TPG Mortgage Investment Trust, Inc. quarterly report, Q2 FY2018

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AG Mortgage Investment Trust, Inc. — Q2 2018 Form 10-Q

Entity note: The filing identifies the registrant as AG Mortgage Investment Trust, Inc. (NYSE: MITT), not TPG Mortgage Investment Trust, Inc. The summary below reflects the filing provided.

Business context and reporting period

Unaudited results cover the quarter and six months ended June 30, 2018. MITT is an externally managed mortgage REIT investing in Agency and non-Agency mortgage securities, mortgage loans, excess mortgage servicing rights and related assets.

Financial performance and position

  • Q2 revenue and earnings: Interest income was $36.0 million and interest expense was $16.3 million, producing net interest income of $19.7 million, versus $21.0 million in Q2 2017. Net income was $8.2 million, compared with $33.2 million; net income available to common stockholders was $4.8 million, or $0.17 per diluted share, versus $29.8 million, or $1.07 per diluted share.
  • First-half results: Net interest income was $43.8 million, up from $40.8 million in the first half of 2017. Net income available to common stockholders fell to $9.7 million from $51.6 million; diluted EPS was $0.34 versus $1.86.
  • Drivers and margins: Q2 unrealized losses on real estate securities and loans were $0.6 million, versus $25.5 million of gains a year earlier. First-half unrealized losses were $36.7 million, versus gains of $38.3 million. Higher derivative gains partly offset these losses. Management-reported portfolio net interest margin was 2.71%, versus 2.48% at June 30, 2017; this is a non-GAAP measure.
  • Cash flow: First-half operating cash flow was $37.2 million, compared with $25.8 million in 2017. Investing activities provided $331.1 million, versus $355.9 million used in 2017; financing activities used $339.0 million. Cash, cash equivalents and restricted cash totaled $82.1 million at period-end.
  • Balance sheet and leverage: Total assets were $3.51 billion and stockholders’ equity was $696.6 million at June 30, compared with $3.79 billion and $714.3 million at year-end 2017. Repurchase agreements totaled $2.63 billion and securitized debt was $14.0 million. GAAP leverage was 4.0x and management’s non-GAAP “at-risk” leverage was 4.4x.
  • Liquidity and book value: Management reported $123.3 million of available liquidity, including $31.1 million cash and $92.2 million of unpledged Agency securities. Book value per common share was $18.98, down from $19.62 at December 31, 2017 and up from $18.77 a year earlier.

Material changes versus comparable periods

  • Q2 common earnings declined by $25.0 million year over year; first-half common earnings declined by $41.9 million. Management attributed the declines primarily to weaker security pricing, partly offset by higher derivative values.
  • Interest income rose, but financing costs rose faster: Q2 interest expense increased to $16.3 million from $10.2 million, and first-half expense increased to $31.6 million from $18.4 million. Management cited higher funding rates and larger average financing balances.
  • Repurchase agreements decreased to $2.63 billion from $3.00 billion at year-end. The fair value of real estate securities declined to $3.11 billion from $3.51 billion; residential mortgage loans increased to $93.1 million from $18.9 million, reflecting purchases.
  • First-half securities sales generated $1.3 billion of proceeds and a net realized loss on securities sales of approximately $29.4 million. The company recorded $1.7 million of securities OTTI in the first half, versus $4.8 million in the first half of 2017.
  • Management’s non-GAAP Core Earnings were $15.4 million, or $0.55 per diluted share, in Q2, compared with $12.9 million, or $0.47, in Q2 2017. First-half Core Earnings were $31.9 million, or $1.13 per diluted share, versus $24.4 million, or $0.88. The company changed this measure in Q2 2018 to exclude transaction-related expenses.

Outlook, risks and unusual items

  • No quantified earnings or portfolio guidance is provided. Management said it expected available liquidity, operating cash flow and borrowing capacity to meet anticipated needs, while noting that results and portfolio strategy depend on market conditions.
  • Management cited a modest rise in interest rates, mortgage-derivative spread widening and specified-pool underperformance versus TBAs as factors affecting book value. It noted the Federal Reserve raised its policy rate by 25 basis points in June 2018.
  • Interest-rate sensitivity estimates show a 75-basis-point rise could reduce projected net interest income by 1.6% and market value by 5.3% of GAAP equity, assuming a static portfolio and other factors unchanged. These are estimates, not forecasts.
  • Key risks include short-term repo funding and rollover availability, collateral margin calls, changing haircuts, interest rates, spread and basis risk, prepayments, credit losses, real-estate values and counterparty exposure. Management reported all margin calls were met at period-end.
  • At June 30, $1.21 billion of fair-value assets were Level 3, relying on significant unobservable inputs. Management’s valuation estimates are subject to uncertainty. The company also reported $28.3 million remaining commitment to MATH/MATT, $4.2 million on a mezzanine loan, $2.3 million on a variable funding note, and an unfunded $20.0 million commercial-loan commitment subject to conditions.
  • The company declared a common dividend of $0.50 per share for Q2, payable July 31, 2018. Estimated undistributed taxable income was approximately $1.57 per share; taxable income and GAAP earnings differ. Management reported no material legal proceedings, and concluded disclosure controls were effective.

Important facts for investors to verify

  • Confirm the registrant identity: the provided filing is for AG Mortgage Investment Trust, Inc. (MITT), not the company named in the request metadata.
  • Review the decline in GAAP earnings and book value alongside realized security-sale losses, unrealized marks and the non-GAAP Core Earnings reconciliation.
  • Assess refinancing, margin-call and collateral risks against short repo maturities, $123.3 million of reported liquidity and 4.4x at-risk leverage.
  • Examine Level 3 valuation assumptions, credit performance and the growing mortgage-loan and affiliate exposures, including unfunded commitments.
  • Check dividend sustainability against taxable income, cash availability and required REIT distributions; do not treat Core Earnings as a substitute for GAAP results.