Q4 2019 Earnings Call
Good morning, and welcome to the AG mortgage investment Trust fourth quarter 2019 earnings call My name spread that nobody your operator for today.
This time all participants are in listen only mode. Later, we will conduct a question answer session during which you can start one if the other question. Please note. This conference is being recorded.
I'll turn it over to Robert Riedl, you may begin Sir.
Thank you Brandon good morning, everyone and welcome to the fourth quarter 2019 earnings call for AG mortgage investment Trust Inc.
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 SEC 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 SEC filings.
During the call today, we will refer to certain non-GAAP financial measures. Please refer to our SEC filings for reconciliations to the most comparable GAAP measures.
We will also referenced the earnings presentation that was posted to our website after market close yesterday.
To view the slide presentation turned to our website www Dot AG MIT dot com and click on the Q4 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.
Travel and good morning to everyone.
We're very pleased with mix performance in the fourth quarter.
Core earnings were 52 cents per share and book value per share rose by 2.6%.
TJ and Brian will provide further detail comment on our financial results for the quarter and for the year.
During the quarter, we continue to rotate more of the portfolio into credit investments, both residential and commercial.
This is consistent with our long term strategy of leveraging the Angelo Gordon credit and real estate engines that have 85 investment professionals, who touched upon a wide range of missed opportunity sat in credit.
An important example is our activities in non QM.
In 2019, we successfully launched our non QM platform and completed three securitizations under our GE Cat securitization program permit and other Angelo Gordon funds.
Our GE cat securitization platform is already well known to the market based on our many past whole loan securitizations.
This calendar year Weve already come to market with our first of what we would expect to be many non QM securitizations.
His actions this year.
We have a slide in our presentation slide five that shows the total return to a mix shareholder over the period from our our IPO in July of 2011 to the end of 2019.
And we compare that to be but see mortgage Riet index.
Both calculations assume reinvestment of dividends.
The mic cumulative return is 125% versus the indexes cumulative return up 103%.
We also have a slide slide six that looks at the two key related metrics, a price to book ratio and dividend yield.
As of yearend met traded at a steeper discount to book and had a higher dividend yield than our peer group.
Looking forward, we intend to address this through continuing to execute on our differentiated credit strategy in which we leverage the AG platform.
As well as providing greater clarity in communicating.
What we believed to be a very good at appropriate strategy in this environment.
Before turning the call over to TJ I'll add my remarks by saying that I'm very proud to be part of both Angelo Gordon and our mid teens.
Thank you David good morning, everyone.
On slide eight of our presentation, we walked through our 2019 fiscal year highlights.
We reported $2.39 of net income per share and $1.70 cents of core earnings per share.
While producing an economic return on equity of 13.4%.
During the year, we lost or Nonqm securitization program by issuing three rated deals throughout the course of the year.
Additionally, we issued our first rated RPL deal. This summer further expanding our securitization footprint away from just our historical unrated three year step ups structures.
And finally, our capital raising we're very pleased we were able to access the equity capital markets in February 2019 for the first time in seven years.
And were able to follow up thereafter, with our preferred capital raise in September raising a net total of 177 million in 2019.
Turning to slide 10, as David mentioned, the investment portfolio performed well in the fourth quarter.
After several challenging quarters for the agency MBS and rate markets.
Those headwinds faded and some even turned to tailwinds during the fourth quarter.
A return to more normalized funding markets and a third federal reserve rate cut helped boost net our net interest margins for levered investors such as ourselves.
The modest rise in longer term rates, the resulting steeper yield curve and declining implied volatility further helped create an environment where agency MBS valuations could tighten along with other spread product.
Our core earnings in the quarter were 52 cents per share, including a two cents retrospective adjustment.
After accounting for a onetime positive five cent impact due to a discounted security paying off earlier than expected our run rate core came in at 45 cents covering our current dividend.
I wanted to provide some more color with respect to the onetime positive five cent contribution to core this two core this quarter.
Non agency mortgage backed securities have cleanup calls.
Which the holder of the call rights can exercise when the outstanding deal balance falls below a certain threshold typically 10% of the original balance.
These cost typically result in the debt paying off at par.
As legacy non agency bonds continued to season strong collateral performance low interest rates and healthy securitization markets continue to incentivize these call rights to be exercised.
