Q3 2020 Anworth Mortgage Asset Corp Earnings Call
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And worst markets third quarter earnings conference call.
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Before we begin the call I would like to introduce Mr. Todd helmets.
<unk> director of Investor Relations, who will make a brief introductory statement.
Thank you Christine.
Statements made on this earnings call may contain forward looking statements within the meaning of section once you said today.
He's active 1933 as amended and section 21 E of the guarantees exchange active 1934 as amended and we hereby claim the protection of the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995 with respect to any such forward looking statements.
Forward looking statements are those that predict or describe future events or trends and that do not solely relate to historical matters you.
You should not rely on or 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 and investment strategy market trends and risks pumps.
Just 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 in 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 of the date they are made.
New risks and uncertainties arise over time 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 future events or change in events conditions or circumstances or otherwise.
Thank you.
I would now like to introduce Joe Mcadams, our Chief Executive Officer.
Thank you John and thank you all for joining us so in other words third quarter 2020 earnings call.
With me today on the call or at least or cash from overseas senior VP and portfolio manager.
Brett Roth senior VP and portfolio manager and Chuck Siegel Edwards Chief Financial Officer.
During the quarter and worth posted another solid book value increase continuing to recovery, which began in the second quarter our.
Our agency MBS positions benefited from a continued firming and stability in prices aided by the fed support and we believe the outlook for this sector continues to be positive.
With our mortgage credit investments, we have seen improving performance metrics regarding cobot, forbearance and delinquency trends and the values of these assets saw increases during the quarter as a result.
While agency prepayment rates on our portfolio remain high which is a drag on core earnings roll income from our TV acquisitions continued to be attractive and drove core earnings higher on the quarter.
Core earnings were $3.6 million or four cents per common share during the third quarter up from two cents in the second quarter GAAP.
GAAP net income was 20 cents per share the comprehensive income, which includes all realized and unrealized gains and losses reflected on our balance sheet was a gain of $26 million on the quarter compared to the second quarter is comprehensive income gain of $28 million.
Looking to Anworths investment portfolio.
See the total agency MBS investments grew from $2.1 billion at June Thirtyth to $2.3 billion at September Thirtyth.
As our increased the position and agency TBA fees more than offset the reduction in agency arm and fixed rate pools, driven by prepayments during the quarter.
[noise] non agency MBS, which are carried at fair value on the balance sheet in.
Increased on the quarter as market prices continue to recover.
And residential loans held in securitization trusts as well as our non QM loans, which are held for securitization fell slightly during the quarter due to prepayments while not reflected on the balance sheet for a book value. The fair value of these non QM loans held for securitization increased by $7 million relative to their key.
Larry and value.
On the quarter.
One additional point I'd highlight regarding our increased agency TBA position is that of the $2.6 million of dollar roll income from GBA is reflected in this quarters core earnings roughly 2.5 cents per share approximately half of that was earned during the month of September when our position was large.
Sure and more in line with where it ended the quarter. So while roll income can be variable from month to month based on the market.
We entered the fourth quarter with our agency TBA positions, providing a strong and improving contribution to core earnings.
So with that I'd like to turn the call over to be struck to discuss the agency portfolio in more detail.
Thank you Joe with continuing strong base effect purchases and muted volatility agency MBS performed well in the water spreads tightened across the coupon stack with the exception of Threed, which widened substantially.
First of all I'd pool pay ups increased but that the most coupons and collateral attribute.
Our agency MBS portfolio increased to approximately 2.3 billion at quarter end.
<unk> agency MBS comprised 66% of the portfolio 15, yet and Twentys securities combined 9% and adjustable rate MBS, 25%.
As we mentioned on the last call, we viewed lower coupon sleep GTB aimed at providing very attractive risk adjusted spread.
Given the significant role financing advantage.
With the combination of fed purchases and heavy origination volume, we expect did well, especially on this topic and as you can see we increased our GBA position substantially during the quarter.
Our Cts MBS allocation is currently a barbell of lower coupon, two and two and a half TB ace and higher coupon full on average specified pools.
5% of our specified pools have some prepayments mitigation characteristics.
Our adjustable rate securities coupons continue to reset down and we expect this will naturally moderate that repayment over the next six months.
As we discussed on the last call, we anticipated fast portfolio prepayments during the third quarter.
Overall agency portfolio CPR was 39 and adjustable rate Securities CPR was 37.
And I've Cobra Agency MBS universe, prepayments increased and similarly, our portfolio prepayments speed was higher at 41 CPR Howie.
