Q4 2019 Earnings Call

Text John and thank you for joining our call today today to discuss an words fourth quarter 2019 results with me today on the call or a bistro senior vice president and portfolio manager Brent Ross senior vice president and portfolio manager and Chuck Siegel and worth CFO.

The the fourth quarter was generally positive for an words portfolio the FED cut rates for the third time on the ear and October and was largely successful at calming the repo markets following the wage. I can overnight rates seen in the third quarter as interest rates moved higher our agency MBS Holdings significantly outperformed their Hedges and with the stock market and most risk a truck that's in general performing. Well, our mortgage credit Securities had similarly solid price performance.

Following the interest rate decline seen during the summer months the follow-through of higher refinancings and and prepayments on our MBS portfolio was realized during the fourth quarter wage higher cost of prepayments being the primary drag on quarterly quarter earnings versus the prior quarter quarter earnings were six point eight million dollars or seven cents per common share for the quarter down from eight months in the third quarter. Again, the primary driver of this decline was the higher cost of prepayment expense realized and we'll discuss later in more detail how prepayments have been lowered during the first girl to date both due to seasonal effects as well as shifts in the agency portfolio composition. Net income was twenty seven point four million dollars or $0.28 a share comprehensive income which includes realized and unrealized gains on all of the MBS assets and related derivatives was 28.9 million dollars or $0.29 a month.

Here for the quarter.

Overall our agency MBS Investments increased from 73% to 75% of our total asset portfolio with a shift from agency TV box options to fixed-rate agency pools on the mortgage credit side. Non-agency. MBS was lower due primarily to pay downs and we continue to add new lead originated non-qm loans currently held for securitization to discuss the agency MBS portfolio more detail. I'd like to turn the call over to distribution over thank you Jo-Jo the composition about agency MBS portfolio. You see we further increased our allocation to sit here fixed rate Securities as we view them providing more attractive risk-adjusted returns, then other agency MBS actors add Quad City of fixed-rate Investments, including ta positions comprise 73% of our agency MBS per month.

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Mia & 20th sixth grade security is combined with 6% total adjustable-rate MBS declined to 21% and arms with coupon resets within a declined to 15% of the agency portfolio.

During the Florida we continue to rotate our fixed rates this year allocation into lower coupon Securities with limited prepayment risk. Our new Investments were focused on specific rules with loan balance. So other characteristics that mitigate prepayments

We also further reduce our exposure to hire coupons video Securities that were most exposed to prepayments as you can see the coupon of our city of 66 MBS declined almost fifty basis points to 3.56% and quadrant.

I would be a position while still consisting of lower coupon Securities only with small at quadrants even weaker role implied financing with Red Lobster portfolio prepayments the overall agency portfolio prepayment rate increase to 25 GB are in the fourth quarter from Twenty-One CPR in the previous one way just obliterate MBS three payments. Similarly Rose to 32GB are from 28 CPR.

as expected

Given the repositioning of our portfolio towards lower Global Securities and the declining seasonal refinancing effect agency portfolio prepayments have decreased so far in the quarter worth 217 CPR for the overall portfolio in the month of January and February. We continue to focus our new Investments on Lower coupon CTs would provide attractive spread and have certain prepayment protection characteristics.

Thanks Bistro, and to discuss the non-agency MBS and other mortgage credit Investments like Red Cross takeover. Thanks, Joe during the fourth quarter spreads on a mortgage credit assets tightened in as Treasury and swap rates Rose. This tightening did not offset fully the increase on Words during the quarter but did reduce the negative impact on the evaluation of our portfolio a call back during the court of the securitized credit portfolio continue to shrink do two bonds being called run off and some strategic Bond sales. Our view remains that there is no more value wage non-qm loan space then in the securitized credit space and therefore we continue to commit our reinvestment dollars to our loan portfolio during the quarter we closed on approximately thirty-eight million of money loans while we saw prepayment speeds on our existing loan portfolio increased to the high Thirty voluntary prepayment rate area. However, we did not we did continue to age.

from negotiated CPT projection protection on these assets and the Assets in our portfolio somewhat lowering the impact of prepayments on

Premium dollars paid we continue to focus our focus our investing activities on the higher credit quality near Miss type non-qm loans, which use non-traditional have documentation. Our current portfolio of assets has a weighted average FICO of seven forty-four an LTV CLTV of 70% and DTI of 38% Approximately 84% of our portfolio is comprised of hybrid hybrid arms of which the majority are 7 Watts.

As be anticipated with these assets that credit performance continues to remain strong with default remaining at zero CDR and no loans in the sixty-plus delinquent pocket loss over the course of the quarter. We have continued to expand our network of strategic Partnerships with several Originators. We have continued to roll out our guidelines to several new partners and are working closely with them to roll or non-qm programs. We also entered into a new strategic partnership with a new partner in order to acquire loans on a flow basis over the next eighteen months. We are focused on continuing to expand these types of Partnerships in the future on the funding side. We continue to prudently manage our financing book and therefore our cost of funds over the quarter. We were able to further improve on the spread we pay off.

