Q3 2019 Earnings Call
Welcome to the AG mortgage investment Trust third quarter 2019 earnings call. My name is held back and I'll be your operator for today.
This time all participants are in listen only mode. Later, we will conduct a question and answer session.
During the question and answer session. If you have a question. Please press Star then one using your Touchtone phone.
Please note that this conference is being recorded.
I'll now turn the call over to Mr., Robert Moreno, Mr. Marino you may begin.
Thank you Hilda good morning, everyone and welcome to the third quarter 2019 earnings call for AG mortgage investment Trust thing.
Before we begin please note that the information discussed on today's conference call may contain forward looking statements.
Any forward looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the risk factor section in our most recent annual and quarterly atrophy filings.
The Companys actual results may differ materially from these statements.
We encourage you to read the disclosure regarding forward looking statements contained in our earnings release in our earnings presentation and in our FTC box.
During the call today, we will refer to certain non-GAAP financial measures.
Please refer to our SEC filings a reconciliation to the most comparable GAAP measures.
We will also reference the earnings presentation was posted to our website after the market close yesterday.
To view the slide presentation turned for website Www Dot Agee MIT dotcom and click on the Q3 2019 earnings presentation link on the homepage.
Again, welcome and thank you for joining us today with that I would like to turn the call over to our CEO David Roberts.
Thanks travel and good morning to everyone I'd like to begin by briefly reviewing our common comments on last quarter's call.
We discussed than our intention to recalibrate, our dividend to 45 cents from 50 cents per share to better reflect our expectations for core earnings over the near to intermediate term.
We cited the yield curve compression that we were experiencing and the relative picking this up our funding costs as the fed lowered rates versus our asset yield.
As we expected we did declare 45 cents quarterly dividend and we can still say, what we said last quarter that the 45 cents dividend rate continues to reflect our view of core earnings over the near to medium term.
Core earnings for the third quarter were 40 cents per share after a negative two cents per share a retrospective adjustment.
GAAP book value for the third quarter was $17.16 per share down about 1.5% from the prior quarter. Some of the book value decline includes expenses of successful securitization transactions during the quarter, which Brian will provide more detail.
In TJ his comments ill discuss the quarters activities and in particular are fair several investment highlights underscoring our view at the opportunity set in credit.
Permit is broad diverse and growing.
As we've mentioned in prior quarters, our opportunity set also reflects the value proposition of being part of the broader Angelo Gordon platform. For example, during the quarter Mitt added non U.S. exposure leveraging the expansion of our investment team into Europe .
Finally, we are pleased that during the quarter, we raised net proceeds of approximately $111 million through a preferred stock offering.
We fully invested the proceeds into agency RMBS, but a half as has been our historical practice with capital raises we intend to rotate much of those proceeds into credit overtime.
With that I will turn the call over TJ.
Thank you David good morning, everyone.
As David mentioned, the third quarter continue to challenge website investors as the spread between 10 year swap rates and a three month overnight index swap all I asked kind another 26 basis points to bottom out at 48 negative 48 basis points in late August just before the second of to 25 days quite cuts by the.
I said during the third quarter.
On a positive note this spread improved after the second fed cut to finished the quarter unchanged at approximately minus 20 basis points.
It has once again widened into positive territory post quarter end with the Feds third interest rate cut this year.
While this period prove difficult, resulting in a 23 cents decrease in our UN depreciated book value. We did produce a positive economic return during the quarter of 1.3% generating an 8.6% economic return on equity for the first nine months of the year and 11.5% annualized.
To date.
Increased agency MBS supply low TB carry in the face of elevated prepayments speeds and disruption in the funded market for liquid assets such as agency mortgages near quarter end all contributed to underperformance of agency MBS spreads during the quarter.
This underperformance was minimized by the high percentage of quality specified pools, and our agency portfolio and was partially offset by strong performance in our various credit portfolios.
Book value was also negatively impacted by mark to market losses on our mortgage servicing exposure given the rally in rates as well the shortfall between our core earnings and our dividend.
I'd like to highlight a few slides in our presentation.
Turning to slide six of earnings presentation.
Our third quarter activity.
Our overall agency MBS exposure increased inter quarter end as we have temporarily deployed the proceeds from our September September capital raise its a agency mortgages, while we continue to source credit investments with longer settlements.
