Business context and reporting period
AG Mortgage Investment Trust, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The company is an externally managed REIT investing primarily in Agency residential mortgage-backed securities, alongside Non-Agency RMBS, ABS, CMBS, and commercial loans. It finances investments mainly with short-term repurchase agreements. The filing identifies the registrant as AG Mortgage Investment Trust, Inc.
Financial performance and position
| Metric | Q2 2013 / June 30, 2013 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $42.3 million | $17.9 million in Q2 2012 |
| Net interest income | $35.0 million | $15.4 million in Q2 2012 |
| Net income (loss) | $(71.2) million; $(2.66) per common share | $44.9 million; $2.85 per share in Q2 2012 |
| Six-month net income (loss) | $(54.5) million; $(2.21) per common share | $55.9 million; $3.73 per share in first half 2012 |
| Total assets | $4.74 billion | $4.86 billion at Dec. 31, 2012 |
| Stockholders’ equity | $722.1 million | $794.6 million at Dec. 31, 2012 |
| Repurchase agreements | $3.82 billion; weighted-average rate 0.70% | $3.91 billion; 0.70% at Dec. 31, 2012 |
| Cash and cash equivalents | $70.5 million | $149.6 million at Dec. 31, 2012 |
| Cash from operations, six months | $78.2 million | $35.9 million in first half 2012 |
Common dividends declared were $0.80 per share for Q2 and $1.60 for the first half, compared with $0.70 and $1.40 in 2012. Book value per common share was $19.77, down from $23.47 at year-end 2012.
Material changes and unusual items
- Market volatility associated with anticipated Federal Reserve tapering contributed to large fair-value and realized losses. Q2 included $76.6 million of net realized losses, $83.1 million of unrealized losses on real estate securities and loans, and $67.9 million of unrealized gains on derivatives.
- The company recorded $43.3 million of impairment charges on securities it intended to sell, including securities underlying linked transactions. It also reported additional OTTI charges of $0.8 million for Q2 and $1.9 million for the first half on other securities.
- Real estate securities at fair value totaled $4.02 billion at June 30, versus $4.54 billion at year-end. Agency RMBS fell to $3.09 billion from $3.79 billion, while Non-Agency RMBS rose to $741 million from $569 million. Commercial loans increased to $30 million from $2.5 million.
- GAAP leverage was 4.84x equity, or 5.40x including linked transactions, compared with 4.91x and 5.26x, respectively, at year-end. Repurchase-agreement debt including linked transactions was $4.23 billion.
- Interest-rate swap notional increased to $3.76 billion from $2.17 billion at year-end. The company reported $44.5 million of derivative assets and $10.6 million of derivative liabilities.
Outlook, risks, and contingencies
Management described sharply higher Treasury and mortgage rates, weaker Agency RMBS performance, reduced market liquidity, and volatility across mortgage-credit markets in Q2. It expected market conditions to continue affecting financing costs, hedging, investment choices, and results. Management cited potential housing-market opportunities but expected home-price appreciation to moderate absent income growth.
After quarter-end, continued volatility and portfolio sales had reduced portfolio size by approximately 15% as of July 31, 2013. Management reported GAAP leverage of 4.3x–4.4x and leverage including linked transactions of 4.7x–4.8x, and expected the smaller portfolio and lower leverage to adversely affect future operating results. Net interest margin at July 31 was said not to differ materially from quarter-end.
Key risks include short-term repo refinancing and margin calls; rising rates, widening credit spreads, prepayment and duration risk; basis risk that swaps may not offset; counterparty exposure; and credit and valuation uncertainty in Non-Agency assets. Credit Suisse exposure was 11.5% of stockholders’ equity on a GAAP basis. Proposed legislation to wind down Fannie Mae and Freddie Mac could affect Agency RMBS pricing, liquidity, and value; the outcome and impact were uncertain. The Wells Fargo repo facility was renewed with maximum capacity increased from $75 million to $125 million and maturity extended to April 11, 2014; covenants include minimum adjusted tangible net worth of $430 million, liquidity of $30 million, and unrestricted cash of $5 million. Management reported no significant contingencies or legal proceedings at June 30 and said disclosure controls were effective.
Important facts for investors to verify
- Reconcile the large quarterly loss, including the $43.3 million OTTI, realized security-sale losses, and fair-value movements in assets and derivatives.
- Track post-quarter portfolio sales, leverage, liquidity, and the expected impact of lower portfolio size on earnings and dividends.
- Assess repo rollover and margin-call capacity against $70.5 million cash, unpledged Agency RMBS, short debt maturities, and counterparty concentrations.
- Review assumptions and sensitivity in Level 3 valuations, especially for Non-Agency securities and other credit investments.
- Monitor interest-rate, spread, prepayment, and housing-finance reform developments, including proposed changes to Fannie Mae and Freddie Mac.