AG Mortgage Investment Trust Inc (MITT) 2011 Q4 法說會逐字稿

Welcome to the AG Mortgage Investment Trust fourth-quarter 2011 earnings call. My name is John and I'll be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Allan Krinsman of AG Mortgage General Counsel Investment Trust. Mr. Krinsman, you may begin.

Thanks, John. Good morning, everyone, and welcome to the AG Mortgage Investment Trust fourth-quarter and year-end 2011 earnings conference call. Joining me on today's call are David Roberts, our CEO; Jonathan Lieberman, our Chief Investment Officer; and Frank Stadelmaier, our CFO. Before we begin I'd like to read our Safe Harbor statement.

Today's conference call and corresponding slide presentation contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are intended to be subject to the protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of the Company.

All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Additional information concerning risk factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the periodic reports we file with the Securities and Exchange Commission and will be included in our Form 10-K which we expect to file later this month with the SEC.

Copies of the reports are available on the SEC's website at www.SEC.gov. Finally, we disclaim any obligation to update our forward-looking statements unless required by law. With that I'll turn the call over to David Roberts.

Thanks, Allan, and good morning to everyone on the phone. To start off, we're very pleased with our performance in the fourth quarter. As we mentioned in our last quarterly call, we really focus on our core earnings which came in at $0.65 per share in the fourth quarter.

And there were two factors that Jonathan and then Frank will go into in some more detail, but just to hit them up front -- we took a defensive posture in the fourth quarter with regard to both liquidity and leverage given the uncertainty we saw in global markets, particularly in Europe.

The other factor -- and then Jonathan will address that. The other factor that Frank will address is that in our last quarter, and in this quarter as well, we took substantial gains on our Agency position which has the effect of bringing forward net interest margin into that gain category.

In terms of dividend, based on everything that we know today our current plan is to continue our current dividend policy of $0.70 per quarter. I'd also like to address the offering that we did which happened after the quarter end, our secondary offering.

Our goal is always been to achieve a premium valuation. We know that a necessary precondition to achieving a premium valuation is to have a liquid stock. And the main goal of the offering was to improve the liquidity of our stock and we're very pleased that after the offering we've seen that liquidity improve by a factor of approximately three times.

I'd also mention that at this time we have no current plans to do another offering in the near future. So with that summary I'd like to turn it over to Jonathan to go through the portfolio and our outlook.

Thank you, David. I'm going to be referring to a set of slides that you can access on our website, so our deck for the quarter is on our website. Starting on slide number 5, investment selection and portfolio management is premised upon risk-adjusted returns, liquidity, mark-to-market volatility, the regulatory environment and an economic outlook including interest rate forecasts.

Not dissimilar to the third-quarter, our views remain pretty much the same. The macro outlook remains very choppy; the recovery will be muted and uneven because there has been limited to no real income growth in the United States. We see US households still heavily indebted and we see growing government deficits as a real threat to growth in the country.

Developed economies remain significantly overleveraged and will continue to experience economic contractions. We are seeing already the effects of European weakness translating to lower global trade numbers between Europe and Asia and we expect a similar impact later this year for the United States.

We remain highly dependent upon leverage for fiscal stimulus to drive spending by consumers. Emerging markets, we're continually dealing with their excess dependence upon exports. US unemployment we see remaining elevated for the foreseeable future; it may not be the headline unemployment number but it may be a factor of participation rate.

As to US housing and commercial real estate, we continue to expect another 5% to 10% decline in home prices before we bottom, and we see material risk of debt forgiveness for Non-Agency mortgages due to the recent Attorney General settlement which has not yet been concluded and other pressure on different parties to embrace debt forgiveness.

We are disappointed in the type of debt forgiveness that is being given where the Attorney General settlement perversely gives pari passu treatment to second lien debt with first lien debt in the face of very strong political pressure and this may translate into debt forgiveness for the GSEs rather than by second lien holders which we think will be more effective long-term in stabilizing housing.