We also increased our residential loan exposure and re performing and nonperforming loans as well as newly originated non QM loans.
Additionally, on the credit side, we added our first non U.S. dollar exposures through the acquisition of UK mezzanine RMBS backed by 10 year, plus seasoned collateral and recently originated prime mortgages.
Finally on the commercial side, we originated one new Siri loan continued to fund our existing Siri construction loans and had one CRT CRT loan payoff info.
Turning to our capital markets activity, we're pleased to announce that during the third quarter Mitt issued its first rated reperforming loan securitization collateralized by existing inventory on clean pay re performing loans as well as a newly settled pool.
We were able to securitize and sell AAA through single B debt at a duration made a spread of 174 of the swaps.
In addition met along with other Angelo Gordon funds completed its second grade and non QM securitization in September .
We were able to lock in a cost of funds from AAA. The double b at a duration average duration weighted average spread of 122 basis points over swaps.
As we stayed on last quarter's call based on the current loan origination volumes, we see we envision being a quarterly issuer of non QM loans via RG catch up.
Both the Securitizations provided met with a termed out and materially cheaper cost of funds in comparison to our warehouse lines.
Slide nine lays out our investment portfolio composition for the quarter.
On the heels of our copper raised the net carrying value of the aggregate portfolio increased from 4 billion to 4.9 billion for the quarter and that quarter analysts composer comprise composed of approximately 60% agency, 37% credit and 3% single family rental.
For those of you are looking at the right. Most column on the page Brian will address the concept of economic leverage and his comments later.
Focusing on our agency portfolio on slide 10.
We break at our current exposure by product type.
As mentioned, we immediately deployed a majority of the capital from our preferred equity raise into agency MBS.
As I previously mentioned, we benefited from holding a large percentage of higher quality specified pools.
That is greatly outperform TB a year to date.
Our disciplined agency MBS asset selection process allows us to position the portfolio for a variety of prepayment environments.
The constant prepayment rate for our agency book was 9.8 CPR for the third quarter versus 17.7 for the overall 30 year, Fannie Mae universe and upwards of 61 CPR for peak speeds on chips to deliver pools.
We expect the portfolio to continue to outperform the overall universe of agency MBS with prepayment speeds anticipated to peak next month.
Turning to slide 12 during the quarter, we funded approximately 6 million of existing equity commitments related to our commercial real estate construction loans during the quarter and have approximately 48 rent 48 million remaining and existing equity commitments.
These construction loans are primarily first mortgages and senior positions at the top of their respective capital structures.
As I mentioned, we also originated one new $51 million Siri loan and had 133 million dollar loan payoff and fall.
On Slide 13 report this quarters operating metrics for our single family rental portfolio.
Both occupancy and and margins remain stable quarter over quarter.
Subsequent to quarter end, we have entered into a purchase and sale agreement with an institutional investor for the entire single family rental portfolio.
We anticipate this transaction to close in the fourth quarter and have a de minimis impact on book value.
Slide 15 shows our current duration gap, a 0.73 years, which is down from 0.98 years at the end of the second quarter.
We increased our overall hedge book in concert with the increase in our agency book, while at the same time the duration of our residential loan portfolio declined due to due to the Securitizations I highlighted earlier.
During the quarter, we were able to lower our weighted average pay fixed rate down to 1.7% from 1.9% through the restructuring of our swap book.
We also had a 450 million notional a payer swaptions during the quarter, taking advantage of both low absolute rates and subdued implied volatility.
Looking ahead, we continue to see a large pipeline of credit opportunities at favorable risk adjusted returns source view Angelo Gordons platform.
We are excited that we're able to assist successfully ex access the preferred equity capital markets and complete two rated securitizations during the third quarter.
Looking forward, we intend to remain active in utilizing a securities markets to fund our various hold on activities.
With that I'll turn the call over to Brian to review our financial results.
CJ overall for the third quarter, we reported net income available common stockholders of 6.3 million or 19 cents per fully diluted share core earnings in the third quarter was 13 million or 40 cents per share versus 11.8 million or 36 cents per share in the prior quarter. There was a negative two cents retrospective adjustment in the third.
Quarter versus a negative four cents retrospective adjustment in second quarter.
As described on page five of our presentation net interest margin remained relatively unchanged for the quarter 2%.
