AG Mortgage Investment Trust, Inc. — Q1 2015 Form 10-Q
Filing identity: The supplied filing is for AG Mortgage Investment Trust, Inc. (NYSE: MITT), not TPG Mortgage Investment Trust, Inc. It covers the unaudited quarter ended March 31, 2015.
Business context and reporting period
AG Mortgage Investment Trust is an externally managed REIT investing in Agency and Non-Agency residential mortgage-backed securities, other real estate securities, mortgage loans and related assets. It finances much of its portfolio with short-term repurchase agreements and uses derivatives and other instruments to manage interest-rate exposure.
Financial and operating results
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Interest income | $36.4 million | $34.1 million |
| Interest expense | $7.5 million | $6.1 million |
| Net interest income | $28.9 million | $28.0 million |
| Net income | $12.8 million | $31.2 million |
| Net income available to common stockholders | $9.4 million | $27.8 million |
| GAAP diluted EPS | $0.33 | $0.98 |
| Core earnings per diluted share (non-GAAP) | $0.63 | $0.62 |
| Operating cash flow | $23.3 million | $23.6 million |
Net interest income increased about 3%, while net income and GAAP EPS fell sharply, reflecting weaker realized and unrealized results. Management reported a 3.08% net interest margin at March 31, versus 2.62% at March 31, 2014, and core earnings of $17.9 million versus $17.7 million.
Assets totaled $3.56 billion and stockholders’ equity was $725.1 million at quarter-end. Repurchase agreements were $2.671 billion and securitized debt was $38.4 million. GAAP debt-to-equity leverage was 3.69x; management’s non-GAAP leverage was 3.71x and “at risk” leverage, including net TBA exposure, was 3.97x. Cash and cash equivalents were $42.1 million, down from $64.4 million at year-end. Management reported $185.4 million of available liquidity, including cash and unpledged Agency securities.
Investing activities provided $73.0 million of cash, while financing activities used $118.5 million. Book value per common share was $19.87, down from $20.13 at December 31, 2014. The company declared a $0.60-per-share common dividend for the quarter; payment was scheduled for April 30, 2015.
Material changes versus comparable periods
- Net income available to common stockholders declined to $9.4 million from $27.8 million year over year, despite modestly higher net interest income.
- Net realized results were a $9.6 million loss, compared with a $0.5 million gain in Q1 2014. Q1 2015 included $13.8 million of realized losses from derivative settlements and $2.7 million of other-than-temporary impairment charges; securities sales and TBA settlements generated gains.
- The company continued shifting toward credit assets: credit investments were 46.1% of the gross portfolio at March 31, 2015, up from 38.3% a year earlier. Credit investments generally carry greater credit risk and lower leverage capacity than Agency RMBS.
- Adoption of ASU 2014-11 on January 1, 2015 changed linked repurchase transactions to secured-borrowing presentation and brought assets and borrowings onto the balance sheet gross. Management said the adoption did not affect net income or stockholders’ equity; prior-period presentation is not fully comparable.
- Interest-rate swap notional declined to approximately $1.045 billion from $1.446 billion at year-end; the company also added long and short U.S. Treasury positions.
Outlook, commentary, risks and unusual items
- No specific earnings, portfolio-return or dividend guidance was provided. Management said investment and financing strategies may change with market conditions and described current liquidity sources as sufficient for anticipated needs, subject to assumptions and market access.
- Management discussed slower-than-expected U.S. economic growth early in 2015, globally low rates, moderate credit-spread tightening and improving housing and credit fundamentals, while noting uncertainty around the pace of recovery, rates and inflation.
- Principal risks include rising short-term rates and funding costs, falling asset values, wider credit spreads, prepayment variability, counterparty exposure, repo-renewal risk and margin calls. Repo financing is largely short term; most repo balances were due within 30 days at quarter-end.
- Management reported that all margin-call requirements had been met at March 31. The filing nevertheless warns that sharp declines in collateral values, higher haircuts or reduced financing availability could strain liquidity and force asset sales.
- Fair-value estimates include significant Level 3 inputs for portions of credit securities and loans, making valuations sensitive to assumptions about defaults, losses, prepayments and discount yields. The company recorded $2.7 million of OTTI; management considered remaining unrealized losses temporary and said it had the ability and intent to hold affected securities.
- A Wells Fargo repurchase-facility amendment executed after quarter-end increased maximum borrowing capacity to $200 million and extended maturity to April 2017. The company disclosed no significant legal proceedings or commitments and contingencies, and no defaults upon senior securities.
Investor verification priorities
- Confirm the registrant identity: this filing is AG Mortgage Investment Trust, Inc., not TPG Mortgage Investment Trust, Inc.
- Review the bridge from GAAP net income and EPS to non-GAAP core earnings, including treatment of derivative and fair-value changes.
- Assess short-term repo maturities, lender concentration, collateral haircuts, margin-call sensitivity and the availability of unpledged liquidity.
- Examine the growing credit portfolio and Level 3 valuation assumptions, including loan delinquency, collateral loss and recovery estimates.
- Check the effect of the linked-transaction accounting change when comparing 2015 balances and results with earlier periods, and verify subsequent financing-facility terms.