Q2 2020 Anworth Mortgage Asset Corp Earnings Call
Thank you Jamie.
Statements made on Mr., Oh, maybe deemed forward looking statement with meaning of section 27 eight of the Securities Act as 1933 as amended and section 21. He loved the Securities Exchange Act was 934 as amended and we hereby claim the protection of the Safe Harbor provisions of the private securities.
Litigation reform after 1990 fives with respect to any such forward looking statement.
Forward looking statement or those that predict bright future where trends that you're not relates 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.
Statements regarding the following subjects are forward looking by their nature.
Our business in investment strategy market trends and risks.
Assumptions regarding right.
Just some since we got you pick the right 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 in other reports that we filed from time to time with the U.S. Securities and Exchange Commission.
Cause our actual results could differ materially and adversely from those projected in any forward looking statements that we make.
Forward looking statements speak only as of the date they are made.
New risks and uncertainties are rice overtime and it is not possible to predict those events or how they may affect us.
Except as required by law, we do not intend to publicly update or revise any forward looking statements, whether as a result of new information or expectations or a change in events conditions circumstances or otherwise. Thank you.
I would now like to introduce Joe Mcadams, our Chief Executive Officer.
[noise]. Thank you John and thank you for joining us on Edwards second quarter 2020 earnings call with me today on a call RBC Your passion, most senior Vice President and portfolio manager, Brett Roth Senior Vice President and portfolio manager and Chuck Siegel Edwards CFO.
Yeah in response to the significant market volatility and decline in valuations of our mortgage credit investments due to the effect of cobot 19 on the economy, we significantly reduced the size of our investment portfolio subsequent to the March 31st quarter and.
These sales took place during the month of April and as discussed on our last quarterly earnings call allowed us to reduce repo borrowings and build back up both the overcollateralization levels on remaining borrowings and our excess liquidity and cash to levels, which we believe appropriate given the market uncertainties.
Tilley.
Since April [laughter], we've seen increases in the market value of our investment portfolio, particularly in mortgage credit investments, resulting in an increase in the company's book value per share.
The impact to covert 19 on or near term earnings power has continued to be significant though as higher prepayments driven by the significant decline in mortgage rates due in part to the feds intervention in the agency MBS market.
As well as the effect of missed interest payments on non agency loans encoded forbearance plans have impacted earnings during the second quarter.
[noise] core earnings were $1.6 million or two cents per common share during the second quarter down from nine cents in the first quarter.
GAAP net income was 35 cents per share and comprehensive income, which includes all realized and unrealized gains or losses reflected on our balance sheet was a gain of $28 million on the quarter relative to last quarter's loss of $186 million.
Focusing for a moment on core earnings our goal has been for that measure of earnings to reflect not just the core recurring components of our GAAP earnings, but also to attempt to most transparently reflect the actual economic performance of our portfolio without relying heavily on the sorts of smoothing or assumptions based measures have been.
Income recognition required under GAAP.
Most obviously our recognition of the cost of higher agency prepayments the a pay down expense in our core earnings was larger than the gap premium amortization measured by word of mouth nearly equivalent to one of the half sense of core earnings for the quarter.
And similarly, we now recognize income on a non agency MBS based on the actual interest collections as opposed to the gap level yield method. These payments as well as those are loans have been reduced during the quarter by approximately 20% primarily due to covert related forbearance. So while we expect many of these near term shocks to earnings to pursue.
During the current quarter I do believe it's important to highlight how we reflect these near term economic costs into our core earnings measurement and that should be considered both when comparing anworth core earnings to peers and it's also something that we consider when taking the current quarter's earnings into account in evaluating our dividend policy.
Turning to Edwards portfolio.
At the total portfolio declined from $3.7 billion at March 31st.
2.97 billion at June Thirtyth with the sales and agency non agency MBS occurring early in the quarter.
Relative to our agency TBA positions I would point out that as discussed on our prior earnings calls we closed out all of our TV a positions early in the second quarter to reduce mark to market volatility.
Deviate trade has become attractive during the second quarter and our new portfolio investments during the quarter as well subsequent to June Thirtyth have been an agency tdrs. So while there is 100 million dollar approximately increase from TPH shown quarter over quarter. The average GBA position carried during the quarter was significantly lower and the effect.
Core earnings from TV, a dollar roll income should be more significant going forward, then would simply be reflected in the quarter over quarter change.
