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AG Mortgage Investment Trust, Inc. (NYSE:MITT)

Q4 2012 Earnings Call Transcript

March 6, 2013 10:00 am ET

Executives

Lisa Yahr – Investor Relations

David Roberts – Chief Executive Officer

Frank Stadelmaier – Chief Financial Officer

Jonathan Lieberman – Chief Investment Officer

Analysts

Trevor Cranston – JMP Securities

Jason Stewart – Compass Point

Boris Pialloux – National Securities

Kenneth Bruce – Bank of America Merrill Lynch

Operator

Welcome to the AG Mortgage Investment Trust Fourth Quarter 2012 Earnings Call. My name is Dona, and I’ll 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. Please note that the conference is being record.

I will now turn the call over to Lisa Yahr. Lisa, you may begin?

Lisa Yahr

Thanks, Dona, good morning everyone, and welcome to the AG Mortgage Trust Fourth Quarter 2012 Earnings Conference Call. Joining me on today’s call are David Roberts, our Chief Executive Officer; Jonathan Lieberman, our Chief Investment Officer; and Frank Stadelmaier, our Chief Financial Officer.

Before we begin, I’d like to review our Safe Harbor statement. Today’s conference call and corresponding slide presentation contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are intended to be subject to the protection provided by their format.

The Company’s actual results may differ materially from those projected due to the impact of many factors beyond its control. All forward-looking statements included in this conference call and the slide presentations are based on our beliefs and expectations as of today March 6, 2013.

Additional information concerning the factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the Risk Factors section of the Company’s periodic reports filed with the Securities and Exchange Commission. Copies of the reports are available on the SEC’s website at www.sec.gov.

Finally, we disclaim any obligation to update our forward-looking statements, unless required by law. With that I’ll the turn the call over to David Roberts.

David Roberts

Thank you, Lisa, and good morning to everyone. MITT ended 2012 with another strong quarter, our fourth quarter core earnings were $0.85 per share, we’re pleased to declare our first quarter 2013 dividend of $0.80 per share consistent with our 2012 fourth quarter dividend.

One of the highlights since our last call was the addition to MITT’s portfolio of two proprietary transactions sourced through the Angelo, Gordon platform. One was a commercial real estate loan that closed in January of this year, and the other, a legacy portfolio of residential whole loans that closed in December.

In 2012, our success in expanding MITT’s capital base from around $200 million to around $800 million in turn has expanded MITT’s scale, and thus with the expansion of that scale, our ability to invest in these types of transactions.

We expect that these proprietary transactions to be an increasingly significant factor for MITT this year, and in future years. I want to take a few minutes to discuss the Angelo, Gordon platform and how it benefits MITT and its shareholders.

Angelo, Gordon is a firm with $25 billion in assets under management, specializing in real estate and credit. Many of our investment areas like RMBS and CMBS and residential and commercial real estate whole loans stand at the intersection of both credit and real estate. And these disciplines and areas benefit from the combination of our expertise in both credit and real estate. We have over 100 investment professionals in these areas.

The commercial real estate loan MITT invested in, in January was sourced and analyzed by Angelo, Gordon’s private equity real estate group. The legacy whole loan portfolio that MITT invested in, in December was sourced through relationships that Angelo, Gordon had developed over many years, predating the formation of MITT, and this transaction was analyzed using the resources at the RMBS Group.

We have continued to add resources to the Angelo, Gordon platform which we expect will benefit MITT. In February, we hired Jason Biegel to lead our efforts in the residential whole loan area, our plan is for Jason to add significantly to our resources in this area, which we believe will provide MITT with differentiated, attractive and sizeable investment opportunities.

Similarly, we plan to add resources to commercial real estate lending, but we believe our deep expertise in the great networks we have developed as a buyer of properties over the past 20 years will give us an edge in sourcing and analyzing opportunities, and here I’m talking about Angelo, Gordon’s Private Equity Real Estate Group.

In summary, as we have said ever since we formed MITT, our goal is to bring the considerable resources of Angelo, Gordon to create for our MITT shareholders the best risk adjusted, most diverse and robust portfolio in our industry.

With that, I will turn over to Jonathan Lieberman to talk about our quarter’s investments.

Jonathan Lieberman

Thank you, David. We are very pleased with our accomplishments and the maturation of the company. As we look ahead to this year, we are excited about our existing portfolio, the scale of the platform, and the outlook we’re continuing to deliver value to our shareholders.

