AG Mortgage Investment Trust, Inc. — Form 10-Q Summary
Filing identity: The supplied filing is for AG Mortgage Investment Trust, Inc., not TPG Mortgage Investment Trust, Inc. It covers the quarter ended September 30, 2013; financial statements are unaudited.
Business context and reporting period
The company is an externally managed mortgage REIT investing primarily in Agency residential mortgage-backed securities (RMBS), alongside Non-Agency RMBS, asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), commercial loans and related assets. It funds much of its portfolio with short-term repurchase agreements and uses derivatives to manage interest-rate exposure.
Key financial metrics
| Metric | Q3 2013 | Nine months 2013 |
|---|---|---|
| Interest income | $33.3 million | $114.2 million |
| Interest expense | $5.6 million | $19.7 million |
| Net interest income | $27.7 million | $94.4 million |
| Net income/(loss) | $6.0 million | $(48.5) million |
| Preferred dividends | $3.4 million | $10.1 million |
| Net income/(loss) available to common stockholders | $2.6 million | $(58.6) million |
| Basic and diluted EPS | $0.09 | $(2.10) |
| Common dividends declared per share | $0.60 | $2.20 |
For comparison, Q3 2012 net income was $61.2 million and common EPS was $3.13; nine-month 2012 net income was $117.1 million and common EPS was $7.07. The filing attributes the sharp deterioration principally to realized investment losses and market-value changes.
- Balance sheet at September 30, 2013: assets $3.89 billion; liabilities $3.18 billion; stockholders’ equity $707.8 million. Cash and cash equivalents were $35.1 million; restricted cash was $15.4 million.
- Portfolio: real estate securities had $3.54 billion fair value, down from $4.54 billion at December 31, 2012. The portfolio’s weighted-average coupon was 3.74% and effective yield 3.65%. Commercial loans were $30.0 million; investment in affiliates was $16.1 million.
- Debt and leverage: repurchase agreements were $2.97 billion, down from $3.91 billion at year-end. Including unsettled trades, management reported GAAP leverage of 4.21x equity (4.53x on its linked-transaction-inclusive presentation). Average repo rate for Q3 was 0.81%; average asset yield was 3.86%, with swap costs equivalent to 1.08% of average repo borrowings. These are not a directly stated net interest margin.
- Liquidity: management reported $221.7 million available, comprising $35.1 million cash and $186.6 million of unpledged Agency RMBS. Repo collateral haircuts averaged 8.40% at quarter-end. The company said it had met all margin calls.
- Cash flows, nine months: operating activities provided $105.0 million; investing activities provided $803.4 million; financing activities used $1.02 billion. Cash declined by $114.5 million to $35.1 million.
- Book value: $19.26 per common share at September 30, versus $23.47 at December 31, 2012 and $23.71 at September 30, 2012.
Material changes versus comparable periods
- Q3 net interest income increased to $27.7 million from $24.1 million a year earlier, but common-stockholder income fell to $2.6 million from $60.4 million. Nine-month net interest income rose to $94.4 million from $51.7 million, while common-stockholder results shifted from $116.3 million income to a $58.6 million loss.
- Q3 2013 included a $45.2 million net realized loss, compared with a $4.1 million gain in Q3 2012. For the first nine months, net realized loss was $116.5 million, versus a $14.1 million gain in 2012.
- Q3 unrealized gains on real estate securities and loans were $40.1 million, but nine-month unrealized losses were $60.7 million. Derivative and other instrument results were a $5.8 million Q3 loss and a $67.3 million nine-month gain.
- Real estate securities declined by about $996 million from year-end, while repo borrowings declined by about $946 million. Management said capital offerings and portfolio growth drove the increase in year-to-date average equity and investments versus 2012; it also sold substantially more securities in 2013.
Outlook, commentary, risks and unusual items
- Management described significant 2013 interest-rate volatility following market expectations of Federal Reserve tapering, followed by a decline in yields and improved RMBS pricing after the September FOMC decision not to taper. It anticipated continued debate, volatility and possible limited liquidity, and said it might position the portfolio to withstand those conditions. No earnings or dividend guidance was provided.
- Management remained optimistic about housing-market prospects but expected home-price appreciation to moderate without income growth. It noted possible effects of proposed housing-finance reforms on mortgage markets, while saying outcomes and impacts were uncertain.
- OTTI charges were $7.9 million in Q3 and $51.1 million for the nine months, including write-downs on securities the company intended to sell and charges tied to adverse expected cash-flow changes. The filing says remaining securities in unrealized-loss positions were not considered other-than-temporarily impaired because management intended and was able to hold them for recovery.
- Key risks include interest-rate and spread movements, mortgage prepayments, credit losses in non-Agency assets, valuation uncertainty, short-term repo refinancing, margin calls, counterparty exposure and potential inability to maintain liquidity. A further U.S. credit-rating downgrade or failure to resolve debt-ceiling or budget issues could affect Agency RMBS values and financing access.
- The company reported no significant legal proceedings or contingencies and no defaults upon senior securities. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
- The common dividend was $0.60 per share for Q3, down from $0.77 in Q3 2012. Preferred shares carry cumulative annual dividend rates of 8.25% (Series A) and 8.00% (Series B). The external manager receives a fee of 1.50% per annum of contractually defined stockholders’ equity and reimbursable expenses; management fees were $8.2 million for the first nine months.
Important facts for investors to verify
- Confirm the issuer: this filing is AG Mortgage Investment Trust, Inc., not TPG Mortgage Investment Trust, Inc.
- Review the drivers and security-level composition of 2013 realized losses, including the $51.1 million nine-month OTTI charge and securities marked for sale.
- Assess the sustainability of common dividends against earnings, taxable income, liquidity and the REIT distribution requirements.
- Examine repo maturity concentration, collateral haircuts, margin-call exposure and the adequacy of the reported $221.7 million liquidity buffer under stressed market conditions.
- Evaluate sensitivity to interest rates, mortgage spreads, prepayments and less-observable Level 3 valuations; a substantial portion of credit assets uses unobservable valuation inputs.
- Check subsequent portfolio, financing and Federal Reserve developments: the filing’s market commentary includes events through October 30, 2013, after the quarter-end date.