With that I'll turn the call over to be extirpation I'm about to discuss the agency portfolio in more detail.
Thank you Joe during the second quarter. The Feds continued strong base of budgeted led to further stability in the agency MBS market with low volatility and tighter spreads, particularly for production coupons.
I've been damage related slowdown in refinancing activity.
Like the anticipated by market participant did not materialize 11.
Hi, coupons underperformed well specified pool valuation inflows materially.
At quarter end, our agency MBS portfolio was approximately 2.1 billion.
The reduction in portfolio size as Joe mentioned was driven by the sale in April of Alethia, 3% coupon security.
As discussed on the last call that was what you up production pools, we viewed as most exposed to the expected significant increases in prepayment and GBA suite.
Our agency MBS, new investments during the second quarter, well focused entirely on lower coupon two and two and a half fidia TB eight given their very attractive county profile as you can see our TV a position increased to 12% of the agency portfolio.
The continued shift in outlets video fixed rate allocation the average coupon of our pool investments increased.
Q4 percent.
However, 84% of these pools have characteristics like long balance Oh seasoning that mitigate prepayment rate.
Regarding portfolio prepayments during the second quarter. The overall agency portfolio prepayment rate was 33, CPR and the adjustable rate securities prepayment rate was 28.
In July agency, MBS prepayments speeds have exceeded projection.
Given unprecedented low in mortgage rate and a potential narrowing of the primary secondary mortgage rates spread we anticipate spot repayments for the remainder of the quarter.
However, we expect to see the fact of burnout and amongst abuse prepayments response in our specified pools subsequently.
With regard to New agency MBS investment, we remain focused on opportunistically, adding to our TV a position given the roll specialness and significant implied financing advantage of lower coupon TV.
Thank you mr. with that I'd like to turn the call over to Brett Roth to discuss our mortgage credit investments.
Thank you Joe.
During the second quarter credit market saw liquidity return.
Tightened in have you Dan I'll buy not the same type levels. As we were previously that's significantly tighter than we were at quarter end at the widest points observed during the crisis driven widening.
During the quarter. We also saw a return of new issue securitization deals with each new deal being priced better than the last we are seeing other signals in the marketplace that indicate to us that the market is resuming activity again at different pricing and risk expectation levels, but in a manner that allows for asked.
To be cleared between participant on a systematic basis that does not imply draconian or liquidation assumptions.
During the quarter, we did not conduct any additional asset sales other than the 111 million sold in April which we had identified during our last call.
Primarily due to increases in the value of the portfolio, but also due to improvement in haircuts on assets, we've been able to support portfolio leverage with our current that that Ashley.
In fact, we've been able to completely removed leverage from certain assets, where we thought that was the prudent decision.
As mentioned earlier there were no other additional sales nor where their purchases in the securitized credit portfolio. The composition of the portfolio migrated due to the sale of the 111 million of assets sold in April.
Relation changes and prepayments.
During our last call our portfolio was comprised of approximately 72.5% of legacy CUSIP.
I'm, sorry, legacy MBS, and 27% credit risk transfer assets.
Currently the balance is approximately 58% legacy M.B.S. and 42% credit risk transfer assets.
Definitely 75% of our CRT investments are focused on agency re performing loans.
Turning to our loan portfolios.
We have been very close contact with the Servicers of our loans in both the loan held for investment portfolio and loans held for securitization.
Looking at the residential loans held for investment portfolio. This is a portfolio of high quality jumbo loans originated in 2014 in 2015.
Overall, the performance of the loans within this portfolio continues to be strong has reported.
For our conversations with the servicer Servicers of these loans that are designated excuse me per our conversation with the service or those that are designated as coated are not being reported as delinquent. However, they're missing principal and interest payments are being accounted for as for born payment.
Based on the information we received from the servicer, we estimate approximately 300000 of covert related principal and interest was four born during the quarter.
It appears to us at approximately 7.7% of this portfolio is experiencing coded forbearance.
[noise] voluntary prepayments increase from last quarter moving to a range of 35 to 45 CPR during the quarter.
Our portfolio of loans held for securitization is our non QM loan portfolio.
Our current portfolio of assets has a weighted average FICO, a 742, LTV CLTV, 70% and de <unk>, 38.4%.
Approximately 84% of our portfolio is comprised of hybrid arms of which the majority or 71.