With respect to commercial property, we expect that the recovery in Class A properties will continue; B&C properties and secondary markets will experience slower rates of recovery.

Dr. Bernanke has noted that he anticipates that short-term rates will remain low through 2014. We remain cautious, but we do expect that rates will remain low for the foreseeable future given how much additional pressure that would put on the fiscal side of the equation as well.

Turning to page 6, treasury yields declined 12 basis points for five-year maturities and 4 basis points for 10-year maturities quarter over quarter, whereas swaps, which were used predominantly for hedging our portfolio, underperformed the five-year and diverged from the 10 years. The fives were down 3 basis points and the 10 years were down 7 basis points.

Mortgage pass-throughs experienced modest price appreciation by quarter end, but marginally underperformed treasuries on supply and refinancing concerns.

Turning to page 7, mortgage spreads experienced significant intra-quarter volatility, but by the end of the quarter had not materially changed. At the beginning of the quarter, quarter four, Agency MBS and mortgage rates underperformed due to very significant concerns over refinancing and greater supply.

The reality is mortgage origination capacity remains very challenging. Origination documentation, quality control, rising G fees and simply personnel, trained personnel continues to hamper refinance activity. A very telling number is the volume of purchased money mortgages remains tepid, which implies continuing house weakness for new home sales.

Turning to slide 8, Non-Agency RMBS and CMBS in the AM and AJ sectors underperformed rate products in most credit markets during the fourth quarter due to continuing weakened technicals, which consisted of lower liquidity, widening bid offers and fear of new supply from distressed European sellers. The weakness in the sector was really very, very concentrated in subprime, pay option ARMs and in the weaker portions of CMBS.

Once again MITT has no exposure to subprime and pay option ARMs. Now we have seen in the first quarter of 2012 a very nice Beta rally. We have seen some of that Beta rally regress, but generally speaking we have seen the credit sector's Non-Agency and CMBS come off the bottom in January and February and recover most of the losses in the fourth quarter.

Turning to page 9, the risk/reward profile of opportunities during the fourth quarter and funding risk predominantly out of Europe continue to justify our predominant capital deployment in the Agency RMBS space. Once again labor markets remain relatively weak, housing depressed and our economic outlook remains uneven. With -- these conditions, coupled with the Fed's pledge to keep rates at near zero in 2014, this is very supportive for our Agency RMBS investments.

The Agency RMBS portfolio, which was initially positioned in 15 and 20 year sectors, has changed very significantly in the fourth quarter. Throughout the quarter the Agency RMBS portfolio was rotated into securities backed by loans with favorable prepayment characteristics and into longer duration securities. The rotation of the Agency book generated significant capital gains. To manage our distribution requirements we also rotated select portions of our credit securities.

With the success of European Central Bank's long-term refinance operation, the LTRO, funding risks have materially declined since December 21 and we have begun to deploy capital in a more aggressive manner than we did in the fourth quarter. At quarter end the portfolio consisted of 91% Agency RMBS and 9% credit securities with a NIM of 225 basis points.

On page 10, with lower rates and a very aggressive government housing policy prepayment risk remains elevated for both seasoned under water mortgages and new mortgage -- for new mortgages of very high credit quality. When you look at the modifications that have been made to the HARP program, it really -- it behooves many of the large banks to refinance as much of as possible many of the high coupon seasoned loans to eliminate liability.

If I had a button and I was one of the CEOs I certainly would be refinancing high coupon paper very aggressively and pushing that button to get it done. Unfortunately the major constraint is basically origination capacity. For seasoned high coupon under water mortgages we believe these recent changes will increase prepayment speeds significantly over the next 12 months. We have no exposure to these assets.

For high quality mortgages lower rates will really provide a very significant incentive. But once again, we don't have exposure since we're predominantly in current coupon. On page 10 we have a very nice chart that shows the differences in prepayment behavior for loans with different attributes. And as you can see, our portfolio is predominantly in that slower pre-pay category.

