our current dividend. I wanted to provide some more color with respect to the onetime positive $0.05 contribution to core this quarter.

Non-agency mortgage-backed securities have cleanup calls, which the holder of the call rights can exercise when the outstanding deal balance falls below a certain threshold, typically 10% of the original balance. These calls typically result in the debt paying off at par. As legacy non-agency bonds continue to season, strong collateral performance, low interest rates and healthy securitization markets continue to incentivize these call rights to be exercised. So while we characterize this as onetime from an accounting perspective this quarter, we do not think it's unreasonable for our portfolio to potentially experience this type of activity in the future.

A $0.45 increase in book value, coupled with core earnings of $0.07 above our $0.45 dividend, resulted in an economic return during the quarter of 5.2%. The tightening in agency mortgages that I previously mentioned more than offset modest spread widening in the CMBS sector and drove the fourth quarter's book value increase. I'd like to highlight a few additional slides in our presentation. Slide 11 includes details on our fourth-quarter activity.

As we stated on last quarter's call, our agency exposure was temporarily elevated as a result of our September preferred capital raise. Throughout the fourth quarter, we rotated into residential whole loans, both non-QM and seasoned NPL and RPLs. Additionally, in December, we entered into a purchase agreement on approximately $480 million of clean reperforming loans, which settled subsequent to year-end and is, therefore, not yet reflected on our balance sheet. Finally, we increased our allocation to commercial credit, net purchasing about $138 million of investments during the quarter.

Turning to our capital markets activity. We are active in the securitization space. MITT, along with other Angelo Gordon funds, completed its third rated non-QM securitization in November. We were able to lock in a cost of funds from AAA through BB at a duration weighted average spread of 119 basis points over swaps.

As we stated on last quarter's call, based on the current loan origination volumes, we envision being a quarterly issuer of non-QM loans via our GCAP program. Additionally, in November, MITT, along with other Angelo Gordon funds, completed a non-rated securitization of RPLs by exercising call rights on approximately $237 million of unpaid principal balance. We were able to lower our cost of funds from a floating rate of LIBOR plus 315 basis points to a fixed rate of 3.25% and increased our advance rate on par from 50% to 75%. Both securitizations provide MITT with termed out and materially cheaper cost of funds in comparison to our warehouse lines and previous securitization.

Lastly, we announced on last quarter's call, we had entered a purchase and sale agreement to sell our single-family rental portfolio. We completed this transaction in November, and it resulted in an immaterial realized gain from our current carrying value. We believe this is the best outcome for the long-term earnings power of the investment portfolio as we continue to find attractive opportunities in both residential and commercial credit space. Slide 12 lays out our investment portfolio composition for the quarter.

The fair value of the aggregate portfolio decreased from $4.8 billion to $4.4 billion for the quarter, and at quarter end was composed of approximately 35% agency, 42% residential credit and 23% commercial credit. The bar chart at the bottom of the page displays the portfolio allocation over time, and we expect to continue this rotation into credit from our agency allocation as we continue to expand our residential mortgage strategy. Turning to Slide 13. We break out our current agency portfolio by product type.

As previously mentioned, we rotated the capital initially deployed into agencies from our September preferred equity raise into credit investments. Our disciplined Agency MBS asset selection process allows us to position the portfolio for a variety of prepayment environments. We continue to hold close to 80% of our Agency MBS in high-quality specified pools with the remainder in new issue, lower coupon pools. As a result, the constant prepayment rate for our agency book was 11.2% CPR for the fourth quarter versus 18.8% CPR for the overall 30-year Fannie Mae universe.

We expect our portfolio to continue to outperform the overall universe of Agency MBS in terms of prepayment speeds. As previously mentioned, on Slide 14, you can see we continue to increase our exposure to residential loans and reduce our exposure to non-Agency RMBS securities at current market levels. Quickly turning to our commercial portfolio on Slide 15. You can see we had a particularly active quarter in the Freddie K B-Piece space as we source investments in both the primary market and secondary markets, which is particularly unusual given the high demand and limited trading volume for this product.

Additionally, during the quarter, we funded approximately $7 million of existing equity commitments related to our commercial real estate construction loans, resulting in approximately $41 million remaining in existing equity commitments. Slide 17 shows our duration gap of 1.17 years, which is up from 0.73 years at the end of the third quarter, largely due to a lower hedge ratio on newly acquired residential loans and some minor extension of our Agency MBS portfolio. With respect to hedges, as Slide 18 shows, we were able to lower our weighted average pay fixed rate down to 1.6% from 1.7% through the restructuring of our swap book. Looking ahead, we continue to see a large pipeline of credit opportunities at a favorable risk-adjusted return, sourced via Angelo Gordon's platform.