As noted in our early earnings release at June Thirtyth, approximately 1.5 million of this loan portfolio was 30 days delinquent approximately 13.3 million was 60 days delinquent and approximately 13 million was 90 day plus delinquent.
Of these amounts the percentage that is covert 19 related are as follows 30 day delinquency, 65% 60 days delinquent, 96% and 90 plus delinquency 96%.
Our non QM loan portfolios cobiz experience with similar to what we understand other non QM coded portfolios experienced specifically, we were contacted and extended coded payment plans to approximately 29% of our power.
This number does not include borrowers that called in but did not request paperwork to proceed with the plants.
Oh that group of 29% that entered into plant.
31% remained current.
Overall, our nonqm loan portfolio experienced a 20% delinquency rate due to covert forbearance plant.
Looking at the latest statistics, we see that the coded identified assets in the portfolio has declined from 29% to 26%.
The 26%, 22% our current.
Therefore, our portfolio has remained steady with covert related delinquencies reported at 20%.
However of the coated identified delinquent loans, 41% of these borrowers have resumed making some payment on their low.
Looking at funding since last call quarter, the improved liquidity of the market has impacted the cost of financing our assets on the securitized side of our business. We have seen our weighted average haircut improve and funding spreads have tightened on the loan side, we successfully negotiated a term repo financing.
Tonight's our portfolio.
Thanks, Joe.
Thank you, Brad continuing with our portfolio financing inline with our asset sales and de levering early in the quarter repo borrowings declined significantly similarly to a total of $1.7 billion at quarter end with an average rate of 39 basis points over.
Overall, and the hedged rate of 1.24%.
Our leverage multiple at June Thirtyth was 4.1 times total capital when implied TB financing is considered our effective leverage at June Thirtyth was 4.7 times total capital. While this leverage is lower than the 6.1 times reported at March 31st we have helped beverage fairly constant content subsequent to.
Our portfolio sales early in the quarter.
Our interest rate swaps declined a notional balance to $915 million as we had both swap maturities as well as terminations of some of our shorter maturity swaps. We believe offered little value given the outlook for the fed to maintain rates near zero for an extended period, we still maintain a significant balance in swaps beyond the five.
You are maturity to protect book value from an increase in longer maturity interest rates, even if short term rates stay anchored.
Our book value per share increased 16 cents to $2, an 85 cents per common share when taking into account that both the first and second quarter dividends were declared subsequent to March 31st the total economic return on book value for common shareholders was 9.7% for the quarter.
Lastly, I notice a subsequent event as Bret mentioned that we renewed our warehouse line of credit we used to finance loans held for Securitizations for a one year term in July as previously disclosed in our first quarter 10-Q due to the significant decline of the company's market capitalization, we were not in compliance with all of the covenants on our previously.
Fine, but we were able to obtain waivers on those covenants and have now modified the covenants on this line with this renewal. So we are in compliance at this point and expect to remain so going forward with that I turn the call over to Jamie our operator for any questions you might have.
Ladies and gentlemen will begin the question and answer session.
He would like to ask your question. Please press Star then one using a touchtone telephone.
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So what do you all your questions you May press star into.
Once again that is star then one to ask a question.
Well pause momentarily to assemble the roster.
Our first question today comes from Mikhail Goberman from JMP Securities. Please go ahead with your question.
Hi, Thanks for taking the call hope everybody's a safe and sound and.
Congratulations on a good book value quarter I appreciate the commentary on the core EPS run rate that's very helpful. I.
I guess, if we could start if you could could you give an update on book value performance, thus far in third quarter.
Sure, where we've seen so far in the month of July is.
Fairly steady from our agency portfolio and an increase a continued increase appreciation in our mortgage credit investments. So we would estimate book value per share through July to be up in the neighborhood of 2% relative to June thirtyth.
Thank you that's very helpful.
If we could pivot quickly to the non agency portfolio. You mentioned you were looking at.
Agency Rpls is there anything else that's attractive in that space and kind of looking forward. How do you. How do you guys think about the allocation of.
Capital to agencies versus non agencies is there.
If you don't financing attractive been in credit do you keep ramping up the allocation the agencies.
Sure.
The.
As we mentioned the agency Rpls is our existing portfolio of.
Our crts that we ended the quarter.
We have not made any new investments in mortgage credit investment into in the mortgage credit space, we have been focused.
