Q3 2019 Earnings Call
Before we begin the call I would like to introduce Mr., John Helman, and worst director of Investor Relations. He will make a brief introductory statement.
Thank you Danielle.
Statements made on this earnings call may contain forward looking statements within the meaning of section 27 eight of the Securities Jacked up my team 33, as amended and section 21 E. Other Securities Exchange Act of 1934 as amended and we hear by claim the protection of the Safe Harbor provisions of the private.
Jason Reform Act of 1995 with respect to any such forward looking statements.
Forward looking statements are those the predictor describe future events were trends and that do not relate solely to historical matters you should not rely on our forward looking statements because the matters. They describe are subject to assumptions known and unknown risks uncertainties and other unpredictable factors many of which are beyond our.
Control.
Segments regarding the following subjects are forward looking by their nature, our business in investment strategy market trends and risks assumptions regarding interest rates and assumptions regarding prepayment rates on the mortgage loans, securing our mortgage backed securities.
Our actual results may differ materially and adversely from those expressed in any forward looking statements as a result of various factors and uncertainties.
Certain risks uncertainties and factors, including those discussed under the heading risk factors in our annual report on Form 10-K , and other reports that we file from time to time with the Securities and Exchange Commission could cause our actual results to differ materially and adversely from those projected in any forward looking statements that we make.
All forward looking statements speak only as a date they are made.
New risks and uncertainties are rise over time and it is not possible predict those events were hardly any affect us.
Except as required by law, we do not intend to probably publicly update or revise any forward looking statements, whether as a result of new information or expectations for change in events conditions or circumstances or otherwise. Thank you I.
I would now like to introduce Joe Mcadams, our Chief Executive Officer [noise].
Thank you John I'm also with me today are these drove past them over and Brett Roth folk senior Vice presidents and portfolio managers as well as Chuck Siegel Edwards Chief Financial Officer.
The third quarter.
So a continuation of the economic uncertainty market volatility and falling long term interest rates that have persisted for much of this year.
This resulted in a continued price underperformance of our agency MBS assets in particular as well as heightened expectations for more rapid prepayments due to refinancing.
We had reduced our portfolio leverage during the second quarter. So although our overall balance sheet expanded somewhat during the third quarter, our earning assets were lower on average during the quarter relative to Q2.
The smaller portfolio was the primary driver for core earnings declining two cents per share to eight cents or $7.6 million on the quarter. GAAP income was a loss of 20 cents for the quarter, but only includes unrealized gains and losses on our swap hedges and some of our MBS assets [laughter] comprehensive.
Income, which includes both realized and unrealized gains on all of the M.B.S. assets and related derivatives was $844000 or one cents for the quarter.
The fed interest rates twice during the quarter, but the spread between our repo borrowing rates and other short term benchmark rates remained elevated and was a significant headwind for earnings from our agency MBS investments.
There was the well publicized spike in short term repo rates in mid September and while the extreme repo rates were short lived the borrowing environment was challenging in terms of the rates we paid during the quarter.
Recently, we've seen an improvement in our agency repo borrowing relative to lie bore after the fed cut rates were a third time.
This month in October .
Last month in October so while borrowing over yearend can be unpredictable, we do expect to see improved borrowing terms over fall moving forward.
[noise] looking at our total portfolio our agency MBS investments remained approximately 73% of our portfolio.
Although we added agency MBS pools during the quarter and reduced our TV positions.
On the mortgage credit side, you can see that non agency MBS was lower this was primarily due to pay downs and non QM loans held for securitization increase.
I'd like to turn the call over to district to discuss the agency portfolio in more detail.
Thank you Joe looking at the composition of our agency MBS portfolio, you see we continued to tell us.
Yes allocation to say she has fixed rate securities as we view them, providing more attractive risk adjusted returns and other agency MBS sector.
At quarter end, Cts exchange investments, including TV, a position comprised 65% of our agency MBS portfolio.
Yeah, and 20 as fixed rate securities combined with 7% and adjustable rate MBS, 28%.
During the quarter I, when you think fixed rate pool investment, we're focused on lower coupon.
Given they Havent limited prepayment risk.
We further reposition Dallas <unk> allocation, eliminating exposure to stage, three and a half and focus.
I'll now smaller TJ position consists of 53 as less exposed to prepayments and providing relatively attractive roll financing.
Turning to I love adjustable rate MBS allocation would reset within the yet constituted 17% of the agency portfolio.
No decrease from the previous water.
With one year libel declining further 15 basis points in the third quarter. The coupons on these securities continued to reset lower and we expect this will lessen prepayment speeds going forward.
