AG Mortgage Investment Trust Inc (MITT) 2018 Q2 法說會逐字稿

Good morning, and welcome to the AG Mortgage Investment Trust Second Quarter 2018 Earnings Call. My name is Brandon, and I'll be your operator for today. (Operator Instructions) Please note, this conference is being recorded.

And I will now turn it over to Karen Werbel. You may begin.

Thanks, Brandon. Good morning, everyone. We appreciate you joining us for today's conference call to review AG Mortgage Investment Trust second 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 the slide presentation are made as of today, August 7, 2018, and we disclaim any obligation to update them. We will refer to certain non-GAAP measures on this call. And for reconciliations, 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 second quarter 2018 results with you today.

We increased our dividend to $0.50 per common share for the second quarter of 2018 and represented a 5.3% increase over the prior quarter's dividend.

Our core earnings for the quarter was $0.55 per share. Core benefited by approximately $0.05 per share, due to the rise in 3-month LIBOR that we received as part of our swap hedge book, which was above the increase of our repo funding costs. This benefit compares to a $0.03 benefit in Q1 of 2018. As we said last time, we do not anticipate this dynamic will persist at these magnitudes going forward.

Book value per share decreased 1.8% from the prior quarter, primarily due to a modest rise in interest rates given our positive duration gap, acquisition and securitization expenses related to residential whole loans acquisitions, spread widening in mortgage derivatives and underperformance of specified pools versus poles versus TBA.

Book value increased approximately 2% in the month of July due to an increase in the value of our credit portfolio. Although we generally do not comment on inter-quarter moves in book value, in this case, given the second quarter's book value decline, we felt it was appropriate to provide a rough sense of current book value.

We continue to see fundamentals in the Agency RMBS sector's supportive evaluations and agencies as a sector with a favorable risk reward return profile. Should spreads widen further in response to reduced bad influence, the flexibility we maintain on our agency book leverage would allow us to opportunistically increase our exposure to the agency sector.

As we continue to rotate MITT's credit portfolio away from Legacy NPL securities and into areas that require greater specialized housing and credit expertise, I'd like to emphasize the advantages that MITT enjoys from being part of Angelo, Gordon's Structured Credit platform and part of the overall Angelo, Gordon family.

The Angelo, Gordon's Structured Credit Platform is comanaged by TJ Durkin and Andy Solomon and has over 25 investment professionals. For the past decade, the group has been a leader in investing in a wide range of housing and credit transactions, and accordingly, has a wealth of experience and a strong reputation on Wall Street that has led to a robust deal flow of diverse and attractive opportunities.

Angelo, Gordon is a 30-year old firm with approximately $30 billion of assets under management and over 170 investment professionals. The firm specializes in and has long been a recognized leader in both real estate and in credit.

MITT benefit significantly from the resources of both the structured credit group and the overall firm of Angelo, Gordon, particularly as markets evolve. As TJ will discuss, many of the more exciting credit opportunities we are pursuing require both greater due diligence experience and expertise and in-house asset management capabilities, which MITT is fortunate to have available to us.

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

Thank you, David. Good morning, everyone. The economy continues to grow at an above trend pace, underpinned by tax cuts, reduced regulation, accommodative monetary policy and a labor market that is still showing improvement.

Inflation remains subdued, but has improved to levels close to the Fed's 2% target as transitory factors from 2017 have faded.

In response, the Fed at its June meeting raised the federal funds rate by 25 basis points and continue to reduce its holdings of Agency MBS by further curtailing its monthly reinvestment of pay-downs.

Agency MBS finished the second quarter flat to marginally tighter versus the swap curve, while the continued reduction of the fed's holdings of Agency MBS poses a headwind. Net origination in 2018 is running at a slower pace than 2017 and slower than most industry forecast for 2018 providing some offset. Meanwhile, demand to the sector remained robust, supply was manageable and interest rate volatility was muted.

During the quarter, spread performance was somewhat mixed across mortgage credit sectors. Legacy RBS spreads which were at or near all-time tights to start the quarter maintain these levels by quarter-end, as market participants continue to reinvest monthly proceeds back into the sector. The CRT markets are indications of spread tearing in the mezzanine supported tranches, as investors favored seasoned deals with comparably better underwritten collateral.

There were also several large legacy loan sales throughout the quarter, which gave the market access to pools of different quality and return assumptions.

The slow and steady positive performance in the CMBS market continued during the second quarter of 2018 and the credit curve continued to flatten.