To begin, I’d like to touch on a few highlights for the full-year, this is set out on page three of our presentation that’s on our website. First, we generated total annual shareholder returns of over 31% including paying close to $3 per share in dividends.

Second, we completed a strategic capital raise in mid December, this equity raise were approximately $90 million was done in anticipation of the two new investment opportunities that David mentioned earlier.

Third, we grew our overall portfolio from $1.4 billion to $4.9 billion, and our gross allocation to credit assets was 22.2% at year end, up from 9% a year earlier.

Finally, I’ll discuss in greater detail MITT’s participation in a legacy whole loan trade that was procured by AG just prior to year end. The investment team is very excited about this facet of our business.

On slide four, we shared top line performance details along with several portfolio metrics. I’ll spend more time discussing many of these metrics later, but I’d like to discuss a few important performance attributes.

For the quarter, we generated $0.85 of core earnings, and also increased our undistributable taxable income by close to $1 million from $1.19 to $2.15 per share. The investment team is actively rotating assets that reach terminal value. Basically, that they’ve peaked in valuation, and we believe that, at this point, we should realize the gains, monetize our gains and basically redeploy that capital in much more attractive opportunities. Retention of undistributed income accomplishes two strategic objectives for the company.

First, it enhances valuation by providing the investment team with our cheapest source of capital, which Frank will address in more detail. And secondly, we can maintain a more durable and sustainable dividend level for the future.

Book value increased $2.95 from $20.52 as of December 31, 2011. For Q4 2012 book value modestly declined from $23.71 to $23.47; this decline was predominantly attributable to move in Agency MBS prices quarter-over-quarter not completely offset by our credit book and warrant exercise activity.

With respect to leverage as of December 31, leverage declined to approximately 5.26 times. This decrease in leverage partially reflected the delay in closing our two proprietary transactions, the residential deal which closed on December 31, and the commercial deal that closed in the middle of January.

Leverage also reflects our prudent management of capital during Washington’s fiscal cliff negotiations, I know this is kind of ancient history, but you will recall for time there was concern that potentially Washington will take us over the cliff.

Our NIM decline quarter-over-quarter is due in part to a typical year end increase in repo cost of funds, greater interest rate hedging, and the delayed credit capital deployment.

On slide five, the foundation for portfolio allocation decisions is our economic outlook, and then granular asset level analysis by the portfolio teams. Despite some marginal improvements, the global macro environment continues to be challenging.

In the U.S. economy despite signs of recovery and a broadening base of activity still faces challenges. Housing and commercial real estate remain among the brightest spots in the U.S. economy, in the case of housing it was gone through six grueling years of price declines and declining home ownership.

The U.S. housing markets seems to have finally bottomed in 2012, we are much more optimistic at this point, and construction activity is now a net contributor to GDP growth.

Home price appreciation is further healing the balance sheets of both households and financial intermediaries. For the year, we expect housing to be an important engine of growth for the U.S. economy and project U.S. home prices will increase approximately 5% to 6% with a meaningful positive impact on real personal consumption expenditures as a result.

Our constructive view on housing is driven by supply and demand considerations, the REO rental buyers coming into the market in force, record low interest rates and the anticipation of a relaxation in credit standards for underwater borrowers refinancing their homes and new purchase money mortgages.

Labor market conditions, we believe will continue to heal with positive contributions from energy, construction, housing related occupations and some service industries. Job reductions by the defense industry, government, financial services will cause a drag on employment.

Our belief is that both unemployment rate and non-farm payrolls should be able to keep up with natural growth rates in the working age population. Consumer spending is at risk of decline due to a combination of the expiring payroll tax cuts in January, elevated energy costs and higher taxes for both upper income wage earners and also on investment earnings.

Median income remain stagnant, as you’ve seen recently in the press students remain encumbered by significant debt, which is impeding their ability to basically purchase houses. With respect to Europe, the poor economic situation remains chronic despite the concerted accommodative policy stance, and accompanying low interest rates in the periphery countries.

As the world’s largest economic zone, Europe fiscal lows will have a global impact that stands to potentially impede any type of meaningful growth in other parts of the world.

Now moving to page six of the slides of our presentation, we have a snapshot highlighting quarter-over-quarter changes in rates and credit markets, credit markets rallied on the heels of ongoing reach for yield by investors, improving fundamentals and the resolutions of the fiscal cliff.

