Business context and reporting period
AG Mortgage Investment Trust, Inc. (NYSE: MITT) filed this unaudited Form 10-Q for the quarter ended June 30, 2016. It is an externally managed mortgage REIT investing in Agency and non-Agency mortgage securities, other real estate-related securities, and mortgage loans. The filing identifies the issuer as AG Mortgage Investment Trust, Inc.; this differs from the company name in the request metadata.
Financial and operating highlights
| Metric | Q2 2016 / June 30, 2016 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $30.2 million | $37.3 million in Q2 2015 |
| Net interest income | $21.8 million | $29.7 million in Q2 2015 |
| Net income available to common stockholders; diluted EPS | $17.7 million; $0.63 | Q2 2015 loss of $1.5 million; $(0.05) per share |
| Six-month net income available to common stockholders; diluted EPS | $11.9 million; $0.42 | $7.9 million; $0.28 for first half 2015 |
| Core earnings, non-GAAP; per diluted share | Q2: $11.9 million; $0.43. First half: $23.2 million; $0.82 | Q2 2015: $18.6 million; $0.65. First half 2015: $36.5 million; $1.28 |
| Total assets; stockholders’ equity | $3.02 billion; $646.5 million | $3.16 billion; $666.9 million at December 31, 2015 |
| Repurchase agreements; FHLBC advances | $2.25 billion; none outstanding | $2.03 billion; $396.9 million at December 31, 2015 |
| Cash and cash equivalents; restricted cash | $41.9 million; $40.5 million | $46.3 million; $32.2 million at December 31, 2015 |
| Available liquidity, as defined by management | $166.3 million, including cash and unpledged Agency securities | Comparable prior-period figure not stated in the provided filing text |
| Book value per common share | $17.42 | $17.88 at December 31, 2015; $19.21 at June 30, 2015 |
For the six months ended June 30, operating activities provided $32.8 million of cash, versus $48.5 million in the prior-year period. Investing activities provided $191.0 million and financing activities used $228.2 million; cash and cash equivalents fell by $4.4 million to $41.9 million. These cash-flow totals reflect portfolio purchases, sales, principal repayments, and financing turnover, not just recurring earnings.
At quarter-end, the GAAP investment portfolio of securities, loans, and servicing rights was approximately $2.6 billion. Management’s broader presentation, which includes TBAs and investments held through affiliates but excludes AG Arc, was $2.8 billion: 45.9% Agency RMBS and 54.1% credit investments. For Q2, management reported an annualized asset yield of 4.60% and average financing and hedge cost of 1.71%. These are portfolio yield and funding-cost measures, not a reported GAAP net interest margin.
Material changes versus comparable periods
- Q2 common earnings improved from a loss in Q2 2015, principally as real estate securities and loans recorded $11.0 million of unrealized gains versus $22.3 million of unrealized losses a year earlier. First-half common earnings rose to $11.9 million from $7.9 million, while first-half net interest income declined to $43.9 million from $58.6 million.
- Interest income declined year over year, while interest expense increased: Q2 expense was $8.4 million versus $7.6 million; first-half expense was $17.0 million versus $15.1 million. Management attributed weaker net interest income primarily to a smaller portfolio, lower leverage, a greater allocation to less-levered credit assets, and higher financing costs.
- Non-GAAP core earnings fell year over year in both Q2 and the first half. The GAAP improvement in Q2 therefore did not represent an equivalent increase in management’s measure of recurring portfolio earnings.
- Repurchase-agreement borrowings increased from $2.03 billion at year-end to $2.25 billion, while total balance-sheet liabilities declined from $2.50 billion to $2.37 billion, largely reflecting repayment of FHLBC advances and changes in other liabilities. Non-GAAP leverage was 3.22x equity, down from 3.42x at year-end; non-GAAP at-risk leverage was 3.38x.
- The common quarterly dividend was $0.475 per share, down from $0.60 in 2015. During the first half, the company repurchased 432,853 common shares for approximately $5.9 million, at an average $13.56 per share.
Outlook, commentary, risks, and unusual items
- No quantitative earnings, portfolio, or dividend guidance was provided. Management said results and strategy will continue to respond to market conditions and emerging investment opportunities. It expected housing fundamentals to remain supportive, but anticipated a more moderate pace of home-price appreciation.
- Management described Q2 as a recovery in risk assets and mortgage prices, with low Treasury yields supporting Agency RMBS and credit securities. It noted that falling swap rates reduced the value of its pay-fixed swap hedges. Management also cited uncertainty around future interest rates, prepayments, financing availability and cost, asset values, and credit performance.
- The FHFA rule excluding captive insurers from FHLB membership required the company to exit FHLBC advances; none remained at June 30, 2016. Management said the rule had not materially affected liquidity or the ability to meet obligations. The captive’s FHLBC stock was largely redeemed; the remaining stock was to be sold back by February 19, 2017.
- The company recorded securities OTTI charges of $3.2 million in Q2 and $12.4 million in the first half, attributed to adverse changes in expected cash flows. No OTTI was recorded on residential mortgage loans in the 2016 periods. Management characterized other securities’ unrealized losses as market-driven and said it intended and was able to hold those securities for recovery.
- Fair-value estimates rely in part on Level 3 inputs and management assumptions. During the first half, $466.0 million of non-agency RMBS and $30.0 million of securitized debt were transferred into Level 3 because market transparency had declined.
- Liquidity is exposed to collateral marks, margin calls, and the ability to roll short-term repurchase agreements. At June 30, $31.6 million of cash and $4.9 million of securities were pledged against derivatives; counterparties had posted no collateral. The filing also identifies rate, spread, prepayment, credit, basis, counterparty, and property-value risks.
- Arc Home, an indirect affiliate investment originating conforming, FHA, and jumbo loans, completed its acquisition of a mortgage seller/servicer in June. The company’s Arc Home commitment was $13.4 million, of which $5.2 million had been contributed. Its value and business are exposed to GSE and government-program changes, underwriting performance, delinquencies, and loan-sale conditions.
- Management reported effective disclosure controls as of June 30, 2016, with no material change in internal control over financial reporting during the quarter. The company reported no material legal proceeding and no defaults upon senior securities.
Important facts for investors to verify
- Confirm issuer identity: the supplied filing names AG Mortgage Investment Trust, Inc., while the request metadata names TPG Mortgage Investment Trust, Inc.
- Assess whether the decline in net interest income and core earnings, despite positive Q2 GAAP results, is consistent with the company’s expected recurring earnings and dividend capacity.
- Review the sustainability of the $0.475 common dividend against taxable income, cash generation, leverage, and the preferred dividend burden; the filing reports approximately $1.86 per share of undistributed taxable income at June 30.
- Evaluate the $166.3 million of stated available liquidity against short-term repo maturities, collateral haircuts, potential margin calls, and the loss of FHLBC advance funding.
- Examine the $12.4 million first-half securities OTTI, credit exposures, Level 3 valuation assumptions, and the increase in non-agency RMBS classified as Level 3.
- Review Arc Home’s acquisition, remaining funding commitment, related-party governance, and exposure to changes in GSE and government mortgage programs.