Also note, single-asset/single-borrower deal volume is up more than 60% this year versus last. We find this market attractive as the lower rated tranches of these deals are often preplaced with 1 or just a handful of buyers, and Angelo, Gordon continues to be one of the industry participants who are often shown these fields in advance.

Focusing on Slide 5 of our quarterly earnings presentation, we outline our second quarter activity. On the credit side, MITT purchased a pool of primarily reperforming residential mortgage loans, investing $18.8 million of equity. Payoffs and sales of the commercial investments returned $7.2 million (sic) [$17.2 million] of equity, which was primarily reinvested in our commercial whole loan at the end of July. And additionally, MITT along with other Angelo, Gordon fund participated in a term securitization in June, which refinanced reperforming mortgage loans, returning $12.7 million of equity capital back. We maintained exposure to the securitization through interest in subordinated tranches as well as through an ownership of the vertical risk retention portion of the securitization.

On Slide 8, we've laid out our investment portfolio composition for the quarter. The fair value of the aggregate portfolio was $3.6 billion for the quarter, comprised of our agency book, which was approximately $2.2 billion, and our credit book, which was approximately $1.4 billion.

Focusing on our Agency portfolio, on Slide 9, you'll see a breakout of our credit exposure by product type. The constant prepayment rate for our agency book was 6.4% of the second 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 for the agency collateral.

On Slide 10 and 11, we would like to highlight that 45% of our residential credit investments excluding whole loans and 72% of our commercial and ABS investments are floating rate in nature and are directly benefiting from the recent increase in the Fed funds rates.

Moving ahead to slide 13 of the quarterly earnings presentation. We lay out the duration gap of our portfolio, which decreased modestly this quarter to 1.08 years versus 1.25 years in the prior quarter.

As we look ahead, we believe MITT is well positioned to take advantage of a large pipeline of opportunities at favorable returns that are sourced via the Angelo, Gordon platform. We continue to explore ways to deploy capital into our target credit asset classes, such as newly originated and seasoned residential whole loans, MSRs, CMBS, CRE debt and other real estate related assets including single family rental and manufactured housing.

Our Agency MBS assets provide MITT with a high-quality liquid core holding space, which we can increase or decrease depending on the relative value we see within different market conditions.

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

Thanks, TJ. Overall for the second quarter, we reported net income available of common stockholders of $4.8 million or $0.17 per fully diluted share.

Core earnings in the second quarter was $15.4 million or $0.55 per share versus $16.5 million or $0.59 per share in the prior quarter. In the prior quarter, the $0.59 included a $0.02 retrospective adjustment and $0.03 from a commercial loan payoff.

Given our large recent purchase of whole loans and the securitization of one of those pools in second quarter, we had $1.2 million of upfront transaction costs that were excluded from core earnings.

The $1.2 million was comprised of $300,000 of other operating expenses and $900,000 of expenses that flow through the equity in earnings from our facilities line item, given that we co-invested in the pool with another AG fund.

To give you a better sense of our current $3.6 billion portfolio, I'd like to highlight a few more statistics. At the start on Page 4 of our presentation, the portfolio at June 30 had net interest margin of 2.71%. This was comprised of an asset yield of 5.08%, offset by a total cost of funds of 2.37%.

Net interest margin remained relatively unchanged from the prior quarter. Increase in cost of funds was primarily due to an increase to 25 basis points in the federal funds rate in June, which was particularly offset by repo spread tightening versus LIBOR.

As of June 30, we had 40 financing counterparties and our financing investments 29 of them.

In the second quarter, we do not see any yields effect in the financing market from the rate increase. 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 $123 million, comprised of $31 million of cash and $92 million of unlevered agency whole pool securities and CMOs.

Additionally, at quarter-end, our estimated undistributed taxable income was $1.57, and we continue to evaluate this on a quarterly basis to make sure that we are in compliance with our distribution requirement.

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

(Operator Instructions) From Crédit Suisse, we have Douglas Harter.

If you could just talk about -- little more detail about the whole loan strategy, just where exactly you're seeing the opportunities? And if, kind of, some of the activities you mentioned in your prepared remarks, TJ, how much that sort of changed the pricing during the quarter? And, kind of, if they're still attractive today?

Sure, I mean, I think, what we've been focusing hasn't changed in that. We're probably targeting the middle- to smaller-sized pools that have been out there. Round numbers in the $250 million range. I think there's been a lot of coverage on some of the larger, multibillion dollar pools that have traded and we're just finding better value in the smaller transaction sizes. So I would say the return profile hasn't dramatically changed in that size of an opportunity versus some of the larger ones have attracted different types of money, and I think, potentially driven yield in.