So why would characterize this as one time from an accounting perspective. This quarter, we do not think its unreasonable for our portfolio to potentially experience. This type of activity in the future.
A 45 cents increase in book value, coupled with core earnings of seven cents above our 45 cent dividend.
Resulted in an economic return during the quarter a 5.2%.
The tightening and agency mortgages that I previously mentioned more than offset modest spread widening in the CMBS sector and drove the fourth quarters book value increase.
I'd like to highlight a few additional slides in our presentation.
Slide 11 includes details on our fourth quarter activity.
As we stated on last quarter's call. Our agency exposure was temporarily elevated as a result of our September preferred capital raise.
Throughout the fourth quarter, we rotated into residential whole loans, both non QM and season to NPL and RPL.
Additionally in December we entered into a purchase agreement on approximately 480 million of clean re performing loans, which settled subsequent to yearend and is therefore, not yet reflected on our balance sheet.
Finally, we increased our allocation to commercial credit net purchasing about $138 million of investments during the quarter.
Turning to our capital markets activity, we're active in the Securitizations pace.
Mid along with other Angelo Gordon funds completed its third rated non QM securitization in November.
We were able to lock in a cost of funds from AAA through double b at a duration weighted average spread of 119 basis points oak swaps.
As we stated on last quarter's call based on the current loan origination volumes, we envision being a quarterly issuer of Noncovered loans via Archie cap program.
Additionally, in November Mitt along with other Angelo Gordon funds completed a nonrated securitization of Rpls by exercising call rights on approximately 237 million of unpaid principal balance.
We are able to lower our cost of funds from a floating rate of LIBOR, plus 315 basis points to a fixed rate of 3.25%.
And increase our advance rate on par from 50% to 75%.
Both securitizations provide met with turned out and materially cheaper cost of funds in comparison to our warehouse lines and previous securitization.
Lastly, we announced on last quarter's call. We had entered a purchase and sale agreement to sell our single family rental portfolio.
We completed this transaction in November and it resulted in an immaterial realized gain from our current carrying value.
We believe this is the best outcome for the long term earnings power of the investment portfolio as we continue to find attractive opportunities in both residential and commercial credit space.
Okay.
Slide 12 lays out our investment portfolio composition for the quarter.
The fair value of the aggregate portfolio decreased from 4.8 to 4.4 billion for the quarter.
And at quarter end was composed of approximately 35% agency, 42% residential credit at 23% commercial credit.
The bar chart at the bottom of the page displays the portfolio allocation overtime and we expect to continue this rotation into credit from our agency allocation as they continue to expand our residential mortgage strategy.
Turning to slide 13, we break out our current agency portfolio by product type.
As previously mentioned, we rotate the capital initially deployed into agencies from our September preferred equity raise into credit investments.
Our disciplined agency MBS asset selection process allows us to position the portfolio for a variety of prepayment environments.
We continue to hold close to 80% of our agency MBS and high quality specified pools with the remainder in new issue lower coupon pools.
As a result, the constant prepayment rate for our agency book was 11.2 CPR for the fourth quarter versus 18.8 CPR for the overall 30 year Fannie Mae Universe.
We expect our portfolio to continue to outperform the overall universe of agency MBS in terms of prepayments speeds.
As previously mentioned on Slide 14, you can see we continue to increase our exposure to residential loans and reduced our exposure to non agency RMBS securities at current market levels.
Quickly turning to our commercial portfolio on slide 15, you can see we had a particularly active quarter in the Freddie K DP space as we sourced investments in both the primary market and secondary markets, which is particularly unusual given the high demand and limited trading volume for this product.
Additionally, during the quarter, we funded approximately 7 million of existing equity commitments related to our commercial real estate construction loans, resulting in approximately 41 million remaining in existing equity commitments.
Slide 17 shows our duration gap of 1.17 years, which is up from 0.73 years at the end of the third quarter.
Largely due to a lower hedge ratio a newly acquired residential loans and some minor extension of our agency MBS portfolio.
With respect to hedges as slide 18 shows we were able to lower our weighted average pay fixed rate down to 1.6% from 1.7% through the restructuring of our swap book.
Looking ahead, we continue to see a large pipeline of credit opportunities at a favorable risk adjusted return.
Source via Angelo Gordons platform.
