AG Mortgage Investment Trust Inc (MITT) 2012 Q2 法說會逐字稿

Welcome to the AG Mortgage Investment Trust second-quarter 2012 earnings call. My name is Hilda and I will 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 Ms. Lisa Yahr. You may begin.

Thanks, Hilda. Good morning, everyone, and welcome to the AG Mortgage Investment Trust second-quarter 2012 earnings conference call. Joining me on today's call are David Roberts, our Chief Executive Officer; Jonathan Lieberman, our Chief Investment Officer; and Frank Stadelmaier, our Chief Financial Officer.

Before we begin I would like to review 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. The Company's actual results may differ materially from those projected due to the impact of many factors beyond its control.

All forward-looking statements included in this conference call and the slide presentation are based on our beliefs and expectations as of today, August 7, 2012. Additional information concerning the factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the risk factors section of the Company's periodic reports filed with the Securities and Exchange Commission. 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.

Good morning. AG Mortgage Investment Trust had another very strong quarter. We are pleased to report today that our core earnings in the second quarter increased to $0.86 per share, a significant increase over core earnings of $0.71 per share in the first quarter.

As we have said before, we believe that core earnings are the best measure of the income that MITT produces, and we use core earnings as the primary guide in setting our dividend. Therefore, the quarterly dividends we declare will generally follow in the same direction as our core earnings.

I want to emphasize that this is a directional relationship, and that we will not necessarily seek to create a formulaic one-to-one correspondence between core earnings and dividends. Also noteworthy is that, after the quarter ended, we successfully completed the issuance of approximately $45 million of preferred stock at a coupon of 8.25%. We believe that this capital is both appropriate and attractive for our Company.

With that, I'm going to turn over the proceedings to Jonathan Lieberman to discuss our results and our investment portfolio.

Good morning. Thank you, David. As David highlighted, we are extremely pleased with the solid results we were able to deliver to our shareholders in the second quarter.

Turning our focus to the current quarter and our economic outlook, this is set forth on page 6 of our presentation that has been posted to our website, AG Mortgage Investment Trust. When we think about portfolio construction, portfolio hedging, and asset allocation, our fundamental economic thesis is one of our basic building blocks for our portfolio.

After the brief growth scare in March, US economic activity as well as overall worldwide economic activity has markedly slowed. In the US, growth is likely to remain tepid for the foreseeable future as unemployment remains stubbornly elevated, consumers continue to delever, and the fiscal deficit continues to constrain further governmental intervention. This, although not clearly positive and optimistic for the world economy as well as the US economy, is a very good economic environment for the REIT and the portfolio that we have constructed.

We see tax revenues in many states slowing or missing revenue projections. We see further layoffs at the state and local government levels, possibly re-accelerating next year. At the federal level, current spending levels are not sustainable in the long term.

Once again, all of this means basically slow and tepid growth for the foreseeable future. Budget cuts at the federal level may shave approximately 1% off of GDP activity in order to begin walking down the annual fiscal deficit.

The situation abroad remains a major cause of concern as the periphery has undoubtedly moved into a depression and core countries are, by our estimate, double dipping. We believe Europe, the world's largest economic zone, is currently experiencing deflation and negative interest rates.

So, what does this mean for our portfolio? We believe that basically we are in a low interest rate environment for several years; that the Fed is constrained in their ability to raise interest rates, since that would further depress GDP at a national level; and that basically this is well situated for REITs that are basically investing in mortgage assets.

One bright spot for the US economy over the past several months and potentially for 2013 is the housing market. After six years of declining home values, we see valuations moving closer to a bottom and then slowly starting to appreciate, although the recovery is going to be uneven and is going to be ZIP code dependent.

The combination of low interest rates, pent-up demand, rental to REO investors, and supply constraint is very supportive of housing and very supportive of how we've positioned our portfolio on the credit side. Stagnant household incomes and the jobless recovery will continue to weigh on housing as well as the overall economy.

Looking ahead, we think interest rates are likely to stay low through at least 2014. And the probability of a QE3 has increased due to the decelerating economic activity during the second half of this year.

Also like to point out that Germany is currently experiencing negative 2-year interest rates. Similarly, we would not rule out the possibility of negative short-term interest rates in the US in the future potentially.

The next several pages of our investor presentation highlight the strong rally that has occurred across fixed-income markets over the last several months. The yield curve has flattened meaningfully as 10s rally close to 60 basis points, with 2-year yields only coming down a few basis points. Dollar prices in all MBS has appreciated markedly in response to these interest rate moves .

The rallying credit is depicted on page 9 of our presentation and benefited significantly our credit book. In June, RMBS credit markets consolidated their rally from the first and second quarters; and in July, the rally has once again begun. Given high trading volumes in the non-agency market and robust new-issue ABS and CMBS, we have been able to add attractive credit positions and increase our overall allocation to higher-margin securities.