With regard to agency portfolio prepayments the overall portfolio prepayment rate increased to 21 CPR in the third quarter from 18 CPR in the previous one.
Adjustable rate MBS prepayments Similarly rose to 28 CPR from 24 CPR.
As anticipated agency MBS prepayments have increased further in the fourth quarter.
To 27 CPR for the overall portfolio.
However, given the decline of the N.V., we find that from its August high and went to seasonality, we expect prepayments to moderate in the next couple of months.
So fun to clause that Alan you investments remain focused on safety and securities with local bomb and some prepayment protection characteristics.
They should also contribute to reduce portfolio prepayment speeds going forward.
Thanks, Steve and now.
Let's turn the call over to Brett to discuss our residential credit investments. Thanks, Joe.
During the third quarter spreads on mortgage credit assets, where responsive to changes in rates ultimately ending the quarter wider. However, this why didn't think it was more than offset by the rally we saw in rates during the call quarter, resulting in a net positive change in asset valuation for the quarter.
Looking at our loans held in securitization trust the credit performance of these assets continues to remain strong with defaults remaining at zero CDR as you would expect of these high credit quality in the money borrowers voluntary prepayments speeds increased in response to interest rate changes.
As we looked to find assets to invest in over the quarter, we continue to see more value and investments in non QM loans, rather than securitized credit product. Therefore, our investment activities are focused on non QM loans, rather than securitized product. Thus during the quarter, we saw the securitized credit portfolio shrink due to.
Run off with the reinvestment dollars being committed to our loan portfolio.
In regard to non QM loans sector, we continue to focus our investing activities on is the higher credit quality near Miss type non QM loans, which use non traditional forms of documentation.
Our current portfolio of assets has a weighted average FICO of 746, and LTV and CLTV, 70% and the DTA <unk>, 38%.
Approximately 82% of our portfolio is comprised of hybrid arms of which the majority or seven ones.
During the quarter, we did see voluntary prepayment activity increase in our portfolio in response to lower interest rates.
As mentioned earlier over the course of the quarter. We do we continue to purchase loan assets. While we were also settling our previous trades. Further we have continued to expand our network of strategic partnerships with several originators, we've rolled out our guidelines to several new partners and are working closely with them to rollout or nonqm programs. We are focused on continue.
Going to expand these types of partnerships in the future.
On the funding side, we continue to produce prudently manage our financing book and therefore, our cost of funds over the quarter, we were able to further improve on on the spread we pay above.
LIBOR.
We continue to feel that we are in a good position to take advantage of investment opportunities as they arise in the current market.
We are actively pursuing opportunities to add attractive assets to the credit before portfolio across all sectors of residential mortgage credit.
Our investment activities in the non QM mortgage loan sector is continuing to expand we anticipate that will continue growing our network of sources for these assets and we'll continue to increase our footprint in this sector of the market.
Thank you Brett I'm, turning to the portfolio financing the repo borrowings increased to $3.25 billion at September Thirtyth.
With an average interest rate of 2.41% after taking into account our interest rate hedges are effective borrowing cost was 2.34% down four basis points from June thirtyth.
The average hedge term of these borrowings was two and a half years.
Our leverage multiple ticked up from 5.4 times to 5.7 times total capital as we added agency MBS. It during the quarter as discussed we carried a lower balance of agency TB A's at September Thirtyth, So our effective economic leverage which includes the synthetic borrowing implied MTB purchase.
This was little changed at 6.5 times.
Our interest rate swap balance declined from 2.9 billion to 2.2 billion on the quarter due to the combination of swap maturities as well as some swapped terminations to offset the effect of lower MBS durations.
While the average pay rate was little changed at 2.08%. The remaining average turn of the swaps extended to 2.9 years due to the shortest swaps maturing during the quarter.
The overall effective net interest rates spread on our portfolio tightened five basis points to 91 basis points.
As evident from the breakdown of the components of this non-GAAP spread which follows our financial statements. This tightening was driven.
Primarily by a reduction in TV, a low income on the quarter.
We declared a 10 cents dividend in September which resulted in a 12.1% annualized dividend yield based on the September Thirtyth closing stock price.
Book value per common share declined 11 cents to $4 at 42 cents when combined with a 10 cents dividend. This book value decrease resulted in a negative 0.2% economic return for common shareholders during the quarter and a positive 1% economic returns year to date with.
That I would like to open the call up for any questions you might have so I will turn the call back over to do our operator Danielle at this time.
We will now begin the question and answer session to ask a question you May Press Star, then one and Touchtone phone.