On page 11, the MITT Agency portfolio is comprised predominantly of lower loan balance and new coupon production securities. 72% of our specified pools have a maximum loan balance of less than $150,000. This is versus last quarter's 54% and 96% of our 30-year pools have maximum loan balances of less than $150,000.

The balance of our portfolio is new originations with a weighted average loan age of less than four months. As I mentioned, we have no HARP exposure. And during the fourth quarter and in December our Agency CPR was 5%, which was below last quarter's 5.8% CPR.

For the credit investments on page 12, once again we limited our investments due to weakness in technicals and liquidity concerns. Between Europe, US budget concerns, growth concerns we believe patience is very prudent and the right course of action. Non-Agency MBS and ABS investments are predominantly senior securities with strong credit enhancement that we believe will not be susceptible to the recent Attorney General settlement.

CMBS securities were -- once again were underwritten at loan level. And we did not -- we did undertake a rotation of these credit assets once again to manage our distribution requirements.

On page 13, portfolio leverage increased slightly quarter over quarter from 5.7% to 5.86%. Overall leverage remained at the lower bound of our targeted portfolio levels. We maintained surplus capital for opportunistic investments. We had $135 million of liquidity at quarter end, up from $122 million of liquidity at the end of Q3, once again exceeding our portfolio targets.

Liquidity figures include capital available for opportunistic and nimble deployment. Given European issues, we believed it was prudent to maintain this liquidity and have commenced deploying that capital in the first quarter.

On page 14, as of December 31 we've established funding relationships with 21 counterparties, this is up from 16 counterparties in Q3. We continue to selectively add counterparties and further diversify our funding. We also experienced no funding difficulties during the fourth quarter and believe our funding relationships are primarily built out at this point in time. For credit assets we anticipate the completion of a term facility which is currently in legal documentation mode.

As to our hedging policy which is set out on page 15, we're not seeking to eliminate all interest rate risk and market value risk. Rather, we seek to protect our net interest margin and book value within a specified band of risk or boundary line based upon our rate and economic outlook. We adjust for hedges in response to different expectations, our outlook and changes to our basic portfolio.

The hedging policy has three primary tools -- swap swaptions, locking in our repo financing and mortgage derivative hedges like IOs and inverse IOs. The portfolio has a calculated net duration gap of 1.4 years, the portfolio duration increased in response to our addition of 20-year and 30-year mortgage exposure.

Another driver of the duration gap is the fact that we've moved into more low-low balance pools over the prior quarter. Additional hedges were added to mitigate portfolio duration. The assets generally had about a three-year duration, our hedges roughly a negative 1.5 year duration and our locked in repo approximately 0.1 year. That brings our duration gap to 1.4.

In closing, and talking a little bit about the first two months of this year, the first two months of 2012 have been the busiest in history of the investment team, the RMBS, ABS investment team. Activity levels are up six fold over the third and fourth quarter. The opportunity set that we're seeing today is very robust and very interesting.

A tremendous amount of economic and market uncertainty is facilitating attractive investment opportunities and we're taking advantage of that. The challenges in Europe, the challenges in Washington with regulatory policy open up unique opportunities for a platform such as Angelo Gordon managing the MITT franchise.

With that let me turn it over to Frank Stadelmaier, our CFO, to continue a discussion of our financial performance.

Thank you, Jonathan. I would like to give you some more details about our fourth-quarter and year-to-date results. For the quarter we reported net income of $5.8 million or $0.58 per diluted share and core earnings of $6.5 million or $0.65 per share. For the year we reported GAAP net income of $19 million and core earnings of $12.4 million.

As a reminder, we have elected to mark our assets and derivatives to market for GAAP and core earnings excludes these items as well as the realized gains or losses on the sale of securities.

In December we declared a $0.70 dividend per share. After giving effect to this dividend, at December 31 we had approximately $0.46 per share of undistributed taxable income. Our taxable income includes our core earnings plus the gain or loss on sales of securities and other book tax differences.

During the year we recorded $7.2 million on the sale of Agency securities as we rotated our portfolio into securities with more favorable prepayment characteristics.

