TPG Mortgage Investment Trust, Inc. quarterly report, Q3 FY2017

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Business context and reporting period

This is AG Mortgage Investment Trust, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The company is an externally managed REIT investing in Agency and non-Agency mortgage securities, loans, and related assets. The request metadata names TPG Mortgage Investment Trust, but the filing identifies the registrant as AG Mortgage Investment Trust, Inc. (NYSE: MITT).

Financial performance and position

  • Third quarter: Interest income was $33.6 million and interest expense $12.0 million, producing net interest income of $21.6 million, versus $22.0 million a year earlier. Net income was $36.0 million; income available to common stockholders was $32.6 million, or $1.17 per diluted share, compared with $42.8 million, or $1.54 per share, in Q3 2016.
  • Nine months: Net interest income was $62.5 million versus $66.0 million in 2016. Net income was $94.3 million and income available to common stockholders $84.2 million, or $3.03 per diluted share, compared with $64.8 million and $54.7 million, or $1.95 per share, respectively.
  • Drivers and margins: Nine-month net income benefited from higher unrealized gains on securities and loans and derivatives, and increased affiliate earnings. Company-reported portfolio net interest margin was 2.57% at September 30, down from 3.16% at December 31, 2016; weighted-average portfolio yield was 4.69% versus 5.18% and funding cost was 2.12% versus 2.02%.
  • Balance sheet: Total assets were $3.54 billion, liabilities $2.84 billion, and stockholders’ equity $706.6 million at September 30, 2017. Repurchase-agreement debt was $2.69 billion, up from $1.90 billion at year-end 2016. Non-GAAP “at-risk” leverage was 4.2x, versus 2.9x. Book value per common share was $19.35, versus $17.86 at December 31, 2016.
  • Portfolio: Investment portfolio fair value was $3.53 billion, up from $2.55 billion at year-end; Agency RMBS increased to $2.18 billion, while credit investments declined to $1.35 billion. The portfolio was 61.7% Agency RMBS and 38.3% credit investments at quarter-end.
  • Cash flow and liquidity: Nine-month operating cash flow was $58.3 million; investing cash flow was negative $809.0 million, reflecting substantial securities purchases; financing cash flow was positive $759.9 million. Cash and cash equivalents were $61.7 million. Management reported $166.3 million of available liquidity, including cash and unpledged Agency securities.

Material changes versus comparable periods

  • Q3 income available to common holders fell 24% year over year, chiefly reflecting prior-year realized gains, lower derivative gains, and higher financing costs. Nine-month income available to common holders rose 54%, driven principally by stronger unrealized investment gains and affiliate earnings.
  • Interest expense rose to $12.0 million in Q3 from $8.5 million, as both average financing balances and rates increased. For the nine months, expense rose to $30.3 million from $25.5 million.
  • Repurchase debt and portfolio size expanded substantially from year-end. Company-reported weighted-average financing cost increased modestly to 1.80% from 1.72% at December 31, 2016, while leverage increased.
  • The company issued 460,932 common shares through its equity distribution agreements for approximately $8.7 million net proceeds. It declared a Q3 common dividend of $0.575 per share, including a $0.10 special dividend; the prior-year quarterly dividend was $0.475.

Outlook, risks, contingencies, and unusual items

  • Management described Q3 spread tightening across many Agency and credit markets, a 3.5% increase in book value during the quarter, and a generally supportive housing and market backdrop. It expected interest rates to remain range-bound through year-end, while noting uncertainty; no specific earnings or dividend guidance was provided.
  • Interest-rate, spread, prepayment, credit, and funding risks are material. A modeled parallel 100-basis-point rate increase was estimated to reduce GAAP equity market value by 10.4% and projected net interest income by 4.7%; these are estimates, not forecasts. Net effective duration was 1.36 years.
  • Short-term repo financing creates rollover and collateral-call exposure. Most repo borrowings mature within 30 days; lenders may demand additional collateral or repayment if asset values fall. The company said it had met all margin calls through quarter-end.
  • Real estate securities impairment charges were $2.0 million in Q3 and $6.5 million for the nine months; loan impairment was $0.4 million for the nine months. Management said remaining unrealized security losses were not other-than-temporary, based on its ability and intent to hold affected assets.
  • The company committed $33.4 million to a new mortgage investment venture, MATH/MATT, but had funded none by quarter-end. It also had a net long TBA position with a $122.5 million payable amount and $121.1 million fair value.
  • In June 2017, Wells Fargo, as trustee in 20 RMBS deals, withheld more than $90 million for potential legal costs. MITT did not own bonds in those deals, but similar withholding in securities it owns could cause losses. The filing reports no legal proceedings believed likely to have a material adverse effect.
  • Management disclosed related-party arrangements, including the external management fee (1.50% annually under the agreement), expense reimbursements, affiliated investments, and transactions. It also noted that management-agreement terms were not negotiated at arm’s length.
  • Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  1. Confirm the issuer identity: the filing is for AG Mortgage Investment Trust, Inc., not the company named in the request metadata.
  2. Review the sustainability of earnings and distributions, distinguishing recurring net interest income and core earnings from fair-value marks and realized items.
  3. Assess leverage, short-term repo maturities, counterparty concentration, collateral haircuts, and liquidity available under stressed market conditions.
  4. Evaluate sensitivity to rising rates, spread widening, prepayments, and credit deterioration, including reliance on Level 3 valuations and model assumptions.
  5. Confirm funding needs and terms for the $33.4 million MATT commitment, and assess related-party governance and fee arrangements.