Anworth Mortgage Asset (ANH) Q4 2020 Earnings Call Transcript

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Anworth Mortgage Asset (ANH)
Q4 2020 Earnings Call
Feb 24, 2021, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, everyone, and welcome to the Anworth fourth-quarter 2020 earnings conference call. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Mr.

John Hillman, Anworth's director of investor relations, who will make a brief introductory statement. Sir, please go ahead.

John Hillman -- Director of Investor Relations

Thank you, Jamie. Statements made on this earnings call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of [Technical difficulty] and Section 21E of the Securities Exchange Act of 1934 as amended, and we hereby claim the protection of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to any such forward-looking statements. The forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You should not rely on our forward-looking statements because the matters they described are subject to assumptions, known and unknown risks, uncertainties, and other unpredictable factors, many of which are beyond our control.

Statements regarding the following subjects are forward-looking by their nature: business and investment strategy, market trends and risks, assumptions regarding interest rates, assumptions regarding prepayment rates on the mortgage loan securing our mortgage-backed securities, and the scope and duration of the coronavirus pandemic, including actions taken by governmental authorities to contain the spread of the virus and the impact on our business and the general economy. Our actual results may differ materially and adversely from those expressed in any forward-looking statements as a result of various factors and uncertainties. Certain risks, uncertainties, and factors, including those discussed under the heading, Risk Factors, in our annual report on Form 10-K and other reports we filed from time to time with the Securities and Exchange Commission could cause our actual results to differ materially and adversely from those projected in any forward-looking statements that we make. All forward-looking statements speak only as of the date they are made.

New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, we do not intend to publicly update or revise any forward-looking statements whether as a result of new information or expectations or a change in events, conditions, or circumstances or otherwise. As you should be aware, on December 6, 2020, Anworth entered into an agreement and plan of merger with Ready Capital Corporation and RC Merger Subsidiary, Ready Capital's Merger Subsidiary. Pursuant to the merger agreement, Anworth will be merged with and into Ready Capital's Merger Subsidiary with the Merger Subsidiary continuing as a surviving company.

In connection with the merger, Ready Capital filed a registration statement on Form S-4, which was declared effective by the SEC on February 9, 2021. The registration statement includes a joint proxy statement for the Ready Capital special meeting, as well as the special meeting of the Anworth stockholders to approve the merger. Anworth filed the joint proxy statement with the SEC on February 9, 2021. Anworth also mailed hard copies of the proxy statement, including the proxy card, for the special meeting to our stockholders.

To the extent you have any questions regarding the merger or the Anworth's special meeting, we kindly ask that you refer to the proxy statement or contact Morrow Sodali, Anworth's proxy solicitor in connection with the Anworth's special meeting. Morrow Sodali's contact information is listed in the proxy statement. Thank you. At this time, I'd like to introduce Joe McAdams, our chief executive officer.

Joe McAdams -- Chief Executive Officer

Thank you, John, and thank you for joining us on Anworth's fourth-quarter 2020 earnings call. With me today on the call are Bistra Pashamova and Brett Roth, both senior vice presidents and portfolio managers; and Chuck Siegel, Anworth's chief financial officer. But first, as I'm sure you're all aware and to reiterate what John Hillman just discussed, in December of 2020, Anworth entered into a merger agreement with Ready Capital Corp. There's an upcoming special meeting of the Anworth shareholders to vote on this proposed merger, and all Anworth shareholders should have received the proxy statement by now.

If anyone who's dialed in today looking to ask questions or get information regarding the merger proposal or the special meeting, I would refer you to the proxy, as well as other publicly available documents, we referenced in our earnings release. For today's earnings call, the body of our presentation and the Q&A session will be focused on Anworth's fourth-quarter 2020 results. If you have any issues receiving or accessing the publicly available documents pertaining to the proposed merger or any questions at all, please don't hesitate to reach out to us at anworth.com via our shareholder relations number or to our proxy solicitor. With that said, we'll now turn to Anworth's financial results.

During the fourth quarter, Anworth, posted an increase in book value per common share, as well as a quarter-over-quarter increase in core earnings. Core earnings were $4.7 million or $0.05 per common share during the fourth quarter, up from $0.04 during the third quarter. GAAP net income was $0.21 per share and comprehensive income, which includes all realized and unrealized gains and losses reflected on our balance sheet was a gain of $16 million on the quarter, compared to the third quarter's comprehensive income gain of $26 million. Looking at Anworth's portfolio, you'll see the total agency MBS investments were roughly unchanged in total from the prior quarter at approximately $2.4 billion.