This was comprised of an asset yield of 4.6% offset by total cost of funds of 2.6%. The decline in yield was driven mostly by increased prepayments on our agency portfolio. As we previously mentioned offset by decreased financing cost as a result of the feds reduction in rate.
The deployment of the proceeds from our preferred reason to agencies also contributed to the decrease as they carry lower yields and lower cost the financing than our credit portfolio.
As TJ mentioned, we executed on two securitizations during the quarter.
One, including our first rated deal where mitt is consolidating the assets and liabilities on its balance sheet and another three JV, where mitt and other funds affiliated with Angelo Gordon full senior tranches to third parties and retain the most subordinate tranches.
As David alluded to these two transactions had upfront costs of 3.8 million or 12 cents per share. This was expense startling to book value. This quarter as we elect the fair value option and therefore do not capitalized theses. However, these fees are excluded from core earnings.
The fees do flow through our income statement a portion in the gene a line item and the remaining portion in equity in earnings given one of the Securitizations occurred in the JV.
We expect that these upfront transaction costs will be more than offset by the long term benefits of the securitizations through better leverage and reduced funding costs.
Given this new consolidation, we introduced the new non-GAAP leverage metric this quarter, calling it economic leverage and this leverage number excludes nonrecourse financing.
We believe economic leverage enables investors to identify and track the leverage metric that we used to evaluate and operate the business.
Our economic leverage ratio was 4.7 times at September 30, as compared to 4.3 times at June 30.
The increase is primarily a result of agency purchases during the period in conjunction with our preferred equity raise.
As of September 30, we had 45 financing counterparties and our financing investments with 32 of them in general funding continues to be plant default with new entrants in both the credit and agency space.
In addition, we saw Noel effects from the overnight funding rate Spike in Q3 as most of our financing have enrolled over quarter end prior to the site.
At quarter end, we have liquidity of approximately 147 million comprised of 31 million of cash and 160 million of Unlevered Agency hopeful securities.
Additionally at quarter end, our estimated undistributable taxable income was 36.3 million or $1.11 cents per share. We continue to evaluate this on a quarterly basis to make sure that were in compliance with our redistribution requirements.
That concludes our prepared remarks, and we'd now like to open the call for questions operator.
Thank you we will now begin the question and answer session. If you have a question. Please press Star then one on your touched on Tom If you wish to be removed from the question Q.
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We have a question from Docker from credit Suisse.
Hey, guys. This is actually Josh on for Doug.
Can you just talk a little bit about the pace of asset rotation that you expect for the preferred equity raised and how long that might take to fully deployed into more target assets. Thanks.
Sure I mean, I think using.
On the on the residential mortgage side, if we're looking at.
Pools that are out in the market, whether they be seasoned re performing nonperforming pools that theyre typically taking.
45 out to 90 days to settle once trade date is awarded and on new originations is probably.
Inside that.
Probably within 60 days.
So I think.
By call it within two quarters, I think we should be able to to get a fair amount of that capital rotated into.
Credit assets. When you just think about the settlement process on the loan side on the commercial side, it's a little bit more episodic.
In terms of how were getting new assets on the books, so it's a little bit harder to handicap.
Great. Thanks, TJ that makes sense and then.
Given the planned to be cereal issuers of Securitizations you did the differs RPL and then the non QM opportunity how much additional capital if any do you think you need to support the current run rate or any thoughts around.
Just the current non QM market and the opportunity to scale up piece of the portfolio. Thanks.
Yes, I think I think we're on the non QM side I think we have a more.
Well defined roadmap in terms of scaling I think where were trying we aim to be quarterly issuers and that effectively lets us rotate that.
Capital that's in the.
The equity in a warehouse and we get a fair amount of that back post securitization. So.
You will see effectively the retained credit.
That we securitize go on the Bucks and that kind of constant equity capital in the warehouse will be there as we buy new originations so.
I think we have plenty of capital to rotate and fund that sort of business over the next coming years.
Great. Thanks, guys.
Thank you and the next question comes from Eric Hagen from Kb.
Yes.
Hey, guys. Good morning. Thanks.
The announcement this morning to sell the SFR portfolio can you just shine some light on what drove the the sale right now and where the cap rate is on that portfolio.
Yeah sure so Eric will be in a better position to discuss the details next quarter post closing.
I guess the few comments I'll make today are we still agree with the original macro thesis that theres a shortage of affordable housing stock.
