AG Mortgage Investment Trust Inc (MITT) 2018 Q1 法說會逐字稿

Welcome to the AG Mortgage Investment Trust first quarter 2018 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 to turn the call over to Karen Werbel, Head of Investor Relations. You may begin.

Thanks, Christine and good morning, everyone. We appreciate you joining us for today's conference call to review AG Mortgage Investment Trust's First Quarter 2018 results and recent developments.

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 safe harbor protection provided by the Reform Act.

Statements regarding 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 are forward-looking statements by their nature. The company's actual results may differ materially from those projected due to the impact of these factors and others beyond its control.

All forward-looking statements included in this conference call and slide presentation are made as of today, May 3rd, 2018, and we disclaim any obligation to update them. We will refer to certain non-GAAP measures on this call. And for reconciliation, please refer to the earnings press release and 8-K, which are posted on our website and have been filed with the SEC. At this time, I would like to turn the call over to David Roberts.

Thank you, Karen, and good morning, everyone. I'd like to share some highlights from our first quarter 2018 results with you today. Our core earnings for the quarter was $0.59 per share with 3 notable items I'd like to highlight. First, core benefited $0.02 a share from a retrospective adjustment. Second, core benefited $0.03 per share from a onetime positive impact from a commercial loan payoff that happened subsequent to quarter-end. Third, core also benefited by approximately $0.03 per share due to the rise in 3-month LIBOR that we received as part of our stock hedge book. That increase was above the increase of over repo funding costs. This dynamic was unusual and was driven by various supply/demand technicals within the short-term rates market. We do not anticipate that this dynamic will persist beyond the next quarter or so.

During the first quarter, we declared a regular common dividend of $0.475 per share for the 10th quarter in a row. Book value per share decreased 1.5% from the prior quarter primarily due to the rise in interest rates and modest spread widening in the Agency sector. We continue to see fundamentals in the Agency RMBS sector as supportive of valuation and Agencies as a sector with an attractive risk-reward return profile. Should spreads widen much further in response to reduced bad influence, the flexibility we maintain in our Agency book leverage will allow us to opportunistically increase our exposure to the sector at favorable risk-return profiles.

During the quarter, we focused on purchasing credit assets that played to the sourcing and diligent strengths of our extensive RMBS ABS team as well as the extensive strengths of the Angelo Gordon platform. These purchases, which were done alongside other Angelo Gordon funds, included 2 pools of RPL whole loans, 2 pools of non-QM whole loans, excess mortgage servicing rights and a credit card ABS note. We plan to continue to emphasize these kinds of internally sourced assets as part of our credit book.

With that, I will turn the call over to TJ Durkin.

Thank you, David. Good morning, everyone. The Fed in its march meeting raise the federal funds rates by 25 basis points and continued to reduce its holdings of Agency mortgages by curtailing its monthly reinvestment of paydowns. Progress continues to be made with respect to the Fed's dual mandate of full employment and price stability, as unemployment remains below 5%. Agency mortgages began the first quarter well supported by yield buying, a robust Federal Reserve purchase schedule and manageable supply. Throughout the quarter, there was increased interest rate volatility as interest rates rose 30 to 40 basis points across the yield curve, with the front end moving marginally higher than the long end.

In response to the uptick in volatility and continued tapering by the Fed, Agency MBS spreads widened 5 to 6 basis points versus the swap curve over the balance of the quarter. While we may experience some further spread volatility over the course of this year, we think the fundamental outlook for Agency mortgages remains favorable, given reduced prepayment concerns, manageable rate volatility and favorable relative value compared to other liquid spread products.

During the first quarter in the credit market, spread performance of mortgage and asset-backed securities was somewhat mixed although investor demand remained an ongoing scene for both sectors. CRT spreads were more volatile and tightened early in the quarter to levels last seen prior to Hurricanes Harvey and Irma, but then widened as new supply and broader market volatility weighed on the sector. Spreads for precrisis RMBS continued to tighten due to the persistently strong net demand technical, coupled with continued strength in the fundamentals.

The CMBS market was relatively calm despite the significant uptick in rate volatility and noise around the retail sector. Within CMBS, the credit curve flattened as AAA rated securities widened and lower rated securities tightened, reflecting a bifurcated buyer base with opportunistic investors displaying a strong reach for yield, while more risk-averse buyers invested with increased caution.

With respect to interest rates, the rate move year-to-date largely reflects the significant improvement in the U.S. economy. We continue to anticipate a modest rise in interest rates this year as the Fed continues to tighten monetary policy in response to the substantial progress made on each of its dual mandates. However, we do not anticipate a material increase in rates because the gap between market pricing of interest rates and the Fed's median forecast for the federal funds rates has narrowed and market positioning remains defensive regarding interest rates.

