Business context and reporting period
AG Mortgage Investment Trust, Inc. (NYSE: MITT), an externally managed residential mortgage REIT, filed this unaudited Form 10-Q for the quarter ended September 30, 2023. It primarily acquires and securitizes U.S. residential mortgage loans, including Non-Agency and Agency-Eligible loans, and also invests in mortgage securities and affiliates.
Financial results and position
Amounts below are in millions except per-share data and percentages.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $64.2 | $50.2 | $182.8 | $123.0 |
| Interest expense | $52.7 | $34.7 | $148.3 | $74.0 |
| Net interest income | $11.5 | $15.5 | $34.5 | $49.0 |
| Net income/(loss) | $(2.2) | $(2.9) | $18.4 | $(64.8) |
| Net income/(loss) available to common stockholders | $(6.8) | $(7.5) | $4.7 | $(78.6) |
| GAAP diluted EPS | $(0.33) | $(0.33) | $0.23 | $(3.38) |
| Earnings Available for Distribution (non-GAAP), per diluted share | $0.10 | $(0.03) | $0.21 | $0.03 |
Q3 net interest margin was 0.58% on the GAAP investment portfolio and 0.73% on the broader investment portfolio, including affiliates. For the first nine months, operating cash flow was $18.1 million; investing cash outflow was $471.6 million and financing cash inflow was $493.9 million. Cash and cash equivalents were $118.7 million at quarter-end, with restricted cash of $20.5 million.
At September 30, total assets were $4.88 billion, total liabilities $4.43 billion, and stockholders’ equity $450.4 million. Securitized debt at fair value was $3.83 billion and financing arrangements were $565.9 million. GAAP leverage was 9.7x and economic leverage 1.2x. Book value was $11.37 per common share; adjusted book value, after preferred liquidation preference, was $11.00. The company declared a $0.18 common dividend for the quarter.
Material changes versus prior periods
- Q3 interest income rose 28% year over year, but interest expense rose 52%, reducing net interest income by $4.0 million. Management attributed the expense increase to higher financing rates and greater financing balances.
- Q3 net loss available to common stockholders improved by $0.7 million year over year. Nine-month results moved to $4.7 million of income available to common stockholders from a $78.6 million loss, mainly reflecting substantially smaller unrealized losses and improved affiliate results.
- Compared with December 31, 2022, total assets increased to $4.88 billion from $4.37 billion; securitized debt rose to $3.83 billion from $3.26 billion, while financing arrangements declined to $565.9 million from $621.2 million. GAAP leverage increased from 8.4x to 9.7x.
- Common shares outstanding declined to 20.2 million from 21.3 million at year-end, including 1.11 million shares repurchased during the first nine months of 2023 for $6.4 million.
Outlook, management commentary, risks and unusual items
- Management described volatile markets, further increases in benchmark rates during Q3, and October spread widening. It noted that higher financing costs can pressure net interest spreads and rising rates can reduce asset fair values. No formal earnings or dividend guidance was provided.
- The company completed two rated securitizations during Q3, converting some recourse, mark-to-market financing to non-recourse financing without mark-to-market margin calls. It reported $4.9 million of merger-related costs in the first nine months, including a $3.0 million termination fee paid to Terra Property Trust on WMC’s behalf.
- The proposed merger with Western Asset Mortgage Capital Corporation (WMC) would issue approximately 9.2 million MITT shares at an exchange ratio of 1.498 shares per WMC share, plus a manager-funded cash payment subject to a $7.0 million cap. MITT stockholders approved the share issuance on November 7, 2023; WMC’s vote was adjourned to December 5 because of insufficient quorum. Closing was expected in Q4 2023, subject to WMC stockholder approval and other customary conditions. The manager’s fee reductions and expense waiver depend on closing.
- On November 1, 2023, TPG completed its acquisition of Angelo Gordon, MITT’s manager’s parent; the filing reported no changes to the management agreement in connection with the transaction. A fourth-quarter common dividend of $0.08 per share was paid November 8.
- Key exposures include interest-rate and spread movements, borrower delinquencies/defaults, prepayments, property values, refinancing and counterparty liquidity, and potential margin calls. Mortgage assets and securitized debt are largely Level 3 fair-value measurements and depend on estimates such as yields, defaults, prepayments and loss severity. At quarter-end, the company reported $80.8 million of unpaid principal balance in loans 90 or more days delinquent; California represented 32% of the reported residential loan portfolio exposure.
- Financing agreements contain covenants, including liquidity and leverage requirements; the company reported compliance with all financial covenants at September 30. It reported no material legal proceedings and effective disclosure controls.
Most important facts for investors to verify
- Whether WMC stockholders approved the merger and whether it closed, including final share issuance, cash consideration and expected cost savings.
- How net interest income and funding costs evolve as short-term financing resets, and whether securitizations continue to reduce recourse and margin-call exposure.
- Liquidity available for margin calls, maturities and dividends, in light of $118.7 million of cash and financing arrangements with $173.978 million due within 30 days.
- Credit performance, fair-value assumptions and geographic concentration of the mortgage portfolio, including delinquency and foreclosure trends.
- Common and preferred dividend sustainability, the Series C preferred stock’s scheduled transition to a floating rate in September 2024, and any effects on funding costs.