AG Mortgage Investment Trust, Inc. (NYSE: MITT) — Q2 2022 Form 10-Q
Business context and period: The filing is for the quarter and six months ended June 30, 2022. The company is a residential mortgage REIT focused primarily on acquiring and securitizing U.S. residential mortgage loans, especially non-agency and agency-eligible loans. It is externally managed and owns approximately 44.6% of Arc Home, a mortgage originator and servicer. Financial statements are unaudited.
Financial performance and position
| Metric | Q2 2022 / June 30, 2022 | Comparable period / prior date |
|---|---|---|
| Interest income | $39.4 million | $14.2 million in Q2 2021 |
| Interest expense | $23.2 million | $5.3 million in Q2 2021 |
| Net interest income | $16.2 million | $8.9 million in Q2 2021 |
| Net income (loss) | $(48.7) million; common-stockholder loss $(53.3) million, or $(2.27) per share | Net income $15.5 million; common income $10.9 million, or $0.70 per share, in Q2 2021 |
| Core earnings (non-GAAP) | $1.8 million, or $0.08 per diluted share | $0.03 million, effectively $0.00 per share, in Q2 2021 |
| Total assets / stockholders’ equity | $3.88 billion / $478.7 million | $3.36 billion / $570.4 million at December 31, 2021 |
| Debt and leverage | $2.47 billion securitized debt and $902.2 million financing arrangements on the balance sheet; GAAP leverage 7.0x and economic leverage 2.7x | $999.2 million securitized debt and $1.78 billion financing arrangements; GAAP leverage 4.9x and economic leverage 2.4x at December 31, 2021 |
| Liquidity | Management-reported liquidity $94.2 million: $88.6 million cash and $5.6 million unencumbered Agency RMBS. Cash plus restricted cash totaled $140.7 million. | Cash plus restricted cash was $100.2 million at December 31, 2021 |
| Book value per common share | $11.48; adjusted book value $11.15 | $14.64 and $14.32, respectively, at December 31, 2021 |
For the six months ended June 30, 2022, net interest income was $33.5 million versus $17.0 million a year earlier; net loss was $61.9 million and loss available to common stockholders was $71.1 million, or $3.00 per share, compared with net income of $58.7 million and common income of $49.6 million, or $3.34 per share, in the first half of 2021. Six-month Core Earnings were $1.3 million, or $0.06 per share, versus $3.5 million, or $0.24 per share.
Six-month operating cash flow was $12.9 million; investing cash outflow was $761.9 million and financing cash inflow was $789.4 million. The filing reports portfolio net interest margin at quarter-end of 0.96% on the GAAP investment portfolio and 1.09% on the broader investment portfolio, down from 1.77% and 2.66%, respectively, at June 30, 2021. These are portfolio metrics, not a quarterly income-statement margin.
Material changes and management commentary
- The company expanded its loan portfolio: residential mortgage loans and securitized residential mortgage loans at fair value totaled $3.57 billion at June 30, versus $2.64 billion at year-end 2021. It bought $336.0 million of Non-Agency Loans and $262.1 million of Agency-Eligible Loans during Q2.
- Two Q2 securitizations converted financing into long-term, non-recourse funding without mark-to-market margin calls, covering $524.8 million of Non-Agency Loan unpaid principal balance and $425.5 million of Agency-Eligible Loan unpaid principal balance. Five securitizations were completed in the first half, compared with one in the first half of 2021.
- The company sold its remaining 30-year fixed-rate Agency RMBS during Q2 for approximately $209.2 million. Agency RMBS fair value fell from $495.7 million at year-end to $21.5 million at June 30, primarily reflecting the sale.
- Management attributed higher interest income to portfolio growth and higher yields, while higher financing balances and costs also drove a sharp increase in interest expense. Q2 unrealized losses were principally associated with residential mortgage loans; gains on securitized debt partly offset them. Market conditions weakened amid inflation, Federal Reserve tightening, rising mortgage rates, wider credit spreads, and lower liquidity.
- Common-stock book value per share declined from $14.64 at year-end to $11.48. Management reported a Q2 repurchase of approximately 1.4 million shares for $11.0 million, or a weighted average $7.70 per share. The old $25 million authorization was fully used; a new $15 million repurchase authorization was approved August 3, after quarter-end.
Outlook, risks, and unusual items
- No numerical earnings, dividend, or portfolio guidance is provided. Management states it expects available liquidity, operating cash flow, and borrowing capacity to meet anticipated needs, but cautions that actual results may differ materially.
- Key risks include further interest-rate and credit-spread volatility, falling asset values and margin calls, refinancing or counterparty risk, rising funding costs, loan defaults and delinquencies, prepayment changes, housing-market deterioration, and reduced market liquidity. COVID-19 effects and broader macroeconomic and geopolitical uncertainty are also identified.
- At June 30, the company reported $503.7 million of commitments, including $471.7 million of unfunded forward commitments to purchase loans from Arc Home. Related-party loan purchases and management/expense reimbursements are disclosed; investors may wish to review the amounts and governance arrangements.
- Residential loan and securitized debt valuations rely substantially on Level 3 inputs and models, including projected yields, defaults, prepayments, and loss severity. Changes in assumptions can materially affect reported earnings and equity.
- Financing covenants were reported in compliance at quarter-end, and all margin call requirements had been met. The filing reports no material legal proceedings. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
- The Manager waived incentive fees for 2021 and 2022; the fee may first be payable for 2023 under a formula tied to cumulative adjusted earnings and an 8% hurdle. The company also has cumulative preferred stock with stated annual dividend rates of 8.00%–8.25%.
Important facts for investors to verify
- Whether the $94.2 million of reported liquidity is adequate under additional collateral calls, asset-price declines, or tighter financing conditions; note that restricted cash is not generally available for corporate purposes.
- How the 7.0x GAAP leverage figure reconciles with 2.7x economic leverage, including the treatment of non-recourse securitized debt and TBA positions.
- The valuation assumptions and sensitivity of Level 3 loan assets and securitized liabilities, and the drivers of the $68.8 million six-month net unrealized loss.
- The economics, execution, and ongoing risks of the five first-half securitizations, including the extent of retained interests and non-recourse financing.
- Arc Home performance and related-party dealings, including forward purchase commitments, loan sales to the company, management fees, and expense reimbursements.
- The sustainability of common and preferred dividends in light of GAAP losses, book-value decline, REIT taxable-income distribution requirements, and liquidity needs.