In the us where a year into this investment and we havent found ways to scale. This as a bigger part of the portfolio in a meaningful way like we had hoped when we when we entered this so I think given all that we thought it was prudent to basically redeploy the capital into the other target asset classes, both agency and credit which.
Oh, let's say over the last 12 months had been producing hirer leads for the shareholders.
Got it and if I'm looking at it correctly, it looks like about $30 million to $35 million of capital get freed up from the sale.
Yes.
Exactly.
And then just switching over to the agency segment actually agency on residential credit in the deck you guys note that the the are always there are.
Between nine and 14% on agency and eight and 14% on residential credit I mean thats a.
Fairly wide range and can you just give us a sense for.
Where they are always in that part in each of those specific buckets are currently falling.
Yes, I mean on the inside it really depends on how much leverage you want to use.
I think thats, probably the biggest.
Differentiator.
Where we're running the book today.
With a current leverage is probably in the low double digits call. It 10 to 12 and when we look at something.
And just taking like non QM as an example, when it's in the warehouse our net carries probably around 10, I think post securitization on those retained credit pieces are probably in the mid teens from an R&D perspective.
Great. Thanks, Hi, guys. How are you guys thinking about leverage overall in the book.
Going forward I mean, I realize there's going to be some transition maybe into agency over the near term, which could take leverage up but on a kind of organic basis do you guys think about.
Increasing or decreasing leverage irrespective of the mix. How are you guys to hear about that sure. I mean, I think were generally focused on getting higher yielding assets that require less leverage we're probably.
At the higher end of our leverage range given that we did deploy.
At the end of the quarter or near the end of the quarter the capital raise into agencies and I would expect that to start to come down over the next coming quarters.
So I think we're probably at the higher bound of what we've been running from a leverage perspective a portfolio basis.
Great. Thanks for the comments.
Mr reminder of we have any questions. Please press star one.
Your next question comes from Trevor Cranston.
Hi, Thanks.
Yes first a question on the the gap between the core earnings number and the dividend this quarter.
You have to comment in the press release, the dividends still reflects your.
Expectations for core earnings in the near to intermediate term.
Regarding if you could maybe provide a little bit of commentary around kind of what you pick the primary drivers are that are.
To close the gap going forward I know Theres the earnings obviously on the preferred capital, but I was wondering if there's any other.
Key things that we should be focused on driving up thanks.
Well.
It's David Roberts is as cheap as TJ noted.
And as I commented.
There is a sticky newness to our funding costs that takes some time to to be reflected so that is.
Yes, that's part of what.
Our expectation is.
And as well.
As TJ just commented on as we.
Fine and rotate into credit, we expect that to be a positive.
So I I guess I would highlight those those two.
Factors in answering your question you Jonah went ahead and just I think now that we're through Threeq fed cuts that just.
Profile for offices.
Any other 11 investor I think has gotten a bit easier. So I think that part of the calendar or at least 2019 was the most stressful part of earnings and based on where we are in the rate market and where we are now through the fed cuts.
Earnings earnings profile just looks.
Better than it did in August .
Okay. That's helpful.
And then you guys also noted that you.
Deployed a little bit into some non us dollar opportunities.
I was wondering if you could add some additional.
Context around that if that was sort of a one off things you guys founder if you're finding enough opportunities outside the us where you might expect to to grow a little bit going forward. Thanks, yes, so and the whole I think we have seen an uptick in activity.
And securitization activity out of out of Europe , and particularly the UK some larger portfolios.
We're being refinanced and so that was the majority out of the capital where where we deployed.
This past quarter.
We wouldn't we Wouldnt say that that was one off what we would look to continue.
To to deploy capital there are just risk adjusted basis, if we think it's compelling.
There's probably.
A little less competition, there and the credit part of the capital structure on the downside some of the Securitizations themselves.
Tend to be smaller so it can be a bit harder to put capital work, but.
In in the in June of this year, we had a full time employee.
Started our London office, which is helping us access.
More investments coming out of the various jurisdictions in Europe .
Okay, great appreciate the color. Thank you.
Okay.
Once again for any questions. Please press star one.
At this moment, we show no further questions Mr. Maranatha you have any final remarks.
Thanks, everyone look forward to speaking with everyone next quarter.
Thank you.
Ladies and gentlemen. This concludes today's conference. We thank you for participating you may now disconnect.