AG Mortgage Investment Trust, Inc. (NYSE: MITT) — 2018 Form 10-K
Entity note: The supplied filing is for AG Mortgage Investment Trust, Inc., not TPG Mortgage Investment Trust, Inc. It reports the fiscal year ended December 31, 2018; fourth-quarter results are also presented.
Business context and reporting period
MITT is an externally managed hybrid mortgage REIT investing in Agency RMBS, credit investments (including non-Agency RMBS, loans, CMBS and ABS), excess mortgage servicing rights, and single-family rental properties. In September 2018, it acquired 1,225 rental homes, primarily in the Southeast, adding a second reportable segment.
Financial results and key metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Interest income | $156.5 million | $128.8 million |
| Interest expense | $72.1 million | $43.7 million |
| Net interest income | $84.4 million | $85.1 million |
| Net income (loss) available to common shareholders | $(11.9) million | $105.1 million |
| GAAP diluted EPS | $(0.42) | $3.77 |
| Core Earnings, a non-GAAP measure | $59.2 million; $2.08 per diluted share | $51.8 million; $1.86 per diluted share |
| Common dividends declared per share | $1.975 | $2.00 |
| Book value per common share at year-end | $17.21 | $19.62 |
- Net realized loss was $39.5 million, including $55.0 million of losses on securities sales, partly offset by gains on derivative settlements; unrealized losses on securities and loans were $20.9 million and on derivatives and other instruments $13.5 million.
- Net interest margin for the broader investment portfolio was 2.30%, versus 2.38% at year-end 2017. GAAP investment-portfolio net interest margin was 2.36%, versus 2.19%. The measures have different scopes and are not directly interchangeable.
- At December 31, total assets were $3.55 billion, financing arrangements were $2.82 billion, and stockholders’ equity was $656.0 million. GAAP leverage was 4.3x and non-GAAP at-risk leverage was 4.6x, compared with 4.2x and 4.4x, respectively, a year earlier.
- Cash and cash equivalents were $31.6 million; restricted cash was $52.8 million. Management reported $88.0 million of liquidity, including cash and unpledged Agency securities and U.S. Treasury securities.
- Cash flow from operations was $78.0 million; investing activities provided $161.0 million; financing activities used $207.5 million. The cash-flow statement reports cash, cash equivalents and restricted cash together, ending at $84.4 million.
Material changes versus the prior comparable period
- Common-shareholder results swung from $105.1 million of income in 2017 to an $11.9 million loss in 2018. Management attributed the decline mainly to lower prices on securities, derivatives and other investments; net interest income was nearly flat despite higher interest income.
- Interest expense rose $28.3 million as the average financing rate increased from 1.86% to 2.58% and average financing balances increased. Year-end cost of financing rose from 1.98% to 3.19%, reflecting higher rates and a portfolio mix with more loans and rental-property financing.
- Agency RMBS fair value fell to $1.99 billion from $2.25 billion, while non-Agency RMBS fell to $625.4 million from $1.00 billion. Residential mortgage loans increased to $186.1 million from $18.9 million; excess MSRs increased to $26.7 million from $5.1 million.
- The new SFR portfolio had a net carrying value of $138.7 million, year-end occupancy of 87.9%, and average monthly rent of $1,020. 2018 rental income was $4.1 million, reflecting only the post-acquisition period.
- Year-end liquidity declined from $121.1 million at September 30 to $88.0 million, partly due to derivative margin posted during fourth-quarter spread widening and falling benchmark rates.
- Core Earnings are non-GAAP and the company changed their definition during 2018, including a fourth-quarter policy change applied retrospectively. The filing cautions that this measure may not be comparable to similarly named measures at other companies.
Outlook, risks, contingencies and unusual items
- No numerical earnings or portfolio guidance is provided. Management said market conditions may lead to adjustments in investment and financing strategies. It noted that Agency mortgage spreads widened in the fourth quarter as rates fell, weighing on book value; market and economic uncertainty remained.
- Principal risks include interest-rate and yield-curve changes, spread or basis widening, credit losses, prepayments, fair-value estimation, short-term repo refinancing and margin calls. Most financing is short term; a large share of assets is fixed-rate, and hedges do not generally protect against spread risk.
- At year-end, the company had $2.0 billion notional of pay-fixed interest-rate swaps. Hedging can reduce some rate exposure but may create collateral needs and may not fully offset asset and funding movements.
- Unfunded commitments at December 31 included $55.6 million for a commercial construction loan and $4.6 million for a variable funding note; the $14.0 million remaining commitment to MATT was fully funded by February 5, 2019. Additional construction-loan commitments were entered into after year-end.
- On February 14, 2019, MITT completed a common-stock offering of 3.45 million shares at $16.70 per share, generating approximately $57.3 million net proceeds. This is subsequent to the reporting date.
- The company elected to meet part of its REIT distribution requirement with a dividend paid after year-end and accrued $1.7 million of excise tax. It estimated undistributed taxable income of approximately $1.58 per share at year-end; taxable income differs from GAAP income.
- Management reported no litigation believed likely to have a material adverse effect. The auditor gave an unqualified opinion on the financial statements and internal control; the acquired SFR business was excluded from the year-end internal-control assessment and audit under the applicable acquisition guidance.
Most important facts for investors to verify
- Reconcile the 2018 GAAP loss and book-value decline with the $2.08 per-share non-GAAP Core Earnings figure, including the effects of the changed Core Earnings definition.
- Assess whether recurring income and distributions can withstand higher funding costs: net interest income declined, year-end funding costs rose, and leverage remained high.
- Review liquidity available after the fourth-quarter margin calls, including restricted versus unrestricted cash, collateral requirements, repo maturities and counterparty concentrations.
- Evaluate the SFR acquisition’s sustained occupancy, rent collections, operating expenses, renovation needs and financing performance beyond its partial-year contribution.
- Track the use and dilution impact of the February 2019 equity proceeds, as well as funding needs for construction loans and other commitments.
- Examine credit quality and valuation assumptions for Level 3 assets, including mortgage loans, non-Agency securities, CMBS and excess MSRs; fair values rely partly on significant unobservable inputs.