Q2 2019 Earnings Call
Welcome to the AG mortgage investment Trust second quarter 2019 earnings call.
My name is Vanessa and I will be your operator for today's call. At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session. During the question and answer session. If you have a question. Please press Star then one on your Touchtone phone.
Please note that this conference is being recorded I will now turn the call over to your house.
Well right now.
Thank you Vanessa good morning, everyone.
Welcome to the second quarter 2019 earnings call for AG mortgage investment Trust.
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 recently.
Our most recent annual and quarterly RTC filing.
The company's actual results may differ materially from these forward looking statements.
We encourage you to read the forward looking statements disclosure in our earnings release and presentation. In addition to our quarterly and annual SEC filings.
During the call today, we will also refer to certain non-GAAP financial measures.
Please refer to our SEC filings reconciliation the most comparable GAAP measures.
Throughout the call. This morning, we will reference the earnings presentation that was posted to our web site. After the market closed yesterday to view the slide presentation turn to our website www Dot AG MIT dot com and click on the Q2 29 <unk> 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, David Thanks, Darryl and good morning to everyone.
I'm going to share some of our second quarter 2019 financial results with you today.
Our core earnings for the second quarter were 36 cents per share after subtracting a four cents retrospective adjustment.
Core earnings were negatively impacted mainly by the effects of yield curve compression and changing prepayment expectations as asset yields have reset lower funding costs have remain sticky not adjusting until late in the quarter. When it became clear that bad would be lowering policy rate.
That said our book value was roughly flat quarter over quarter as the shortfall between our 50 cents dividend and our 36 cents of core earnings was offset by tightening spreads and gains in our credit portfolio.
As well we were pleased with the pre payment performance of our specified agency pools, which continued to perform better than the overall universe of agency mortgage backed securities.
In light of this quarter's shortfall of core earnings versus our dividend.
I'd like to spend some time addressing our dividend going forward.
As we stated on previous calls our board takes into account our expected multi quarter run rate core earnings.
Our undistributed taxable income.
And our general outlook on the market and our portfolio among other factors when setting our common stock dividends.
Based upon our current view of the market and our portfolio. We felt it was prudent to announce our expectation that our board will adjust our quarterly common dividend.
To 45 per cent per share for the third quarter of 2019 subject to any changes in our outlook.
This compares to 50 cents declared for the second quarter.
We believe that this level of dividend 45 cents better reflects the model earnings power of our targeted asset portfolio.
Of our anticipated leverage.
And our projected funding costs in the current market environment.
As I mentioned earlier, while our asset yields have been cold lower by longer term rates that reflect the markets anticipation of future interest rates. Our funding costs are more closely tied to policy rates at the front end of the yield curve that are set by the federal reserve.
The compression of this spread reached its narrowest point during the second quarter.
However, as it became clear late in the quarter that the fed would be adjusting rates lower in the second half of the year.
Which was then confirmed at the July FOMC meeting last week.
We have begun to see funding costs improve.
While residual headwinds may still be present in the very near term, we anticipate that further expected rate cuts and our continued progress in adding higher yielding whole loans to our mix of our portfolio mix should improve net interest margins overtime.
TJ will provide more detail on my comments regarding agencies.
Our whole loan strategy and the performance of the other material components of our portfolio and with that I will turn the call over to TJ Durcan.
Thank you David good morning, everyone.
As David mentioned, the second quarter continued to challenge Levered investors as yields on assets further out on the curve fell more sharply than shorter term funding costs that are tied more directly to fed policy rates.
In response to persistently low inflation slowing economic activity and uncertainty over global trade. The fed has pivoted from its tightening policy.
To neutral to the first interest rate cut in over 10 years on the period of just seven months.
Between November of last year, and the middle of the second quarter the spread between the three month overnight index swap or Elias rate and the 10 year swap rate has tightened by 120 basis points to negative 22 basis points.
The last time, we experienced in version in this relationship was briefly in 2006.
While not unscathed, we feel that our diversified portfolio of credit whole loans and agency MBS has performed well in this environment and also versus our peer group generating a 7.3% economic return on equity for the first six months of the year or 14.6% annualized year to date.
Despite the rate moves book value has been stable roughly unchanged quarter over quarter.
Our hedged agency MBS portfolio did experience some basis widening but this was minimized by the high percentage of quality specified pools in our agency portfolio.
And was more than offset by spread tightening in our whole loan and credit portfolios.
I'd now like to briefly discuss our core earnings.