While long-term rates and Agency MBS sold off, trading volumes in credit remain robust even in the typical quite year end. Our team was able to continue to source an attractive credit at investments for the portfolio during the fourth quarter.

And I’d also like to note that the investment environment in February and March continues to improve from what we’ve seen in January, and we’re a seeing a steady stream of potential attractive investments across the entire platform.

On slide seven, as of year end, we held just under $4.9 billion in securities, roughly unchanged from the end of Q3. The size of our Agency portfolio decreased slightly, and we did undertake some optimization of the agency book.

As you recall from prior calls, our focus since inception has been on growing our credit portfolio by taking advantage of Angelo, Gordon’s credit platform and expertise. On a gross asset basis, we crossed the 20% mark in the fourth quarter, with the credit book increasing from 19.7% to 22.2% of the overall portfolio. Equity capital allocation to credit assets was approximately 35% at year end, so, significantly higher than the gross exposure.

On slide eight; returning to our agency portfolio, we invest in a diversified portfolio of 15, 20 and 30 years specified home loans guarantied by Fannie and Freddie.

We continue to invest in bonds that we believe will exhibit favorable prepayment behavior. These stories continue to include lower loan balance, which counts to roughly a third of our agency portfolio as well as HARP pools and newer production current coupon bonds.

Our aggregate CPR’s constant prepayment rates have remain muted with the book printing at 7.8% CPR for the fourth quarter and 6.4% CPR for the full year. We were selecting agency pools with the expectation that interest rates will remain relatively low, but with periodic bouts of volatility for the foreseeable future.

We also believe origination capacity constraints will continue to ease resulting in a tightening of the primary and secondary spreads, and ultimately an increase in organic refinance activity.

Continuing home price appreciation should translate into higher future prepayments as borrowers emerge from negative equity positions and the credit box eases over time. We therefore continue to believe the right positioning for our portfolios involves bonds that will exhibit favorable prepayment behavior in this changing environment.

Now turning to the credit side of our portfolio on slide nine, you see that we continue to deploy capital into credit throughout the quarter, of note, we more than quadrupled the size of our Alt A exposure from $51 million of fair value to over $212 million.

As we mentioned repeatedly the depth, breadth of the AG platform continues to see and source robust sets of opportunities. Our entry into the whole loan space in December exemplifies our opportunistic approach to investing, and where we are taking the business. This opportunity was sourced in an extremely limited competition fashion, and it was among the largest and we believe most attractive whole loans trades in 2012.

MITT participated in the acquisition of 1,898 legacy whole loans, which were financed in a securitization on the closing date, December 31. So we managed to rule in Hanukkah, Christmas and almost New Year to get this close.

The total equity capital committed to this investment was approximately $29 million after financing. We continue to increase AG’s resources as David mentioned, and we believe that the hiring of Jason Biegel will give us a competitive advantage in building out our whole loan business.

Subsequent to quarter end, MITT did close on a mezzanine loan investment backed by commercial retail and office property located in the island of Manhattan. This loan was originated by Angelo, Gordon’s private equity real estate group. And the investment team is continuing to dedicate significant resource to source additional opportunities from MITT.

Now turning to slide 11, the overall portfolio leverage decreased from 6.06 times as of September 30 to 5.26 times at year end. This decrease stems from our higher credit allocation, our desire for greater cash balances pending the resolution of the fiscal cliff negotiations; and then the timing of the closing of our whole loan trade on the last day of the year; and the delayed closing of our first originated commercial loan until early January.

Overall leverage is within our target range, and allows us flexibility to respond to any attractive opportunity. At quarter end, excess liquidity was greater than $315 million. On slide 12, we layout our funding. On the funding side weighted average original maturity of our repo book was extended to 87 days from 79 days as of the prior quarter end. As it is typical, agency repo rates did increase during the fourth quarter by approximately four basis points.

Since the beginning of 2013, we have seen those basis points come down, we’ve seen roughly a 4% decline in funding costs on the agency side, and we believe this trend will continue, we also expect that our current financing rates for the credit side will also decline. We now have 30 counterparties who are actively engaged in several conversations and negotiations regarding longer tenure financing facilities for the platform.

Given the size of the portfolio, we believe that we have adequate financing at our disposal for any opportunistic trades that would arise.

On page 13, our hedging summary lays out that we had approximately 65% of our total agency repo notional hedge. Our hedge percentage rose from 53% as of September 30 with the addition of over $300 million of notional pay fixed swaps.