Focusing on Slide 5 of our quarterly earnings presentation, we outline the first quarter activity. We actively managed the Agency book and credit book, increasing our investments in both categories by a total net equity amount of $23 million. During the quarter on the Agency side, we added excess MSR stripped from government and conventional loans. And on the credit side, MITT, alongside another Angelo Gordon fund, purchased 2 pools of primarily reperforming residential mortgage loans. Additionally, MITT purchase 2 non-QM pools alongside other Angelo Gordon funds. MITT also purchased a revolving loan on a credit card ABS securitization.

During the quarter, we sold securities in the credit books, capitalizing on relatively tight CRT spreads to shed some exposure ahead of anticipated new issue supply, which ultimately put pressure on spreads. We realized gains from sales on Freddie K-series securities and they were sales and payoffs of legacy RBS securities during the quarter. In terms of credit investments, we are finding value both in the new issue market as well as in lesser known niche opportunities we obtain through the Angelo Gordon platform.

On Slide 9, we've laid out the investment portfolio composition for the quarter. The fair value of the aggregate portfolio was $3.8 billion for the quarter, comprised of our Agency book which was approximately $2.3 billion, and the fair value of our credit book, which was approximately $1.5 billion.

Focusing on our Agency portfolio on slide 10, you will see a breakout of our current exposure by product type. The constant prepayment rate for our Agency book was 6.3% for the first quarter. Because of the size of our Agency portfolio relative to the overall market and the discipline and selectiveness of the investment team when adding Agency risk, we expect prepayment fees for our portfolio to generally outperform the overall universe of Agency collateral.

On slides 11 and 12, we'd like to highlight that 44% of our residential credit investments, excluding whole loans, and 71% of our commercial and ABS investments are floating rate in nature and are directly benefiting from the recent increases in the Fed funds rate. The decline in our residential credit investments floating rate percentage in this quarter was a result of our rotation out of CRT securities during the quarter.

Moving ahead to slide 14 of the quarterly earnings presentation, we lay out the duration gap of our portfolio, which increased modestly this quarter to 1.25 years versus 1.15 years in the prior quarter. The overall duration contribution of our Agency MBS portfolio held constant at 2.77 years and some minimal duration extension was offset by a shift to higher coupon Agency flows and therefore shorter duration bonds. During the quarter, our hedge book increased marginally as we added swaps throughout the quarter. This resulted in the duration gap of the most interest rate sensitive portion of our portfolio declining to a de minimis 0.5 years, while the overall duration gap increased with our newly purchased whole loan investments.

As we look into 2018, we are confident that MITT is well positioned to deliver attractive returns to our investors while protecting book value. Given the purposeful construction of our portfolio, we have ample flexibility to take advantage of opportunities that may arise out of any increase in spread volatility in the future, and we seek to deploy capital into investments that we find attractive in more liquid sectors, such as agency mortgages and other residential or commercial credit investments, and into larger opportunities in less liquid spaces presented us through the larger Angelo Gordon platform.

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

Thanks, TJ. Overall for the first quarter we reported net income available to common stockholders of $4.9 million or $0.17 per fully diluted share. Core earnings in the first quarter was $16.5 million or $0.59 per share versus $14.2 million or $0.50 per share in the prior quarter. There was a $0.02 retrospective adjustment in the first quarter due to premium amortization of our Agency portfolio versus a de minimis retrospective adjustment in the prior quarter. At March 31, our book value was $19.32, a decrease of $0.30 or 1.5% from the last quarter, due to the reasons David previously mentioned.

To give you a better sense of our current $3.8 billion portfolio, I would like to highlight a few more statistics. As described on page 4 of our presentation, the portfolio at March 31, had a net interest margin of 2.69%. This was comprised of an asset yield of 4.99%, offset by the total cost of funds of 2.3%. Net interest margin increased from the prior quarter due to the increase in yield, primarily due to the increase in interest rates and a commercial loan payoff subsequent to quarter-end. The increase in the cost of funds was primarily due to an increase of 25 basis points in the federal funds rate in March, which was partially offset by repo spread tightening versus LIBOR.

As of March 31, we had 39 financing counterparties, and our financing investments to 28 of those counterparties. In the first quarter, we do not see any ill effect on the financing market from the rate increase, and in general, funding continues to be plentiful with new entrants in both the credit and the Agency space.

At quarter-end, we have liquidity of $115 million. This was comprised of $25 million of cash, $85 million of unlevered Agency whole pool securities and $5 million of unlevered Agency IO securities. In addition, after the quarter, we received $15 million of principal proceeds from the paydown of the unlevered commercial loan. Additionally, at quarter-end, our estimated undistributed taxable income was $1.54 and we continue to evaluate this on a quarterly basis to make sure that we're compliant with our distribution requirements.

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

(Operator Instructions) And our first question is from the Doug Harter of Crédit Suisse.