In Q2 core experienced a nine cents hit compared to last quarter, primarily due to an increase in modeled lifetime prepayment expectations on our agency MBS.
Agency RMBS were down approximately 11 cents, which was comprised of approximately seven cents in response to benchmark swap rates that were 45 to 60 basis points lower across the curve.
At approximately four cents due to a onetime change due to our transition during the quarter from an investment banks agency prepayment model to the more widely used you'll book model.
Away from agencies. There was there were a handful of other items that provided a positive two cents offset to these changes and the prepayment expectations.
Of our agency book.
Turning to our investment activity, we are pleased to announce that during the second quarter Mitt along with other has all Gordon funds completed its first rated non QM securitization in June .
We were able to lock in the cost of funds from AAA to Triple B had a duration duration weighted average spread of 106 basis points over swaps, which is a dramatic improvement from our warehouse line cost of funds.
Based on the current volumes, we are seeing in the market, we would hope to become a quarterly issuer VR well known GE catch out.
The credit sector performed well during the second quarter.
The credit risk transfer market, which serves as a barometer of overall residential mortgage credit extended its first quarter spread tightening.
Outperforming high yield corporate and other broader markets throughout the quarter.
Fannie Mae and Freddie Mac made structural modifications to their crts as our programs evolve to balance their needs and the changes were well received by the market with new issue deals often being multiple times oversubscribed.
However, tighter spreads have some CRT tranches.
At significantly higher price premiums to par.
Creating some prepayment concerns should refinancing activity pick up as a result of lower prevailing mortgage rates.
Legacy RMBS spreads were unchanged to modestly tighter on relatively light trading volumes.
CMBS spreads were relatively unchanged after a strong performance in the first quarter.
Turning to slide six of our quarterly earnings presentation details of our second quarter activity.
We reduced our overall agency MBS exposure, which had increased during the first quarter as we deployed proceeds from our capital raise.
During the quarter, we increased our residential loan exposure at both in re performing and nonperforming loans and a newly originated non QM loans.
Additionally, on the credit side, we continue to add to our CRT securities portfolio and fund draws on our existing CRM CRD loan book.
On slide nine we've laid out our investment portfolio composition for the quarter.
The net carrying value of the aggregate portfolio.
It was down from $4.1 billion to 4 billion for the quarter and at quarter end was approximately 58% agency.
39% credit and 3% SFR.
Focusing on our agency portfolio on Slide 10 is a breakout of our current exposure by product type.
As mentioned, we modestly reduced our agency MBS exposure during the quarter by selling pools backed by generic and less call. Please call protected collateral, which resulted in an increase in our percentage of pools backed by lower loan balance loans or loans and favorable geographic locations to 96% from 90% quarter over quarter.
We have benefited from holding a high percentage of higher higher quality specified pools that have greatly outperform TV a year to date.
Our disciplined agency MBS asset selection process.
Allows us to position the portfolio for a variety of prepayment environments.
The constant prepayment rate for our agency book was 7.1% for the second quarter versus 12.4% for the overall 30 year Fannie Mae Universe.
We expect the portfolio to continue to outperform the overall universe of agency MBS as prepayment speeds are anticipated to pickup over the coming months in response to lower interest rates.
Turning to slide 12, focusing on our commercial real estate loans portfolio.
We funded approximately 4 million of equity commitments related to construction loans during the first quarter and have approximately $50 million remaining in equity commitments.
These construction loans are primarily first mortgages that sit in senior positions at the top of their respective capital structures.
Turning to slide 13, we provide portfolio statistics are single family rental portfolio.
Occupancy decreased slightly during the quarter from 93.7 to 92.1 and rents were relatively unchanged operating margin declined from 45.2% to 41.5, primarily due to the aging and subsequent write off of certain rental receivables.
On Slide 15, you can see our duration gap of 0.98 years, which is fairly constant versus 0.95 years at the end of the first quarter.
We reduced our hedges in concert with both a smaller agency portfolio and shorter asset duration, given the move lower in rates.
During the quarter, we were able to lower our weighted average pay fixed rate down to 1.9% from 2.2%.
Looking ahead, we continue to see a large pipeline of credit opportunities at favorable risk adjusted returns sourced via Angelo Gordons platform.
We are excited that we were able to successfully complete our first rated non QM securitization and to intend to remain active in utilizing the securitization markets to fund our various hole on activities.
With that I will turn the call over to Brian to review our financial results.
Thanks TJ.