As we've been mentioning names throughout the course of the year, we have invested both time and resources into the creation and growth of our non QM conduit or aggregation strategy and we are now well on our way to being a well known issuer within the debt investor community.
Our securitization and activities in 2019, and our forward looking pipeline as a result of the energy and focus the team devoted in 2018 and 19 to developing relationships with strategic mortgage origination partners ranging from banks community development financial institutions or CD advisors. They are commonly known.
As well too as well as spud traditional specialty finance companies.
Well may not be apparent just yet is a significant work being done by Angelo Gordon investment team in New York with Arc home.
Fully licensed mortgage originator owned by met and other as onboard and managed funds.
As we look forward into 2020, we fully expect our homes origination to be a more meaningful part of our non QM program and continue to raise Angelo gordons profile in the securitization ecosystem for non agency credit and thereby help enhance our returns within the space.
Before I turn the call over to Brian to review our financial results I wanted to provide some brief commentary on the markets. This week.
In reaction to the krona virus the interest rate market has now effectively priced in three rate cuts this year starting in March.
Prior to this week the agency basis had widened from the previous move lower in rates and therefore, despite the drastic move in rates. This week the basis is holding in well all things considered.
Moving to the credit markets, we've witnessed very little trading volume this week, but the tone to the market does obviously weaker.
We believe new issue deals will be the best benchmark to reset spreads across the stack and based off the information. We know today. There is a heavy calendar that at least was originally due to come to market over the next few weeks.
We continue as always to look prudently to deploy capital into new opportunities. Thank you, Brian. Thanks CJ.
Overall for the fourth quarter, we reported net income available common stockholders of 29.4 million, where 90 cents per fully diluted share core earnings in the fourth quarter was $16.9 million or 52 cents per share versus 13 million or 40 cents per share in the prior quarter. There was a positive to sent retro perspective adjustment in the fourth quarter.
Our versus a negative to send retrospective adjustment in the third quarter.
Additionally, we recognize the positive five cent impact to core as a result of a discounted security paying off earlier than expected as TJ previously mentioned.
As described on page 10 of our presentation net interest margin increase from 2.1% at September Thirtyth to 2.5% at December 30 Onest.
This was comprised of an assay yield of 4.8% offset by a total cost of funds of 2.3%.
The increase in net interest margin was driven mostly by steepening of the yield curve TG previously mentioned.
Our economic leverage ratio was 4.1 times at December 30, Onest as compared to 4.7 times at September Thirtyth.
The decrease is primarily as result of agency sales during the period as we rotated our capital into credit investments.
As of December 30, Onest, we had 44 financing counterparties and our financing investments with 30 of them.
Despite the recent market volatility the GC and credit repo markets have remained stable.
At quarter end, we had liquidity of approximately 163 million comprised of 82 million of cash and 81 million of Unlevered agency whole pool and Treasury Securities.
We closed the year with an elevated amount of liquidity in anticipation of purchasing the pool of clean Rpls TV TJ previously mentioned.
As previously mentioned during the quarter, we completed the sale of our SFR portfolio. We concluded that that disposition of this portfolio met the criteria for discontinued operations as such for all current and prior periods presented we've reclassified the related assets and liabilities as held for sale on our balance sheet and related operating rig.
Bolt as discontinued operations on our income statement.
The operating results have also been excluded from our core earnings for all current and prior periods presented.
Definitely at quarter end, our estimated undistributed taxable income was 36 million or $1.10 cents per share. We continue to evaluate this on a quarterly basis to make sure that plans with our redistribution requirements.
That concludes our prepared remarks, and we'd now like to open the call questions operator.
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Yes from KBW with Eric Hagen. Please go ahead.
Hi, Thanks, good morning.
Thanks for the comments on spreads this week, but I know theres a lot of.
Uncertainty, that's that's kind of overhanging the market and about how do you think about deploying capital in this environment just.
Obviously, given what's happened. This week do you think spreads have sort of overcorrected in your view or is this.
A better time to wait.
Or is it does better to wait for things to I guess calm down.
And number two another question separately, but.
What are the types of non QM that youre originating in what are the cumulative losses that you expect in that portfolio.
Sure I mean, I think it's probably still or too early to tell in terms of where spreads are shaking out just given like I mentioned the.
The lack of real trading volume to I guess, I would say kind of reset.