However, we expect some moderation in prepayments in the coming months as a result of the winter seasonal effect and have been out of our higher coupon pools.
With regards to new agency MBS investment our focus continues to be on opportunistically, adding to our lower coupon 30 year position. So.
So far this quarter roll financing advantage has remained significant particularly let's say to you too and we have capitalized on very attractive dollar all carry.
Thanks, Peter and at this point I'd like to turn the call over to Brett to discuss our mortgage credit investments.
Thank you Joe.
During the third quarter credit markets continue to benefit from improved liquidity.
Spreads further tightened and over time and then over the course of the quarter overall, we have retraced a significant amount of the spread widening that we experienced during the first quarter. We are start still not nearly back to the levels. We were at at our tightest. However, the market is continuing to function smoothly with trade activity continuing.
To increase and the demand for assets continuing to grow.
During the quarter, our CUSIP portfolio's value increase due to the spread tightening in the market further on the funding side, both haircut and funding spreads improved we continue to pour portfolio leverage again at lower levels.
Levels than we had previously with our current assets, both cash and securities.
The voluntary prepayments speeds on our legacy portfolio over the quarter was approximately 13, C.R.R. and CDR is trending back downward to approximately two CPR.
You do delinquencies look to be returning to levels experienced prior to Covidien 30 day delinquencies running at approximately 3% since increasing into post cobot experience. We are seeing the 60, plus delinquency bucket holding steady at approximately 20%.
There are no other additional sales normally their purchases in the securitized credit portfolio. However, a few of our securitized MPL bonds were called during the quarter.
Last quarter, our portfolio was comprised of approximately 50, 56% legacy MB, Andrea and 47% credit risk transfer.
Currently the balance is approximately 53% legacy MBS and 47% credit risk transfer assets.
Nearly 84% of our CRT investments focused on agency re performing loans.
Turning to our loan portfolios, we have been in very close contact with the Servicers of our loans in both loans held for investment portfolio and loan held for securitization looking.
Looking at the residential loans held for investment portfolio. This is a portfolio of highly qualified quality excuse me high quality jumbo loans originated in 2014 2015.
Over the quarter, we experienced increased delinquencies. However, any instances there were there was had been liquidations. We have generally benefited from the increased value of underlying properties not experienced losses when liquidating property.
We continue to see high voluntary prepayments in this portfolio.
With BP are still running at approximately 38 C.R.
Overall, the performance of the loans within this portfolio continues to be strong per our conversations with the servicer loans that are designated as coded for not being reported delinquent. However, they are missing principal and interest payments are being accounted for as for foreign payments.
So on the information we received from the servicer. It appeared that no additional forbearance was experienced during the quarter.
Our portfolio of loans held for securitization is our non QM loan portfolio.
Current portfolio of assets has a weighted average FICO of 743, and LTV LTV of 70% and D.T.I. of 38.5%.
Approximately 83% of our portfolio is comprised of hybrid arm of which the majority are 71.
At September Thirtyth, approximately 1.5 million of this loan portfolio was 30 days delinquent approach.
Approximately 6.4 million was 60 days or 60 days delinquent and approximately 3.5 million was 90 plus days delinquent.
We have seen both the 60 day and 90 day buckets improved significantly from last quarter, where they were 13.3 million and 13 million respectively.
Yes.
Hmm the percentage that is COVID-19 related are as follows 30 day delinquency, 84% 60 day delinquency, 72% and 90 day delinquent, 93% looking.
Looking at the latest statistics, we see that the cobot identified assets.
Folio has declined from 26% to 23%.
Of that 23%, 41% or current.
Our portfolio has experienced an improvement in coated related delinquencies reported at 12% down from 20% last quarter.
Further the Colgate identified delinquent loans, 62% of these borrowers have resumed making payments on their loans.
Thanks, Jeff.
Thank you Brett.
Turning now to the portfolio financing.
In line with our smaller agency MBS pool position.
You'll see the repo borrowings declined similarly to a total of 1.46 billion at quarter end with an average rate of 35 basis points overall, and a hedged interest rate of 1.44%.
Our leverage multiple declined to 3.4 times total capital at September Thirtyth when implied the applied GBA financing is considered our effective economic leverage at June Thirtyth was 5.0 times total capital.
Well, so while leverage the repo and other borrowing so from the prior quarter economic leverage was up from 4.7 times at June Thirtyth due to the increase in our.
Agency TBA positions.
