AG Mortgage Investment Trust Inc (MITT) 2015 Q2 法說會逐字稿

Welcome to the AG Mortgage Investment Trust second quarter 2015 earnings call. My name is Eric and I'll 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. Karen, you may begin.

Thanks, Eric. Good morning, everyone. We appreciate you joining us for today's conference call to review AG Mortgage Investment Trust second 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 belief and expectations as of today, August 6, 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. It's David Roberts. Good morning, everyone. In the second quarter of 2015, interest rates were volatile and higher. This had a negative impact on the value of our agency MBS portfolio. Our credit book, however, was stable, and helped to mute the agency performance.

Core earnings for the quarter approximated our dividend, which was $0.66 per share for the eighth consecutive quarter. Consistent with our business plan, our allocation to non-agency securities and value-added assets increased, and we continue to leverage Angelo, Gordon's multidisciplined investment platform. We continue to evaluate many opportunities for MITT, sourced through the broader Angelo, Gordon network. These opportunities include both single-asset investments as well as platforms focused on real estate-related asset classes.

We are pleased also to announce that a wholly owned subsidiary of MITT became a member of the FHLB of Cincinnati. Through the FHLB membership, MITT will benefit from having greater financial flexibility and enhanced liquidity management.

With that, I will turn things over to Jonathan Lieberman, President and Chief Investment Officer of AG Mortgage Investment Trust.

Thank you, David. Good morning, all. The second quarter of 2015, capital markets proved challenging for investors to successfully navigate and hold onto favorable returns. The combination of global interest rate volatility, geopolitical instability, the renewed sell-off in commodities, and the Greek debt crisis once again reemerging, caused most capital markets to underperform relative to their fundamentals.

Modestly improved, but somewhat inconsistent US economic data, and lower-than-expected worldwide growth, coupled with valuation concerns, exacerbated investor uneasiness with capital markets. The combination of interest rate volatility that carried [in the] first quarter into the second quarter, plagued pockets of the agency MBS sector.

But, unlike Q1, where the underperformance was not driven by concerns over increased prepayments that mostly affected our inverse IO and IO book, rather, this was really a pure volatility-of-rates-driven event, and also concern over the increased supply due to positive housing seasonals that left underlying agency pass-throughs to bear the brunt of underperformance.

On the credit side, credit RMBS, CMBS and ABS spreads were modestly wider. Trading volumes were rather light. CMBS and ABS struggled with heavy new issuance calendars. Volatility was increased just slightly in the mortgage credit market.

However, we do not think this is attributable to any change in the fundamental collateral performance. Delinquencies have declined, and other remittance data has largely been range-bound for some time.

Despite the volatility, higher rates resulted in greater confidence in prepayment speeds as the MBA Refinance Index fell 35% during the second quarter. The backdrop of slower and more stable prepayments, and a continued lack of supply in the sector, should help mortgages ultimately find spread stability and realize their income profile.

So, moving on, with respect to MITT's asset and financial performance, we distributed our eighth consecutive quarterly dividend of $0.60. MITT has paid cumulative dividends of $2.40 to our shareholders over the past consecutive 12 months, while retaining $1.73 of undistributable -- undistributed taxable income for potential future distributions.

The investment team continues to execute on several key metrics, such as lowering our overall exposure to agency MBS and increasing investments in granular, idiosyncratic credit.

An additional highlight is noted in slide 7, and as David mentioned that -- we are very pleased to announce our acceptance of our wholly owned subsidiary of MITT into the Federal Home Loan Bank of Cincinnati. Brian will expand upon our acceptance further into this discussion.

MITT continues to benefit from Angelo, Gordon's multidisciplined platforms, adding sourcing and investment capacity in non-agency RMBS, ABS, CMBS and CRE. Our asset manager, Angelo, Gordon, allows to have access to a large team of talented professionals relative to our overall equity base.

We were able to leverage the AG platform to participate, along with other AG funds, in two term securitizations of nonperforming mortgage loans in May and July -- in each instance, the securitized funds, securitized NPLs with fixed-rate debt in which the senior bonds were sold to third-party investors, while MITT and AG funds retained the lower credit tranches.

