AG Mortgage Investment Trust, Inc. — 2012 Form 10-K
Entity note: The supplied filing is for AG Mortgage Investment Trust, Inc. (NYSE: MITT), not TPG Mortgage Investment Trust. It covers the year ended December 31, 2012; the filing was signed March 6, 2013. The 2011 comparative results cover March 7 through December 31 only, so they are not full-year comparables.
Business context and reporting period
MITT is an externally managed mortgage REIT investing mainly in Agency residential mortgage-backed securities (RMBS), alongside Non-Agency RMBS, asset-backed securities (ABS), commercial mortgage-backed securities (CMBS) and mortgage loans. It finances securities primarily with short-term repurchase agreements and uses interest-rate swaps to manage exposure. Management reported a 2012 shift toward credit assets as Agency RMBS spreads narrowed following Federal Reserve purchases.
Key financial metrics
| Metric | 2012 | 2011 comparative period |
|---|---|---|
| Interest income | $96.4 million | $18.7 million |
| Interest expense | $15.0 million | $1.7 million |
| Net interest income | $81.4 million | $17.1 million |
| Net income | $134.9 million | $19.0 million |
| Net income available to common stockholders | $130.8 million | $19.0 million |
| Basic / diluted earnings per common share | $7.20 / $7.18 | $3.20 / $3.20 |
| Operating cash flow | $114.8 million | $15.4 million |
| Common dividends declared per share | $2.97 | $1.10 |
Quarterly net income was $11.0 million, $44.9 million, $61.2 million and $17.8 million in Q1 through Q4, respectively. Q4 net interest income was $29.7 million. Earnings included material fair-value and realized gains and losses; net income therefore was not solely recurring net interest earnings. The filing does not present a single operating margin measure.
- At December 31, 2012, total assets were $4.86 billion, stockholders’ equity $794.6 million and GAAP repurchase-agreement debt $3.91 billion. Cash and cash equivalents were $149.6 million; restricted cash was $9.1 million.
- GAAP debt-to-equity leverage was 4.91x (5.26x including linked transactions), compared with 5.67x GAAP (5.86x including linked transactions) at year-end 2011. Repo balances grew from $1.15 billion to $3.91 billion.
- GAAP investment portfolio fair value was about $4.54 billion: Agency RMBS $3.79 billion, Non-Agency RMBS $568.9 million, ABS $33.9 million, CMBS $148.4 million and commercial loans $2.5 million. Including linked transactions, reported portfolio fair value was about $4.86 billion.
- Agency RMBS represented 83.4% of the GAAP portfolio, down from 94.3% at year-end 2011; the credit portfolio share increased. Pay-fixed, receive-LIBOR swaps totaled $2.17 billion notional, up from $793.0 million.
- Book value per common share was $23.47. The company raised approximately $353.5 million net from common-stock issuance and $161.2 million net from preferred-stock offerings during 2012.
Material changes versus the prior period
- The balance sheet expanded substantially, with total assets increasing from $1.39 billion to $4.86 billion, alongside equity issuance, preferred-stock offerings and increased repo financing.
- Management increased credit investments and reduced the relative concentration in Agency RMBS. Credit investment fair value rose from approximately $76.9 million at year-end 2011 to $753.7 million at year-end 2012 on the GAAP balance sheet.
- Net income and EPS rose from the shorter 2011 operating period, but the comparison is not like-for-like. 2012 also reflected $52.1 million of unrealized gains on real estate securities and $24.1 million of unrealized derivative losses, among other realized and linked-transaction items.
- Common dividends declared increased during 2012, from $0.70 per share in the first two quarters to $0.77 in Q3 and $0.80 in Q4. The Q4 dividend was payable in January 2013.
Outlook, commentary, risks and unusual items
- Management expected to continue a gradual, opportunistic allocation to Non-Agency RMBS, ABS, CMBS and mortgage loans, subject to market yields and conditions. In January 2013, the company closed a $30 million Manhattan commercial real estate investment bearing LIBOR + 8.75%; 5% was payable currently and the balance accrued until payoff.
- Management described 2012 as a potential bottoming in residential and commercial real estate markets and cited Federal Reserve purchases, low interest rates, housing stabilization and prospective credit opportunities. These are management views, not assured outcomes; the filing gives no quantified earnings or dividend guidance.
- Funding and liquidity are key risks: repo borrowings are short-term, with year-end maturities extending only into June 2013. Falling collateral values or higher haircuts can trigger margin calls, while inability to renew financing could force asset sales. Management reported that all margin calls had been met through year-end.
- Interest-rate sensitivity analysis estimated that a parallel +100 basis-point shock would reduce GAAP equity 10.6% and projected net interest income 19.9%; a +50 bp shock was estimated to reduce them 4.2% and 7.0%, respectively. These are model-based estimates for a static portfolio, not forecasts.
- Fair-value estimates use third-party pricing and, for certain credit holdings, significant unobservable inputs. Level 3 assets were $329.5 million at year-end, including Non-Agency RMBS, ABS, CMBS and linked transactions. Changes in prices and assumptions can materially affect reported earnings and equity.
- Other material risks include credit losses and prepayments in non-agency assets, Federal Reserve or housing-policy changes, Fannie Mae/Freddie Mac reform, derivative counterparty exposure, REIT qualification and Investment Company Act exemption requirements, and conflicts related to external management. The manager’s 1.50% annual fee is based on defined stockholders’ equity, and its terms were not negotiated at arm’s length.
- The company accrued $1.7 million of excise tax in 2012 in connection with meeting part of its REIT distribution requirement through a dividend payable in 2013. The auditor reported that the financial statements were fairly presented under GAAP and internal control over financial reporting was effective; no material litigation or significant contingencies were reported.
Important facts for investors to verify
- Reconcile reported earnings to recurring net interest income, realized results and fair-value changes; assess how much 2012 EPS depended on market gains and portfolio growth.
- Review repo maturity, counterparty, collateral and haircut disclosures, and evaluate liquidity available for margin calls and refinancing.
- Check credit-portfolio composition, Level 3 valuation assumptions, collateral performance and realized-loss experience as the company expands non-agency and commercial exposures.
- Assess the sustainability and source of common dividends, including REIT taxable income, cash generation, preferred dividends and the 2013 distribution obligation.
- Review the full management agreement, fee calculation, expense reimbursements, termination provisions and investment-allocation conflict disclosures.