As yields have come down from where we made the initial investments the sale had the effect of accelerating the higher yield we were earning on these assets into the current earnings in the form of realized gains. These gains were offset by losses on the disposition of certain of our credit investments which were sold in part to help manage our 2011 distribution requirements.

A few statistics on our portfolio economics -- our net interest margin at December 31 was 2.25%, the yield on our investment portfolio was 3.16%, and our cost of funds was 0.91%. Our leverage at December 31 was 5.86 times equity.

One other item of note is that we are in the documentation stage on a term facility to finance our credit investments which we hope will provide us flexibility to deploy into that credit strategy if opportunities arise. With that, that concludes the formal part of our presentation and we'd like to open up the line to questions.

(Operator Instructions). Boris Pialloux, National Securities.

Actually I had like two questions regarding your portfolio, one is about subprime, what would -- what are your views -- would your view change if there was a meaningful rally in the subprime market given that some of your peers are actually investing in this type of market? And two is, if you could give more color about the senior securities you're kind of buying in your portfolio given that you're concerned about debt forgiveness?

With respect to subprime we have several concerns with the potential performance outcomes with those assets. They did look -- certain select assets looked attractive during the fourth quarter.

But given the uncertainty with the Attorney General settlement, given the extension risk of time lines, issues such as loss severities coming through from the servicers, we don't think that the asset class is necessarily as attractive as other segments of the Non-Agency market where we have a lot more protection on those assets -- those attributes, as well as the fact that the assets carry much, much more attractively.

And what you find is that a subprime asset that may be attractive let's say at a $28 figure, if it increases 10% goes to $31, that asset is no longer attractive.

And so, from our perspective we would prefer to put on assets that might be $70 to $90 assets in the prime sector where many more of the borrowers have equity in the house, continue to pay or we believe that they will pay and our analytics allow us to look through to the borrower level and see how they're paying their credit cards, their auto loans, their student loans and we're much less likely to see the intervention of regulators or idiosyncratic servicer risk.

Now that could change if there is a change in pricing for subprime. It could change if we believe that home prices are going to stabilize. But given our outlook and what we're seeing in the data, we don't necessarily think it's as attractive as maybe other folks are making it out.

With respect to our Senior securities, we have some new Re-REMICs, new securitizations in the NPL space that are basically 1.5 year duration securities that have 40, 50, 60 points of credit support that can withstand significant modification risk, can withstand significant principle forgiveness and time line extension with no impact upon returns.

For our jumbo securities we are typically in '04-'05 vintage securities that -- once again, where the borrower may have equity or 80% to 90% of the borrowers continue to pay.

Okay, thank you very much for the color.

Stephen Laws, Deutsche Bank.

I apologize if I missed this in your prepared remarks, but I was wondering if you could maybe give us your thoughts on Agency versus Non-Agency mix and really kind of more where you're comfortable with leverage in today's environments on each of those respective assets. And then maybe what the financing opportunities are on the Non-Agency side or whether you're going to look at funding those short.

Okay, maybe starting with the last part of that. We've had no issue funding with 30-, 60-, 90-day repo either asset class. We have cured nine-month locked up capital without a term facility for Non-Agencies from counterparties. We are working on a term facility that is in documentation.

Funding levels for the Non-Agency market, we are able to get 10%, 15%, 20% haircuts on those assets. Generally our overall leverage on the Non-Agency sector runs somewhere between two and four times; overall leverage in the Non-Agency sector is approximately three times.

We have the ability, if we're so inclined, to take leverage up significantly based upon the terms that are being provided to MITT, but we have not been inclined to do so. Funding levels for Non-Agency run from LIBOR 75 up to LIBOR 2.25 depending upon the asset, the rating, the haircut that we're willing to provide to the counterparties.

On the Agency side, funding cost did increase in the fourth quarter marginally, you know somewhere between 4 and 8 basis points. We've seen that funding cost come down in the first quarter as expected, especially following the LTRO program. Haircuts have not changed at all for Agency collateral.