With respect to our financial performance, MITT reported a negative $0.05 net income and core earnings of $0.65. The decrease in net income from last quarter was primarily due to volatility attributable to the agency mortgage bases.

Throughout the quarter, the agency mortgage bases widened out materially. Core earnings included a positive $0.04 retrospective adjustment due to quarter-over-quarter increases in interest rates. Book value declined modestly to $19.21, which represents a decrease of $0.66 netted for the impact of our dividend paid to shareholders on July 31.

As I mentioned, the largest component of the decrease in book value was attributable to the decline in market of our agency and derivative book.

The aggregate size of our book decreased modestly from the prior quarter at approximately $3.2 billion as a result of our continued rotation into less levered credit assets, a reduction in our TBA exposure, and organic amortization of our agency assets. Our hedge ratio stood at 84% of our overall agency RMBS repo notional and 47% of our finance.

The constant prepayment rate for our agency book increased to 11.4%, due to a moderate increase in prepayment speeds that is consistent with seasonality, the collateral aging curve, and the overall smaller agency portfolio.

Leverage declined to 3.64 times, down from 3.97 times last quarter. Net interest margin decreased 2.86, due to the removal of Treasury long positions and the addition of Treasury short positions which increased our cost of hedging, a component of our cost of funds.

Slide 8 of our deck sets out our 2015 outlook. The generally encouraging recovery in the second quarter supports Fed Chairman -- or, Chairwoman, Yellen's consistent message that the economy is making slow but steady progress, and if sustained, will be ready for a gentle policy rate adjustment some time in the latter half of this year.

Whether the Fed opts to lift rates in September, December, or some time in 2016, we ultimately expect Fed funds to remain below 2% over the next several years. As the front end rates inch higher, we see few signs of inflation, and have positioned the portfolio and our hedges to maintain a bias towards a flatter curve in the coming years.

With respect to the overall market landscape, it remains positive for investing the residential mortgage loans and non-agency RMBS. Housing fundamentals remain in line with our forecasts, and consumer health is steadily improving.

We believe that mortgage credit is loosening and older housing stock along with legacy mortgage loans will continue to benefit from credit expansion. Greater credit availability should increase prepayment activity in our legacy non-agency mortgages and translate into higher prepayments for non-agency down the road. Home prices remain firm in most markets, and appraisals for stressed legacy loans have thus far proven in line with our investment expectations.

Moving on to our portfolio, slide 9 details some of our top-level sector metrics from the quarter. The fair value of our agency and credit book was approximately $1.6 billion and $1.6 billion respectively.

Focusing first on our agency MBS portfolio, capital allocated to agency MBS declined as we exited positions in agency TBA, reduced our agency derivative positions modestly, and experienced organic amortization of our agency whole loan pools. This is consistent with our objective to reduce overall exposure to the mortgage basis and invest in more stable credit positions.

From a prepayment perspective, our pools continue to perform in line with our expectations, with Q2 CPR of 11.4% and July CPR of 11.6%, with the increase in speeds consistent with seasonality, aging profiles, and the shape of the interest rate curve.

Our aggregate credit book was approximately $1.6 billion at quarter end, fair market value. Performance of our credit book continues to be in line with our investment underwriting.

Valuations for credit RMBS and CMBS were modestly weaker quarter over quarter, on lower overall trading volumes. Unlike other periods of elevated volatility, markets for our risk assets generally remained orderly, and selling was very modest during the quarter.

During the second quarter, we invested $25.5 million approximately in subordinated bonds of a new-issue, all-day, non-agency MBS, with $14.2 million of associated financing, and received favorable 1940 Act treatment on the purchase.

This allowed MITT to satisfy the 1940 Act requirements without increasing our agency exposure. The collateral backing these bonds was composed of legacy residential mortgage loans which had experienced favorable pay histories.

Securitization, term funding facilities and CRE credit investments do necessitate higher upfront transaction expenditures to finance and to assemble these assets going forward.

Turning now to slide 12, we provide an update on our financing and duration gap. We currently have 37 financed counterparties. Funding continues to be plentiful and stable for the Company. With the acceptance of our wholly owned subsidiary into the FHLB of Cincinnati, we will have additional stable and flexible financing from a well-regarded counterpart.