As we've been mentioning throughout the course of the year, we have invested both time and resources into the creation and growth of our non-QM conduit or aggregation strategy, and we are now well on our way to being a well-known issuer within the debt investor community. Our securitization activities in 2019 and our forward-looking pipeline as a result of the energy and focus the team devoted in 2018 and '19 to developing relationships with strategic mortgage origination partners, ranging from banks, community development financial institutions, or CDFIs as they are commonly known, as well as the traditional specialty finance companies. What may not be apparent just yet is a significant work being done by Angelo Gordon investment team in New York with ARC Home, a fully licensed mortgage originator owned by Mitt and other Angelo Gordon managed funds. As we look forward into 2020, we fully expect Arc Home's origination to be a more meaningful part of our non-QM program and continue to raise Angelo Gordon's profile in the securitization ecosystem for non-agency credit and thereby help enhance our returns within the space.

Before I turn the call over to Brian to review our financial results, I wanted to provide some brief commentary on the markets this week. In reaction to the coronavirus, the interest rate market has now effectively priced in three rate cuts this year starting in March. Prior to this week, the agency basis had widened from the previous move lower in rates. And therefore, despite the drastic move in rates this week, the basis is holding in well, all things considered.

Moving to the credit markets. We've witnessed very little trading volume this week, but the tone to the market is obviously weaker. We believe new issue deals will be the best benchmark to reset spreads across the stack. And based off the information we know today, there is a heavy calendar that at least was originally due to come to market over the next few weeks.

We continue, as always, to look prudently to deploy capital into new opportunities. Thank you. Brian?

Brian Sigman -- Chief Financial Officer and Treasurer

Thanks, TJ. Overall for the fourth quarter, we reported net income available to common stockholders of $29.4 million or $0.90 per fully diluted share. Core earnings in the fourth quarter were $16.9 million or $0.52 per share versus $13 million or $0.40 per share in the prior quarter. There was a positive $0.02 retrospective adjustment in the fourth quarter versus a negative $0.02 retrospective adjustment in the third quarter.

Additionally, we recognized a positive $0.05 impact to core as a result of a discounted security paying off earlier than expected as TJ previously mentioned. As described on Page 10 of our presentation, net interest margin increased from 2.1% at September 30 to 2.5% at December 31. This was comprised of an asset yield of 4.8%, offset by a total cost of funds of 2.3%. The increase in net interest margin was driven mostly by steepening of the yield curve as TJ previously mentioned.

Our economic leverage ratio was 4.1 times at December 31 as compared to 4.7 times at September 30. The decrease is primarily as a result of agency sales during the period as we rotated our capital into credit investments. As of December 31, we had 44 financing counterparties and are financing investments with 30 of them. Despite the recent market volatility, the GC and credit repo markets have remained stable.

At quarter end, we had liquidity of approximately $163 million comprised of $82 million of cash and $81 million of unlevered agency hold pool and treasury securities. We closed the year with an elevated amount of liquidity in anticipation of purchasing the pool of clean RPLs, TJ previously mentioned. As previously mentioned, during the quarter, we completed the sale of our SFR portfolio. We concluded that disposition of this portfolio met the criteria for discontinued operations.

As such, for all current and prior periods presented, we have reclassified the related assets and liabilities that's held for sale on our balance sheet and related operating results as discontinued operations on our income statement. The operating results have also been excluded from our core earnings for all current and prior periods presented. Additionally, at quarter end, our estimated undistributed taxable income was $36 million or $1.10 per share. We continue to evaluate this on a quarterly basis to make sure they were complaint with our REIT distribution requirements.

That concludes our prepared remarks, and we'd now like to open the call for questions. Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] And from KBW, we have Eric Hagen. Please go ahead.

Eric Hagen -- KBW -- Analyst

Hi. Thanks for the comments on spreads this week, but I know there's a lot of uncertainty that's kind of overhanging the market right now. But how do you think about deploying capital into this environment, just, obviously, given what's happened this week? Do you think spreads have sort of overcorrected in your view? Or is this a better time to wait? Or is it just better to wait for things to, I guess, calm down? And number two, another question separately, but what are the types of non-QM that you're originating? And what are the cumulative losses that you expect in that portfolio?

TJ Durkin -- Chief Investment Officer

Sure, Eric. I mean I think it's probably still too early to tell in terms of where spreads are shaking out, just given, like I mentioned the lack of real trading volume to I guess I would say kind of reset the market. So I think it's too early to tell. I think we would expect potentially commercial mortgage investments, thinking about hotels to probably be more affected in credit spread than, say, residential mortgages.

Just kind of thinking about the near to medium-term effects of what's going on out there. So I mean, that's how we're thinking about risk and just trying to see if the markets are pricing that accordingly. In terms of non-QM, we're buying a variety of products across the different originators, each somewhat have their own programs or niches, if you will, and we're sort of aggregating them to what we think is a well-diversified pool when we go to securitize. So I mean that's everything from loan type in terms of investor property, alternative verification of income, etc., to foreign national.

