TPG Mortgage Investment Trust, Inc. quarterly report, Q2 FY2017

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Filing summary

Identity note: The request metadata names TPG Mortgage Investment Trust, Inc., but the supplied Form 10-Q is for AG Mortgage Investment Trust, Inc. (NYSE: MITT). This summary reflects the supplied filing, for the quarter ended June 30, 2017; financial statements are unaudited.

Business context and reporting period

AG Mortgage Investment Trust is an externally managed REIT investing in Agency and non-Agency residential mortgage securities, commercial mortgage securities and loans, asset-backed securities, and related investments. The filing reports the three and six months ended June 30, 2017, with comparisons to 2016 and balance-sheet comparisons to December 31, 2016.

Financial performance and position

  • Q2 earnings: Net income was $33.2 million; income available to common stockholders was $29.8 million, or $1.08 basic and $1.07 diluted per share, versus $17.7 million and $0.63 per share in Q2 2016.
  • First-half earnings: Net income was $58.3 million and income available to common stockholders was $51.6 million, or $1.86 per share, versus $18.6 million and $11.9 million, or $0.42 per share, in first-half 2016.
  • Interest and margin: Q2 net interest income was $21.0 million, down from $21.8 million. First-half net interest income was $40.8 million, down from $43.9 million. Management-reported portfolio net interest margin was 2.48% at June 30, versus 3.16% at December 31, 2016; GAAP portfolio margin was 2.29% versus 2.93%.
  • Drivers and earnings quality: Higher unrealized investment gains helped lift GAAP earnings: unrealized gains on real estate securities and loans were $25.5 million in Q2 and $38.3 million in the first half. Core Earnings, a non-GAAP measure, were $12.9 million, or $0.47 per diluted share, in Q2 and $24.4 million, or $0.88 per share, in the first half.
  • Balance sheet and debt: Total assets were $3.235 billion and stockholders’ equity was $683.1 million at June 30. Repurchase agreements were $2.257 billion, up from $1.901 billion at year-end; securitized debt was $18.8 million. GAAP leverage was 3.7x equity, while management’s non-GAAP at-risk leverage was 4.2x, versus 2.9x at December 31.
  • Liquidity and cash flow: Management reported $113.9 million of available liquidity, comprising $29.2 million cash and $84.7 million of unpledged Agency securities. First-half operating cash flow was $34.3 million; investing cash flow was negative $393.4 million and financing cash flow was positive $335.9 million. Cash ended at $29.2 million, down from $52.5 million at year-end. The company reported meeting all margin calls.
  • Other metrics: Book value per common share was $18.77, compared with $17.86 at December 31, 2016 and $17.42 at June 30, 2016. Common dividends declared were $0.475 per share per quarter, unchanged from 2016.

Material changes versus comparable periods

  • Q2 common earnings per share rose to $1.08 from $0.63; first-half EPS rose to $1.86 from $0.42. Management attributed the improvement principally to stronger security and derivative valuations and, for the first half, affiliate earnings.
  • Interest expense increased to $10.2 million in Q2 from $8.4 million, and to $18.4 million in the first half from $17.0 million. Management cited higher average financing rates, which partly offset higher asset yields.
  • The investment portfolio expanded: management’s non-GAAP portfolio fair value was $3.434 billion at June 30, up from $2.547 billion at year-end. Agency RMBS allocation increased, and repo borrowings also rose.
  • First-half securities purchases were $841.1 million, versus $165.7 million in the prior-year period. First-half securities sale proceeds increased to $260.9 million from $131.0 million.

Outlook, commentary, risks and unusual items

  • Management described strong demand and tightening credit spreads during Q2, benefiting credit portfolio valuations; it said it increased its hedged Agency allocation and expected to continue doing so near term. It viewed interest rates as likely to remain range-bound through the rest of 2017 and did not anticipate more than 50–75 basis points of additional Federal Reserve rate increases over the next 12–24 months, while noting uncertainty around Fed leadership and policy.
  • Interest-rate sensitivity estimates indicated that a parallel 100-basis-point rate increase could reduce GAAP equity market value by 10.3% and projected net interest income by 4.3%; a 100-basis-point decrease was estimated to increase them by 4.1% and 2.5%, respectively. These are model-based estimates, not forecasts.
  • Key risks include short-term repo funding against longer-lived assets, refinancing and counterparty exposure, collateral haircuts and margin calls, interest-rate and spread movements, prepayment variability, credit losses, and valuation uncertainty. A substantial share of credit assets uses Level 3 valuation inputs; $1.206 billion of assets carried at fair value was classified Level 3.
  • The company recorded $4.5 million of securities OTTI charges in the first half and $0.4 million of OTTI on residential loan pools. Management said remaining unrealized security losses were not considered other-than-temporary and it had the ability and intent to hold the affected securities.
  • On May 5, 2017, the company established a $100 million at-the-market equity program; it had sold 99,932 shares for approximately $1.8 million net proceeds by June 30. It also committed additional capital to Arc Home and reported its $17.8 million share of the commitment fully funded.
  • The company disclosed that Wells Fargo, as trustee in 20 other RMBS securitizations, withheld more than $90 million for potential legal costs. MITT held no bonds in those deals, but similar withholdings in securitizations where it invests could cause losses. The filing reported no legal proceedings expected to have a material adverse effect.
  • Management said disclosure controls were effective and there was no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Confirm the issuer identity: the supplied filing is for AG Mortgage Investment Trust, not the company named in the request metadata.
  • Assess how much reported GAAP profit and book-value growth depends on unrealized fair-value gains, and compare it with Core Earnings and recurring net interest income.
  • Review the rise in leverage and repo balances, the concentration of maturities within 30 days, and liquidity available for collateral calls or financing disruption.
  • Examine Level 3 valuation assumptions, credit performance and OTTI judgments, particularly for non-Agency assets and residential loans.
  • Monitor the effect of changing short-term rates, hedging costs, and mortgage/credit spreads on funding expense, portfolio value and net interest margin.
  • Review the terms and potential dilution from the equity distribution program, as well as related-party management, expense reimbursement and Arc Home transactions.