Business context and reporting period
This summary covers the unaudited quarter ended March 31, 2017. The filing identifies the registrant as AG Mortgage Investment Trust, Inc., a mortgage REIT externally managed by AG REIT Management, LLC. This differs from the request metadata naming TPG Mortgage Investment Trust, Inc.; verify the intended issuer.
The company invests in Agency and non-Agency residential mortgage-backed securities, commercial mortgage-backed securities, asset-backed securities, mortgage loans, and related investments. Amounts below are in U.S. dollars.
Financial results and position
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $28.0 million | $30.7 million in Q1 2016 |
| Net interest income | $19.8 million | $22.1 million in Q1 2016 |
| Net income (loss) | $25.1 million | $(2.4) million in Q1 2016 |
| Net income (loss) available to common stockholders | $21.8 million; diluted EPS $0.78 | $(5.8) million; diluted loss per share $(0.21) in Q1 2016 |
| Core earnings, non-GAAP | $11.5 million; $0.41 per diluted share | $11.3 million; $0.40 per diluted share in Q1 2016 |
| Operating cash flow | $16.5 million | $14.6 million in Q1 2016 |
| Total assets | $2.621 billion | $2.629 billion at December 31, 2016 |
| Repurchase agreements | $1.879 billion | $1.901 billion at December 31, 2016 |
| Total stockholders’ equity | $664.6 million | $655.9 million at December 31, 2016 |
| Book value per common share | $18.17 | $17.86 at December 31, 2016; $17.22 at March 31, 2016 |
| Available liquidity, as defined by management | $162.6 million: $29.6 million cash and $133.0 million unpledged Agency securities and Agency interest-only securities | Not stated as a comparable measure |
Cash and cash equivalents decreased by $22.8 million during the quarter to $29.6 million. Investing cash flow was $(9.6) million and financing cash flow was $(29.8) million. Quarter-end GAAP leverage was 2.9x equity; management’s non-GAAP “at-risk” leverage was 3.0x.
GAAP net interest margin was 2.65%, versus 2.90% at March 31, 2016; the broader investment-portfolio margin reported by management was 2.86%, versus 3.02%. Management reported quarter-end weighted-average asset yield of 5.02% and cost of funds of 2.16% on that broader portfolio.
Material changes versus prior comparable period
- Common-stockholder results improved by $27.6 million year over year, chiefly reflecting stronger securities valuations and less adverse derivative valuation changes. This included $12.8 million of unrealized gains on real estate securities and loans and a much smaller unrealized derivative/other loss than in Q1 2016.
- Net interest income declined $2.3 million year over year. Management attributed lower interest income primarily to a smaller average investment portfolio, partly offset by a higher average portfolio yield. Interest expense fell modestly as average financing balances declined, partly offset by higher funding rates.
- Core earnings rose modestly year over year despite the substantial improvement in GAAP net income, illustrating the effect of market-value changes and realized items on GAAP results.
- From year-end 2016, fair value of the reported investment portfolio on management’s non-GAAP basis increased to $2.625 billion from $2.547 billion. The Agency allocation increased, while credit assets remained the larger portion of the portfolio.
- The common dividend declared was $0.475 per share, unchanged from Q1 2016. Preferred dividends were also paid at the stated Series A and Series B rates.
Outlook, commentary, risks and unusual items
- Management described Agency RMBS markets as relatively stable and mortgage and asset-backed markets as stronger during the quarter, with credit spreads tightening. It increased hedged Agency exposure and participated in new credit-related issues, while selling selected legacy securities, particularly CMBS, where it saw less attractive risk-adjusted returns.
- Management expected home-price appreciation to moderate but remain positive in 2017, and anticipated further gradual Federal Reserve rate increases. It said it did not expect long-term rates to move sharply in response to policy changes, but emphasized continued monitoring of rate risk. No company-specific earnings or dividend guidance was provided.
- Interest-rate sensitivity estimates showed that a parallel 100-basis-point rate increase could reduce projected net interest income by 5.3% and market value by 7.8% of GAAP equity; a 100-basis-point decrease was estimated to increase them by 4.2% and 4.8%, respectively. These are model-based estimates for a static portfolio, not forecasts.
- Key risks include short-term repo funding of longer-duration assets, refinancing and counterparty exposure, collateral haircuts and margin calls, interest-rate and basis risk, prepayment uncertainty, credit losses, and the possibility that asset values or financing availability deteriorate. At quarter-end, $1.39 billion of repo borrowings matured within 30 days. Management said all margin-call requirements had been met.
- The company recorded $2.7 million of securities impairment charges in Q1 2017, compared with $9.2 million in Q1 2016. It reported no loan impairment charge for either period and said other unrealized security losses were not considered other-than-temporary.
- After quarter-end, the company terminated a Wells Fargo repurchase facility effective April 13, 2017 and said the related securities were financed with new counterparties. Also after quarter-end, it agreed to an additional Arc Home capital commitment, of which its share is $4.5 million.
- The filing reports no material litigation, no defaults upon senior securities, and effective disclosure controls. The company said it had no FHLB advances outstanding and could no longer rely on them as a liquidity source.
Most important facts for investors to verify
- Confirm the issuer: the supplied filing is for AG Mortgage Investment Trust, Inc., not the company named in the request metadata.
- Review repo maturity concentration, refinancing arrangements, collateral haircuts, and the effect of adverse market moves on the reported $162.6 million liquidity measure.
- Assess the sensitivity of GAAP earnings, book value, and distributable taxable income to market-value changes, prepayments, credit assumptions, and interest rates; core earnings is non-GAAP.
- Check the status and terms of replacement financing after the Wells Fargo facility termination, and the funding and performance of the additional Arc Home commitment.
- Verify the company’s taxable income and distribution coverage: management estimated undistributed taxable income of approximately $1.84 per share at March 31, 2017, while GAAP results and taxable income can differ materially.