The market. So I think it's too early to tell I think we would.
You know expect potentially commercial mortgage investments and thinking about hotels to probably be more affected and credit spread than say residential mortgages, just kind of thinking about the.
Near to medium term effects of what's going on out there.
So I mean, that's how we're thinking about risk and just trying to see if the markets our.
Pricing that accordingly.
In terms of non QM.
You know, we're buying a variety of product.
Across across the different.
Originators each somewhat have their own.
Programs are Knishes, if you will it and we're sort of aggregating them to what we think as a.
Well diversified pool, when we go to securitize. So I mean, that's everything from loan type in terms of.
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Invest our property.
Alternative verification of income et cetera.
So far national so it's so there's a mix going in there.
Weve moved generally stayed away from the low where.
The lower.
Month verification income programs that are out there. So one month, thanks, Dana et cetera is not really that our focus on to date. So you know nonqm losses, given the LTV is I think are anywhere from.
In there in a single digit Q loss numbers.
Depending on the profile.
Got it so again again generally given the credit and then again, it's a particularly I think strong LTV profile.
We're not seeing it expecting a lot of cume loss.
Right. Okay. So like low single digits I would imagine just kind of extrapolating from your comments, yes. That's correct. Okay. Okay, and then what what percentage of your legacy non agency portfolio is callable at this point.
I don't know that off the top of my head we'd have to get back to you on that.
Okay as it a large percentage or is that kind of relatively minor.
I would think it's a large percentage, but let us let us verify.
Sure. Okay. Thank you very much of the comments.
From JMP Securities we have Trevor Cranston. Please go ahead.
Hey, thanks.
Follow up on the question about capital deployment, given what's going on in the markets over the last week or so.
Are you guys.
Comfortable continuing to acquire.
Non QM loans like over the last weekend currently.
Sort of Pendings seeing were spread shakeout, and where securitizations would be executed.
Or at this point would you be more likely to sort of we.
So we're not not acquire loans near term and wait and see where you think securitizations some.
Could be done with new loans grew core.
Well there happened so just to take a step back there hasn't been a lot of opportunities to deploy capital. This week for a variety of reasons from starting with an industry conference at the beginning of the week too.
Just generally people.
Not looking to transact given the volatility.
Yes, I think with regards to non QM loans I don't think were overly concerned about securitization being able to get executed, albeit at probably wider spreads.
And part of my comments from earlier, where.
We.
From what we understand there are few deals that are lined up to come get originally next week, we'll see if they potentially put that on hold.
Given the market volatility into and try and laid that out.
The last part I would say is as we look at new loans today in the current rate environment.
We want to be sensitive to probably newer expectations on the duration or prepayments speeds and so we'll be very sensitive to the premiums.
That maybe some of these originators are looking for in today's rate environment.
Okay that makes sense.
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And then there's also related to how things have moved this quarter.
Could you could you provide any update on.
Any changes you might have made to the portfolio.
For the hedge book because rates have come down.
Yes, I mean, I wouldn't say there was anything material the different than what we would do in a normal situation where rates are coming down and trying to.
Keep up with the convexity on the agency book I wouldn't say.
It's anything out of the ordinary and what I would say as you know the drastic move lower of late.
I think it'll be hard for originators to keep uplift.
Okay.
Potential volume.
Given that we were already seeing a rate decline before this week.
So I think a lot of youre not going to see that team linear move on the 25 basis points. This week as you would have seen.
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You know coming from where we started this rate move down and I think we're pretty comfortable list.
The way, we're positioned on on agencies, and our hedged and what the already high expectations of prepayments were coming into this week.
Yeah.
Okay Gotcha.
And I think I missed.
Prepared remarks, you guys.
Said something about RPL transaction that settled post quarter end.
But I missed any any details but.
The size of that or anything else you guys provided if you could.
Yes, sure and on that again, yes, just prior to year end, we entered a purchase agreement on.
480 million.
PB, a notional of of Rpls that.
I was subsequently settled this this quarter.
Okay and holdover.
Yep.
Yes. Thanks.
And once again, if you do other question. Please delstar one of your telephone keypad and we're standing by for any further questions.
Showing no further questions at the moment ill turn it back to our speakers for closing remarks.
Thanks, everyone look forward to speaking with you next quarter.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.