Business Context and Reporting Period
Company: AG Mortgage Investment Trust, Inc. (AGMIT)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2012
Business Overview: AGMIT is a Maryland real estate investment trust (REIT) focused on investing in residential mortgage-backed securities (RMBS), including Agency (Fannie Mae, Freddie Mac, Ginnie Mae) and Non-Agency RMBS, Asset-Backed Securities (ABS), and Commercial Mortgage-Backed Securities (CMBS). The Company is externally managed by AG REIT Management, LLC, a subsidiary of Angelo, Gordon & Co., L.P.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2012 | Three Months Ended June 30, 2012 |
|---|---|---|
| Net Interest Income | $27,602,205 | $15,432,991 |
| Total Other Income (Net) | $32,611,605 | $31,802,781 |
| Net Income | $55,868,216 | $44,917,778 |
| Earnings Per Share (Basic & Diluted) | $3.73 | $2.85 |
| Total Assets | $2,638,884,820 | (Balance Sheet Item) |
| Total Liabilities | $2,294,682,204 | (Balance Sheet Item) |
| Stockholders' Equity | $344,202,616 | (Balance Sheet Item) |
| Repurchase Agreements (Debt) | $2,133,730,466 | (Balance Sheet Item) |
| Cash and Cash Equivalents | $17,457,490 | (Balance Sheet Item) |
| Dividends Declared Per Share | $1.40 | $0.70 |
Liquidity: As of June 30, 2012, the Company held $17.5 million in cash and cash equivalents. Additionally, approximately $138.6 million in securities ($111.7 million Agency RMBS and $26.9 million credit investments) remained unpledged as collateral.
Material Changes vs. Prior Period
- Revenue and Profit: The Company reported significant profitability in the current period compared to the prior year. For the six months ended June 30, 2011, the Company had no operations (having been organized in March 2011) and reported a net loss of $(15,818). In contrast, the six months ended June 30, 2012, generated net income of $55.9 million.
- Portfolio Growth: Total assets increased from $1.39 billion at December 31, 2011, to $2.64 billion at June 30, 2012. This growth was driven by a follow-on common stock offering in January 2012 raising approximately $104 million in net proceeds and the deployment of capital into Agency RMBS.
- Debt Levels: Repurchase agreements increased from $1.15 billion at December 31, 2011, to $2.13 billion at June 30, 2012, reflecting the expansion of the investment portfolio.
- Unrealized Gains: The Company recorded an unrealized gain on real estate securities of $32.8 million for the six months ended June 30, 2012, contributing significantly to net income.
Guidance, Outlook, and Risks
Management Commentary: Management continues to focus primarily on Agency RMBS due to favorable funding conditions and liquidity. The Company intends to gradually allocate more capital to Non-Agency RMBS, ABS, and CMBS when compelling returns are available. The Company utilizes leverage primarily through repurchase agreements and hedges interest rate risk using interest rate swaps (notional amount of $1.2 billion as of June 30, 2012).
Subsequent Events: On August 3, 2012, the Company completed a preferred stock offering of 1,800,000 shares of 8.25% Series A Cumulative Redeemable Preferred Stock, raising approximately $45.0 million in gross proceeds. An over-allotment option was exercised in full on August 7, 2012, expected to raise an additional $6.5 million.
Risks and Contingencies:
- Interest Rate Risk: A 100 basis point increase in interest rates is estimated to decrease the portfolio value by 18.23% and net interest income by 15.69%.
- Liquidity and Margin Calls: The Company relies on short-term repurchase agreements. Declines in the fair value of pledged collateral could trigger margin calls, requiring the posting of additional cash or securities.
- Prepayment Risk: Accelerated prepayments on Agency RMBS could reduce yields by accelerating the amortization of purchase premiums.
- REIT Qualification: The Company must distribute at least 90% of its taxable income to maintain REIT status and avoid corporate income tax.
Investor Verification Checklist
- Dividend Coverage: Verify that net taxable income (which may differ from GAAP net income due to unrealized gains/losses) is sufficient to cover the declared dividends of $0.70 per share for the quarter.
- Leverage Ratios: Confirm the Company's compliance with financial covenants in its Master Repurchase Agreements, specifically the leverage ratio (Total Indebtedness to Adjusted Tangible Net Worth) and minimum Adjusted Tangible Net Worth of $185 million.
- Unrealized Gains Volatility: Assess the impact of interest rate fluctuations on the $32.8 million unrealized gain on real estate securities, which significantly boosted GAAP net income but may not be available for distribution.
- Preferred Stock Dilution: Review the terms of the newly issued 8.25% Series A Preferred Stock and its impact on common stock dividends and equity structure.
- Counterparty Exposure: Verify the distribution of repurchase agreement counterparties to ensure no single counterparty holds more than 10% of stockholders' equity at risk.