Similarly, non-agency MBS remained little changed at $207 million, and residential loans held in securitization trusts, as well as our non-QM loans which are held for securitization fell during the quarter due to prepayments. While our agency TBA position was little changed quarter over quarter, the fact that this position was increased during the third quarter and held during the entire fourth quarter increased the amount of TBA dollar roll income we earned and was the primary driver of our core earnings increase on the quarter. While the overall portfolio size was little changed in the quarter, we did see shifts in the composition of our investment sectors. And to discuss the agency portfolio in more detail, I'd like to turn the call over now to Bistra.

Bistra Pashamova -- Senior Vice President and Portfolio Manager

Thank you, Joe. Agency MBS spread tightened further in the fourth quarter supported by ongoing strong pace of fed purchases and muted interest rate volatility. Prices were higher across the coupons stack with particularly strong performance for production coupons despite a 23-basis-point rise in the 10-year treasury yield. Specified for performance was mixed with pay-ups weakening for lower coupons.

As Joe mentioned, the size of our agency MBS portfolio approximately $2.3 billion was unchanged from the previous quarter with our 30-year MBS allocation increasing to 70% of the portfolio. 15-year and 20-year securities combined were 8% and adjustable-rate MBS declined to 22%. As I mentioned on the last call, early in the quarter, we viewed production coupons 30-year MBS as providing attractive risk-adjusted spread, enhanced by significant role financing advantage. And we capitalized on very attractive dollar roll carry by focusing our new investments in that sector, particularly 30-year TBAs into coupons.

As you can see, at quarter-end, dollar keeping position was unchanged and was 31% of the portfolio. The average coupon of our 30-year fixed-rate pools declined, reflecting the addition of new and relatively generic pools. Our higher coupons 30-year fixed-rate investments remained comprised of specified pools, 85% of which have some prepayment mitigation characteristics. As we discussed on the last call, we anticipated portfolio prepayments to remain flat in the fourth quarter.

Overall, agency portfolio CPR was 40% and the adjustable rate to 30-year CPR was 35%. We expected some moderation in prepayment subsequently from the combined effect of winter seasonals, a burnout of our higher-coupon fixed-rate pools, resetting of coupons of the adjustable-rate securities, and new portfolio investments. And in the two months of the current quarter, portfolio prepayment speeds have declined consecutively to an average of 33% CPR for the overall portfolio and 26% CPR for the adjustable-rate MBS. Regarding new portfolio investment and allocation, we did not view spreads at the start of the current quarter as providing enough compensation for extension risk, and as further bearish deepening of the yield curve.

We have trimmed our exposure to production coupon 30-year MBS by outright sales and have further reduced portfolio size by not reinvesting monthly portfolio paydown.

Joe McAdams -- Chief Executive Officer

OK. Thank you, Bistra. And now, to discuss our residential mortgage credit investments, I'd turn the call over to Brett Roth.

Brett Roth -- Senior Vice President and Portfolio Manager

Thanks, Joe. During the fourth quarter, credit markets continue to benefit from improved liquidity. Spreads further tightened in over the -- in over the course of the quarter. Overall, we have retraced a significant amount of the spread widening -- widening that we experienced during the first quarter.

We are still not nearly back to the levels we were at at our tightest, however, the market is continuing to function smoothly with trade activity continuing to increase and the demand for assets continuing to grow. During the quarter, our CUSIP portfolio's value increased due to the spread tightening in the market. Further on the funding side, both haircuts and funding spreads improved. We continue to support portfolio leverage again at lower levels than we had previously with our current assets, cash, and securities.

The balance of legacy portfolio over the quarter was approximately 12 CRR and CDR remained in the same general range as last quarter at two CDRs. New delinquencies this quarter continued what we saw last quar -- quarter, i.e., a return to similar alert levels experienced with 30-day delinquencies running at approximately 3%. Since increasing in the post-COVID experience, we are seeing the 60-plus delinquency bucket holding steady at approximately 20%. There were no other additional sales nor were there -- no other additional sales during the quarter.

