Business context and reporting period
AG Mortgage Investment Trust, Inc. (the filing registrant; externally managed by AG REIT Management, LLC) filed this unaudited Form 10-Q for the quarter ended March 31, 2014. The mortgage REIT invests in Agency and non-Agency mortgage securities, asset-backed and commercial mortgage-backed securities, and mortgage loans. It finances much of its portfolio with repurchase agreements and uses derivatives to manage interest-rate exposure.
Financial and operating metrics
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $34.1 million | $38.6 million in Q1 2013 |
| Net interest income | $28.0 million | $31.7 million in Q1 2013 |
| Net income | $31.2 million | $16.8 million in Q1 2013 |
| Net income available to common stockholders; diluted EPS | $27.8 million; $0.98 | $13.4 million; $0.49 in Q1 2013 |
| Operating cash flow | $23.7 million | $36.4 million in Q1 2013 |
| Cash and cash equivalents | $33.3 million | $86.2 million at December 31, 2013 |
| Total assets; stockholders’ equity | $3.89 billion; $715.4 million | $3.68 billion; $704.4 million at December 31, 2013 |
| Repurchase agreements | $3.07 billion | $2.89 billion at December 31, 2013 |
| GAAP leverage; non-GAAP leverage | 4.10x; 4.36x | 4.10x; 4.42x at December 31, 2013 |
| Book value per common share | $19.53 | $19.14 at December 31, 2013; $23.16 at March 31, 2013 |
- At quarter-end, management reported a 4.27% weighted-average portfolio yield, 1.65% weighted-average cost of funds, and 2.62% net interest margin, compared with a 2.25% margin at March 31, 2013.
- Management reported $199.3 million of available liquidity, consisting of $33.3 million cash and unpledged Agency securities. Restricted cash was $13.5 million.
- Cash flows: investing activities used $189.0 million and financing activities provided $112.3 million. Cash declined $52.9 million during the quarter.
- The GAAP investment portfolio of securities and loans was approximately $3.5 billion: 66.2% Agency RMBS and 33.8% credit assets. Including linked transactions and investments in affiliates, management reported a $3.8 billion portfolio, with 38.3% in credit assets.
- Common dividends declared were $0.60 per share, paid April 28, 2014. Series A and Series B preferred distributions were $0.51563 and $0.50 per share, respectively.
Material changes versus comparable periods
- Net income and EPS rose year over year, principally alongside a $29.4 million unrealized gain on real estate securities and loans, versus a $17.7 million unrealized loss in Q1 2013. This was partly offset by a $19.2 million unrealized loss on derivatives and other instruments, compared with a $5.2 million gain in Q1 2013.
- Net interest income fell $3.7 million year over year as interest income declined; interest expense also decreased. Net realized gains fell to $0.4 million from $5.3 million.
- The company continued shifting toward credit assets and loans. Credit allocation in management’s portfolio presentation increased from 26.5% of assets at March 31, 2013 to 38.3% at March 31, 2014.
- Agency RMBS weighted-average CPR declined to 6% from 9% a year earlier. Repurchase debt increased from year-end, while GAAP leverage was unchanged at 4.10x.
- The common dividend declined to $0.60 per share from $0.80 in Q1 2013. Book value per share was below the prior-year level, though above December 31, 2013.
Outlook, commentary, and risks
- No earnings, dividend, or portfolio guidance is provided. Management expects gradual migration toward credit assets and loans, and says investment and financing strategies may change with market conditions.
- Management described credit markets as generally positive in Q1 2014 and expressed cautious optimism about long-term home-price appreciation, while noting that appreciation may moderate without income growth. The Federal Reserve’s ongoing reduction of asset purchases and uncertainty over future interest rates and housing-finance reform may affect asset values and financing.
- Management’s modeled parallel rate shocks estimated that a 100-basis-point increase would reduce GAAP equity by 4.0% and projected net interest income by 7.5%; a 100-basis-point decrease would reduce equity by 1.0% and projected net interest income by 1.3%. These are model estimates, not forecasts.
- Key exposures include short-term repo refinancing and margin calls, interest-rate and basis risk, credit spreads and defaults, prepayments, property values, and derivative counterparty and collateral demands. Most repo funding is short term; management said all margin-call requirements had been met at March 31.
- Quarterly results included a $0.6 million other-than-temporary impairment charge. Management considered remaining unrealized security losses temporary and said it had the ability and intent to hold affected investments. Fair values for certain credit assets and loans rely on Level 3 assumptions.
- The company acquired a residential loan pool with $59.0 million unpaid principal, $35.1 million cost, and $52.2 million expected cash flows. At quarter-end, 95% of the fair value of residential loans had unpaid principal exceeding current property value.
- Subsequent to quarter-end, the company amended a Wells Fargo repurchase facility, increasing maximum capacity to $165 million and extending maturity to April 13, 2015. At March 31, $106.5 million was outstanding under that facility; the filing also reports $19.0 million outstanding under a separate residential-loan facility.
- The company reported no significant contingencies or legal proceedings and no defaults upon senior securities. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether reported earnings growth is sustainable apart from mark-to-market gains, given derivative losses and lower net interest income.
- Liquidity available after pledged assets, margin requirements, and short-term repo maturities; also monitor lender haircuts, covenant headroom, and counterparty concentration.
- The valuation assumptions and performance of Level 3 credit investments, especially the residential loan pool, and the extent of future credit impairment.
- The effect of interest-rate movements, Fed policy, prepayments, and credit-spread changes on book value, net interest income, and hedging effectiveness.
- The sustainability and tax basis of distributions, including the lower common dividend and the company’s reported undistributed taxable income of approximately $1.88 per share.
- Related-party costs and governance: the external manager’s 1.50% annual management fee, reimbursed expenses, and the management agreement’s termination provisions.