AG Mortgage Investment Trust Inc (MITT) 2015 Q1 法說會逐字稿

Welcome to the AG Mortgage Investment Trust first-quarter 2015 earnings call. My name is Christine, and I will be your operator for today's call. (Operator Instructions.) Please note that this conference is being recorded.

I will now turn the call over to Karen Werbel, Head of Investor Relations. You may begin.

Good morning, everyone. We appreciate you joining us for today's conference call to review AG Mortgage Investment Trust's first-quarter 2015 results and recent developments. Joining me on today's call are David Roberts, our Chief Executive Officer; Jonathan Lieberman, our Chief Investment Officer; and Brian Sigman, our Chief Financial Officer.

Before we begin, I'd 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. Statements regarding the following subjects are forward-looking statements by their nature -- our business and investment strategy, market trends and risks, assumptions regarding interest rates and prepayments, changes in the yield curve, and changes in government programs or regulations affecting our business.

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, May 7, 2015. Please note that information reported on today's call speaks only as of today, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

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.

Thank you, Karen, and good morning, everyone. From an overview point of view, this quarter was very similar to the past quarter. We again had solid core earnings exceeding our dividend. It was our seventh consecutive quarter issuing a $0.60 dividend.

We continue to move out of the agency section of the portfolio and look for value-added assets. That is a key metric for us and a key focus of our team. Using the Angelo, Gordon platform, we're seeing a lot of very interesting opportunities. We maintain what we consider to be appropriately conservative leverage and interest rate positioning in a volatile interest rate environment.

With that introduction, I'll turn things over to Jonathan Lieberman, President and CIO of AG Mortgage Investment Trust. Thank you.

Thank you, David. Good morning, all. So I thought I'd just talk a little bit first about the markets and then go into details of our quarter.

So for the first three months of 2015, RMBS, non-agency, and ABS markets rebounded and experienced a strong increase in trading activity after a relatively soft December. Credit and ABS credit spreads moderately tightened as new capital flowed into the markets, especially the higher-yielding securities with favorable technicals and sound fundamentals.

The one notable exception to this trend was in agency RMBS. The mortgage basis came under pressure in response to lower interest rates and fear of potentially higher prepayment speeds. The agency MBS market, like the interest rate market, has been a challenging sector to navigate over the past four months, with a material pickup in volatility and weakening liquidity.

In contrast, structured credit markets were generally unaffected by the sharp decline in oil prices, unanticipated lower interest rates, and losses in high-yield and bank loan markets. Index, or beta-like securities such as Fannie Mae and Freddie Mac's risk transfer transactions, rallied in the first quarter after struggling in the fourth quarter. Interest rates during the quarter declined in response to weakening US economic activity, geopolitical concerns, concerns over Greece, declining worldwide interest rates that dragged us lower. But as many of you have seen in the last two weeks, they have risen significantly, even in the face of choppy, poor economic data, other than maybe just overall employment levels.

Negative net issuance, or non-agency RMBS and ABS, continues to support our market. With respect to borrower performance, the trend of improving consumer and mortgage credit quality continues to hold. Overall, the US economy continues to grow, but in a sideways and muddled fashion with few indications of acceleration. The rapid worldwide currency adjustments continue to challenge economic forecasters and their econometric models. Inflation generally remains under pressure worldwide, and the importation of deflation vis a vis dollar strength, we believe, will probably continue.

So under these market and economic conditions, we are pleased with the performance of our investment team in both sourcing unique opportunities, as well as attractive investments where we think the assets carry well and generate good carry income -- good cash-on-cash income. We believe our asset allocations sets the portfolio up to continue to deliver strong, superior, risk-adjusted performance throughout the balance of the year.

The overall market landscape remains a positive one for investing in residential mortgage loans and non-agency RMBS, housing fundamentals remain in line with our forecast, and consumer health is steadily improving. We believe that mortgage credit is loosening gradually, and older housing stock, along with legacy mortgage loans, will benefit from this credit expansion. Greater credit availability should increase prepayment activity for our legacy non-agency mortgages and ultimately translate into greater returns for MITT.

So, now moving on to specifics of our Company's asset and financial performance. As David mentioned, we distributed our seventh consecutive quarterly dividend of $0.60. MITT paid out a cumulative dividend of $2.40 to our shareholders over the past consecutive 12 months while retaining $1.81 of undistributed taxable income for future distribution, potentially.