Firstly and reducing the size of the portfolio in April and maintaining a relatively constant economic leverage through a agency GBA trades, which as these are pointed out had been offering.
Very significant carry as well as.
Significant price support from the fed in the near term.
Looking forward I think.
We're going to continue to be focused on attractive spread investments in the agency MBS space.
Relative just to our various strategies in mortgage credit.
We do have our portfolio of non QM loans that are held.
For securitization.
While there was significant coded forbearance there initially as Bret pointed out about 40% of those borrowers.
Who had skip the payment are now making payments or in the process of becoming current so as that continues to improve I think we would certainly look forward the ability.
Did to move forward with some sort of more permanent financing through securitization of these securities. If we find attractively newly underwritten loans to add to those.
And to build a more efficient securitization size, we certainly have I consider that we havent been focused as much in the non agency MBS space. We have had as Bret pointed out improvement of pricing we've had some stability in our financing counterparties, but.
All things equal the non agency repo financing.
It's still fairly extensive than I think we'd want to have some continued confidence that there's going to be.
Improving pricing as well as stability in the financing markets before we would be significantly increasing in the non agency space.
Yields are certainly attractive on non agency MBS by historical standards.
But they're not high enough you really would consider purchasing them on an unlevered basis is something that would be accretive to earnings.
I see great. Thank you very much for that.
If I could ask about you mentioned on the the prior call three months ago that as far as buybacks were concerned weren't really thinking about it as preservation of capital was the focus is that still the same situation.
And now.
Well you are correct our focus during the second quarter was primarily on generating maintaining prudent level of excess liquidity and cash right.
While we certainly believe there's still significant economic uncertainties in the market and there's the potential.
For more volatility in the future we are seeing positive signs from both the market value of our mortgage credit investments and the improvements we noted in cobot related forbearance. So.
For the time being our two investments have been focused on agency GBA trace their very efficient from the standpoint of requiring little to no capital outlay versus traditional security investment.
But as we move forward and become confident that it will be prudent to decrease liquidity and potentially increased leverage will certainly continue.
Consider can sit or share repurchases or to meaningfully increased book value per share.
We've stated in the past continue to believe that we will certainly continue consider all the options we have available to improve total shareholder return.
Making new investments that have potential to drive earnings higher and could potentially allow us to increase the dividend rate at some point the future obviously very important but also the ability of share repurchases at a significant discount to book to drive book value higher.
It's also a very important tool and one that as you know we've we've used significantly in the past.
Thank you if I could just squeeze one more in just a question about in your prepared remarks about the core EPS run rate.
Just wanted to make sure you did say.
The near term shocks from the forces that.
Produce the lowered.
Core earnings number in second quarter are still there for the third quarter is that right.
Right. So if you think about the the difference between the current effect of prepayments versus something that will be based premium amortization is with a longer term estimate that difference was I think about $1.3 million during the second quarter.
And we expect this booster pointed out that for prepayments to remain high during the third quarter and you know if interest rates stay around where they are now begin to mitigate as we move into the fall as well is this sort of seasonal effects, we normally see as well.
That's certainly would continue into the third quarter.
Relative to the roughly 20% decline in interest collections on our loans in non agency MBS no that is roughly a million dollars a quarter of missing income we have due to decode forbearance. We certainly are seeing some improvements there, but I do think that some amount of koby forbearance, we will continue to expand.
In the future.
Third point I'm I would make is that.
We only had about $300000 have rolled income during the second quarter because.
We had a very limited average T.D.A. position on during the quarter, but given where it stood.
At June Thirtyth, and I think we'll continue to look to Opportunistically adds there we do expect that given the very significant drops and wide spreads and implied financing in the TV a trade that the TJ roll income will be.
Much more significant components core earnings going forward.
Got you. Thank you very much everybody.
Sure.
And our next question comes from Doug Harter from Credit Suisse. Please go ahead with your question.
Hey, guys is actually Josh bolt on for Doug I'm, just wondering if you could talk a little bit about your target leverage I'm, specifically in the agency portfolio going forward and.
And I guess, a follow up to that would be what are you seeing or if you could talk a little bit about the levered returns you're seeing on incremental investments into those agency assets. Thanks.
Sure I'll take it first and turn it over to be strip, but.
In terms of the target leverage or we are down.
At least the full turn and leverage from where we were heading into the March quarter end.
So I do think we would.
As market conditions continued to improve I.