Great. And then, Brian, it appeared that expenses fell sequentially this quarter, once you strip out the yield expense. Can you just give us a little more detail as kind of what might have been behind that?

Sure. The expenses actually, in terms of like corporate ongoing run rate, expenses were pretty flat. Roughly, we've been running at about 3.1%, 3.2% per quarter for the past couple of quarters. I think what you're thinking about, we have about, look, like I said, $1.2 million of the upfront transaction cost. Those actually came in 2 line items. Only $300,000 of that was actually from other operating expenses. So that line item was 3.4%-ish and you let off that $300,000, and you get 3.1%, 3.2% run rate. The other $900,000 is actually baked into the equity and earnings line item. So that line item took the brunt of the $1.2 million.

But going forward -- away from the upfront transactions which we'll continue to highlight, we would expect the G&A, other operating to be roughly $3.2 million. And in terms of NIM and the equity and earnings line item, that would be about $900,000 higher.

From KBW, we have Eric Hagen.

Maybe I'm just not seeing in the report, but what was the margin benefit from TBAs during the quarter?

You mean the dollar roll?

Yes, not the income component, but just the margin component?

Sorry, what do you mean by margin?

Well, you disclosed an asset yield in -- of funding cost. I mean, are -- just the income component from TBAs, is that just included in your asset yield? Or do you take it out -- where is that included in the margin -- in the net margin that you report?

It's in the -- we typically group it into the asset yield. And then we break out the dollar roll in order to kind to give you a sense on how much -- sorry, sorry, I think, it's in the net realized gain or losses, and that's why we kind of strip it out and try to add it back into the dollar roll income in order to show how much of that would have come from there.

Got it. Okay, great. The 2% increase in book value during July, was that driven mostly by spread tightening on all credit assets? Or is there some particular positions that you can point to?

I think credit has broadly done well in July, but our portfolio, in particular, benefited within the CMBS sector.

Okay, got it. CMBS, great. And then maybe you can just give us an update quickly on Arc Home. Just maybe you can tell us what the origination volume that they've done year-to-date is, that would be really helpful.

We haven't historically commented on origination volume. It's still -- I would say, it hasn't dramatically increased or decreased from a year ago.

And what was it a year ago? I apologize that I missed that at some point.

We just have -- we haven't commented on that. It's fairly de minimus, I think, to the core earnings of the REIT, so it's somewhat immaterial in that sense.

Okay. And then, is there an intention to acquire additional MSR at this time and can you just discuss any trends or pricing that you're seeing in that market? And how attractive it looks to you?

Yes. We're constantly in the market. I would say, from the start of the year today, on the conventional side, probably, marginally tighter by maybe 100 to 200 basis points depending on the size of our portfolio. Again, it's a similar theme, I would say, to the legacy loan space in that the larger MSR portfolio will trade tighter than, say, a sub-$1 billion no-show MSR pool. So again, that's where we focused, I would say, our attention.

(Operator Instructions) And from JMP Securities, we have Trevor Cranston.

Question on the new dividend level. I guess if we look at second quarter earnings and take out the benefit from LIBOR, you guys basically covered the new dividend level. But can you have any additional commentary on when you made the decision to increase it? If there's any consideration about the amount of undistributed taxable income you guys have? Or if it was primarily set with the intention that, that was kind of what you would be able to cover with the core earnings level by itself?

It's really the latter. We don't set the dividend based on -- the regular dividend based on the undistributed.

Got you, okay. That helps. And then you guys made a comment on -- in the prepared remarks about having the flexibility in the Agency portfolio to increase if spreads become more attractive at some point this year. Can you just comment on sort of how you're thinking about just leverage and how high you guys potentially would be willing to take leverage in the agency book in a more attractive spread environment?

Yes, I think we look at it more on the overall portfolio leverage than the agency book in particular. So I think our band has typically been in a, sort of, on the bottom end, a low 4 handle leverage up into, I would say, the mid-4s on the high end of our band. And so I think, we closed the quarter at 4.4. So I think we certainly would have room to take that up a few -- 1/4 of a turn, say, to the extent agencies widened. I think, on page 8, we show the equity allocation, which has us running about 7.1 turns of leverage on the agency book which, I think, is on the more conservative side versus some other REITs. So we do feel like we have some room there. And [AJ] looks -- really shows how we look at equity allocation and leverage in more detail.

And we have no further question at this time.

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

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