MITT's duration gap decreased modestly from 0.62 years to 0.45 years quarter over quarter, due to the addition of Treasury short positions and interest rate swaps. Overall, the portfolio and liquidity position should help us navigate a wide range of interest rate, credit spread and credit market movements.

As to hedging and interest rate sensitivities, that's laid out in the next slide. We continue to adjust our hedge positions in responses to changes to our portfolio, US economic conditions, and potential normalization of US monetary policy. Our hedge book continues to be set up with a modest bias towards a flattener, which we believe will perform well should the Fed begin to tighten.

I'd like to wrap up by saying we believe our portfolio remains well-positioned for today's market environment and the future.

And with that, I'll turn the call over to Brian to review our financial results.

Thanks, Jonathan. In the second quarter we reported core earnings of $18.6 million, or $0.65 per fully diluted share, versus $17.9 million, or $0.63 per share, in the prior quarter. At June 30 we had a positive $0.04 retrospective adjustment to our premium amortization on our agency portfolio. Stripping this out, core would have been $0.61.

Overall for the quarter we reported a net loss available to common stockholders of $1.5 million, or $0.05 per fully diluted share. The $0.65 of core earnings was offset by net and unrealized losses of $0.71 per share. This $0.71 per share loss was primarily due to $0.61 of net realized and unrealized losses on our agency securities and derivative portfolio, and $0.10 of net realized and unrealized losses on the credit portfolio.

At June 30, our book value was $19.21, a decrease of $0.66 or 3.3% from last quarter. This decrease is mostly attributable to the losses I previously mentioned, mainly regarding the agency portfolio, offset by the $0.05 of core earnings that was in excess of our $0.60 common dividend.

To give you a better sense of our current $3.2 billion portfolio, I'd like to highlight a few more statistics. As described on page 4 and 5 of our presentation, the portfolio at June 30, 2015 had a net interest margin of 2.68%. This was composed of an asset yield of 4.64%, offset by repo and hedge cost of 1.14% and 0.64% respectively, for the total cost of funds of 1.78%.

Our net interest margin decreased, mostly as a result of the removal of Treasury long positions and the addition of some Treasury short positions, which increased our cost of hedging. We do not have any forward-starting swaps, and therefore our swap costs do reflect the true cost of our swaps.

On the funding side, we continue to be active. We are pleased to announce that a wholly owned sub of MITT has been accepted by the FHLB of Cincinnati. There will be significant potential benefits to this membership -- notably, greater financial flexibility due to access to reliable, low-cost, flexible-term, same-day funding, and we will now have the -- diversified our counterparty risk with a AAA-rated GSE execution, as well as an alternative source of agency MBS financing. We plan on funding with the FHLB within the next couple of weeks.

Our liquidity remains strong, and at quarter-end we had total liquidity of $193 million, composed of $74 million of cash, $53 million of unlevered agency whole pool securities, and $66 million of unlevered agency IO securities.

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

(Operator Instructions). Trevor Cranston, JMP Securities.

First question -- I wanted to follow up on your comments that the agency portfolio has kind of constrained your performance the last couple of quarters, and that you plan to continue reducing exposure to the basis.

Can you comment on how much room you have to take down the agency portfolio from here, outright, or is that something that's going to really depend on being able to add other whole-pool-type assets to the balance sheet?

So -- it's Brian. We don't give out specific amounts of cushion. But we do have some excess cushion on the 1940 Act as it currently stands. And as Jonathan mentioned, we are actively looking at ways and different types of assets that satisfy the 1940 Act, which would replace the current agency. So, we can do, really, both. We can bring down the agency and eat into some of our cushion, as well as replace it with other good 1940 Act assets.

Okay. Got it. And with respect to the FHLB membership, I think you said you were planning to access the funding within the next couple of weeks. Can you comment on kind of which part of the portfolio you'd be using that financing for currently; and also, maybe, comment on whether or not that financing kind of opens up any new asset classes that you might find attractive now, that you hadn't previously, with Street financing only available? Thanks.

Yes. I think at first you'll see us probably inch towards moving some of our agency securities over. The cost of financing is cheaper, so we're going to see probably a small pickup to core just from lower financing cost.

