AG Mortgage Investment Trust, Inc. — 2015 Form 10-K
Reporting period: Year ended December 31, 2015; filed February 26, 2016. The filing identifies the registrant as AG Mortgage Investment Trust, Inc. (NYSE: MITT), not TPG Mortgage Investment Trust, Inc.; verify the issuer and filing match the requested company.
Business context
The externally managed REIT invests in mortgage-backed securities, loans and other real-estate-related assets, using leverage and hedges. In 2015 it continued shifting its portfolio from Agency RMBS toward credit investments, including Non-Agency RMBS and commercial assets.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Interest income | $141.3 million | $141.6 million |
| Interest expense | $31.2 million | $26.5 million |
| Net interest income | $110.0 million | $115.1 million |
| Net income | $13.8 million | $109.4 million |
| Net income available to common shareholders | $0.35 million; $0.01 per diluted share | $95.9 million; $3.37 per diluted share |
| Core Earnings, non-GAAP | $65.3 million; $2.30 per diluted share | $69.8 million; $2.45 per diluted share |
| Operating cash flow | $87.1 million | $93.8 million |
| Cash and cash equivalents at year-end | $46.3 million | $64.4 million |
| Total assets | $3.16 billion | $3.46 billion |
| Stockholders’ equity | $666.9 million | $732.7 million |
| Book value per common share | $17.88 | $20.13 |
At year-end, GAAP debt-to-equity leverage was 3.39x; non-GAAP leverage was 3.42x and at-risk leverage 3.53x, down from 3.66x, 3.85x and 4.17x, respectively, in 2014. GAAP borrowings included $2.035 billion of repurchase agreements, $396.9 million of FHLB Cincinnati advances and $30.0 million of securitized debt. Management reported a 2015 average asset yield of 4.67%, average rate paid on financing and hedges of 1.75%, and weighted-average leverage of 3.64x.
Reported available liquidity was $133.7 million: $46.3 million cash and unpledged Agency securities and Treasury securities. The filing reports cash flow from investing activities of $314.1 million and financing activities of negative $419.3 million; cash decreased by $18.1 million over the year.
Material changes versus comparable periods
- Net income fell sharply from 2014, when gains in asset values helped results. In 2015, realized and unrealized losses on investments and hedges weighed on earnings; net interest income also declined by $5.0 million.
- Core Earnings declined 6% to $65.3 million. The filing defines this as a non-GAAP measure; it is not a substitute for GAAP results.
- Credit investments grew to 55.8% of the portfolio, inclusive of affiliated investments and TBAs, from 44.6% in 2014; Agency RMBS fell to 44.2% from 55.4%.
- Book value per common share fell to $17.88 from $20.13. Management attributed pressure in part to widening MBS and credit spreads relative to swap hedges and an unusual inversion in swap spreads.
- Common dividends declared totaled $2.275 per share in 2015, versus $2.40 in 2014. The fourth-quarter dividend was reduced to $0.475 from $0.60 in each 2014 quarter. Q4 2015 net loss available to common shareholders was $3.9 million, or $0.14 per share, versus Q4 2014 net income available to common shareholders of $11.3 million, or $0.40 per share.
Outlook, risks and unusual items
- Management said it intended to continue increasing investment in attractive credit assets and loans, while adjusting investment and financing strategies as market conditions evolve. The filing provides no numerical earnings or dividend guidance.
- The FHFA’s 2016 rule bars new FHLB advances to the company’s captive insurer and requires the FHLB relationship to be wound down by February 19, 2017. The company had $396.9 million of advances outstanding at year-end and stated it would need replacement financing or repayment; adverse terms could pressure liquidity or force asset sales. The filing’s text also contains a conflicting February 9, 2016 effective-date reference; verify the operative dates.
- Interest-rate, spread, prepayment, credit, valuation, liquidity, collateral-margin and counterparty risks are material. The company warned that swaps did not reliably hedge Agency RMBS basis risk in 2015. Its modeled +100 basis-point parallel rate shock implied a 10.2% decline in GAAP equity and a 9.3% decline in projected net interest income; these are estimates, not forecasts.
- Other notable items: $10.5 million of impairment charges on securities and loans; a $25 million share repurchase authorization, of which $1.7 million was used to repurchase 126,715 shares; and formation of Arc Home with Angelo, Gordon-affiliated funds. A proposed acquisition by Arc Home of a mortgage seller/servicer remained subject to regulatory and GSE approvals.
- The company said it believed it remained qualified as a REIT and within its Investment Company Act exemptions. It reported no legal proceedings expected to have a material adverse effect. PwC issued an unqualified audit opinion and concluded internal control over financial reporting was effective.
Investor verification priorities
- Confirm the issuer: this filing is for AG Mortgage Investment Trust, Inc. (MITT), not the company named in the request.
- Review the FHLB wind-down timeline, outstanding advances, replacement funding plans and post-year-end liquidity disclosures.
- Reconcile GAAP earnings with Core Earnings and assess the sources of realized, unrealized and impairment losses.
- Assess dividend coverage, including the 2015 common-dividend reduction, preferred dividend obligations and reported undistributed taxable income of approximately $1.74 per share.
- Check portfolio fair-value assumptions, credit exposures and sensitivity to spread widening, rate changes and margin calls; significant Level 3 assets rely on unobservable valuation inputs.
- Review subsequent developments in the Arc Home acquisition and related-party arrangements, and confirm the dates and effects of the linked-transaction accounting change.