So there's a mix going in there. We've generally stayed away from the lower month verification income programs that are out there. So one month bank statement, etc., has not really been our focus to date. So non-QM losses, given the LTVs, I think, are anywhere from — and they're in the single-digit cum loss numbers depending on the profile.

Eric Hagen -- KBW -- Analyst

Got it.

TJ Durkin -- Chief Investment Officer

So again, generally, given the credit and then again, it's a particularly, I think, strong LTV profile, we're not seeing it, expecting a lot of QM loss.

Eric Hagen -- KBW -- Analyst

Right. OK. So like low single digits, I would imagine just kind of extrapolating from your comments. Is that fair?

TJ Durkin -- Chief Investment Officer

Yes, they are.

Eric Hagen -- KBW -- Analyst

OK. OK. And then what percentage of your legacy non-agency portfolio is callable at this point?

TJ Durkin -- Chief Investment Officer

I don't know that off the top of my head. We'd have to get back to you on that.

Eric Hagen -- KBW -- Analyst

OK. Is it a large percentage? Or is it kind of relatively minor?

TJ Durkin -- Chief Investment Officer

I would think it's a large percentage but let us verify.

Eric Hagen -- KBW -- Analyst

Sure. OK. Thank you very much for the comments.

Operator

From JMP Securities, we have Trevor Cranston. Please go ahead.

Trevor Cranston -- JMP Securities -- Analyst

Hey. Thanks. Follow-up on the question about your capital deployment given what's going on in the markets over the last week or so. I guess, are you guys comfortable continuing to acquire non-QM loans, like over the last week and currently sort of pending seeing where spreads shakeout and where securitizations would be executed? Or at this point, would you be more likely to sort of wait, sort of not acquire loans near term and wait and see where you think securitizations could be done with new loans you acquire?

TJ Durkin -- Chief Investment Officer

Well, so just to take a step back. There hasn't been a lot of opportunities to deploy capital this week for a variety of reasons from starting with an industry conference at the beginning of the week to just generally people not looking to transact given the volatility. I think with regards to non-QM loans, I don't think we're overly concerned about securitization being able to get executed, albeit at probably wider spreads. And part of my comments from earlier were, from what we understand, there are a few deals that are lined up to come.

Again, originally next week. We'll see if they potentially put that on hold given the market volatility and should try and weight that out. The last part I would say is, as we look at new loans today in the current rate environment, we want to be sensitive to probably newer expectations on the duration or prepayments fees. And so we'll be very sensitive to the premiums that maybe some of these originators are looking for in today's rate environment.

Trevor Cranston -- JMP Securities -- Analyst

OK. That makes sense. And then I guess also related to how things have moved this quarter. Can you provide any update on any changes you might have made to the portfolio or the hedge book as rates have come down?

TJ Durkin -- Chief Investment Officer

Yes. I mean I wouldn't say there was anything materially different than what we would do in a normal situation where rates are coming down and trying to keep up with the complexity on the agency book. I wouldn't say it's anything out of the ordinary. And what I would say is the drastic move lower of late.

I think it will be hard for originators to keep up with potential volume given that we were already seeing a rate decline before this week. So I think a lot of —you're not going to see that same linear move on the 25 basis points this week as you would have seen coming -- from where we started this rate move down, and I think we're pretty comfortable with the way we're positioned on the agencies and how we're hedged and what the already high expectations of prepayments were coming into this week.

Trevor Cranston -- JMP Securities -- Analyst

OK. Got you. And I think I missed in the prepared remarks, you guys said something about an RPL transaction that settled post quarter end. But I missed any details about the size of that or anything else you guys provided, if you could share on that again?

TJ Durkin -- Chief Investment Officer

Yes. Sure. Yes. Just prior to year end, we entered a purchase agreement on $480 million UPB notional of RPLs that have subsequently settled this quarter.

Trevor Cranston -- JMP Securities -- Analyst

Yes. Yes. Thanks.

Operator

[Operator instructions] OK. Showing no further questions at the moment. I will turn it back to our speakers for closing remarks.

Raul Moreno -- Secretary and General Counsel at AG Mortgage Investment Trust Inc.

Thanks, everyone. Look forward to speaking with you next quarter.

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Raul Moreno -- Secretary and General Counsel at AG Mortgage Investment Trust Inc.

David Roberts -- Chief Executive Officer

TJ Durkin -- Chief Investment Officer

Brian Sigman -- Chief Financial Officer and Treasurer

Eric Hagen -- KBW -- Analyst

Trevor Cranston -- JMP Securities -- Analyst

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