And I think, going forward, we will see the ability to enter into some new spaces or finance some of our credit portfolio. We think that, as Jonathan mentioned, it just opens up a whole host of opportunities. Unfortunately, we all know that there is the FHA ruling that's still out there, so I think we'll have to proceed with some caution before getting into it too heavily. But hopefully that will be resolved in the next couple of months.

Okay. Thank you.

Mike Widner, KBW.

[To only] follow up on the new securitization -- the all-day, non-agency thing. I was wondering if you could talk a little bit more about that in particular.

I mean, what's different about this one that qualifies for more favorable 1940 Act treatment? And it's very -- could you give us, like, a shelf a ticker -- sort of, just to identify which one? Because this seems like something new and different to me.

So, with respect to the actual securitization, the technology has been in existence for many, many years. We were able to negotiate the appropriate control rights as part of the documentation with respect to the loans that satisfied Counsel and our accountants that we are actively involved in any sort of loss mitigation effort. And that allowed us to treat the asset favorably as a whole pool 1940 Act for the securities that we retained, purchased, and the associated financing with respect to those assets.

With respect to the shelf, it was off of a City shelf. And I don't have the moniker, but we could follow up with you on the actual ticker.

Okay. Got you. Appreciate that. And so, just to be clear, then -- so, it's -- to do this, you have to have sort of controlling interest. And then if that's -- if I understand that right. And then I guess my question would be, then, do you have to consolidate for GAAP purposes, the whole thing on your balance sheet, or do you still report it as kind of a -- just the equity piece?

In this case, and every case, really, it's -- you have to look at it on its own. But in this case we do not have to consolidate on the GAAP balance sheet.

Okay. So, there's no relationship between whether it's considered a qualifying asset --

No. Some of -- I mean, some of the features overlap, so you have to look at all of them; but in this case, it wasn't -- the control that we received that we needed for 1940 Act purposes did not force us to consolidate for GAAP, which is also nice.

Yes, that's handy. And then, I guess, not to belabor the topic or the question, because it's a relatively small asset, but, I mean, this is something you needed to do. Like, this isn't something you could go out and do aftermarket and just go out and buy.

It sounds like it's something you had to do, sort of, upfront, to make sure that provisions were made in the securitization so that you had control, or could kind of -- could you do this on an ongoing basis by just being selective about, sort of, which parts of a deal you purchase? If that question makes sense.

It has to be done at inception of a securitization, and it has to be documented in the original PPM or prospective -- prospectus.

Got you.

As well as be incorporated into the indenture or the legal governance.

Got you. So, it's a non-trivial exercise. So, I mean, the -- would you envision being able to do a lot more of this, or is it sort of -- kind of, something that'll happen periodically on kind of an ad hoc basis?

Our expectation is that we will hopefully do more of it. It is ad hoc when we see the right collateral packages. We do control some assets currently in MITT that will ultimately be restructured, potentially in a manner that gives us good 1940 Act, as we collapse potentially, as some securitizations or some assets that we may be able to procure.

Excellent. Well, thank you, guys. Appreciate the comments, as always.

(Operator Instructions).

Okay. Well, thank you very much for joining us, and we look forward to speaking to you next quarter. Have a -- oh, I'm sorry. There is another question.

Douglas Harter, Credit Suisse.

Thanks for taking the question. In the past you guys have invested in ABS. Given what's going on in the student loan ABS market, is that an opportunity for you guys?

Yes. We have invested in ABS, and -- believe in the first quarter, we did add a little bit of ABS in the consumer space. We are typically investing in the more subordinate securities -- the yieldier parts of the capital structure.

In the case of student loans, a lot of the dislocation is occurring in the senior bonds, in the AAAs or the AA securities. And they're moving from, let's say, LIBOR 40 to LIBOR plus 125. And unfortunately, it's just not yielding enough, and not enough distress, at least at this point in time, for this -- for that asset class, and for those specific positions to be attractive and to be beneficial for MITT.

Great. Thank you.

And we have no further questions at this time.

All right. At the risk of interrupting anyone again, I'll say, thank you very much for joining us. We look forward to seeing you next quarter, and wish everyone a good rest of the summer. Thank you.

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