AG Mortgage Investment Trust, Inc. — FY 2020 Form 10-K
Entity note: The filing is for AG Mortgage Investment Trust, Inc. (NYSE: MITT), not a registrant identified as TPG Mortgage Investment Trust, Inc. It covers the fiscal year ended December 31, 2020; quarterly figures below include Q4 2020.
Business context and reporting period
MITT is an externally managed hybrid mortgage REIT investing in Agency mortgage-backed securities (RMBS), residential and commercial credit investments, and mortgage loans. It reported results amid severe COVID-19-related market dislocation, financing stress and portfolio reductions. Its single-family rental business was sold in 2019 and is reported as discontinued operations.
Financial performance and position
| Metric | FY 2020 / December 31, 2020 | Prior comparable period |
|---|---|---|
| Interest income | $74.5 million | $171.7 million in FY 2019 |
| Interest expense | $36.9 million | $90.1 million in FY 2019 |
| Net interest income | $37.6 million | $81.6 million in FY 2019 |
| Net income (loss) from continuing operations | $(421.6) million | $97.3 million in FY 2019 |
| Net income (loss) available to common stockholders | $(430.9) million; $(12.24) per diluted share | $76.8 million; $2.39 per diluted share in FY 2019 |
| Core Earnings (non-GAAP) | $22.0 million; $0.63 per diluted share | $54.9 million; $1.70 per diluted share in FY 2019 |
| Net interest margin | 1.91% GAAP; 2.27% investment-portfolio basis | 2.34% GAAP; 2.47% investment-portfolio basis in 2019 |
| Total assets | $1.40 billion | $4.35 billion at December 31, 2019 |
| Stockholders’ equity | $409.7 million | $849.0 million at December 31, 2019 |
| Book value per common share | $4.13; adjusted $3.94 | $17.61; adjusted $17.33 at December 31, 2019 |
| Financing arrangements / securitized debt | $564.0 million / $355.2 million | $3.23 billion / $224.3 million at December 31, 2019 |
| Leverage | 2.4x GAAP; 1.5x economic | 4.1x on both measures at December 31, 2019 |
| Liquidity | $54.2 million, including $47.9 million cash and $6.3 million unencumbered assets | Not stated on a comparable basis |
| Cash flows | $4.2 million operating; $2.19 billion investing; $(2.26) billion financing | $65.2 million operating; $(747.0) million investing; $722.7 million financing in FY 2019 |
Q4 2020 net income was $41.0 million and net income available to common stockholders was $47.4 million, or $1.16 per share. These results followed a first-quarter loss available to common stockholders of $490.7 million.
Material changes versus 2019
- The investment portfolio declined from $4.42 billion to $1.40 billion, and the GAAP investment portfolio from $4.04 billion to $1.18 billion, primarily through asset sales and counterparty seizures during the market disruption.
- Net realized losses rose to $256.5 million from $50.8 million; unrealized losses on real estate securities and loans were $159.5 million, versus unrealized gains of $83.8 million in 2019.
- Interest income and net interest income fell substantially as the average portfolio shrank. Management said the smaller portfolio would materially limit future earnings.
- Financing counterparties with outstanding debt fell from 30 to five. The company entered and exited forbearance in June 2020 after settling defaults and deficiencies; it reported that all margin calls had been met at year-end.
- Common dividends declared fell to $0.03 per share from $1.90. Preferred dividends were suspended in 2020, then arrears and the Q4 preferred dividends were paid in December.
- Preferred-stock exchange transactions issued approximately 5.1 million common shares in exchange for preferred shares and cash. Common shares outstanding increased to 41.4 million from 32.7 million.
Outlook, risks and unusual items
- No specific quantitative earnings or dividend guidance is provided. Management expected near-term capital to be almost entirely allocated to Credit Investments and warned that the smaller portfolio would constrain interest income. Future dividends remain at the Board’s discretion.
- COVID-19 drove unusually high margin calls, alleged defaults and deficiency notices, asset sales, counterparty seizures, and realized losses. Forbearance ended June 10, 2020 under reinstatement agreements; amended financing terms generally included higher haircuts and coupons, and the agreements impose financial covenants.
- Major risks include borrower delinquencies and defaults, Non-QM loan legal and credit exposure, commercial-property distress, illiquid assets, fair-value estimation uncertainty, short-term repo refinancing and margin calls, interest-rate and prepayment risk, and dependence on a small number of financing counterparties.
- At year-end, 28% of the Re/Non-Performing Loan population and 34% of the Non-QM Loan population had requested COVID-related assistance. Management reported Q4 default rates of 4.8% and 0.8%, respectively, and noted that COVID-related delinquencies represented portions of those defaults.
- Unusual 2020 items included $10.2 million of restructuring-related expenses, $10.6 million of net gain on preferred-stock exchange offers, and $65.4 million of realized losses from unwinding interest-rate swaps in Q1.
- Subsequent events: On January 29, 2021, the MATT financing was amended into a mark-to-market facility recourse to MITT and Angelo Gordon-managed funds. MITT also sold two commercial loans in February and reported planned or conditional Non-QM loan purchases after year-end.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Fair value of residential and commercial loans, including Non-QM loans, was identified as a critical audit matter because of significant valuation judgment and assumptions.
Important facts for investors to verify
- Reconcile the severe GAAP loss and $12.24-per-share loss with positive Q4 results and non-GAAP Core Earnings; review the exclusions in the Core Earnings reconciliation.
- Confirm current liquidity, near-term repo maturities, collateral requirements, covenant headroom and the effect of the reduced lender base.
- Assess loan-level credit performance, forbearance outcomes, commercial loan modifications and subsequent sales, and the assumptions supporting Level 3 valuations.
- Review the post-year-end MATT financing amendment and its added mark-to-market and recourse exposure.
- Evaluate dividend sustainability, preferred-dividend obligations and common-stock dilution from exchanges and fee payments to the Manager.
- Consider the externally managed structure, related-party arrangements and management fees, which are based on defined stockholders’ equity rather than investment performance.