When we were -- moving to your first question -- at a $200 million equity base, we were in some ways limited in terms of how much credit we could have in the portfolio and we felt that that was roughly around 10% to 12% we thought was the right limitation until we had term facilities in place which hopefully we'll have in place at the end of the quarter.

With greater term facilities we'll be able to increase the percentage of the book that will be in credit. We do find both segments very attractive. We are able to find Non-Agency assets on a levered return basis and add those assets at north of 20% gross IRRs. But we're also finding that on the Agency side we can achieve the same gross returns or more so with very, very good liquidity and more diversification of funding.

So we feel that we're kind of -- we're benefiting from wealth on both sides of the equation. With the additional capital raise that we did in January we feel that we have more latitude to add more credit assets and be able to tolerate potentially a little bit more volatility in the book and still achieve our financial targets.

Great. And I guess looking at kind of the sequential change in the investment portfolio tables in your press release, it looks like I guess 15-year exposure kind of went down slightly and it looks like you're in a little longer duration, it took off your 20- and 30-year exposure. Was that just simply due to investment options available or was that kind of a decision you guys to make?

And I guess on the -- related to that, it also looks like from the change in swap positions you really added a lot of longer duration swaps. It looks like you took up the added -- increased the maturities in 16 and then added some swaps with maturity in 18. Is that related to the change in asset duration?

It is related to the change in asset duration. We also -- we have our shorter dated swaps will continue to run off. We felt that our 1-, 2-year swaps really were not adding significant value unless there was a spike in LIBOR due to a European funding crisis and that we should move out and opportunistically lock in our funding costs further out in the curve.

With respect to the portfolio, the 30-year sector looked cheap to us relative to 15's. We did take that percentage up. We also, more importantly, moved many of our 15-year's from TBA type of product to better call protected product, better pre-payment protected product. And that's translated into more stable pre-pay speeds that allow us to do a better job hedging the book long-term.

Great. And one final question if I can. In looking at the repo, the weighted average rates on the Agency and then Non-Agency assets from a repo cost, it looks like that increased a fair amount. Can you talk -- is that really more in a typical year-end pricing with LIBOR rates spiking towards year-end or is it something else going on with regards to your repo facilities?

You know, you had a combination of one-month, three-month LIBOR increasing, especially during the fourth quarter and then you had year-and pressure. And then you certainly had pressure in the markets from European banks trying to fund themselves in different ways. Those were the predominant drivers and we've seen a lot of movement down today.

So I would say that probably we're funding -- the new pool's at about 30 basis points? New Agency pools are about 30 basis points over LIBOR and that continues to decline. As we move pools around we're finding counterparties willing to cut their rates, which is heading in the right direction.

And then in the credit sector, during the fourth quarter historically it does get more expensive. So we did see counterparties try to move credit cost of funds up 10 to 35 basis points and that has also halted and started to reverse itself.

Great, well I appreciate the color on these questions. Thank you.

Jay McCanless, Guggenheim Securities.

The first question I had -- I just wanted to get a little more clarity on what you were discussing with that GSEs and your anticipation for the GSEs. You had made a comment about second liens and how, under this settlement, they seem to be treated pari passu with first liens now. And I missed your comment about how that relates back to your thoughts on the GSEs. Could you repeat that?

The Attorney General settlement attempts to take HAMP policy where a second lien will only be written down pari passu with a first lien and turn that into policy for servicing all mortgages in the Non-Agency space.

So previously -- normally you would think that you would write a second lien off before you would write a first lien off and that's traditional in finance and that's I think the way most folks think about just the world.

In HAMP, back in 2009 the administration paid or convinced servicers, investors to agree to take a payment in exchange for allowing pari passu treatment of select second liens. So if you had a right off of a first lien, part of a first lien you wrote off a pari passu amount of the second lien.

The Attorney General settlement now treats many first and seconds on a pari passu basis. The terms have not been fully released, so all that we have to go by is some disclosure in the most recent Wells Fargo I think 10-K. We should see that as terms come out potentially as early as next week.