However, we did opportunistically add a couple of new positions in our securitized NPL portfolio during the quarter. Last quarter, our portfolio was comprised of approximately 53% legacy MBS and 47% credit risk transfer assets. Currently, the balance is approximately 56% legacy MBS and 44% credit risk transfer assets. In our CRT portfolio, credit performance appears to have improved slightly from last quarter and new delinquencies continued to decline.

The voluntary prepays in this portfolio increased slightly from last quarter to approximately 20 VPR from the high teens last quarter. Approximately 84% of our CRT investments are focused on agency reperforming loans. Turning to our loan portfolios, we have been in -- we continue to remain in close contact with our servicers in both loans -- in both of our loan portfolios. Looking at the residential loans held for the investment portfolio, this is a portfolio of highly -- high-quality jumbo loans originated in 2014 and 2015.

Over the quarter, we experienced increased delinquencies. However, in the instances the -- there -- there -- where there have been liquidations, we continue to benefit from the increased value of the underlying properties and have not experienced losses when liquidating properties. We continue to see high voluntary prepays in this portfolio with voluntary prepays over the quarter running at approximately 46 CRR. Overall, the performance of the loans within this portfolio continues strong for our conversation with the servicer loans that were designated as COVID are not being reported as delinquent.

However, their missing principal and interest payments are being accounted for as for foreign payments. Based on the information we received from the servicer, it appears that no additional forbearance is experienced during the quarter. Our portfolio of loans held for securitization is are non-QM loan portfolio. Our current portfolio of assets is a weighted average of FICO of 744 and LTV CLTV of 64.5% and DTI of 38.5%.

Approximately 83% of our portfolio is comprised of hybrid ARMs of which the majority are seven ones. On December 31, approximately $1.9 million of this loan portfolio was 30 days delinquent. Approximately $2 million with 60 days delinquent and approximately $3.7 million was 90-plus days delinquent. The 60-day bucket improves from $6.4 million last quarter to $2 million this quarter.

The 90-day bucket balance increased slightly from $3.5 million to $3.7 million. Of these amounts, the percentage that is COVID-related are as follows: 30 days delinquent, 58%; 60-day delinquent, 100%; and 90-day delinquent, 77%. Looking at the latest statistics, we see that the COVID-identified assets in the portfolio has declined from 23% to 11%. Of that 11%, 49% are current.

Further, of the COVID-identified delinquent loans, 87% of these borrowers have resumed making some form of payment on their loan. That's it. Thanks, Joe.

Joe McAdams -- Chief Executive Officer

Turning now to our portfolio financing. As was the case with our assets, our borrowings were roughly unchanged on the quarter with $1.5 billion in total repo borrowings. An average repo rate of 33 basis points and an average hedge rate after taking into account our interest rate swaps of 1.38%. Our leverage multiple remained at 3.4 times total capital at December -- December 31st.

And when implied TBA financing is considered our effective leverage at year end was 4.9 times total capital down slightly from the prior quarter. Our interest rate swap positions declined in notional balance to $715 million. As shorter swaps matured during the quarter, we still maintain a significant balance in swaps around or beyond a five-year maturity to protect the book value from an increase in longer maturity interest rates even if short-term rates stay low as we do expect in the coming quarters. On the quarter, our book value per share increased $0.09 from $3.04, at September 30th to $3.13 cents per common share.

When taking into account the $0.05 dividend that was declared during the quarter, the total economic return on book value for common shareholders was 4.6% during the quarter, with the resulting 2020 economic loss finishing the year at a negative 27.2% With that, I'd like to turn the call over to our operator, Jamie, for any questions you might have.

Questions & Answers:

Operator

Ladies and gentlemen, with that, we'll begin today's question-and-answer session. [Operator instructions] And at this time, I'm showing no questions. I'd like to turn the floor back over to Mr. McAdams for final comments.

Joe McAdams -- Chief Executive Officer

All right. Thank you, Jamie. Obviously, if anyone has any questions listening to this call on replay or the transcript, feel free to reach out to us. With that said, I'd like to thank everyone for participating in today's call, and have a great day.

Thank you.

Operator

[Operator signoff]

Duration: 20 minutes

Call participants:

John Hillman -- Director of Investor Relations

Joe McAdams -- Chief Executive Officer

Bistra Pashamova -- Senior Vice President and Portfolio Manager

Brett Roth -- Senior Vice President and Portfolio Manager

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