Are you using a speakerphone please pick up your hands happy for pressing the keys to address your question. Please press star to at this time of pause momentarily to assemble the roster.
So first question comes from Douglas Harter of Credit Suisse. Please go ahead.
Hey, guys is actually Josh on for Doug I'm wondering if you could talk a little bit about Celts any direct effects of the overnight repo market pressures we saw.
In the Middle September and then I guess more broadly.
How are you thinking about the term under repos.
And your positioning heading into year end. Thanks.
Sure. Thank you Josh.
We typically.
And they have our age our agency repos have.
Typically two to three month initial terms on our borrowings are non agency read those typically had a one month terms so.
We don't have any given day or any given week, a terribly large percentage of our repos rolling off so.
Well clearly we had some term repos and even a few overnight repos that came due during the period, where we saw this spike in rates the overall impact was.
Certainly not significant relative to the overall portfolio I will say you know we I think.
Maybe some of the factors that led to that spike.
We're also factors and overall repo rates remaining relatively elevated versus fed funds and LIBOR in general as for year end you know we do.
As I mentioned, a fair amount of term repo. So we are having repos going over the term already at this point. So we typically don't have a significant amount of the book that's sort of wait until the last week or so to go over year end.
Great Thanks to that.
I guess looking at core earnings this quarter, and then looking at where the dividend as said.
Any thoughts about the current dividend level and maybe if you could walk us through some of the puts and takes around how you see core getting closer to.
To the dividend level in the coming quarters would be helpful. Thanks.
The as as we mentioned the primary driver for the reduced core earnings during the third quarter was the smaller overall.
Portfolio size.
We leveraged went from.
You know a little north of six times back in the second quarter, two to where it's been more recently, so I do think we could expect to see.
An increase in overall portfolio leverage as we move through the fourth quarter and into the first quarter.
Back to what maybe more of a normal level for us.
Secondarily as as be strip pointed out.
Our our core the way we report core earnings is based on the actual prepayment activity as opposed to sort of a smooth.
Long term assumptions, so we do tend to see a little more.
Relativity in our core earnings due to actual prepayments, which again quite elevated due to the decline in interest rates and in the third sector is I think we do expect to see.
So we've seen for the last week or so as an improved.
Agency repo rates versus LIBOR. So I think all of those factors, which have been well the two headwinds of repo rates and prepayments as well as our.
So I guess, you could say conservative decision to reduce our leverage somewhat in the face of the volatility in the late second quarter and ended the third quarter.
We see all three of those factors.
You sort of mitigating or reversing as we move forward.
Great appreciate the comments Joe.
Thank you Josh.
The next question comes from Mikhail Goberman of JMP Securities. Please go ahead.
Good afternoon, and good morning quick question on just general sense of 'em, we are seeing.
CPR is trending in the fourth quarter a lot of your peers. I guess have said that October October report is definitely a higher than September and all indications are that November is going to be even higher than October , but probably than December we're going to see how big drop off given seasonality and end of your kind of stuff.
Would you expect for the quarter as a whole, though that speeds will be higher than the third quarter or just about the same or any thoughts on that.
Sure.
As as these for pointed out.
The the speed and I get it was it's just the October report we've seen at this point for the fourth quarter was 27, CPR overall and as a rates trend a prepayment rates trended up during the third quarter. I believe 24 was the speed for the month of September .
So I think the we've sort of be an agreement with with a there's sort of general framework you laid out that we should we'll see so similar or perhaps slightly higher speeds reported in November and then coming back down. So I would expect the average speed for the fourth quarter, that's realized on the agency portfolio to be higher.
In the average speed for the third quarter, but as booster pointed out given the.
Where interest rates have gone, what we've seen going on with the repo or the refi index as well as the typical seasonal effects.
But the the highest the high prepayments are sort of in the pipeline at this point and we should see a moderate after that.
Great. Thank you and just one quick question on your thoughts on the future growth of your non QM loan book.
As as Bret pointed out and we expect that to continue to grow we categorize them on our balance sheet has held for securitization and that's certainly our plan to continue the defined.
Good quality loans.
From the network sources that we've been developing and moved through the process of of securitizing those loans when we have a critical mass in the and the pricing is right.
Okay, great. Thank you very much.
Thank you Kevin.
Sand that seeing that there are no further questions I would like to turn the conference back over to Mr. Mcadams for closing remarks.
Thank you Danielle.
Thank you to everybody for joining us today as always we appreciate your interest and Anworth and we look forward to speaking with you again next quarter in the interim please don't hesitate to call us if you have any additional questions or comments. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.