Business context and reporting period
AG Mortgage Investment Trust, Inc. (NYSE: MITT) filed this unaudited Form 10-Q for the quarter ended March 31, 2019. It is an externally managed hybrid mortgage REIT investing in Agency and non-Agency mortgage securities, loans, mortgage servicing rights, affiliate investments and single-family rentals. The request metadata names TPG Mortgage Investment Trust, but the filing identifies the registrant as AG Mortgage Investment Trust, Inc.
Financial results and key metrics
Unless otherwise noted, amounts are in U.S. dollars; financial statement figures are in millions.
| Metric | Q1 2019 | Q1 2018 or prior quarter-end |
|---|---|---|
| Interest income | $41.5 | $39.4 |
| Interest expense | $23.3 | $15.3 |
| Net interest income | $18.1 | $24.0 |
| Net income | $29.2 | $8.2 |
| Net income available to common stockholders | $25.8 | $4.9 |
| Diluted EPS | $0.84 | $0.17 |
| Core Earnings (non-GAAP) | $13.6; $0.45 per diluted share | $15.2; $0.54 per diluted share |
| Net interest margin (non-GAAP investment portfolio) | 2.09% | 2.69% at March 31, 2018 |
| Assets | $4,007.1 | $3,548.9 at Dec. 31, 2018 |
| Financing arrangements | $3,214.9 | $2,822.5 at Dec. 31, 2018 |
| Stockholders’ equity | $731.6 | $656.0 at Dec. 31, 2018 |
| Book value per common share | $17.44 | $17.21 at Dec. 31, 2018; $19.32 at Mar. 31, 2018 |
- Common earnings improved chiefly because securities prices recovered: unrealized gains on real estate securities and loans were $46.8 million, versus a $36.2 million loss a year earlier. Unrealized losses on derivatives and other instruments were $10.1 million.
- Net realized loss was $20.6 million, including $19.8 million of losses on derivative settlements and $3.1 million of OTTI charges. The company reported $2.4 million of OTTI on securities and $0.6 million on Excess MSRs.
- Interest income rose $2.1 million, but interest expense increased $8.0 million as average financing costs and balances rose. Management reported a 3.22% cost of financing at quarter-end, up from 3.19% at year-end.
- Cash provided by operating activities was $9.7 million (versus $24.9 million). Investing activities used $446.9 million; financing activities provided $440.9 million. Cash, cash equivalents and restricted cash totaled $88.0 million at quarter-end.
- Management reported $104.3 million of liquidity available for needs, comprising $50.8 million cash, $50.0 million of unpledged Agency securities and $3.5 million of unpledged U.S. Treasuries.
- GAAP leverage was 4.3x equity; non-GAAP “at-risk” leverage was 4.7x, compared with 4.6x at year-end. The investment portfolio’s non-GAAP net interest margin was 2.09%, versus 2.69% at March 31, 2018.
- Q1 common dividend declared was $0.50 per share, compared with $0.475 a year earlier. Preferred dividends totaled $3.4 million.
Material changes versus comparable periods
- Common net income rose to $25.8 million from $4.9 million year over year, but Core Earnings declined to $13.6 million from $15.2 million. The difference reflects substantial fair-value gains, underscoring that GAAP earnings were more market-sensitive than recurring earnings.
- Net interest income fell 24% year over year as higher financing costs more than offset higher interest income. The filing reports portfolio weighted-average financing cost of 3.16% for Q1 2019 versus 2.10% for Q1 2018.
- Financing arrangements increased $392.4 million from year-end, alongside portfolio expansion. Fair value of real estate securities increased to $3.244 billion from $2.896 billion at year-end.
- The company issued 3.45 million common shares in a February public offering at $16.70 per share, generating approximately $57.4 million net proceeds, and sold 503,700 shares through its equity distribution program for approximately $8.6 million net proceeds.
- The company purchased a residential loan portfolio in February and expanded commercial lending. Its 1,225-property rental portfolio, acquired in September 2018, generated $3.4 million rental income; occupancy improved to 93.7% from 87.9% at year-end.
Outlook, commentary, risks and contingencies
- No specific earnings or book-value guidance was provided. Management said it expects available capital, operating cash flow and borrowing capacity to meet anticipated liquidity needs, including investments, expenses and distributions; this is subject to market and financing conditions.
- Management described mortgage-sector spreads as tighter in Q1 and said the rally primarily drove the increase in book value. It cited a more dovish Federal Reserve stance, with the Fed holding its policy rate at 2.25%–2.50% in March and projecting fewer future increases.
- Interest-rate sensitivity analysis estimated that an immediate 75-basis-point rate increase would reduce GAAP equity value by 6.5% and projected net interest income by 6.3%; a 75-basis-point decrease was estimated to increase projected net interest income by 5.2%. These are model-based estimates, not forecasts.
- Key risks include short-term repurchase funding against longer-duration assets, collateral and derivative margin calls, inability to roll financing, higher haircuts, interest-rate and spread movements, prepayments, credit losses, property-value declines and reliance on Level 3 valuations. Management said all margin-call requirements had been met at quarter-end.
- Unfunded commitments totaled $119.6 million, including commitments to affiliate-related MATH and commercial loan investments. Certain expected financing for remaining commercial loan commitments was not fully committed and could differ materially from management’s estimates.
- The manager is an affiliate; the management agreement provides for a 1.50% annual fee based on contract-defined stockholders’ equity and expense reimbursements. Management noted the agreement was not negotiated at arm’s length. Affiliate and related-party investments and services are also disclosed.
- The company reported no legal proceedings believed likely to have a material adverse effect. It stated that disclosure controls were effective, but excluded the SFR portfolio from the assessment while it works to incorporate it; SFR represented 7.6% of revenue and 3.4% of assets.
- Management cited uncertainty around possible regulatory changes affecting Fannie Mae and Freddie Mac. REIT qualification and Investment Company Act exemption remain important operating requirements.
Important facts for investors to verify
- Confirm the issuer discrepancy: the supplied request names TPG Mortgage Investment Trust, while this filing is for AG Mortgage Investment Trust, Inc. (MITT).
- Assess how much reported earnings and the book-value recovery depend on unrealized marks, and compare GAAP results with Core Earnings.
- Review refinancing, repo maturity and counterparty concentration, collateral haircuts, and liquidity available for potential margin calls.
- Evaluate the adequacy of credit, prepayment and valuation assumptions—particularly for Level 3 assets—and the effect of rate and spread shocks.
- Track the $119.6 million remaining commitments, affiliate-related exposures and fees, and performance of the rental portfolio as it is incorporated into control assessments.