Business Context and Reporting Period
This Form 8-K, filed on February 11, 2019, by AG Mortgage Investment Trust, Inc. (AGMT), discloses preliminary results of operations for the year and quarter ended December 31, 2018, as well as book value metrics as of December 31, 2018, and January 31, 2019. The company is a real estate investment trust focused on mortgage-backed securities and single-family rental properties. The financial data presented is unaudited and preliminary.
Key Financial Metrics
Year Ended December 31, 2018:
- Net Loss Per Diluted Common Share: $(0.42)
- Core Earnings Per Diluted Common Share: $2.08
- Book Value Per Common Share: $17.21
- Undepreciated Book Value Per Common Share: $17.30
Quarter Ended December 31, 2018:
- Net Loss Per Diluted Common Share: $(1.45)
- Core Earnings Per Diluted Common Share: $0.47
Book Value Trends:
- Book value per share declined from $19.16 at September 30, 2018, to $17.21 at December 31, 2018.
- Management estimates book value increased approximately 2% through January 31, 2019, after adjusting for pro rata dividends.
Debt and Liquidity: The filing does not provide specific values for total debt, cash flow, or liquidity ratios.
Material Changes Versus Prior Period
The decline in book value and undepreciated book value from September 30, 2018, to December 31, 2018, was primarily driven by the widening of the Agency Mortgage-Backed Securities (MBS) basis and a sharp decline in interest rates during the fourth quarter of 2018. While GAAP net loss was significant for the quarter ($(1.45) per share), Core Earnings remained positive ($0.47 per share), indicating that unrealized losses on securities and derivatives significantly impacted GAAP results.
Guidance, Outlook, and Risks
Management Commentary: Management modified its definition of "Core Earnings" in Q4 2018 to exclude realized and unrealized changes in the fair value of Arc Home's net mortgage servicing rights and related derivatives. This change aligns the metric with the treatment of Excess MSRs held directly by the company. Management views Core Earnings as a better measure of core operational performance, focusing on net interest income.
Risks and Uncertainties: The filing includes standard forward-looking statement disclaimers. Key risks identified include changes in interest rates, default rates, yield curve shifts, prepayment rates, financing availability, and market value fluctuations of assets. Actual results may differ materially from the preliminary estimates provided.
Unusual Items: The significant divergence between Net Loss and Core Earnings is due to large unrealized losses on derivatives and securities, which are excluded from the non-GAAP Core Earnings calculation.
Important Facts for Investor Verification
- Preliminary Nature: All financial figures are unaudited estimates; actual results may differ materially once closing procedures are complete.
- Non-GAAP Adjustments: Verify the reconciliation of Net Loss to Core Earnings, specifically the exclusion of unrealized losses on derivatives and mortgage servicing rights.
- Book Value Volatility: Confirm the impact of interest rate changes and Agency MBS basis widening on the company's equity value.
- Dividend Impact: Note that the estimated book value increase through January 31, 2019, is net of a $0.21 per share reduction for assumed dividends.
- Definition Change: Review the specific policy change regarding the calculation of Core Earnings effective Q4 2018.