The investment team continues to execute on several key metrics, such as net interest rate spread, debt-to-equity ratios, asset-liability gap, diversification, duration management, and the ratio of credit assets relative to agency RMBS allocation. MITT continues to benefit from Angelo, Gordon's multidisciplined platform, where we continue to add investment capabilities and source interesting non-agency RMBS, consumer ABS, CMBS, CRE assets, and risk transfer securities. Our team continues to add and grow, as slide 6 will show you, and we think this will benefit MITT in future quarters.

As I've noted on our prior earnings calls, we have specific investment and return objectives for 2015. The key observable metrics are a measured rotation of capital into our credit assets. This means that we're organically allowing our agency book to shrink and rotating that capital into credit assets as they become available. New investments in less liquid assets, core earnings coverage relative to our quarterly dividend, reductions in aggregate leverage, and expansion of our net interest margin.

So now moving to more specifics, MITT earned $0.33 of net income and core earnings of $0.63 during the quarter. The decrease in net income from last quarter was primarily due to losses on interest rate swaps and volatility attributable to agency mortgage basis. Throughout the quarter, the agency MBS volatility was extremely challenging, with the mortgage basis chopping back and forth in response to lower US interest rates. In addition, you had the FHA cut their guaranty fee, which added additional volatility to the marketplace because of associated prepayment concerns that carried over from the Ginnie Mae market to the Fannie and Freddie markets.

Carry income associated with agency MBS continues to be favorable, but book value stability was not as favorable. Core earnings were subject to a negative retrospective adjustment of $0.02 for future potential agency prepayments. Book value declined modestly to $19.87, netted for the impact of our dividend paid to shareholders on April 30. As we mentioned, our undistributed taxable income was $1.81 at quarter end.

The aggregate size of our portfolio decreased modestly from prior quarter, stood at $3.5 billion, approximately as a result of our continued rotation into less levered credit assets and organic amortization of our agency assets. We made a 6.8% annualized economic return on equity as well as 18.7% total stock return, including reinvestment of dividends.

Our hedge ratio stood at 65% of our agency RMBS repo notional and 34% of our financing. The hedge ratio was lower at the end of the first quarter, first to fourth quarter. This was due to a reduction in our interest rate hedge positions. Prepayment speeds for our agency book remain well channeled for a seasoned portfolio and contained at 6.8% CPR. Leverage stood at 3.97 times, inclusive of our net PBA mortgage position, down from 4.17 times last quarter. Net interest margin, excluding the net TBA position, increased to 3.08% due to lower cost of swaps resulting from the termination of several of our interest rate swap positions.

So now, before turning to details of our portfolio, I'd just like to share a few brief thoughts on our outlook for 2015, which is outlined on slide 7.

The precipitous fall in oil prices during the second half of 2014 seems to have stabilized in the first quarter but continues to pressure headline inflation globally. Inflation expectations have remained largely stable, as the Fed Reserve characterizes the drop as having a transitory effect on inflation and a positive impact on future growth. But there exists a potentially destabilizing uncertainty over the lingering effects of both capital expenditures and hiring reductions.

The trends that have been emerging during the first quarter of 2015 have resulted in mixed economic news at best and have continued to drive the global supply-demand imbalance for high-quality fixed income products that has driven rates globally back towards in some parts of the world through the lows of yields experienced during the financial crisis. And we would characterize some of this volatility as a function of the thin liquidity in the market and the growth of algorithmic trading that is leading to wider swings in fixed-income products that theoretically have liquid markets.

With respect to US interest rates, many market participants were positioned during the first quarter for rising in rates given stronger US economic data and expectations of the Federal Reserve normalizing monetary policy. Instead, US interest rates declined sharply in response to deteriorating global economic conditions, widened geopolitical conflict, and looser monetary policies.

Global QE is pervasive and continues to manifest itself in the US in the form of stronger US dollar and lower Treasury yields, even in light of current unemployment levels. Recent talk of US economic strength has now given way to concerns regarding structural stagnation, currency wars, and global deflation. These global conditions and headwinds will continue to confound US policymakers and the Fed.

More recently, we've seen a material sell-off in European and US government debt markets. This sell-off is occurring despite recent unfavorable economic data and slowing corporate profits. As I mentioned, liquidity in many markets remains weak and volatility is increasing. Given these distortions in many markets due to central bank QE programs, we expect benchmark interest rates to widen and volatility to continue for the foreseeable future.

So notwithstanding these headwinds, we still remain cautious but positive on US economic growth prospects for 2015 and believe that over time, the benefits of lower oil prices will reach consumers and that the US economy could muster growth up to 2.5%. But we do expect the volatility to continue as policies, politics, conflicts, and investor uncertainty continue to pull the markets in various different directions.