As we have previously discussed on prior earnings calls, we do not seek to fully hedge our rate and market value risks, consistent with our views of interest rates and first quarter market volatility, we did shift the bands of hedges from the previous range of 40% to 60%, to 50 to 75% of our total notional repo exposure to agencies.

As this shift demonstrates, we are not wed to a specific target, it is meant to be dynamic and flexible in response to both our views of the future path of interest rate changes as well as the composition of our portfolio, in line with prior quarters, we are employing both swaps and MBS derivatives as hedges.

To finish up on slide 14, as you can observe our duration GAAP at quarter end was approximately 1.6 years. This represents a decline from the third quarter given the composition of our portfolio and its actual prepayment experience, we are comfortable with the current level of interest rate exposure retained by the company.

With that, I’ll turn the call over to Frank Stadelmaier, who will discuss our financial performance in greater detail.

Frank Stadelmaier

Thank you, Jonathan. Good morning. I’d now like to highlight a few of the financial metrics in more detail. For the quarter, the yield on our interest earning assets decreased from 3.48% to 3.37%.

During the quarter, we sold approximately $400 billion of securities and recognized $0.56 per share in gains and replaced them with securities that we believe have a better relative yield, but a lower yield in those that which we sold. This was partially offset by the increase in the size of our credit portfolio relative to agency where yields are typically higher. Additionally at December 31, the capital raise that we did late December had not been fully deployed and therefore the yield at December 31 does not include the effects of all the credit assets that we purchased subsequent to year end.

During the quarter, our cost of funds increased from 98 basis points last quarter to 1.11% this quarter. Our cost of funds include both the amount we pay on borrowings, as well as the cost of our interest rate derivatives.

Cost of borrowings under repurchase agreements during the quarter increased to 75 basis points from 67 basis points. Borrowing costs are higher on our credit assets and as we increased the size of our credit portfolio during the quarter, our borrowings also increased and the cost of borrowings also increased.

Additionally, during the quarter we extended the maturity profile of our repos consistent with prior year’s repo rates for borrowings that will cross year-end pick up in the fourth quarter and then come back down after year end.

During the quarter, our cost of swaps increased from 31 basis points to 35 basis points. This increase came from the additional $300 million notional of interest rates swaps Jonathan described earlier. Our G&A as a percentage of equity during the quarter decreased from 1.4% to 1.26%.

As we have significantly grown the equity base during the year, we are now starting to see efficiencies by spreading our G&A cost over a big capital base. The business is at a point where, it will continue to scale better with continued growth and continued growth should bring down G&A as a percentage of equity.

During the quarter, our taxable income increased by $0.96 per share to $2.15. The increase in taxable income was driven primarily by the gains on sales of securities. Additionally, our core earnings continue to exceed our dividend and this excess amount adds to our undistributed taxable income as well.

The increase in undistributed earnings is also what caused our increase in excise tax period over period. This undistributed earnings continues to provide us with flexibility when considering future dividends. I’d now like to open the line for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Trevor Cranston from JMP Securities. Please go ahead.

Trevor Cranston – JMP Securities

All right. Thanks. Congratulations on a good quarter. I was wondering if you could expand a little bit on the build-out of the residential loan platform. At least for the near-term is that something you envision being primarily focused on acquiring legacy assets, or you also thinking of kind of originating new prime jumbo loans and originating MSRs or something like that?

Frank Stadelmaier

I think it’s a case of all of the above subject to the right price point, right yield for the portfolio, but we’re in the market and if we’re going to build this, we have the skill set for all three types of assets, we’re now putting in place the infrastructure that we think is important for each of those distinct asset classes. Now in the case of Jumbo’s, it’s making sure, the credit box is appropriate, building the appropriate diligence controls around the credit and in controlling legal risks associated with the Jumbos and the financing Jumbos.

In the case of legacy, it’s a lot of the upfront diligence and then basically managing the risk once you have it on board and in the case of MSRs a lot of the value is in retention of the MSRs, no matter which way interest rates go, and no matter which way housing prices go. So, we can buy MSRs every day of the year, but we don’t think that that’s prudent without having the ability to recapture or protect the MSR at this point in time.

Trevor Cranston – JMP Securities

Okay. That makes sense. And maybe on the acquisitions of the whole loan opportunities such as the two recent ones you completed, can you just give us kind of a sense of where you see targeted returns on those types of investments right now?

Frank Stadelmaier

We expect that the investment that we made will probably be in the upper teens for the recent acquisition of the residential whole loans, and then that the commercial it’s a high single-digit type of return and then it’s a function of the permanent leverage that we will put in place that will – we think elevate the return and we’re working through that currently.

