Business context and reporting period
AG Mortgage Investment Trust, Inc. (NYSE: MITT), an externally managed REIT investing in Agency and non-Agency mortgage securities, loans and related assets, filed this unaudited Form 10-Q for the quarter ended March 31, 2016. The filing describes a portfolio increasingly weighted toward credit investments. The company is identified in the filing as AG Mortgage Investment Trust, Inc.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Comparable / prior period |
|---|---|---|
| Interest income | $30.7 million | $36.4 million in Q1 2015 |
| Interest expense | $8.6 million | $7.5 million in Q1 2015 |
| Net interest income | $22.1 million | $28.9 million in Q1 2015 |
| Net income (loss) | $(2.4) million | $12.8 million in Q1 2015 |
| Net income (loss) available to common stockholders | $(5.8) million; $(0.21) per diluted share | $9.4 million; $0.33 per diluted share in Q1 2015 |
| Core Earnings, non-GAAP | $11.3 million; $0.40 per diluted share | $17.9 million; $0.63 per diluted share in Q1 2015 |
| Operating cash flow | $14.6 million | $23.3 million in Q1 2015 |
| Total assets / liabilities / stockholders’ equity | $3.281 billion / $2.635 billion / $646.3 million | At March 31, 2016 |
| Cash and cash equivalents | $40.7 million; restricted cash was $44.1 million | At March 31, 2016 |
| Repurchase agreements | $2.557 billion | $2.035 billion at December 31, 2015 |
| GAAP leverage | 3.34x equity | 3.39x at December 31, 2015 |
Management reported a 4.47% annualized average yield on yield-generating assets and an average 1.76% rate for financing and hedges combined; the average financing rate alone was 1.56%. These are portfolio-level measures, not a reported operating margin. Q1 investing cash flow was $(114.3) million and financing cash flow was $94.1 million; cash declined $5.6 million during the quarter.
Material changes versus comparable periods
- Common-stockholder results shifted from profit to loss, and net interest income fell $6.7 million year over year. Management attributed the earnings decline principally to lower investment-portfolio size, lower net interest income, and weaker security and derivative pricing.
- The weighted-average cost of the investment portfolio fell from $3.3 billion in Q1 2015 to $2.8 billion in Q1 2016. Credit investments rose to 56.9% of the portfolio from 46.1% a year earlier; management said these assets generally have higher yields but lower financing leverage.
- Repurchase-agreement borrowings increased from year-end, while leverage remained below the prior-year quarterly average: weighted-average non-GAAP leverage was 3.41x in Q1 2016 versus 3.77x in Q1 2015.
- Following an FHFA rule excluding captive insurers from FHLB membership, the company repaid its FHLBC advances; none remained at March 31, 2016, compared with $396.9 million at December 31, 2015.
- Book value per common share was $17.22 at March 31, 2016, down from $17.88 at year-end and $19.87 at March 31, 2015. The common dividend declared for Q1 was $0.475 per share, compared with $0.60 in Q1 2015.
Outlook, commentary, risks and unusual items
- No numerical earnings or portfolio guidance was provided. Management said results and financing availability would remain sensitive to market conditions and that it may adjust investment and financing strategies as conditions change. It cited a fragile but recovering credit market, interest-rate uncertainty, and expectations for a more moderate pace of home-price appreciation.
- Q1 included $9.2 million of securities impairment charges due to adverse changes in expected cash flows, versus $2.7 million in Q1 2015. The filing states other unrealized losses were considered market-related, not other-than-temporary, and that management intended and was able to hold affected investments.
- Derivative and other instrument unrealized losses were $12.0 million; net realized losses were $13.0 million, including impairment charges. Interest-rate swap liabilities rose to $22.5 million from $6.7 million at year-end. Derivatives were not designated as accounting hedges.
- Liquidity available for general needs was reported as $138.3 million, including cash and unpledged Agency securities. Management said it did not expect the loss of FHLBC advances to materially affect liquidity, but short-term repo funding, collateral haircuts and margin calls remain key risks. All margin-call requirements had been met at quarter-end.
- Management’s interest-rate sensitivity estimates indicated that a parallel 100-basis-point rate increase could reduce GAAP equity by 11.0% and projected net interest income by 12.6%; a 100-basis-point decrease was estimated to increase equity by 6.7% and net interest income by 3.2%. These are model estimates for a static portfolio, and actual results could differ materially.
- The company originated a $12.0 million commercial loan and recorded a $1.8 million participation liability because the transfer did not qualify for sale accounting. It also held $8.0 million of FHLBC stock, which must be sold back by February 19, 2017 under the rule.
- Other risks include credit and property-value losses, prepayment and basis risk, fair-value uncertainty (including significant Level 3 valuations), refinancing and counterparty concentration, and REIT or Investment Company Act qualification. The company disclosed no material pending litigation, defaults on senior securities, or material control changes; management concluded disclosure controls were effective.
Important facts for investors to verify
- How recurring interest income, funding costs and hedging results are evolving, and how the reported non-GAAP Core Earnings reconcile to GAAP results.
- Whether the larger credit-investment allocation and the $9.2 million impairment charge signal sustained changes in credit performance or valuation assumptions.
- Repo renewal terms, collateral haircuts, counterparty exposure and liquidity available to meet margin calls after the FHLBC funding exit.
- The support for Level 3 asset and derivative valuations and the sensitivity of portfolio value to interest rates, spreads, defaults, prepayments and loss severity.
- The sustainability of common and preferred dividends relative to taxable income, cash generation and leverage; the filing reports estimated undistributed taxable income of about $1.87 per share.
- Progress and capital requirements for Arc Home, including the pending seller/servicer acquisition approvals described in the filing.