TPG Mortgage Investment Trust, Inc. quarterly report, Q2 FY2023

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Business context and reporting period

The supplied filing is AG Mortgage Investment Trust, Inc. (NYSE: MITT), not a registrant named TPG Mortgage Investment Trust, Inc. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023. AG Mortgage is a residential mortgage REIT focused primarily on acquiring and securitizing U.S. non-agency residential mortgage loans. Unless otherwise stated, amounts below are in U.S. dollars.

Financial results and key metrics

MetricQ2 2023Comparable period
Interest income$60.8 million$39.4 million in Q2 2022
Interest expense$49.4 million$23.2 million in Q2 2022
Net interest income$11.4 million$16.2 million in Q2 2022
Net income (loss)$8.1 million$(48.7) million in Q2 2022
Net income (loss) available to common shareholders$3.5 million; $0.17 per diluted share$(53.3) million; $(2.27) per diluted share in Q2 2022
Earnings Available for Distribution (non-GAAP)$1.7 million; $0.08 per diluted share$1.8 million; $0.08 per diluted share in Q2 2022

For the six months, net interest income was $23.0 million versus $33.5 million; net income was $20.6 million versus a $61.9 million loss; and income available to common shareholders was $11.4 million ($0.55 per diluted share) versus a $71.1 million loss ($3.00 per share).

  • Margins and funding: For Q2, average GAAP portfolio yield was 5.02% and average financing rate was 4.42%. At June 30, the GAAP portfolio net interest margin was 0.64%, down from 0.68% at year-end 2022; the broader investment portfolio margin was 0.76%, versus 0.83%.
  • Balance sheet and liquidity: Total assets were $4.62 billion, total liabilities $4.16 billion, and stockholders’ equity $460.7 million. Cash and cash equivalents were $80.3 million; cash plus restricted cash was $105.4 million. Management reported $80.3 million of available liquidity.
  • Debt and leverage: GAAP financing arrangements were $727.0 million and securitized debt at fair value was $3.40 billion. GAAP leverage was 8.9x equity, versus 8.4x at December 31, 2022; management’s economic leverage measure was 1.6x, versus 1.3x. Securitized debt is generally non-recourse; most financing arrangements are recourse and subject to margin calls.
  • Book value and dividends: Book value was $11.89 per common share and adjusted book value was $11.52, compared with $11.39 and $11.03, respectively, at year-end. Common dividends declared for the first half were $0.36 per share, down from $0.42 in 2022. Preferred dividends continued at stated rates.
  • Cash flow: First-half operating cash flow was $15.1 million; investing cash outflow was $156.8 million; financing cash inflow was $148.2 million. Cash, cash equivalents and restricted cash increased $6.6 million to $105.4 million.

Material changes versus prior periods

  • Q2 net interest income declined despite higher interest income: portfolio growth and improved yields were more than offset by higher funding costs and greater financing balances. For the first half, average GAAP portfolio yield rose to 4.97% from 4.17%, while the average financing rate rose to 4.37% from 2.48%.
  • The return to GAAP profitability mainly reflects less severe fair-value losses than in 2022. Q2 2023 unrealized losses were $0.2 million, compared with $46.4 million of losses in Q2 2022; first-half unrealized gains were $8.5 million versus $68.8 million of losses.
  • Portfolio fair value increased to $4.47 billion from $4.22 billion at year-end, while financing and leverage also increased. Agency RMBS grew to $278.5 million from $19.1 million.
  • Transaction-related expenses fell to $0.4 million in Q2 from $3.7 million, and to $2.1 million for the first half from $9.6 million, reflecting fewer securitizations. The company completed one securitization in the first half of 2023 versus five in the first half of 2022.
  • Loan sales generated $99.9 million of Q2 proceeds. During the quarter, the company purchased $162.5 million of Non-Agency Loans and $56.7 million of Agency-Eligible Loans by fair value.

Outlook, risks and unusual items

The filing provides no specific earnings or dividend guidance. Management said available liquidity, operating cash flows and borrowing capacity were expected to meet anticipated needs, but emphasized that this depends on market and financing conditions. It cited inflation, interest-rate volatility, credit spreads, borrower defaults and delinquencies, property values, prepayments, refinancing access, counterparty exposure and collateral margin calls as important risks. A 75-basis-point instantaneous rate increase was estimated to reduce GAAP equity fair value by 5.3%; the model estimated a 0.2% increase in projected net interest income. Management cautions that actual results may differ materially.

  • Valuation risk is significant: $4.16 billion of fair-value assets were classified as Level 3, including securitized mortgage loans. Estimates rely on unobservable assumptions such as yields, defaults, prepayments and loss severity.
  • At June 30, residential loans had $74.7 million of unpaid principal balance more than 90 days delinquent. Loan exposure was concentrated in California (34%), New York (16%) and Florida (11%).
  • The company reported compliance with all financial covenants and no material legal proceedings at quarter-end. It had $225.7 million of unfunded forward loan purchase commitments.
  • After quarter-end, the company sold Non-Agency Loans for $68.9 million in gross proceeds. On August 8, it agreed to acquire Western Asset Mortgage Capital Corporation (WMC), expected to close in Q4 2023 subject to shareholder approvals and other conditions. Consideration includes approximately 9.2 million MITT shares and a Manager-funded cash component capped at $7.0 million. MITT also paid a $3.0 million termination fee related to WMC’s terminated prior merger agreement. The Manager agreed to waive $2.4 million of first-year management fees and reduce its base fee by $0.6 million for four quarters after closing.
  • TPG separately agreed to acquire Angelo Gordon, MITT’s manager’s parent; the transaction was expected to close in Q4 2023. The filing said the investment strategy and team were expected to remain unchanged, subject to closing and assignment of the management agreement.

Investor verification priorities

  1. Confirm the registrant identity: the supplied 10-Q is for AG Mortgage Investment Trust, Inc. (MITT).
  2. Review the WMC merger terms, approvals, closing conditions, dilution and integration costs, including the $3.0 million termination fee and management concessions.
  3. Track net interest spread, funding costs, short-term financing maturities, margin requirements and available liquidity as rates and collateral values change.
  4. Assess the quality and sensitivity of Level 3 valuations, loan delinquency trends, geographic concentration and realized versus unrealized results.
  5. Reconcile GAAP earnings with non-GAAP EAD and monitor the common dividend against taxable income, liquidity and financing needs.