I was hoping you could just help quantify some of the benefit you might get from the faster increase in LIBOR in the second quarter and kind of your expectations. Just to quantify that a little bit as to how long it lasts and whether it goes all the way back to sort of prior levels when -- over the next couple of quarters?

Sure. This is Mike Antilety. It's very difficult to quantify, as it really depends on when the floating legs of our swaps reset and when our repo book rolls. It will be -- we do expect it to be accretive to earnings in Q2 given that our floating legs of our swap book reset in Q1. We expect it to be -- I would say at least the same as we saw in Q1, maybe a couple pennies more, given that we'll have the benefit of the full quarter. The situation is really being driven by some short-term market technicals and it's difficult to really project forward whether that's -- whether it's more technical via bill issuance or whether it's -- or whether there's some structural factors there, given reduced commercial paper demand from the money that's been repatriated.

It's hard to lock in for this extended period of time. This relationship has been historically very stable outside some funding crises in history. So we really have no reason to believe that it won't revert back a good portion. We saw the spreads sort of peak in late March and since then it's reverted back by about 7 or 8 basis points through yesterday. We anticipate that we'll see some continued reversion back to a more normal relationship. But it really is difficult to project at this time. I think the market is sort of trying to figure out what that dynamic is going to look like, which is really why we are not projecting it a whole lot further than, say, the next quarter or two. And really trying to view that as just a tailwind that we'll benefit from, but really not counting on that persisting much beyond.

And then just on the -- on some of the whole loans you bought this quarter, if you could talk about the returns that you saw there and whether that's likely -- that opportunity is likely to persist?

Sure. Yes, I think we're seeing opportunity in the RPL and NPL space. Generally, we're finding ourselves to be more competitive on some of the smaller pools that are out for bid versus some of the larger ones. And I think we're anticipating levered ROEs in the low to mid-double digits.

Our next question is from Eric Hagen of KBW.

My first question is on asset yields. Just rates have obviously risen since the end of the quarter. Have you been able to capture even higher yields, either in run-off or anything that you sold since quarter-end?

On the margin I wouldn't say it's been that meaningful since the end of the quarter, no.

Okay. My second question is just on the non-QM strategy. I'm assuming the goal there is to eventually securitize some pools of those assets, but until they -- until you do -- until -- as they're just sitting on your balance sheet, what kind of financing are you getting on those and what are the ROEs?

Sure. We have it on a regular warehouse facility. The program has been -- the loans are being purchased in conjunction with other Angelo Gordon fund. So what we see on our balance sheet is just MITT's portion. But we have a typical warehouse type facility similar to the ones that we set up on the RPL and NPL pools that we've bought over years and we're pretty comfortable with that facility. But certainly, securitization is what we would like to get to. Then the returns, I think we don't typically early on in the stage to disclose the expected returns but we wouldn't expect them to be much different than the rest of the portfolio. And obviously as you do securitization that could change as well.

Our next question is from Trevor Cranston of JMP Securities.

A question on the excess MSRs you guys bought in the quarter. Can you just give a little more detail on that? And if it's new issuance or slightly older stuff. And also maybe comment on if that was sort of a unique opportunity or if you're -- just in general, finding more opportunities within the MSR market?

Sure. On the seasoning of them, they're typically less than 2 years seasoned, so generally new origination. We're seeing more supply come and I think originators are looking to get more cash on the balance sheet, so they are selling their retained MSRs in the market. I think we see generally unlevered yields on that space, depending on the size of the pool and it's Fannie Freddie versus Ginnie, in the very high single digits unlevered to potentially on some transactions in the Ginnie space with a double digits unlevered.

Got it. Okay. And then a question on the asset yield you guys have on slide 4 there. There's a comment that the increase this quarter was due to higher rates in the commercial loan payoff. I was curious on the higher rates component, is that more sort of the retro adjustment on prepay speeds? Or is there an element there that -- some of your assets are resetting to higher LIBOR type rates?

Yes, I think it's a little of both. I think, obviously, we disclosed that we own a fair amount of floating rate taper that's directly tied to LIBOR. The assets themselves typically reset monthly. And then, moving over to the Agency space, given the higher yield curve, the just absolutely yield is respectively higher than it was entering in Q1.

Okay. Can you quantify how much of it was coupons resetting to higher rates?

I think it'd probably be easier to quantify how much was the commercial loan payoff. I think it was around 10 basis points. We own this loan at a fairly sizeable discount. We had thought it would pay off in about a year from now, so we were amortizing over that period. Our projections changed and as I've mentioned the money came in a couple days after the quarter, so we got the true up which was worth about $0.03 of income. Which translated into a pickup in kind of the yield at 3/31. That will reset because, as David mentioned, not recurring and what we'll be left with is, as TJ was saying, the higher yield on the assets mainly due to the LIBOR rate of it, floating rates going up.

(Operator Instructions) And we have no further questions.

Okay. Thank you, everyone. We look forward to speaking with you next quarter.

Thank you, and thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.