Now, moving into some more detail, on page 10 we share our view on the composition of the portfolio at quarter-end. Quarter-over-quarter, our agency portfolio modestly increased from current face amounts of approximately $2.4 billion to $2.5 billion. We selectively rotated out of higher-payout agency securities into more favorably priced current production assets.

With respect to our credit portfolio, we grew the current face amount from approximately $316 million at Q1 to $491 million at the end of Q2. On a gross asset basis, the credit book grew from 11.5% of our portfolio to approximately 16.4% of our portfolio. With the successful issuance of our preferred stock transaction, we will continue allocate additional capital to credit securities going forward.

The composition of our credit book has also changed, with the sale of lower yielding ABS at a profit and a rotation into more attractive non-agency RMBS and new-issue CMBS. At quarter-end, our credit allocation as a percentage of overall assets was approximately 16.4%. As a percentage of overall capital, it was approximately 22.5%.

Now, we carefully construct an overall portfolio with the goal of integrating and mitigating different strategy risks. With the European crisis overhanging all markets -- and we believe it is going to be a continuous crisis -- we believe our current integration of noncredit and credit assets offers a very favorable balance for a risk- and volatility-adjusted portfolio. We also like the integration of prepayment-sensitive assets and discount security assets, as a means of hedging against a possible Japanese interest rate environment or scenario.

With respect to our agency portfolio, I would like to now walk through a little bit of our thoughts on prepayments. Our prepayment thesis is outlined on page 11.

It is abundantly clear to us that the Federal Reserve System, Dr. Bernanke, the Administration, and Treasury would like to elevate prepayments in the entire mortgage industry, to basically delever households and relieve their interest rate payments or reduce their interest rate payments. I would like to highlight the chart on the bottom right page of page 11.

CPRs on our portfolio have been both remarkably stable, despite the move-in rates, as well as meaningfully below the overall agency universe and various 2011 cohorts. Given our lackluster economic outlook and the Fed poised to basically potentially employ further QE measures, we continue to construct a portfolio to limit our call risk.

Page 12 details composition of our agency book. Over 70% of our specified pool exposure is in pools that offer meaningful prepayment and call protections. These attributes include low loan balance, good geographic concentrations, and high LTV loans.

As of quarter-end just over 50% of our total 15-year and 30-year pools were backed by pools with a sub-balance of $150,000 or less. The rally in rates allowed us to take profits on selected 15-year pools that experienced significant run-ups in pay-ups.

Over the quarter, we did increase our allocation to 30 years, where we focused on lower coupon and new origination. Our new production bucket has a weighted average loan life of approximately 5 months.

In order to minimize prepayment, we accomplished this goal. For June 2012, the portfolio CPR was again extremely low at 5.1%.

Now, turning to the credit side of our portfolio on page 13, you can see that we extended our first-quarter strategy of stepping up our deployment of capital into credit assets in the second quarter. We continue to focus on senior prime and Alt-A securities that offer favorable financing as well as attractive, stable yield profiles.

Our ability to leverage Angelo, Gordon's commercial real estate expertise continues to benefit the REIT as we have selectively deployed more capital into primary new-issue transactions. The overall AG credit platform continues to see and source a robust set of opportunities. I must emphasize the breadth and depth of our credit platform allows us to continue to rotate and deploy capital in an accretive manner.

Activity levels in the credit space have been exceptionally robust over the past 7 months. It is important to emphasize that we are very active in these markets on a daily basis with a team of 16 professionals identifying and acquiring attractive, accretive investments for the REIT.

Now turning to our leverage and then our interest-rate exposure, which are clearly critical aspects for a REIT, on page 14 leverage as of June 30 was 6.79 turns. The decrease quarter-over-quarter was it attributable to our increased allocation to credit securities. Overall leverage is comfortably within our target of range and thus allows us the flexibility to respond to any attractive opportunities in the market.

At quarter end, our excess liquidity was north of $150 million. And given our cautious macro overview, we believe it is prudent to retain a fair amount of excess liquidity.

On the financing side over the past quarter, we increased the number of counterparties with documentation and funding arrangements in place. As page 15 shows, we currently have 26 institutions that are providing MITT with financing, up from 24 as of our last earnings call.

Now on the hedging side, we currently have approximately 50% of our total repo notional hedged as of quarter-end. As we have discussed on prior calls, we do not seek to fully hedge out rate and market value risk.

In general, we operate along the spectrum of hedging anywhere from 40% to 60% of our total notional repo exposure. Should our views around a future path of interest rates change, you will see this reflected in our hedge ratio.

