AG Mortgage Investment Trust, Inc. — FY 2019 Form 10-K
Filing identity: The supplied filing is for AG Mortgage Investment Trust, Inc. (NYSE: MITT), not TPG Mortgage Investment Trust, Inc. It reports the fiscal year ended December 31, 2019; quarterly results include the three months ended December 31, 2019.
Business context and reporting period
AG MITT is an externally managed hybrid mortgage REIT investing in Agency residential mortgage-backed securities (RMBS) and residential and commercial credit assets, including mortgage loans, non-Agency RMBS, CMBS and excess mortgage servicing rights. It reported as one continuing business after selling its single-family rental portfolio on November 15, 2019; the portfolio’s results are presented as discontinued operations.
Key financial metrics
| Metric | FY 2019 / Dec. 31, 2019 | Comparable period |
|---|---|---|
| Interest income | $171.7 million | $156.5 million in 2018 |
| Interest expense | $90.1 million | $70.5 million in 2018 |
| Net interest income | $81.6 million | $86.0 million in 2018 |
| Net income from continuing operations | $97.3 million | $3.5 million in 2018 |
| Net income available to common stockholders | $76.8 million; $2.39 per common share | Loss of $11.9 million; loss of $0.42 per share in 2018 |
| Core Earnings, a non-GAAP measure | $54.9 million; $1.70 per diluted share | $58.8 million; $2.07 per diluted share in 2018 |
| Net interest margin, investment-portfolio basis | 2.47% | 2.41% in 2018 |
| Assets / stockholders’ equity | $4.35 billion / $849.0 million | $3.55 billion / $656.0 million at year-end 2018 |
| Financing arrangements / securitized debt | $3.23 billion / $224.3 million | $2.72 billion / $10.9 million at year-end 2018 |
| GAAP and economic leverage | 4.1x / 4.1x | 4.2x / 4.4x in 2018 |
| Cash and cash equivalents | $81.7 million | $31.6 million at year-end 2018 |
| Cash, cash equivalents and restricted cash | $125.4 million | $84.4 million at year-end 2018 |
Continuing operating cash flow was $67.5 million; continuing investing activities used $882.4 million and continuing financing activities provided $825.7 million. Management reported $163.3 million of liquidity available for support, comprising cash, unpledged Agency securities and unpledged U.S. Treasury securities.
Material changes versus 2018
- Common-stock earnings improved substantially, but the result included an $83.8 million unrealized gain on securities and loans, compared with a $20.9 million unrealized loss in 2018. Core Earnings declined, and should be considered alongside GAAP results.
- Net interest income fell $4.4 million: interest expense rose faster than interest income as the average financing balance and financing rate increased. The annual weighted-average financing rate rose to 2.93% from 2.55%; the year-end financing cost decreased to 2.51% from 3.13% following Federal Reserve rate cuts.
- The investment portfolio grew to $4.42 billion from $3.42 billion. Credit investments rose to 47.2% of the portfolio from 41.1%; Agency RMBS declined to 52.8% from 58.9% of the mix.
- Residential mortgage loans at fair value increased to $417.8 million from $186.1 million. Commercial investments also grew, while ABS holdings fell to zero from $21.2 million.
- The company sold its single-family rental portfolio for approximately $137 million, recognizing a $0.2 million gain. Discontinued operations recorded a $4.4 million loss in 2019 versus a $1.9 million loss in 2018.
- Common dividends declared were $1.90 per share, down from $1.975 in 2018. The company issued common stock and Series C preferred stock, with net proceeds of approximately $57.4 million and $111.2 million, respectively, from public offerings.
Outlook, commentary and risks
No specific earnings, return or dividend guidance is provided. Management said it believed available cash, operating cash flow, equity proceeds and borrowing capacity would meet anticipated liquidity needs. It intends to make quarterly distributions, subject to Board discretion, earnings, liquidity, debt service and REIT requirements.
Management described improving U.S. mortgage credit performance and favorable Agency MBS spread conditions in the fourth quarter, while CMBS spreads generally widened. It noted that market changes may lead to adjustments in investment and financing strategy. The filing’s interest-rate sensitivity analysis estimated that an immediate 75-basis-point rate increase could reduce GAAP equity fair value by 3.8% and projected net interest income by 3.6% for the stated portfolio scenario; the pro forma scenario including potential loan purchases estimated declines of 6.1% and 5.1%, respectively. These are model-based estimates, not forecasts.
- Leverage and short-term repurchase funding expose the company to refinancing, counterparty, collateral valuation and margin-call risks. Most repurchase agreements mature within 60 days; the company reported meeting all margin calls at year-end.
- Credit, default, foreclosure, property-value and liquidity risks affect non-Agency securities and residential and commercial loans. Some investments rely on Level 3 fair-value estimates and significant unobservable assumptions.
- Interest-rate, prepayment, spread/basis and hedging risks may affect book value, income and liquidity; hedges may not offset asset losses. LIBOR transition introduces additional valuation, contract and operational uncertainty.
- REIT qualification and the Investment Company Act exemption are important to the company’s tax and operating model. Failure to maintain either could materially affect operations and distributions.
- The company is externally managed by an Angelo Gordon affiliate. The filing identifies potential conflicts, related-party dealings and a management fee based on stockholders’ equity rather than investment performance.
- Remaining commitments totaled $580.7 million at year-end, including a $468.5 million residential-loan purchase commitment. Subsequent to year-end, that purchase settled for $450.3 million and was financed in part with $413.3 million of financing.
- The filing reports no legal proceeding believed to have a material adverse effect. The auditor gave an unqualified opinion on the financial statements and internal control; management also concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Confirm the registrant identity: this filing is AG Mortgage Investment Trust, Inc. (MITT), despite the request metadata naming TPG Mortgage Investment Trust, Inc.
- Review the earnings bridge: GAAP common earnings rose sharply while Core Earnings per diluted share declined; assess how unrealized marks, realized derivative losses and affiliate results affected each measure.
- Assess liquidity against short-dated financing maturities, collateral requirements, unpledged assets and the $580.7 million of year-end remaining commitments.
- Examine the quality and valuation sensitivity of the expanding residential-loan and credit portfolio, including Level 3 assets and foreclosure exposure.
- Check dividend coverage using taxable income and cash generation, rather than GAAP earnings alone; verify the final tax characterization and distribution requirements.
- Review the terms and subsequent financing of the residential-loan commitment settled after year-end, as well as the consequences of the new Series C preferred stock and its future LIBOR-linked dividend terms.