AG Mortgage Investment Trust, Inc. — Q1 2020 Form 10-Q
Entity note: The supplied filing is for AG Mortgage Investment Trust, Inc. (NYSE: MITT), not a registrant named TPG Mortgage Investment Trust, Inc. The unaudited reporting period ended March 31, 2020; the report was signed June 12, 2020. The company said COVID-19-related disruptions and delayed information from counterparties delayed filing.
Business context and reporting period
AG MIT is an externally managed hybrid mortgage REIT investing in Agency mortgage-backed securities, residential and commercial credit assets, mortgage loans, and excess mortgage servicing rights. Its single-family rental portfolio was sold in November 2019 and is reported as discontinued operations.
Financial results and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable period / December 31, 2019 |
|---|---|---|
| Interest income | $40.3 million | $41.5 million in Q1 2019 |
| Interest expense | $20.0 million | $22.1 million in Q1 2019 |
| Net interest income | $20.3 million | $19.4 million in Q1 2019 |
| Net loss | $(485.0) million | Net income of $29.2 million in Q1 2019 |
| Net loss available to common stockholders | $(490.7) million; loss per share $(14.98) | Income of $25.8 million; EPS $0.84 in Q1 2019 |
| Total assets | $1.559 billion | $4.348 billion |
| Total liabilities | $1.200 billion | $3.499 billion |
| Stockholders’ equity | $358.7 million | $849.0 million |
| Financing arrangements | $969.9 million | $3.233 billion |
| Cash and cash equivalents | $92.3 million; restricted cash $41.4 million | $81.7 million; restricted cash $43.7 million |
Operations were dominated by market losses: total other loss was $456.8 million, including $313.9 million of unrealized losses on securities and loans and $151.1 million of net realized losses. The company attributed the losses to COVID-19-related market dislocation, asset sales and financing-counterparty seizures. It reported operating cash flow of $7.4 million and investing cash inflow of $1.976 billion, largely from asset sales; financing activities used $1.975 billion, primarily for debt repayments and dividends. Cash, cash equivalents and restricted cash increased by $8.4 million to $133.7 million.
Book value per common share fell to $2.63 from $17.61 at year-end 2019. The company’s stated net interest margin was 2.32% on its GAAP investment portfolio and 2.71% on its broader investment portfolio at quarter-end; these are management-defined measures, not GAAP margins.
Material changes versus prior period
- The investment portfolio contracted from $4.0 billion to $1.3 billion on a GAAP basis. The company sold or lost through counterparty seizures 229 securities for approximately $2.4 billion in proceeds.
- Financing arrangements fell from $3.2 billion to $969.9 million, and GAAP leverage declined from 4.1x to 3.1x. The company terminated its pay-fixed interest-rate swaps, recognizing $65.4 million of realized losses; no interest-rate swaps remained at quarter-end.
- Portfolio allocation shifted sharply: at March 31, equity allocation was 5% Agency RMBS and 95% credit investments, compared with 34.8% and 65.2%, respectively, at year-end.
- Net interest income rose by $0.9 million year over year as interest expense declined more than interest income. Management cautioned that the smaller portfolio is expected to materially reduce future interest income.
Liquidity, outlook, risks and unusual items
- Financing stress: The company said it could not fund anticipated margin calls, received alleged default and deficiency notices, and faced potential acceleration, collateral seizure and asset sales. At March 31, some repo haircuts were negative. Subsequent agreements reinstated financing arrangements and waived prior defaults; as of June 10, 2020, the company said it had met all margin calls. Amended financing terms generally include higher haircuts and coupons, new covenants and reporting requirements.
- Subsequent deleveraging: After quarter-end, the company reported asset sales, including a May 28 sale of residential loans with approximately $465 million unpaid principal for about $383 million net proceeds. It reported financing arrangements of $242.2 million at May 31. The filing gives differing estimates of post-quarter total debt obligations—approximately $450 million in Note 15 versus approximately $710 million in MD&A—so the applicable date and definition should be checked.
- Liquidity outlook: Management’s going-concern analysis states that cash resources, operating cash flows, equity in remaining assets and financing access are expected to support operations for more than one year after issuance. That assessment is subject to substantial uncertainty; management also said future conditions could materially affect estimates and liquidity.
- Dividends: The board suspended quarterly common and all three preferred-stock dividends to conserve capital, with suspension intended to continue for the foreseeable future. No common dividend was declared for Q1; preferred dividends of $5.7 million were paid for the quarter. No assurance was given that distributions would resume.
- Investment Company Act status: Some subsidiaries no longer met the 55% real-estate-asset test following asset sales, and the company said it no longer maintained its historical exemption. It is relying on the Rule 3a-2 one-year safe harbor and is working to restore compliance; failure could require registration or restructuring.
- Contingencies: A financing-counterparty dispute with RBC was settled after quarter-end for $5.0 million cash plus a $2.0 million secured note, with a $7.0 million loss accrued at quarter-end. A separate $9.4 million deficiency was also accrued and settled. Additional liabilities related to counterparty seizures were considered probable but not reasonably estimable.
- Other risks and commentary: Management expects a defensive investment posture near-term and identifies borrower delinquencies, defaults, forbearance, property-value declines, illiquid markets, financing access, margin calls and servicing disruptions as material risks. It did not provide quantitative earnings guidance and did not report Core Earnings for Q1, saying the measure would not reflect the pandemic’s economic impact.
Important facts for investors to verify
- Reconcile the filing’s differing post-quarter total-debt estimates and confirm current recourse versus non-recourse obligations, collateral and financing covenants.
- Confirm that reinstated financing agreements remain in good standing, margin calls are satisfied, and the company can meet the new leverage, haircut and reporting requirements.
- Track progress toward restoring Investment Company Act exemption compliance before the one-year safe-harbor period expires.
- Assess whether remaining asset valuations, borrower performance and future asset sales could further affect book value, liquidity and the going-concern outlook.
- Confirm the status of common and preferred dividends, including any arrears and the conditions for resumption.
- Monitor resolution and potential exposure from unsettled counterparty deficiencies and other seizure-related claims.