Maxine Waters yesterday put out a bill requiring the GSEs to write down principal; we do not know if that legislation will move forward. But there is increasing pressure on the GSE is to write off principal without maybe a commensurate write down of second lien debt that is behind the GSE debt.

Okay, so it's more the concern that they could apply similar pressure to the GSEs and to the FHFA to start writing down principal, that's the primary concern?

You know, I think we're highlighting a concern. We're not opposed and we're actually supportive of principal right down. But based upon priority of lien and then putting the borrower from a debt to income ratio below 50% so that the borrower will not re-default.

We think some of these measures are very good headlines, but they're not very good policy and we would prefer to see, once again, a borrower put in a sustainable position to move forward and that would help stabilize housing rather than defaulting six months or 12 months later and still weighing on the overall housing market.

True. My second question, in the last couple of days 3% and 3.5% Agency stacks have come down in price fairly, not dramatically, but I think they've ticked down 1.5 points. Any concerns about the new origination you've been purchasing and any concerns about extension risk?

Well, I think first of all I would say is that we are -- we've been -- we ran last quarter at a 5 CPR. We're not running these pools at very high CPRs to begin with. So there really isn't as much extension risk with the low, low balance. We expect them to stay around and that's what -- we're paying up for that.

What we've seen is that the lower parts of the stack have come off about three quarters of a point, and the vast majority of that has been in response to recent interest rate volatility more than anything and maybe the question of whether the Fed will engage in QE3 and start to buy mortgage product.

True, okay. And then -- and I apologize -- my last question, I apologize if you already discussed this. But with funds that you raised in January how should we expect to see those funds deployed? Would it be similar percentages to where you were at the end of fourth quarter or a little bit of variation on that?

We will -- you should expect that there will be a gradual increase in the credit portion of the portfolio; that we're certainly trying to lean in towards ultimately about a 15% or higher credit bucket. But it's a function of what we see in the market at various times.

Okay, great, thank you.

(Operator Instructions). Mike Widner, Stifel Nicolaus.

First, just a very quick follow-up on that last one. When you say 15% deployment into the credit bucket, you're talking about by equity allocation?

Yes.

Okay. And then most of my other ones have been asked, just wanted to talk about some things that I don't think I heard you guys cover much, but just a couple of the line items and the expense category.

First, if I look at other operating expenses, for the quarter those ran about 150 basis points, 160 basis points of equity annualized. Just wondering if that's kind of what we should think about as a run rate or whether there's any -- either with additional equity if we could see that come lower as a percent of equity or if there's any other reasons we should expect that to potentially run lower going forward.

I think that for the near future, unless the equity base dramatically increases, that that's a good estimate of the run rate for the Company.

And when you say a good estimate, basically looking at it as a percentage of equity or on an absolute basis?

Yes, as a percentage of equity.

Okay. And then just curious about the excise tax. It's not a huge number, but just curious as to what -- any commentary on that one? I guess just being this new it surprised me that you've got an excise tax in your first year given what I thought were the rules regarding how much time you have to pay the dividends and whatnot.

Yes, it's really a function of those realized gains and our decision to hold back some of that distribution just given that the opportunities that we think may exist in the near term, that the right decision there was to hold back a little bit and have it available for future deployment or distribution.

Okay. And then, so just to be clear then, the issue is that a realized gain counts as basically taxable income and you have the current year to pay it out. And since you didn't pay it out by -- 90% of it by December 31 that's the genesis of the excise tax, is that roughly right?

Roughly right.

I think that covers all my questions and thanks for taking the questions.

You have no further questions at this time.

All right, based on where we are, we'd like to thank everybody who has listened to this conference call. We'd like to thank the people that gave us questions. And this draws to a conclusion the earnings statement and report that we delivered today to you. Thank you very much.

Thank you.

Thank you, ladies and gentlemen; this concludes today's conference. Thank you for participating, you may now disconnect.