Looking forward we can.

Can you feel that we were in a good position to take advantage of investment opportunities as they arise in different Market. We are actively pursuing opportunities to add attractive assets to the credit portfolio across all sectors of mortgage credit our investment activities in the non-qm mortgage loan sector is continuing to expand we anticipate that we will continue growing our network of sources for these assets and will continue to increase our footprint in this sector of the market next gen. Thank you for turning to the portfolio financing repo borrowings increased to three point seven billion dollars a your end as we increased our agency MBS pool Holdings relative to tda's with an average interest rate on these borrowings of 2.07% After taking into account on a straight Hedges are affected borrowing costs was 2.13% down Twenty One basis points from September 30th. The average hedge term of these borrowings was approximately 2.7 years.

our leverage multiple

Moved up from 5.7 times to 6.2 times total Capital as we added agency MBS pools financed with Repose during the quarter as discussing. We reduced agency ta positions over the quarter so are effective economic leverage which includes the synthetic borrowing applied in the TV a purchase has increased the less from 6.5 to 6.6 times total Capital at year-end our interest rate swap balance increased from 2.2 billion to 2.5 billion on the quarter with the swamps average maturity remaining off around four years this increase in swamp balance help offset, the increased agency asset duration from both the larger agency portfolio as well as the shift from higher coupon and the lower coupon lower duration agency fixed-rate MBS. The average pay rate on the overall swap book fell six basis points to 2.02%

the overall effect of net interest in

Spread tightened two basis points to 89 basis points annualized as is evident from the breakdown of the components of this non-gaap spread which follows our financial statements the hayirli quarter of an expense on agency MBS and narrow this spread by an annualized ten basis points. We declared a $0.09 dividend in December which resulted in a 10.2% annualized dividend yield based on the year-end closing stock price book value per common share increased $0.18 to $4.60. When combined with the $0.09 dividend is Book value wage increase resulted in a 6.1% economic return for common shareholders for the quarter and a 7.2% economic return for 2019 with that. I'd like to bring up the call for any questions you might have so I'll turn the call back over to our operator.

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First question comes from a government JMP Securities, please. Go ahead. Good morning everybody. Thanks for taking the call. Congratulations on a very solid value performance. I was wondering if you could give any insight into where Book value is trending through the first two months of this year sure. It takes off. Obviously. We've had a good deal of volatility this week, but our estimate with your rates down and agency MBS underperforming their Hedges would be quarter-to-date a book value a decline and approximately down one and half percent area.

Okay, thanks for that. Just a question on the on the dividend. I know now three dividend Cuts in a row and running a little late this quarter two cents below the current dividend. How are you guys sort of thinking going forward about a sustainable dividend level given the sort of reductions that we're seeing in the market with the rates going down. I guess that's my question. Sure. Well, you know one of the when we think about core earnings one of the primary drivers in this quarter-to-quarter volatility of the coordinates has been the the fact that we recognize the actual prepayment cost on the agency side. And so clearly took the sharp Decline and rates. We saw during the summer. I drove that those the cost of those Bay Downs higher during the fourth quarter is is bistro pointed out, you know, clearly seeing a substantial wage.

lower rate of prepayments so far during the first quarter for several reasons, um and likewise

Rates have come down now in the first quarter. So you we would similarly expect to see a few quarters down the road and another increase in prepayment. So in terms of a a longer-term earnings potential, I mean, we we do set our dividend based on at the time. What we feel is the long-term earnings potential for the portfolio. I'd also like to think that that's why we would expect to see prepayments rise over the next quarter or two if rates stay as low as they are right now as Bistro pointed out by having moved into some lower coupon off agency fixed rate during the fourth quarter and continuing that with our new Investments during this. We would hope to expect to see that those situations from quarter-to-quarter and quarter earnings due to pay down expense won't be as as volatile might perhaps more muted than we saw during 2019.

Got you. Thank you and that 17% prepaid speed that was mentioned that's comparable to the 25% agency. MBS prepaid speed. That's correct. That's correct. Okay. I'm just curious one more for me what percentage of your agency book right now is in specified pools.

In terms of pools that have a specific characteristics in terms of low balance cycle. I believe the numbers is between 60 and 65% around 60. Yes. We also have other pools that have been a slower prepayments than TBS because they might have a a significantly lower gross whack or some other characteristics. But we we wouldn't count those in terms of sort of what the market generally views as sort of a prepayment protected specified pools.

Understood. Thank you very much. Thank you for your time.

It's been closer question answer session. I like to turn the conference back over to mr. Joe McAdams for any closing remarks, please go ahead and thank you to everyone for your participation Mondays call and your continued interest in an worth. We look forward to talking to you again. Next quarter. Thanks conferences now concluded thank you for attending the a presentation wage might not disconnect.