I do think we would look too.
Potentially increased leverage back up towards that area, whether it takes the place of GBA trades or new purchases or even as we discussed with account.
Potentially even share repurchases as driving leverage higher.
We'll we'll consider all those options at that time.
In terms of the spread on new investments, it's a bit of a trip, it's a bit of the tricky one because.
Technically spread is about 200 basis points on on a GBA investment you give a small amount of that back from any hedges you put on but again, we technically have almost no capital outlay on a trade so.
I think I would view certainly our incremental investments have been TBS, where the drop has been quite significant on a month over month basis will that special Miss.
Persist for a long period of time, you can never predict that but.
It's a little tough to come up with an orally when you're all your incremental investments have been in TV ads for the past agreements.
Easter do I'll add to that I don't have anything to add that.
Great. Thanks for the color guys.
Thank you Justin.
Once again, if you would like to ask a question. Please press star and then one.
Our next question comes from how Granger from Great quarter Research. Please go ahead with your question.
Thank you for taking my question.
I wanted to ask about the the leverage your leverage person.
331 was 6.1 now it's 4.1.
And you were talking about bringing it up.
But I wasn't I wasn't sure whether whether six whether it's the six area is going to be your long term target.
Historically, we've operated between six and seven times total leverage and and again when we when we have expressed this leverage ratio just to be clear.
We include our.
Repo borrowings and other recourse financings any sort of securitization that's been consolidated in the balance sheet, we excluded from our leverage and Thats nonrecourse financing and the denominator is our total capital, which is common stock our preferred stock as well as some junior subordinated notes that we have on liability.
Portion of our balance sheet. So historically we've operated between.
At around six times leverage or even a higher in the past that number does vary based on our allocation to agency.
Investments, which can have a leverage anywhere from eight to 10 times equity depending versus our non agency investments, which currently our operating quit close to a one time to leverage and historically have been closer to two so.
I do think in the near term when we think it's prudent to reduce the amount of free capital we have reduced our excess liquidity somewhere in the neighborhood of six times leverage will be where we'd be looking to move the portfolio as a whole.
Okay. Thank you I'm looking looking your DNA line GNS line went up in the quarter management fee line went down in the quarter or what kind of imagine DNA would would move roughly with management fee perhaps.
So can you can you talk about what drove the Gionee line higher.
And on a quarter over quarter sure just the DNA ex management fees are correct.
Yes, right just just agenda.
I don't know if I have all the details handy I know Chuck Seagulls, a nickel Chuck do you have any color there in terms of the quarter over quarter increased in a non.
Management BDNA.
No I am sorry, I don't have that information I know that or her.
Do you know insurance was up a little bit.
That recently renewed testing.
Renewed after the end of the first quarter and.
The color I got some or insurance agent was that for.
Just because everything that was going on in the marketplace.
Most DNA insurance.
Went up.
And so the pricing on ours was was actually pretty good but it's still went up so I know that was part of the increase.
I'm really not sure what anything else was.
Okay. Okay, we will have any we would have.
The that usually printing and the.
Huh.
The filing costs.
<unk> of our annual report usually come in the second quarter. So that that's probably part of the difference quarter to quarter.
Yeah. That's a good point I mean, the increase overall was from about 1.1 million in the first quarter to 1.25 million in the second.
As Jeff pointed out we had.
Annual meeting and all of the related printing. We also did have some incremental legal costs.
Just in terms of a lot of things that were going on in the marketplace dealing with lenders et cetera. So I just I apologize we don't have all the details, but I would characterize the a significant amount of that $150000 increase as as something I would consider to be nonrecurring.
Okay. Thanks, I'll end with the comment which is.
Based on your guidance of an increase in 2% in book value from quarter end.
Guys are not trading at a 41% discount to book value, which as you are looking strictly at book value I think as a guide for investing in the sector that seems very appealing.
Thank you.
Okay. Thank you very much.
And ladies and gentlemen at this time and showing no additional questions I'd like to turn the conference call back over to Joe Mcadams for any closing remarks.
Well. Thank you all for your attendance at this call me, they're listening now we're on a replay or via the transcript as always we appreciate your interest.
Look forward to talking to you. This time next quarter, if not sooner. If you have any questions you can always reach out to us. Thank you very much.
Ladies and gentlemen, what that will conclude today's conference call with you. Thank you for attending you may now disconnect your lines.
Yeah.