TPG Mortgage Investment Trust, Inc. quarterly report, Q3 FY2016

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AG Mortgage Investment Trust, Inc. — Form 10-Q Summary

Reporting period: Quarter ended September 30, 2016; financial statements are unaudited. The supplied filing identifies the registrant as AG Mortgage Investment Trust, Inc. (NYSE: MITT), not TPG Mortgage Investment Trust, Inc.

Business context

MITT is an externally managed mortgage REIT investing in Agency and Non-Agency residential mortgage securities, commercial mortgage securities, asset-backed securities, mortgage loans, and related investments. It uses repurchase agreements and interest-rate hedges to finance and manage its portfolio.

Financial results and position

  • Third-quarter 2016: Net interest income was $22.0 million, versus $25.0 million in Q3 2015. Net income was $46.1 million, compared with a $0.3 million loss; income available to common stockholders was $42.8 million, or $1.54 per diluted share, versus a $3.7 million loss, or $(0.13) per share.
  • First nine months of 2016: Net interest income was $66.0 million, down from $83.6 million. Net income was $64.8 million versus $14.3 million; common earnings were $54.7 million, or $1.95 per diluted share, versus $4.2 million, or $0.15 per share.
  • Drivers and earnings quality: Higher securities and derivative valuations supported reported earnings. Q3 unrealized gains were $13.5 million on real estate securities and loans and $7.0 million on derivatives and other instruments. Nine-month figures were $33.3 million and a $4.8 million loss, respectively. Nine-month core earnings, a non-GAAP measure, declined to $37.2 million ($1.33 per diluted share) from $49.5 million ($1.74).
  • Revenue and costs: Interest income was $30.6 million for Q3 and $91.5 million for nine months, down 9% and 15% year over year, respectively. Interest expense was $8.5 million for Q3 and $25.5 million for nine months; the nine-month increase reflected higher financing rates. No conventional operating margin is presented; net interest income was $22.0 million for Q3 and $66.0 million for nine months.
  • Balance sheet at September 30: Total assets were $3.01 billion, liabilities $2.33 billion, and stockholders’ equity $673.4 million. Cash and cash equivalents were $46.0 million and restricted cash $37.3 million. Book value was $18.49 per common share, versus $17.88 at December 31, 2015 and $18.47 at September 30, 2015.
  • Debt and leverage: Repurchase agreements were $2.23 billion; there were no FHLBC advances, compared with $396.9 million at year-end 2015. Reported leverage was 3.2x equity, down from 3.4x at year-end. The weighted-average rate on securities-backed repos was 1.46%; substantial borrowings mature within 30 days.
  • Cash flow: Nine-month operating cash flow was $51.7 million, investing cash flow was $219.3 million, and financing cash flow was negative $271.2 million. Cash declined by $0.2 million to $46.0 million.
  • Dividends and capital: Common dividends declared were $0.475 per share quarterly in 2016, down from $0.60 quarterly in 2015. Preferred dividends continued at stated rates of 8.25% for Series A and 8.00% for Series B. MITT repurchased 614,695 common shares for approximately $8.7 million in the first nine months.

Material changes versus comparable periods

  • GAAP earnings improved substantially year over year, driven mainly by favorable valuation movements; core earnings declined over the first nine months.
  • The portfolio’s reported fair value was approximately $2.70 billion on a GAAP basis, down from $2.77 billion at December 31, 2015. Credit investments represented about 55.5% of the GAAP investment portfolio.
  • The company replaced FHLBC funding with repo financing after a regulatory rule excluded its captive insurer from FHLB membership. Repo balances increased from $2.03 billion at year-end to $2.23 billion, while FHLBC advances were fully repaid.
  • Interest-rate swap notional fell to $369 million from $969 million at year-end 2015. The company reported $13.8 million of derivative liabilities, including accrued interest.
  • Nine-month securities other-than-temporary impairment charges were $13.4 million, versus $7.1 million in the prior-year period. No OTTI was recorded on mortgage loans in 2016.

Outlook, risks and unusual items

  • Management gave no numerical earnings or dividend guidance. It said it expects market conditions to influence portfolio allocation, financing costs, and results, and expressed a favorable but measured view of housing and mortgage-credit fundamentals.
  • Management reported $143.2 million of available liquidity, consisting of $46.0 million cash, $66.1 million unpledged Agency RMBS, and $31.1 million unpledged Agency interest-only securities. It believed available cash flows and borrowing capacity would meet anticipated needs; this is forward-looking and not a guarantee.
  • Key risks include short-term repo funding and rollover availability, collateral haircuts and margin calls, interest-rate and spread movements, prepayment variability, credit losses, property values, and model-dependent fair values. A parallel 100-basis-point rate increase was estimated to reduce GAAP equity by 10.2% and projected net interest income by 13.3%; these are model estimates, not forecasts.
  • The FHFA rule required MITT Insurance to wind down FHLBC relationships by February 19, 2017; management said the funding transition had not materially impaired liquidity. Approximately $8.0 million of FHLBC stock had been redeemed, with the remaining membership stock subject to redemption requirements.
  • Level 3 assets were $1.12 billion, including Non-Agency RMBS, CMBS, mortgage loans, and the Arc Home-related investment; these valuations rely on significant unobservable assumptions. Arc Home acquired a licensed mortgage seller/servicer and began originating loans and retaining or purchasing servicing rights.
  • Management reported no material litigation, no defaults on senior securities, and effective disclosure controls. It disclosed related-party management and expense-reimbursement arrangements, including a 1.50% annual management fee based on defined stockholders’ equity.

Important facts for investors to verify

  • Confirm the intended issuer: the filing is for AG Mortgage Investment Trust, Inc., despite the request naming TPG Mortgage Investment Trust, Inc.
  • Review the composition, performance, and valuation assumptions of the $1.12 billion Level 3 portfolio and the reported unrealized gains driving GAAP earnings.
  • Assess near-term repo maturities, refinancing capacity, collateral haircuts, margin-call liquidity, and the full replacement of FHLBC funding.
  • Compare core earnings and recurring net interest income with the common dividend, and check current taxable-income estimates; the filing reports approximately $1.99 per share of undistributed taxable income, subject to final tax calculations.
  • Review credit exposures, including non-performing and re-performing mortgage assets, OTTI charges, and the effects of interest rates, prepayments, and housing-market changes.