Business context and reporting period
AG Mortgage Investment Trust, Inc. (the filing entity; not identified as TPG in the filing text) is an externally managed mortgage REIT investing primarily in Agency residential mortgage-backed securities (RMBS), with additional non-Agency RMBS, asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS). This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2012. The 2011 nine-month comparison begins March 7, 2011, when the company was organized, and is not a full-year or directly equivalent operating period.
Financial performance and position
| Metric | Q3 2012 | Comparison / period-end |
|---|---|---|
| Interest income / expense | $28.3 million / $4.2 million | Q3 2011: $8.7 million / $0.6 million |
| Net interest income | $24.1 million | Q3 2011: $8.1 million |
| Net income | $61.2 million | Q3 2011: $13.2 million |
| Net income available to common stockholders | $60.4 million | Q3 2011: $13.2 million |
| EPS, basic / diluted | $3.13 / $3.10 | Q3 2011: $1.42 / $1.41 |
| Common dividends declared per share | $0.77 | Q3 2011: $0.40 |
| Total assets / stockholders’ equity | September 30, 2012: $4.77 billion / $704.5 million | |
| Cash and cash equivalents | September 30, 2012: $80.5 million; restricted cash: $5.1 million | |
| Repurchase agreements | $3.84 billion on the GAAP balance sheet; $274.3 million more associated with linked transactions |
For the nine months ended September 30, 2012, net interest income was $51.7 million, net income was $117.1 million, common-stockholder income was $116.3 million and basic and diluted EPS were both $7.07. Operating cash flow was $62.4 million; investing cash outflow was $3.33 billion and financing cash inflow was $3.32 billion. These cash flows primarily reflect rapid portfolio expansion funded by borrowings and equity issuance.
At quarter end, GAAP real estate securities had fair value of $4.55 billion, including $3.95 billion of Agency securities. Management’s presentation including linked transactions showed portfolio fair value of $4.93 billion. GAAP leverage, including unsettled trade amounts as described by management, was 5.67x equity; its measure including linked transactions was 6.06x. Common book value was reported as $23.71 per share.
For Q3, management reported an annualized asset yield of 3.48%, repo funding rate of 0.67% and swap cost equal to 0.31% of average repo balances. These are portfolio-level measures, not a stated net interest margin. The filing reports unrealized gains on real estate securities of $45.9 million and unrealized derivative losses of $13.4 million for the quarter.
Material changes versus the prior comparable period
- The portfolio and balance sheet expanded substantially: total assets rose from $1.39 billion at December 31, 2011 to $4.77 billion at September 30, 2012; GAAP repo borrowings rose from $1.15 billion to $3.84 billion.
- Common shares outstanding increased from 10.0 million at year-end 2011 to 22.9 million at September 30, 2012. The company raised net proceeds through common and preferred offerings; preferred stock issued during 2012 had $161.2 million of aggregate carrying value at quarter end.
- Quarterly net interest income and net income increased from 2011, alongside the larger investment portfolio. Earnings also reflected materially higher unrealized security gains and derivative losses. Basic EPS for the nine-month comparison was lower than the 2011 inception-to-September period ($7.07 versus $3.20 in the filed comparison only if interpreted carefully: the filing shows 2012 nine months at $7.07 and 2011 inception-period at $3.20; differing periods and share counts limit comparability).
- Q3 common dividends declared rose to $0.77 per share from $0.40. Preferred Series A and Series B shares were issued in 2012, with cumulative dividend rates of 8.25% and 8.00%, respectively.
Outlook, commentary, risks and unusual items
- Management said it expected to allocate more capital gradually and opportunistically to non-Agency RMBS, ABS and CMBS when risk-adjusted returns were attractive, while the portfolio remained substantially invested in Agency RMBS. No quantified earnings or dividend guidance was provided.
- Management believed available cash, operating cash flow, equity proceeds and borrowing capacity would meet anticipated short-term liquidity needs. Longer-term requirements depend on access to additional debt and equity financing and on market conditions.
- The Federal Reserve’s QE3 program supported Agency RMBS prices, but management warned that higher asset prices and narrower spreads could reduce investment returns. The filing’s modeled parallel rate shocks estimated that a 100-basis-point rise would reduce GAAP equity by 12.5% and projected net interest income by 16.2%; management cautioned that actual results could differ materially.
- Key risks include short-term repo funding against longer-duration securities, refinancing and rollover risk, margin calls, changes in haircuts, interest-rate and spread movements, prepayments, credit losses in non-Agency assets, counterparty exposure and uncertain market liquidity. At September 30, the company reported meeting all margin calls and having no more than 10% of stockholders’ equity at risk with any single repo counterparty.
- Interest-rate swaps had $1.84 billion notional value and were not designated as accounting hedges; fair-value changes therefore flowed through earnings. Level 3 assets totaled $264.3 million, requiring significant unobservable valuation inputs.
- The filing identified potential CFTC commodity-pool-operator registration and compliance exposure if requested exemptive relief were not granted. It also described uncertainty around proposed FHFA mortgage-market infrastructure changes and their possible effects.
- Management reported no significant contingencies and no legal proceedings at September 30, 2012. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for AG Mortgage Investment Trust, Inc.; the request metadata names TPG Mortgage Investment Trust, Inc.
- Review repo maturity concentration, counterparty terms, haircuts and margin-call capacity, including the distinction between GAAP debt and linked transactions.
- Assess sensitivity of earnings and equity to interest rates, mortgage spreads, prepayments and swap performance; compare scenario estimates with actual subsequent results.
- Examine the valuation assumptions and sensitivity of Level 3 securities, as well as the size and earnings contribution of unrealized gains and losses.
- Verify dividend coverage against REIT taxable income and available cash, and account for preferred dividends, future capital issuance and potential dilution.
- Check subsequent developments in CFTC relief and FHFA proposals, and any changes in financing access or market liquidity.