AG Mortgage Investment Trust, Inc. (MITT) — Q3 2020 Form 10-Q
Entity note: The supplied filing identifies the registrant as AG Mortgage Investment Trust, Inc.; it does not identify TPG Mortgage Investment Trust, Inc. The quarter ended September 30, 2020; results are unaudited.
Business context and reporting period
MITT is an externally managed hybrid mortgage REIT investing in Agency mortgage-backed securities and credit assets, including residential and commercial loans and securities. It had sold its single-family rental portfolio in November 2019, with that business reported as discontinued operations. COVID-19 market disruption, margin calls, asset sales, and financing stress drove a major contraction in the portfolio during 2020.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $5.4 million | $18.8 million | $30.4 million | $56.1 million |
| Net income/(loss) | $20.0 million | $10.0 million | $(461.9) million | $57.9 million |
| Net income/(loss) available to common stockholders | $15.0 million | $6.3 million | $(478.3) million | $47.4 million |
| Basic and diluted EPS | $0.44 | $0.19 | $(14.34) | $1.48 |
Q3 other income was $7.0 million, including $19.5 million of unrealized gains on securities and loans, partly offset by $14.4 million of net realized losses. Equity in affiliate earnings was $17.2 million, including $13.4 million related to AG Arc. For the nine months, net realized losses were $257.2 million and unrealized losses on securities and loans were $184.8 million. Management attributed the losses to pandemic-related market disruption, asset sales and lower asset valuations; $132.0 million of the unrealized loss reflected reversals of gains on assets sold, while $52.8 million was mark-to-market loss on assets still held.
- Balance sheet at September 30: Assets were $1.10 billion, liabilities $710.8 million, and stockholders’ equity $390.5 million. Cash and cash equivalents were $44.6 million; restricted cash was $5.1 million.
- Book value: $3.34 per common share, versus $17.61 at December 31, 2019. The reported value excludes $11.2 million of accumulated, unpaid preferred dividends; deducting those arrears would reduce book value by $0.31 per share.
- Portfolio and leverage: GAAP investment portfolio fair value fell to $903.7 million from $4.04 billion at year-end 2019. GAAP leverage declined to 1.8x from 4.1x; economic leverage was 0.9x. Management reported a 2.30% investment-portfolio net interest margin (GAAP portfolio margin: 1.64%) at September 30.
- Debt: Financing arrangements were $225.5 million, versus $3.23 billion at year-end; securitized debt was $359.0 million and secured debt was $10.3 million. Total financing including these categories was $594.7 million on a GAAP basis. Six counterparties had debt outstanding, down from 30.
- Cash flow, nine months: Operating activities used $2.3 million; investing activities provided $2.49 billion, primarily from asset sales and repayments; financing activities used $2.57 billion, primarily for debt repayments. Cash, cash equivalents and restricted cash ended at $49.7 million, down from $125.4 million at the start of the period.
- Liquidity: Management reported $82.4 million, comprising $44.6 million cash and $37.8 million of unencumbered assets available to support liquidity needs.
Material changes versus comparable periods
- Interest income and net interest income fell sharply year over year as the investment portfolio and associated financing contracted. Management expects interest income and earnings capacity to remain materially lower than in comparable prior periods.
- The portfolio reduction followed extraordinary March 2020 market illiquidity and margin calls. MITT sold or lost through counterparty seizures approximately $3.2 billion of securities and loans during the first nine months.
- The company terminated most of its pay-fixed interest-rate swaps, recording $65.4 million in GAAP realized losses; $180 million notional remained at September 30, compared with $1.85 billion at year-end.
- Common and preferred dividends were suspended for Q2 and Q3 to preserve liquidity. No common dividend had been reinstated as of the filing.
Outlook, risks, contingencies and unusual items
- Management said Q3 markets had continued recovering from the first-half dislocation, but mortgage-credit spreads remained wider than pre-pandemic levels and the outlook depended on COVID-19 developments, economic conditions and government support. No specific earnings or dividend guidance was provided.
- Management stated it expected available cash, operating cash flow, equity in remaining assets and financing access to support operations for at least twelve months after issuance, while warning actual conditions could differ and asset sales might be needed to raise cash.
- In March, MITT could not meet anticipated margin calls and received alleged-default and deficiency notices. Forbearance agreements followed; on June 10, counterparties permanently waived prior defaults and reinstated financing agreements. All margin calls and reported deficiency claims had been settled by quarter-end, and the company said it was in compliance with financial covenants. Amendments generally involved higher haircuts and coupons.
- COVID-related borrower relief and economic weakness pose credit risks. At quarter-end, 25% of the Re/Non-Performing Loan population and 36% of the Non-QM Loan population had requested COVID-related assistance. Hotel and retail commercial-property exposures were particularly stressed; management also cited risks from defaults, delinquencies, foreclosures, lower collateral values, refinancing and short-term funding access.
- Unfunded commitments totaled $47.9 million, including commercial-loan and land-financing commitments. Subsequent to quarter-end, Loan I was modified to defer some interest and increase its commitment by $6.0 million; Loan L was also modified.
- After quarter-end, MITT declared all preferred dividends in arrears and Q4 preferred dividends, payable December 17, 2020. It also completed additional preferred-for-common exchanges: subsequent transactions described in the filing involved 4.58 million common shares and $8.0 million cash in exchange for preferred shares. Common shares outstanding were 40.7 million on November 4, versus 36.1 million at September 30.
- The RBC repo dispute was settled; MITT paid $5.0 million and repaid a $2.0 million note. The lawsuit was dismissed with prejudice. A separate $11.6 million loss for other counterparty deficiencies was recorded; those claims were settled by August.
- Q3 included $1.3 million of restructuring expenses. The company also issued common shares to its manager to settle $4.3 million of management fees. The manager is an affiliate, and the management agreement provides for a 1.50% annual fee based on contractual stockholders’ equity.
Most important facts for investors to verify
- Confirm the registrant identity: the filing is for AG Mortgage Investment Trust, Inc. (MITT), notwithstanding the request metadata naming TPG Mortgage Investment Trust.
- Assess whether the reduced portfolio, reported liquidity and remaining financing can sustain operations and earnings, particularly as repo facilities mature and collateral values fluctuate.
- Review the quality and valuation assumptions of the remaining credit assets, including commercial hotel/retail loans, Level 3 assets and borrower forbearance exposure.
- Track preferred-dividend arrears and payments, the status of common dividends, and the dilution and cash impact of preferred-stock exchanges and common-share issuance.
- Check subsequent filings for covenant compliance, additional financing or asset sales, changes in borrower performance, and any revision to management’s twelve-month liquidity assessment.