Overall for the second quarter, we reported net income available to common stockholders of $15.3 million or 47 per fully diluted share core earnings in the second quarter was $11.8 million or 36 cents per share versus 30 point 13.69, 45 cents per share in the prior quarter.
There was a negative four San retrospective adjustment in the second quarter versus a negative one cents retrospective adjustment in the prior quarter. The reason David the TJ discussed.
At June Thirtyth, our GAAP book value was $17.42 per share as compared to $17.44. A decrease of 2.1% from last quarter. Our Undepreciated book value remained relatively unchanged increasing from 17 56 to $17.57.
This was due to credit spread tightening offset by agency spreads widening and core earnings larger dividends as David mentioned.
As described on page five of our presentation the portfolio at June Thirtyth and a net interest margin of 2%. This was comprised of an asset yield of 5% offset by a total cost of funds of 3%.
The net interest margin declined from the prior quarter was mostly due to the reduced yields on our agency portfolio due to increased projected prepayment.
Additionally, our at risk leverage ratio was 4.4 times at June Thirtyth as compared to 4.7 times at March 30 Onest.
The decrease is primarily a result of agency sales during the period.
As of June Thirtyth, we had 45 financing counterparties and are financing investments with 33 of them in general funding continues to be plentiful with new entrants in both the credit and agency space.
During the second quarter, we entered into agreements to purchase two pools of re performing non performing mortgage loans and added corresponding hedges for GAAP purchases of mortgage loans are accounted for as commitments until the completion of due diligence and the removal of any contingencies and therefore will only be included on our balance sheet and within our portfolio upon settlement.
Separately the hedges were included on the trade date.
As such we presented two forms of duration on slide 15 of our presentation 0.67 years with trials, the GAAP presentation, excluding the commitments and including the hedges.
But also 0.98 years, which is pro forma for the inclusion of the loan purchases in our portfolio alongside the corresponding hedges.
At quarter end, we had liquidity of approximately $120 million, which was comprised of 60 million of cash and $60 million of Unlevered agency hopeful securities.
During the quarter, we executed both a term securitization of primary re performing loans as well as our first rated non QM securitization.
Both of these were alongside other funds affiliated with Angelo Gordon.
These transactions allowed mitt to pullback, a total of $31 million of equity, which added to our liquidity.
Additionally at quarter end, our estimated undistributed taxable income was $41.8 million or $1.28 cents per share. We continue to evaluate that on a quarterly basis to make sure that were in line with our redistribution requirement.
That concludes our prepared remarks, and we'd now like to open the call for questions operator.
Thank you Sir.
We will now begin our question and answer session.
If you have a question. Please press Star then one on your Touchtone phone.
If you wish to be removed from the queue. Please press the pound sign or the hash key.
If you are using a speaker phone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question. Please press Star then one please stand by while we allow parties to queue up.
Mhm.
It seems we have our first question from Eric Hagen with KBW.
Please go ahead Sir.
Thanks.
Good morning on the dividend guidance you guys came in a little bit below that 45 cents you expect a payout.
Going forward I am just trying to narrow down the drivers that will get you back up to that kind of 45 cents level. Thanks.
Hi, its its David Roberts David.
We.
We anticipate that a that the further expected rate cuts.
And our continuation of adding higher yielding whole loans.
Are going to improve our net interest margin going forward.
Okay, Great what is the what is the Levered return on the whole loan piece.
Now relative to let's just say you know a few months ago.
So I think there's two components to that Eric. So I think you know when we are in the warehouse phase we're funding.
On a LIBOR plus spread basis, which has been stickier.
In anticipation of the fed cuts versus.
You know so thats, probably in the very high single digits to very low double digits during that warehouse space, We think we get a pretty big.
Pop once we try to term out.
The funding via securitization.
At that fixed cost and higher advance rate.
Probably into the mid teens mid teens, great. So its kind of two components on the non QM part.
Yes, as a follow up to that how much capital will be needed to support.
That kind of quarterly run rate that you talked about in your prepared remarks.
Securitization once a quarter. Thanks.
Well I think I think as Weve as weve sort of scale to our network of sellers of the product. We now we now anticipate being a more frequent issuer and so that some of that capital that we'll have in the warehouse is almost being turned on a more frequent basis than the longer lead time that we've had in getting to our first deal.
So it's more of a it's more of a constant rotation of that capital funding the equity in the warehouse than where it where we're scaling up the notional of the warehouse and needing more capital. So I think we're pretty comfortable with the capital that we have kind of at the end of this quarter.
Deployed into the into the warehouse.
