Business context and reporting period
AG Mortgage Investment Trust, Inc. (AG MIT) filed this unaudited Form 10-Q for the quarter ended September 30, 2015. The filing describes an externally managed mortgage REIT investing in Agency and Non-Agency mortgage securities, other real estate securities, loans and related assets. The request identifies TPG Mortgage Investment Trust, Inc.; that does not match the registrant named in the supplied filing.
Financial performance and position
| Metric | Q3 2015 | Comparable period |
|---|---|---|
| Interest income | $33.5 million | $36.2 million in Q3 2014 |
| Net interest income | $25.0 million | $29.4 million in Q3 2014 |
| Net income (loss) | $(0.3) million | $22.4 million in Q3 2014 |
| Net income (loss) available to common shareholders; diluted EPS | $(3.7) million; $(0.13) | $19.0 million; $0.67 in Q3 2014 |
| Core earnings per diluted share, non-GAAP | $0.46 | $0.63 in Q3 2014 |
For the nine months ended September 30, 2015, net interest income was $83.6 million versus $86.7 million in 2014; net income was $14.3 million versus $94.7 million, and income available to common shareholders was $4.2 million versus $84.6 million. Diluted EPS was $0.15 versus $2.98. Nine-month core earnings per diluted share, a non-GAAP measure, were $1.74 versus $1.81.
- Margins: Management reported a 3.01% net interest margin at September 30, 2015, versus 2.92% at September 30, 2014. The September 2015 portfolio yield was 4.70%; funding cost was 1.18% and hedging cost 0.51%.
- Cash flow: Nine-month operating cash flow was $69.0 million, investing cash flow was $187.4 million and financing cash flow was $(272.6) million. Cash declined $16.2 million to $48.1 million.
- Assets and equity: Total assets were $3.37 billion and stockholders’ equity was $685.9 million at quarter-end, compared with $3.46 billion and $732.7 million at December 31, 2014. Book value per common share was $18.47, down from $20.13 at year-end.
- Debt and leverage: Repurchase agreements were $2.214 billion, FHLBC advances were $351.7 million and securitized debt was $32.8 million. GAAP debt-to-equity leverage was 3.55x; the company’s non-GAAP leverage and “at risk” leverage were each 3.58x.
- Liquidity and distributions: Management reported $173.2 million of available liquidity, comprising $48.1 million cash and $125.1 million of unpledged Agency securities. The common dividend was $0.60 per share for the quarter; preferred dividends remained current.
Material changes versus comparable periods
- Q3 net interest income decreased about 15% year over year, while common-shareholder results moved from profit to loss. Management attributed reported-period volatility in part to realized and unrealized marks on securities and derivatives.
- The portfolio shifted toward credit assets: Agency RMBS represented 50.4% of the GAAP investment portfolio at September 30, 2015, versus 55.2% at December 31, 2014. The credit allocation increased correspondingly.
- Repurchase agreements declined from $2.645 billion at year-end to $2.214 billion. The company began using FHLBC advances in 2015, with $351.7 million outstanding at quarter-end. Management said advances could replace some traditional repo funding.
- Interest-rate swap notional declined to approximately $1.06 billion from $1.446 billion at year-end. The company also held long and short U.S. Treasury positions, which were absent at year-end.
- Adoption of ASU 2014-11 changed the accounting presentation of linked repurchase transactions to secured-borrowing accounting. The company reported no effect on net income or equity, but balance-sheet and income-statement presentation changed; prior-period disclosures are not fully comparable.
Outlook, commentary, risks and unusual items
- Management described widening credit spreads, deteriorating market liquidity and uncertainty about interest rates and global growth. It expected market conditions to continue affecting results and said investment, financing and hedging strategies may change. No specific earnings or dividend guidance was provided.
- Management cited improving housing and mortgage-credit performance but noted that home-price appreciation may moderate. It reported that September market volatility pressured MBS and credit prices and that CMBS spreads widened amid heavy issuance and weaker retail and hotel fundamentals.
- Interest-rate sensitivity estimates indicated that a 100-basis-point rate increase could reduce GAAP equity by 9.0% and projected net interest income by 11.4%; estimates are model-based and depend on stated assumptions.
- Material risks include short-term repo funding and refinancing, collateral margin calls, spread and interest-rate movements, prepayment and credit risk, valuation uncertainty, and counterparty concentration. The proposed FHFA rule could disqualify the captive insurer from FHLBC membership and require advances to be unwound; this could pressure liquidity or require asset sales.
- Unusual items included Q3 OTTI charges of approximately $3.2 million on securities and $0.2 million on loan pools. The company reported nine-month OTTI of $7.1 million on securities and $0.6 million on loans. It also recorded substantial derivative-related unrealized losses.
- After quarter-end, management reported receiving $400 million in FHLBC advances as of October 2015. On November 3, the board authorized a common-stock repurchase program of up to $25 million; no shares had been repurchased under it as of the filing. Management reported no significant legal proceedings or contingencies, and disclosure controls were considered effective.
Important facts for investors to verify
- Confirm the registrant: the supplied filing is for AG Mortgage Investment Trust, Inc., not TPG Mortgage Investment Trust, Inc.
- Review the sustainability of earnings and common dividends, distinguishing GAAP results from management’s non-GAAP core earnings measure.
- Assess liquidity and refinancing exposure, including repo maturities, collateral haircuts and margin-call capacity, and the status and terms of FHLBC funding.
- Evaluate fair-value and credit assumptions, including Level 3 assets, OTTI, and the concentration and performance of Non-Agency securities and mortgage loans.
- Monitor the FHFA proposal affecting captive-insurer FHLB membership, as well as post-quarter FHLBC advances and any execution of the authorized buyback.