Our interest rate swaps declined in notional balance to $765 million largely driven by the maturity of some of our shorter lower cost swaps, we still maintain a significant dollars to swaps beyond a five year maturity currently to protect book value from it.
From an increase in longer maturity interest rates, even if short term rates stay low as we expect in the coming quarters.
Our book value per share increased 19 cents on the quarter from $2.85 to $3.04 per common share when taking into account. The five cent dividend that was declared during the quarter total economic return on book value for common shareholders was 8.4%.
For the quarter and the year to date economic loss now stands at a negative 30.4%.
With that I would turn the call back over to our operator Christine.
Any questions you might have thank you.
Thank you as a reminder to ask a question you on the progress.
One on your telephone.
Your question.
Okay ASCII. Please standby, we compiled acuity roster.
Your first question comes from the line of Doug Parker from Credit Suisse. Your line is open.
Hey, guys. This is Josh on for dogs, we saw leverage tick up in the quarter like you just mentioned I'm curious if this is the right level.
Or how should we think about target leverage going forward just given the incremental ROE is you're seeing in the agency space specifically in the TV a roll specialness. Thanks.
Sure. Thanks, Josh.
I do think our leverage multiple is.
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It's partly influenced by the allocation of equity across the different asset classes right. We do typically operate with a higher level of leverage on our agency MBS investment. So I think as we've seen the net equity.
Allocated to agency MBS that does drive the overall portfolio leverage higher so.
I think we're comfortable with our individual sector.
Leverage targets that we have now so I do think theres the possibility perhaps of some additional uptick and leverage moving forward. We have a similar magnitude if we were to continue to.
Yes.
Some of the Paydowns off the portfolio.
Into tdrs or other agency MBS pools, but I would say.
By and large given our mix of agency versus mortgage credit and the various components of leverage this is this.
This is sort of where we're targeting at this point.
Great that makes sense secondly, can you give us an update on how book value is trending in the fourth quarter.
Sure we have in the month of October and then you know the first few days of November we have continued to see.
Book value increases I think some.
Similarly, as we saw the prior quarter some coming from both the improvement in price of.
Mortgage credit investments as well as.
This is stability and some firming and some of the agency investments we have so.
As of today or last night to this morning, obviously has been a little volatility, but in a range of between one and 2% would be a book value increase we'd see at this point.
Great that makes sense.
Finally, just given where the stock is trading at has been treating any thoughts that you could share on the attractiveness of share buyback and how you're thinking about the trade off between returning capital versus incremental investments.
Thanks sure we've talked about this in the past and we certainly understand.
The potential for share repurchases to meaningfully increase book value per share if they are done at a substantial discount.
We certainly consider all the options we have to improve total shareholder return.
I will say in this environment and making new investments.
Vestments that have the potential to drive earnings higher and potentially allow us to increase the dividend at some point in the future are also important so we weigh all those factors in terms of.
What a is going to generate the best economic return and in terms of generating income and.
Genuine to increase book value and secondly, what would help drive that price to book discount.
Narrower on that hopefully improving book value. So we certainly have used share repurchases as an important tool in the past and its.
Something we are continuing to evaluate.
Great appreciate the comments Joe.
Thank you.
Your next question comes from the line of Mikhail Goberman from JMP Securities. Your line is open.
Hi, good morning.
Nobody is doing well.
Question on the PVA strategy.
Obviously a huge.
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The allocation to Tvs this quarter a few of your peers have done something similar.
Just curious as to your thoughts on the viability of the PVA strategy going forward.
Perhaps the spec pools.
And.
Second question I know you mentioned Prepays.
Probably going down in the fourth quarter, but is there a.
A ballpark figure you can give us for the month of October thanks.
So.
Please turn to an update on the on the quarter to date in terms of Prepays and I'll go from there.
Yes.
I briefly mentioned it earlier.
Prepays were high in October the overall portfolio CPR was 41.
The honest what city eight right.
Right. So so we've continued to see fast deep into October we usually see some seasonal effect yes.
As we move into the winter weather that and that will be enough to bring the acute to the quarter over quarter speed down for the fourth quarter, what we'll have to see as we move along.
In terms of the GBA.
Allocation.
Yes, I think our position.
So far over the last quarter has been that as our.
Agency portfolio, the pool portfolio, including the spec pools has been paying down the.
The attractiveness of the roll income.
Implied financing the specialness, there as well as our expectation of some stability in pricing.
Of the production coupons.
Would make that.
A more attractive investment on the margin than reinvesting those.