As I noted, short-term rates in Germany are negative. There is a high potential that the United States rates could go negative. And so we are reflective of both the fact that excessive hedging is as dangerous as under-hedging. We currently use both swaps and MBS derivatives as hedges.

Now, on -- with respect to our duration gap, at quarter-end our duration gap was approximately 1.3 years. We pushed out our swap hedges by approximately a quarter-year, and the duration of our assets shortened in a meaningful fashion given the rally in interest rates.

On a different note, I want to just comment on our investment professionals. We continue to expand our investment capabilities with new hires on both the non-agency and the CMBS portfolio teams.

And on the Investor Relations front and on product specialist side, we were able to hire Lisa Yahr from Credit Suisse. Lisa comes from the institutional sales side of Credit Suisse and covered Fannie Mae and several of the largest insurance and money managers in the world.

With that, I would like to turn the call over to Frank Stadelmaier, who will walk you through our financial performance for the quarter.

Thank you, Jonathan. Good morning. I will now give you some more details about our first-quarter results.

For the quarter we reported net income of $44.9 million or $2.85 per fully diluted share. We reported core earnings of $13.5 million or $0.86 per fully diluted share, versus $10.1 million or $0.71 per share in the prior quarter.

The increase in core earnings was driven primarily by the increased size of our portfolio. The weighted average interest earning assets during the current quarter was $2.6 billion versus $2 billion in the prior quarter, which included our January follow-on offering.

The increased size of our portfolio was offset by the effect of interest rates falling during the current quarter. We accrue interest income using a level yield methodology that incorporates a forecast of prepayments over the remaining life of the assets. As rates fell during the quarter, estimated prepayments increased, lowering the yields on our portfolio.

Projected CPR on our agency portfolio increased from approximately 9% in the prior quarter to 11% in the current quarter. Actual experience during the second quarter was 5.5%. Included in our core earnings is a $0.05 per share charge related to the retrospective adjustment of these yields.

In addition to the $0.86 of core earnings, our GAAP net income of $2.85 per share includes $0.48 per share of realized gains and $1.51 per share of unrealized gains. Both our realized and unrealized gains were driven by the performance of our agency portfolios. The on-the-run coupon loan balance in geographic story specified pools that predominate our portfolio outperformed most other mortgage assets during the period.

After giving effect to the $0.70 dividend we declared during the quarter, our book value increased by $2.15 per share to $21.78 per share. We continue to maintain undistributed taxable income, which provides us flexibility when considering future dividends. During the quarter, it increased by $0.74 per share to $1.17 per share.

Our undistributed taxable income has primarily come from the gain on sale of securities. We have reinvested much of these proceeds into new securities, including non-agency securities at attractive yields.

Finally, on August 3, we completed an offering of 1.8 million shares of 8.25% perpetual preferred stock. The Company received net proceeds of $43.6 million, which may grow by $6.5 million if the underwriters exercise their overallotment option. The proceeds have substantially been deployed into investments with leverage yields in excess of the cost of capital, making this offering accretive to our common shareholders.

We would now like to open the call for questions.

(Operator Instructions) Boris Pialloux, National Securities.

Hi. Thanks for taking my question. Actually I wanted to go back to your comment regarding the negative 2-year treasury in Germany. What would be the impact on your cost of financing if we had that in the US? I am just trying to have a big picture, because it seems to be interesting to see the new environment where we are getting into.

Well, ordinarily, I would have expected that potentially our cost of funds would decline. What we have found is, even with the rates going down let's say in the last quarter, treasuries and swaps going -- declining, cost of funds were basically unchanged to maybe just 1 basis point or 2 higher, although in the last week or two they have declined modestly.

So, I think ordinarily directionally you would think that they would follow. But given the potentially heavy utilization of repo financing by counterparties, they may remain at current levels. And counterparties are certainly benefiting from the economics of financing agency collateral.

Okay. Thank you for taking my question.

(Operator Instructions) Trevor Cranston, JMP Securities.

Hi, thanks. Given your comments about core earnings being the primary driver of the dividend, at least directionally, I was hoping if you could just comment on how you think about distributing the undistributed taxable income; whether or not it is something you think about distributing on a continuous basis over time; or if you might consider a special dividend at some point in the future. Thanks.

I think that it really is going to depend on what our use for that retained capital is and whether we can put it back into the marketplace at returns that seem to us to be attractive. So we consider it all the time, but as of yet have not made any distributions of it.

Okay. That's helpful. Thank you.

(Operator Instructions) At this moment we show no further questions in queue. I will turn it back over to you.

All right. Thank you all for participating in today's AG Mortgage Investment Trust second-quarter results. We look forward to speaking with you again in another quarter, and we appreciate your support of the Company.

Jonathan Lieberman Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.