Got it that's helpful color. Thank you very much.
Thank you. Our next question comes from Doug Harter with Credit Suisse.
Hi, Thanks, just just sticking with the non QM for a second obviously the CS C. F. P be made comments a couple of weeks ago. Just your thoughts on Oh, you know kind of what that might mean for the market and you know kind of what the next steps you would be looking forward to see if that could oh.
ER scale up the opportunity size for you.
Sure I think as I think I think there's a lot of talk about the.
The DIY patch and it's you know sort of shelf life, and whether it will be renewed or not or or just the rules of non of water QM mortgages will will be kind of going forward I don't think we know it won't be the status quo.
Post post the patch and eight but we find a lot of we're finding a lot of products sort of in this in the current environment, while the patch exists we think.
Different products like Investor loans, you know could present opportunities to the extent the rules change in the next couple of years, but in the interim we're finding more originators.
Really start to understand the products and how to originate at that had previously been solely focused on.
Agency or FHLB paper, and so so we think theres theres plenty of volume to be had in the interim.
Period before the before the patch rules change and we do we do expect things to looks different.
In the coming years, but we're not.
We're not we don't have an educated guess on what they will look like at this point in time.
All right.
And then you know obviously the past few days have been volatile can you just talk about how.
What the residential credit markets have looked like over the past few days and you know kind of what might need to happen for the shakes free if you know some some more opportunities for new investments.
Yeah, I mean, the most liquid.
Product in residential credit as CRT and that has kind of the most where we say beta two to the broader markets maybe spreads are ken wider over the past.
Weak.
So not not not marginally wider but obviously reacting to.
To the equity sell off of yesterday et cetera.
Great. Thank you.
Thank you as a reminder, if you have a question. Please press Star then one our next question comes from Herbert Cranston with JMP Securities.
Hi, Thanks, good morning.
One more question about the do you know that the drop in rates we've seen.
You know in particular over the last few days.
I know you talked you talked about the impact of lower rates and and faster prepay expectations on the results this quarter.
I guess can you talk about you know if rates were to sort of stay where they are today or even incrementally move lower Oh, you know what what you think the impact of that would be on your portfolio and and how much faster you'd expect to see prepayments good in light of that thanks.
Sure I mean, I think I think for the majority of our book were sort of through the.
The rifai incentive on our books out sort of the next five basis points lower it's not really that material versus sort of what we've already seen in the last call. It 15 to 30 days.
And going back to just the size or agency book is relatively small at 2 billion in the overall scheme of the of the market and so we we do have.
You know fairly well played out collateral stories will there be low loan balance or.
New York only pulls that historically have exhibited better prepayment characteristics in these refiled waves. So we don't think on our book in particular, while we we readjust the models based on the the the the new rate environment. I mean, we we would expect that we would be hopeful that we would be able to on a prepayment speed performance basis.
You know go better than than models. So you know that's on the prepayment side and I think this is confirming that I think funding rates will be lower faster than maybe we thought.
30 days ago right I think this is sort of.
Somewhat, forcing the hand on where where and when rate cuts will be.
From an R&D point of view.
Right.
Okay. Thank you for that a couple more questions on the non QM side.
I guess first can you talk about what you guys have seen in terms of.
How sticky loan rates are in the non QM market I mean, you know compared to compared to conventional they go says as rates have come down.
And then second question would be just as you guys continue to complete securitizations in that space can you say exactly like how much of M.I. Tt's capital is in the you know the retention of each securitization because I know there's some other funds that are also participating in those thanks.
Sure. So tackling the second question first MIT has approximately 45% of the retention in the in the capital stack amongst the other Angelo Gordon funds.
In regards to the.
Speaking of rates I mean, they have definitely been stickier, we are seeing spreads on actual whole loan.
Bulk packages widen as as rates have come in and there is somewhat of a.
Dollar price cap that people are willing to pay on on whole loans in anticipation of a potentially.
Faster prepayments. So we actually have seen spreads on non QM packages widened over the last call. It 30 days as the rates has been sticky.
But the base baseline risk free rates have have come in and so therefore, that's the spread has widened as people are really pricing it.
And then you know more to a yield perspective, now then I would say that in lockstep with where rates are moving.
Okay, Great I appreciate the comments thank you.
And thank you I see no further questions in queue at this time.
Thank you everyone look forward to speaking next quarter.
Thank you.
Thank you ladies and gentlemen. This concludes today's conference. We thank you for participating you may now disconnect.
[noise].
And.
[noise].