Business context and reporting period
This is AG Mortgage Investment Trust, Inc.’s Form 10-K for the year ended December 31, 2013, filed February 28, 2014. The request metadata names TPG Mortgage Investment Trust, Inc.; that does not match the registrant named in the filing and should be verified. AG Mortgage Investment Trust is an externally managed mortgage REIT investing primarily in Agency RMBS, with growing exposure to credit assets.
Financial results and key metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Interest income | $151.0 million | $96.4 million |
| Interest expense | $25.6 million | $15.0 million |
| Net interest income | $125.4 million | $81.4 million |
| Net income (loss) | $(31.6) million | $134.9 million |
| Net income (loss) available to common stockholders | $(45.0) million | $130.8 million |
| Basic and diluted EPS | $(1.61) | $7.20 basic; $7.18 diluted |
| Operating cash flow | $130.8 million | $114.8 million |
| Cash and cash equivalents at year-end | $86.2 million | $149.6 million |
| Total assets | $3.685 billion | $4.855 billion |
| Stockholders’ equity | $704.4 million | $794.6 million |
| Book value per common share | $19.14 | $23.47 |
At year-end, GAAP repurchase-agreement debt was $2.892 billion, down from $3.911 billion. GAAP debt-to-equity leverage was 4.10x (4.42x including linked transactions), versus 4.91x (5.26x including linked transactions) in 2012. Reported liquidity was $266.9 million, comprising $86.2 million cash and $180.7 million of unpledged Agency RMBS. The filing does not provide a conventional operating margin measure.
For 2013, average asset yield was 3.85%, average repo financing rate was 0.83%, and annualized swap cost relative to average repo balances was 0.73%. The filing reports $3.4 billion of GAAP investment portfolio fair value: 70.6% Agency RMBS and 29.4% credit assets. Gross of linked transactions, the portfolio was $3.7 billion, with 65.4% Agency RMBS and 34.6% credit assets.
Material changes versus the prior comparable period
- Net interest income rose to $125.4 million from $81.4 million, but net results swung to a $31.6 million loss from $134.9 million income. The 2013 loss included $123.9 million net realized losses, $84.2 million unrealized losses on securities and loans, and $89.1 million unrealized gains on derivatives and other instruments.
- The company recorded $52.7 million of other-than-temporary impairment charges, including $48.4 million on securities it intended to sell and $4.3 million associated with adverse expected cash-flow changes. No OTTI was recorded in 2012.
- Book value per common share fell to $19.14 from $23.47. Common dividends declared declined to $2.80 per share in 2013 from $2.97 in 2012; the fourth-quarter 2013 dividend of $0.60 was payable in January 2014.
- The portfolio contracted as the company sold a material amount of fixed-rate Agency RMBS after the 2013 rate-driven selloff. Agency RMBS declined to $2.423 billion from $3.786 billion, while Non-Agency RMBS increased to $844.2 million from $568.9 million. Credit assets rose to 29.4% of the GAAP portfolio from 16.6%.
- Interest-rate hedging increased sharply during the second quarter as rates rose: the hedge ratio reached 95% of repo at quarter-end, then declined to 67% at year-end. Year-end swap notional was $2.145 billion, with $115 million net notional of swaptions.
Outlook, commentary, risks and unusual items
Management planned to continue shifting capital toward credit investments, including residential and commercial whole loans, while adjusting asset selection, financing and hedging to market conditions. It expressed optimism about housing recovery but expected home-price appreciation to moderate absent income growth. The Federal Reserve began tapering asset purchases in January 2014, with further reductions announced for February; management noted that market rates, spreads, financing costs and liquidity could affect results.
- Rate, spread and funding exposure: Most financing is short-term repo, creating refinancing, margin-call and collateral risks. A parallel 100-basis-point rate increase was estimated to reduce GAAP equity by 5.5% and projected net interest income by 6.8%; these are model estimates, not forecasts.
- Credit and valuation: Non-Agency RMBS, ABS, CMBS and loans carry borrower-default and collateral risks. Some holdings use significant unobservable valuation inputs; fair values may differ from realized proceeds.
- Policy and regulatory uncertainty: Potential reform of Fannie Mae and Freddie Mac, Federal Reserve tapering, REIT qualification rules and Investment Company Act exemptions could affect asset values, financing or operations.
- Management and governance: The company has no employees and depends on its external manager. The manager’s fee is based on adjusted stockholders’ equity, not performance; the management agreement was not negotiated at arm’s length, and termination may entail a fee.
- Distributions: Common dividends are discretionary and depend on earnings, liquidity, debt service and board decisions. Undistributed taxable income was approximately $1.61 per share at year-end, which the company said it needed to declare in common and preferred dividends by September 15, 2014.
- Subsequent events: In January 2014, the company closed a $10 million hotel-secured commercial real estate investment bearing current interest at LIBOR plus 12.25%, plus fees. A Wells Fargo facility entered into in February 2014 provided up to $100 million borrowing capacity and included minimum tangible net worth and liquidity covenants.
- The filing reported no material litigation or significant contingencies. The independent auditor gave an unqualified opinion and reported effective internal control over financial reporting.
Most important facts for investors to verify
- Confirm the registrant identity: the filing is for AG Mortgage Investment Trust, Inc., not the company named in the request metadata.
- Reconcile the annual loss, large realized and unrealized valuation movements, and $52.7 million OTTI charge to the detailed financial statements and portfolio notes.
- Assess book-value decline, dividend reduction, and whether taxable income and cash generation support future distributions.
- Review repo maturities, collateral haircuts, counterparty exposure, liquidity requirements and the covenants in the new financing facilities.
- Examine credit-portfolio composition, Level 3 valuations and assumptions, and the stated interest-rate sensitivity estimates.