Home prices in most markets remain firm. Appraisals for legacy and stressed legacy home loans continue to improve and track our expectations. Distressed home sales continue to decline as a percentage of overall sales, and generally housing markets have reached equilibrium levels.

So now, moving to our portfolio, slide 8 shows details of our top-level sector metrics, quarter over quarter. Fair value over agency and credit book was approximately $1.9 billion and $1.6 billion, respectively.

So first focusing on our agency book, our agency portfolio decreased modestly, with the main difference quarter over quarter being a slight reduction in agency mortgage pools and a modest decrease in agency TBA positions. We did replace several of our TBA positions with specified pools that have better prepayment profiles, able to withstand a greater range of interest rates, lower.

We proactively rotated out of select inverse IO positions, believing they might underperform if refinance activity accelerated or long-term interest rates continued to decline. And from a prepayment perspective, our pools continue to perform in line with expectation with a first-quarter CPR of 6.8% and the April CPR of approximately 11.1%, with most of that prepayment speed increased pickup due to seasonality.

So now moving to our credit book, which stood at $1.6 billion fair value at quarter end, during the first quarter we continued to leverage Angelo, Gordon's multidisciplined platform, investing in a diverse range of asset classes such as short and long duration, non-agency RMBS, CMBS floaters, ABS, and risk transfer transactions from the GSEs. We selectively pruned certain non-agency MBS and CMBS positions to realize price appreciation for some lower dollar priced assets that appreciated, and we rotated into assets with superior carry profiles.

We replaced credit sales with $24 million of short-duration NPLs and $50 million of RPLs in securitized form. During the quarter we added to positions in the GSE risk transfer section of the book. And on the commercial side, we purchased a new CRE B Piece position for the portfolio. Finally, MITT participated with other Angelo, Gordon funds in the acquisition of an ABS consumer securitized portfolio that we believe has high potential future returns and a favorable risk profile.

Now turning to slide 11, we provide you with a brief update of our financing and duration gap. We currently have 35 financing counterparties. Funding continues to be plentiful and stable for the Company. Our funding counterparties actively continue to seek out business with MITT. MITT's duration gap, inclusive of our net PBA position, did increase from 0.17 years to 0.62 years quarter over quarter due to the termination of approximately $400 million in interest rate swaps at the beginning of the quarter and the addition of selective Treasury long positions.

We took this action in response to weaker US economic activity and to counter potentially faster future prepayment speeds in the portfolio. This would offset some duration shortening on the asset side of our ledger. We believe this adjustment will help protect the portfolio under a wider range of interest rates, faster prepayments, and potentially a curve flattener.

In the event that rates were to rise like they have in the last two weeks due to uptick in economic activity, which is certainly not ascertainable at this time, or whether we just continue to track sideways, our credit portfolio may offset any negative impact from incremental interest rate rises over time.

If the Fed decided to raise short-term interest rates by 0.25%, a quarter of a point, and the front end of the interest rate curve was to pivot upward but, long-term interest rates remain anchored and we did not move any other characteristics of our portfolio -- such as prepayment speeds, interest rate hedges, reinvestment of proceeds from our portfolio -- our overall portfolio could experience modest spread compression. Using our portfolio models and holding many important variables constant, including no reinvestment of pay-downs, our core income could experience a modest reduction of 2.4% in response to one-month LIBOR increasing by 0.25%. This might equate to roughly a 2%-per-quarter reduction in core income during the quarter.

As I said, this is not a multivariable simulation; it's just simply one variable in how we might look at the overall portfolio. Overall, the portfolio and liquidity position should help us navigate a wider range of interest rate, credit spread, and credit market movements over future quarters.

With respect to hedging and interest rate sensitivity, we lay out on the next slide tables that lay that sensitivity out for you. As previously mentioned in January, we adjusted our hedge position in response to changes in our portfolio, weaker US economic conditions, and potentially normalization of US monetary policy. With this, we opened up a bigger interest rate duration gap and reduced our overall hedge notional. We believe that this unwind of select interest rate hedges will allow the portfolio to continue to perform over a wider range of interest rate scenarios and ultimately should generate higher potential future core earnings going forward in 2015.

In closing, I'd like to wrap up by saying we believe the portfolio remains well positioned for today's markets, should generate attractive future risk-adjusted returns for our shareholders. And with that, I'll turn the call over to Brian to review details of our financial results.

