AG Mortgage Investment Trust, Inc. — Q1 2018 Form 10-Q
Issuer note: The filing identifies the registrant as AG Mortgage Investment Trust, Inc. (NYSE: MITT), not TPG Mortgage Investment Trust, Inc. Reporting period ended March 31, 2018; figures are unaudited.
Business context and reporting period
The externally managed REIT invests in Agency and non-Agency mortgage-backed securities, other real estate securities, mortgage loans, and related assets. Its business relies on leveraged investment returns, primarily financed with short-term repurchase agreements, and uses derivatives to manage interest-rate exposure.
Financial results and key metrics
| Metric | Q1 2018 / March 31, 2018 | Comparable / prior period |
|---|---|---|
| Interest income | $39.4 million | $28.0 million in Q1 2017 |
| Interest expense | $15.3 million | $8.2 million in Q1 2017 |
| Net interest income | $24.0 million | $19.8 million in Q1 2017 |
| Net income | $8.2 million | $25.1 million in Q1 2017 |
| Net income available to common shareholders | $4.9 million; diluted EPS $0.17 | $21.8 million; diluted EPS $0.78 in Q1 2017 |
| Core earnings (non-GAAP) | $16.5 million; $0.59 per diluted share | $11.5 million; $0.41 per diluted share in Q1 2017 |
| Total assets / stockholders’ equity | $3.697 billion / $705.8 million | $3.789 billion / $714.3 million at December 31, 2017 |
| Repurchase agreements | $2.827 billion | $3.004 billion at December 31, 2017 |
| Cash and cash equivalents | $25.3 million; restricted cash $42.3 million | $15.2 million and $37.6 million, respectively, at December 31, 2017 |
| Book value per common share | $19.32 | $19.62 at December 31, 2017; $18.17 at March 31, 2017 |
| Portfolio net interest margin / at-risk leverage | 2.69% / 4.6x | 2.38% / 4.4x at December 31, 2017 |
Q1 cash flows were $24.9 million provided by operating activities, $123.2 million provided by investing activities, and $133.3 million used in financing activities. Cash, cash equivalents, and restricted cash increased by $14.8 million to $67.6 million. Management reported $115 million of available liquidity, including cash and unpledged Agency securities.
At March 31, the Company’s managed investment portfolio was $3.84 billion at fair value, including affiliate investments and TBAs; the GAAP investment portfolio was $3.36 billion. The managed portfolio’s weighted-average yield was 4.99%, funding cost 2.30%, and net interest margin 2.69%. These portfolio measures are management-defined and not GAAP measures.
Material changes versus comparable periods
- Common earnings declined to $4.9 million from $21.8 million a year earlier. Lower security prices drove negative realized and unrealized results, partly offset by gains on derivatives.
- Net interest income rose $4.2 million year over year as the weighted-average investment balance increased, although financing costs also rose. Interest income increased $11.4 million, while interest expense increased $7.2 million.
- Real estate securities and loans generated $36.2 million of net unrealized losses, versus $12.8 million of unrealized gains in Q1 2017. Derivatives and other instruments generated $37.1 million of unrealized gains, versus a small loss in Q1 2017.
- Net realized loss was $11.8 million, including a $12.5 million loss on security sales; 57 securities were sold for $728.4 million. The Company recorded $1.0 million of securities OTTI, compared with $2.7 million in Q1 2017.
- Book value per share fell 1.5% from year-end, which management attributed primarily to higher interest rates and modest Agency spread widening.
- The portfolio’s credit-investment allocation increased: management reported credit investments at 40.2% of the managed portfolio, versus 37.7% at year-end. Investment in debt and equity of affiliates rose to $141.7 million on the GAAP balance sheet from $99.7 million.
Outlook, risks, contingencies, and unusual items
- Outlook: No specific earnings or book-value guidance was provided. Management described credit-market demand as supportive and credit performance as stable to improving, and expected home-price appreciation to continue around current levels. It noted the Federal Reserve raised its target rate by 25 basis points in March 2018.
- Rate sensitivity: The filing estimates that a parallel 75-basis-point rate increase would reduce GAAP equity value by 6.5% and projected net interest income by 2.2%; these are model-based estimates for a static portfolio, not forecasts.
- Funding and liquidity: Short-term repo financing exposes the Company to rollover, counterparty, haircut, and margin-call risk. Repo borrowings generally mature within 30–90 days; lenders may demand additional collateral or repayment if pledged assets decline in value. The Company said it had met margin calls through quarter-end.
- Leverage and hedging: GAAP leverage was 4.1x and management-defined at-risk leverage 4.6x. Pay-fixed interest-rate swaps had $2.442 billion notional. Derivatives can reduce some rate exposure but may create collateral needs and counterparty risk; they do not fully protect against spread or basis risk.
- Valuation and credit: $1.13 billion of fair-value assets were classified as Level 3, relying on significant unobservable assumptions, including discount rates, prepayments, defaults, and loss severity. Non-Agency securities, loans, ABS, and CMBS carry credit risk; unrealized losses are sensitive to market and cash-flow assumptions.
- Commitments: As of quarter-end, remaining commitments included $29.2 million to MATT through MATH, $4.2 million for a mezzanine loan, and $4.1 million for a revolving note. These are in addition to ordinary operating and financing obligations.
- Related parties: The Company is externally managed; the management fee is 1.50% annually of contractually defined stockholders’ equity. Q1 management fees were $2.4 million, and $1.8 million of other operating expenses represented accrued reimbursements to the Manager or affiliates. The filing states the management agreement’s terms were not negotiated at arm’s length.
- Distributions and tax: The declared common dividend was $0.475 per share. Estimated undistributed taxable income was approximately $1.54 per share; taxable income may differ materially from GAAP income. Preferred dividends were also paid on Series A and Series B shares.
- Subsequent events: A new $750 million shelf registration statement was filed May 2, 2018 and had not yet become effective. A commercial loan identified as Loan E paid off at par on April 9, 2018.
- The Company reported no material pending litigation, no defaults upon senior securities, and effective disclosure controls as of March 31, 2018.
Important facts for investors to verify
- Reconcile GAAP earnings with core earnings, particularly the effect of fair-value marks, realized security-sale losses, and derivative gains.
- Review the sensitivity of book value and income to interest rates, mortgage spreads, prepayments, and credit-loss assumptions, including the extent of Level 3 valuations.
- Assess the liquidity cushion against repo maturities, margin calls, derivative collateral requirements, and the remaining investment commitments.
- Monitor leverage, repo funding costs, counterparty concentration, and the ability to roll short-term borrowings in stressed markets.
- Evaluate whether taxable income supports the common dividend and confirm the status and terms of the new shelf registration statement.
- Consider the economics and governance of affiliate investments, manager reimbursements, and other related-party arrangements.