Prepayments into the agency MBS market and secondly.
Obviously, we've seen good stability in the markets, we invest in over the past several months, but given the volatility weve seen this year given some of the questions about.
Optimal capital capital allocation.
These are particularly light in terms of their capital Intensiveness, which was attract feature as well. So as we move forward. There clearly is a limit to the amount of TPH you would want to have a one relative to your overall portfolio. So I do think that we are certainly look to looking for opportunities to opportunistically.
Add to the agency portfolio as pay downs come in whether those take place in additional ta is or specified pools that we have been put on repo what sort of take those decisions as they come.
Great. Thanks, that's that's all from me wishing everybody a great holidays and see.
See better.
Next year.
Thanks, I appreciate it and do you too.
Thanks.
Your next question comes from the line of Granger from Great quarter Research. Your line is open.
Thank you for taking my questions.
Regarding the the leverage and the use of capital and rewarding shareholders.
Your dividend right now is what was the.
Last declared dividend was five cents.
Yes.
When you're thinking about how you are going to reward shareholders would it make sense to to increase that at all even though you're already at a double digit percentage yielding common stock.
Our our our our thinking around the dividend is that we would like it certainly over the course of the year and over a multiple quarter horizon to be reflective of the earnings power of the portfolio given that we do report core earn.
Things as reflecting the actual prepayment experience of the quarter, We do report our income off our.
Mortgage credit MBS investments based on.
The actual.
The cash flow that that they are throwing off during the quarter. During this period, we do clearly have volatility from quarter to quarter month to month in core earnings but.
Our expectation would be if we're increasing the dividend in future quarters. It would be because we are seeing and expecting a similar increase in the core earnings as I did point out during.
During my portion of the comments, we have seen a significant increase in core earnings through the.
Spread were earning.
Dollar roll income on the GBA positions that was.
Increased over the quarter about half of that came during the final month. So I do think relative for our third quarter earnings core earnings versus the dividend.
Part of the reason we were comfortable with the five cent dividend was what we see as some positive momentum there on the core earnings.
Okay. Thank you.
Regarding the CPR.
Please try I think mentioned that I mentioned.
The idea that so.
Six months from now CPR would probably be down I think I got that right.
But in a qualitative way rather than than like without and booster did not.
Address what the potential magnitude.
Would be can you talk about about the what you how you envision.
PR in the future.
Sure well the CPR the portfolio CPR, it's going to be driven by to two main factors. The first is going to be where interest rates are and if we were to assume that interest rates stay where they are over the next six months you would expect to see some decrease in prepayments, but I would think that would be in a sort of a single digit decrease.
Fees from from being around 40 to something in the mid mid Thirtys sort of area. The second factor, though when prepayments are as fast as they are is that we're receiving about 10% of the portfolio agency portfolio paying off every quarter and so a lot of the average portfolio.
CPR and the average yield that we're going to be earning on the agency portfolio will be increasingly driven when you. If you were to look out six months bye.
What's the CPR on the new investments and what's the.
The NIM, you're earning on your new investments going forward. So I think that will be I would expect that we will not be buying as.
As many securities that are currently paying that 40 CPR. So we expect the average of the portfolio to come down just from.
The rotation into.
Lower coupon more current.
Specified pools that would have lower prepayments.
Yeah, and I'd, just like to add that that six months reference was.
Related to the CPR is an hour adjustable rate securities.
And related to the resetting of the coupons as you've noticed this quarter the average coupon on the.
That was down about 50 basis points and we expect similar declines.
Over the next two quarters and in six months.
Adjustable rate part of the portfolio would have fully reset to current rate.
2% and I think that the fact that now we have this much lower current coupon would naturally slow down prepayment that's an excellent point, that's an important third factor it's about.
It's not a.
Terribly large portion of our agency MBS portfolio, but we're still at the point with tools were about 25% of our securities will see their rates adjusting down as well.
Okay, great. Thank you very much for that color.
One comment for me and Mike My questions.
Congratulations on growing your book value again, and I see that in your where your stock is trading right now you're at a 43% discount which seems killing tune for investors.
Thank you.
Thank you. Thank you.
Again, we would like to ask a question. Please press star one on your telephone keypad.
There are no further questions at this time.
On the call back over to Joe Mcadams for closing remarks.
Thank you Christine.
And again, thank you all for joining us today or listening in.
On a replay to this call and we appreciate your continued support of Anworth and look forward to talking you talking to you on the next call. Thanks a lot.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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