Thanks, Jonathan. In the first quarter we reported core earnings of $17.9 million, or $0.63 per fully diluted share versus $18.4 million, or $0.65 per share, in the prior quarter. At March 31, we had a negative $0.02 retrospective adjustment to our premium amortization on our agency portfolio. Stripping this out, core would have been $0.65. If we reran our cash list today, we would have a positive retrospective adjustment of $0.02. We are pleased with this result, and it marks the sixth quarter in a row where our core has met or exceeded our common dividend.

Overall for the quarter, we reported net income available to the common stockholders of $9.4 million, or $0.33 per fully diluted share. The $0.63 of core earnings was offset by net realized and unrealized losses of $0.29 per share. The $0.29 loss was primarily due to $0.34 of net realized losses on our security contributed portfolio, which was offset by $0.05 of net unrealized gains on the portfolio. At March 31, our book value was $19.87, a slight decrease of $0.26, or 1.3%, from last quarter.

To give you a better sense of our current $3.5 billion portfolio, I'd like to highlight a few more statistics. As described on page 3, 4, and 5 of our presentation, the portfolio at March 31, 2015, had a net interest margin of 3.08%. This was composed of an asset yield of 4.6%, offset by repo swap costs of 1.13% and 0.40%, respectively, for a total cost of funds of 1.53%.

We are pleased that our net interest margin continues to trend higher. This quarter, the increase was driven primarily by a decrease of 31 basis points in our cost of hedging, mostly as a result of the termination of approximately $400 million of interest rate swaps during the quarter. We do not have any forward-starting swaps, and therefore our swap costs reflect the true costs of our swaps.

On the funding side, we continued to be active. In February, we extended the funding period for another year on the $100 million facility that finances our residential mortgage loans. In April, we extended the maturity on our facility that finances some of our non-agency securities. This facility was extended for another year, and as part of the renewal, we increased the size to $200 million while also lowering certain borrowing rates as well as certain bond-specific haircuts.

Additionally, we entered into a new three-year financing on another $100 million of agency repo during the quarter. Our liquidity remains strong, and at quarter end, we had a total liquidity of $185.4 million, which was composed of $42 million of cash, $100 million of unlevered agency hopeful securities, and $43 million of unlevered agency IO securities.

That concludes our prepared remarks. I would now like to open the call for questions. Operator?

Thank you. (Operator Instructions.) Jason Stewart, Compass Point.

I was hoping you could give us a little bit more detail on the consumer portfolio, maybe on if there's a secured portion to it, unsecured. Just any details there would be very helpful.

Sure. It's an unsecured product, installment sale contract types of contracts from a respected counterparty issuer. We bought it in securitized format. MITT participated with other Angelo, Gordon funds in buying junior securities, which have attractive carry profiles. Very, very secure in terms of their ability to tolerate any potential credit loss. The issuer retains material economic exposure, as the securities carry very well. They are rated securities.

Okay, so this would be -- I think I understand where this position is. I'm actually more interested in where you think that could go, whether you think it could translate into an investment, actual loans, or how big this could end up getting.

You guys, we don't have any distinct plans to basically acquire consumer loans to put into MITT. This would really go into more of an opportunistic trade with great carry profile, potentially some capital appreciation when we exit the position.

Okay, fair enough. And then if we could just pull back a little bit and look at MITT from the global Angelo, Gordon platform and if you could just take a multiyear view and describe what you think the plan is and how -- I mean, it's obviously, when you describe the investment professionals, there's quite a few there. That's clearly not supported, necessarily, only by MITT, in part by Mitt. But if you could just describe what Angelo, Gordon's maybe multiyear plan is for this product.

It's David Roberts talking. We have a deep background in the real estate business, and that's led us to really looking globally at real estate assets in all sorts of different sectors, and it's also led us to look at real estate debt in all sorts of different sectors. So we've got all these professionals looking for real estate-related assets. And MITT is our only permanent capital vehicle. And so what we're constantly looking at are opportunities to use the expertise at our platform to match up assets with MITT's structure, which is permanent capital, yield-oriented assets.

We all know it's a very pricey time relative to other times in the past in the real estate area. But we see a lot of opportunities, and I would say we're optimistic that over the coming years or quarters, hopefully, we're going to find some good matches.

So we have a broad network. We're -- the people who are focused on MITT are in constant dialogue with our real estate professionals. And we would hope to take advantage of that over time.

Okay. Thanks for taking the questions. Appreciate it.

Thank you. (Operator Instructions.) We have no further questions. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.