Business context and reporting period
The supplied filing is AG Mortgage Investment Trust, Inc. (NYSE: MITT), not TPG Mortgage Investment Trust, Inc.; verify the issuer identity before relying on this summary. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019. AG MITT is an externally managed hybrid mortgage REIT investing in mortgage securities and loans, excess mortgage servicing rights, and single-family rental properties.
Financial results and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest income | $40.9m | $36.0m | $82.4m | $75.4m |
| Net interest income | $16.6m | $19.7m | $34.8m | $43.8m |
| Net income | $18.7m | $8.2m | $47.8m | $16.4m |
| Net income available to common | $15.3m | $4.8m | $41.1m | $9.7m |
| Diluted EPS | $0.47 | $0.17 | $1.30 | $0.34 |
| Core earnings per diluted share (non-GAAP) | $0.36 | $0.52 | $0.80 | $1.06 |
- Q2 interest expense rose to $24.3m from $16.3m; for the first half it was $47.6m versus $31.6m. Management attributed the increase primarily to higher financing rates and larger average financing balances.
- Q2 other income was $10.1m, including $43.2m of unrealized gains on real estate securities and loans, offset in part by $27.6m of net realized losses and $10.8m of unrealized losses on derivatives and other instruments. First-half figures show the same sensitivity to valuation and trading results: $89.9m unrealized asset gains, $48.2m net realized losses, and $20.9m unrealized derivative and other losses.
- Q2 total expenses were $10.1m, including $3.9m of other operating expenses and $3.1m of SFR operating costs, depreciation, and amortization. SFR generated $3.2m rental income in Q2.
- At June 30, total assets were $3.798bn, total liabilities $3.067bn, and stockholders’ equity $730.9m. Financing arrangements were $2.993bn, plus $8.6m securitized debt. The company reported 4.1x GAAP leverage and 4.4x non-GAAP “at-risk” leverage.
- Cash and cash equivalents were $60.1m and restricted cash $32.9m. Management reported $120.3m available for liquidity needs, including $60.2m of unpledged Agency securities. First-half operating cash flow was $21.8m; investing cash use was $210.9m and financing cash inflow was $197.8m.
- Management’s quarter-end net interest margin was 2.03% for the investment portfolio (2.71% a year earlier); the GAAP investment portfolio margin was 1.98% (2.57% a year earlier). These are management-defined measures, not GAAP margins.
- Book value per common share was $17.42, compared with $17.21 at December 31, 2018 and $18.98 at June 30, 2018. The company declared a $0.50 common dividend per share for Q2.
Material changes versus comparable periods
- GAAP net income and EPS improved year over year, but core earnings fell to $0.36 per diluted share from $0.52 in Q2 and to $0.80 from $1.06 for the first half. GAAP results benefited substantially from unrealized gains on securities and loans and therefore do not track core earnings.
- Net interest income declined despite higher interest income, as financing expense grew faster. Management reported the weighted-average financing rate for the quarter increased to 3.15% from 2.47% a year earlier; the first-half rate rose to 3.15% from 2.28%.
- The portfolio expanded: total assets rose to $3.798bn from $3.549bn at year-end 2018, and financing arrangements increased to $2.993bn from $2.823bn. Common shares outstanding increased to 32.709m from 28.744m, reflecting a February public offering and sales under the equity distribution agreement.
- The SFR business, acquired in September 2018, added rental revenue and operating expenses absent from the 2018 comparable period. At June 30, 1,222 stabilized properties had average occupancy of 92.1% and average monthly rent of $1,028.
- Agency RMBS CPR rose to 7.1% from 4.4% at year-end 2018. Management noted Agency MBS spreads widened during the quarter while many mortgage credit spreads tightened.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or dividend guidance. Management said available liquidity, operating cash flow, and borrowing capacity were expected to support anticipated needs, but this is a forward-looking statement and not a guarantee.
- Management described a more dovish Federal Reserve outlook amid softer economic data and said markets priced in at least one rate cut before year-end. It cautioned that interest rates, spreads, prepayments, defaults, financing availability, and property markets may materially affect results.
- Interest-rate sensitivity estimates indicated that an instantaneous 75-basis-point increase could reduce GAAP equity by 4.8% and projected net interest income by 6.2%; the corresponding estimates including unsettled loan purchase commitments were declines of 6.1% and 7.3%. These are model-based estimates, not forecasts.
- Short-term repurchase funding creates refinancing and margin-call risk. The company said it had met all margin requirements at quarter-end; lenders may nevertheless demand collateral or repayment if pledged asset values fall. Financing maturities ranged from July 1, 2019 to October 10, 2023.
- Credit and valuation risks include non-Agency securities, mortgage loans, commercial loans, and Level 3 assets valued using significant unobservable assumptions. The company recorded $11.1m of securities OTTI and $2.2m of Excess MSR OTTI in the first half of 2019.
- At June 30, remaining commitments totaled $336.8m, including $190.1m for a residential loan pool expected to settle in September 2019 and commercial loan funding commitments. A commercial loan (Loan B) had an event of default after quarter-end; the company had not adjusted its quarter-end fair value.
- The company reported no material legal proceedings and no defaults upon senior securities. Disclosure controls were considered effective, but the SFR acquisition was excluded from the relevant control assessment under the stated SEC transition provision.
Important facts for investors to verify
- Confirm the issuer: this filing identifies AG Mortgage Investment Trust, Inc. (MITT), not TPG Mortgage Investment Trust, Inc.
- Review the reconciliation of GAAP earnings to core earnings and assess how much reported profit depends on fair-value marks, realized losses, and derivative results.
- Check current repo maturities, borrowing terms, collateral haircuts, available liquidity, and the status of the post-quarter facility payoff and loan commitments.
- Monitor Loan B’s post-quarter default, the settlement and financing of the committed residential loan pools, and credit performance of non-Agency and Level 3 assets.
- Assess the sustainability of the $0.50 common dividend against taxable income, cash generation, leverage, and the REIT distribution requirements.