Trevor Cranston – JMP Securities

Okay, thank you.

Operator

Thank you, our next question comes from Jason Stewart from Compass Point. Please go ahead.

Jason Stewart – Compass Point

Hi, thank you. Drilling down into the focus on the residential platform and MSRs, are you looking at making investments in excess MSRs in addition to creating them through either the origination platform or purchasing securities?

Frank Stadelmaier

We have in the past had in the portfolio excess servicing, excess MSRs that were previously securitized. We have not recently added any excess there have been some recent transactions, I think at Wells Fargo in particular, but once again it’s we think that there is other assets that may provide similar benefits to the portfolio that don’t have the prepayment profile of excess.

Jason Stewart – Compass Point

Okay. Maybe taking that and looking at that as both an investment and a potential hedge and comparing it to an IO or looking at your bookings and taking MSRs, the credit book and your hedge portfolio all together and thinking about the duration gap, how should we be looking at all of those together because it seems like credits going up as a percentage, hedges are going up as a percentage. And there might be an opportunity to lower that cost to hedge through some other investments.

Frank Stadelmaier

That’s very fair and we have been, you know as said we have looked at, we have made investments in IOs that provide positive carry hedges to the portfolio similar with excess. The agency assets also provide a nice hedge to the agency book and certainly has the percentage and depends upon the dollar price for the asset and it’s, basically its relationship to rates, as well as its relationship to home prices.

It integrates really, really well with the agency side. I would say that you come back to the agency side for a moment, we do look at that both in the context of the overall portfolio, but we also look at that as a portfolio on to itself. And in the fourth quarter and in the first quarter, we have taken a view that there was going to be more volatility in rates and potentially higher short-term rates. If you typically or – sometimes you will have a little bit of a growth scare in the first quarter and you certainly have seen a much more vigorous debate between the doves and hawks on the Fed and the size of their balance sheet and we felt that it would be prudent for us to basically add additional hedges here to the portfolio that could protect book value and we’ve shown that we are not wed to one specific hedge ratio and that we’ll move opportunistically. And I think it’s transpired very much the way we foresaw.

Jason Stewart – Compass Point

Okay. That’s good color and then just shifting gears one follow-up on the question on the commercial loan origination, when you’re looking at that space is there a price point or a yield or a part of the capital structure or even a sector that you’re focusing on or is it really just opportunistic?

David Roberts

It’s David. It really is opportunistic, we have a lot of resources here that look at all sorts of different real estate product types whether it’s office or retail or multifamily hotels and it’s very geographically diversified, we’ve been – we are one of the longest standing and probably most prolific in terms of all the markets that we cover in terms of opportunistic real estate players. So, we see a lot of different products from the equity side and we’re just looking and being opportunistic to see what – where on the lending side, we can add value. It’s like everything else, it’s a competitive market. And we’re going to be very choosy and about where we want to participate in, and it’s really going to be a bottom up approach as opposed to saying X percent of the portfolio should be in this. So, it really it’s going to depend upon how we’re able to use the network to uncover great risk reward opportunity. So, we’re very happy with the transaction that closed in January and hope there are others like that.

Jason Stewart – Compass Point

Great, thanks for taking the question.

Operator

Thank you. Our next question comes from Boris Pialloux from National Securities. Please go ahead.

Boris Pialloux – National Securities

Hi, good morning and thanks for taking my questions. Most of my question is regarding the CMBS. One, I’d like to understand your views on the CMBS in regards of – there was a recent article of Bloomberg saying that the spreads are pretty well going up and second is, if the CMBS market is having difficulties, does that mean that what you’re doing like originating or participating in the origination of direct loans would actually seal the gap?

David Roberts

It’s David, I think that again we’re going to be opportunistic in terms of – when you look at the CMBS market overall there are plenty of different places, different tranches, different opportunities, different vintage years to look at and we’re constantly looking at all of those to see where we think there is compelling risk reward and we would view our effort to buy commercial real estate loans, whole loans as really being a corollary and complementary to looking at legacy CMBS assets, so we don’t see it as necessarily a conflict and some areas of the CMBS market have tightened and there may be other areas where we can opportunistically make good purchases.

Boris Pialloux – National Securities

And then lastly, we are getting your – the hiring of Jason, in long-term do you see, if you’re originating loans to or going into the Jumbo, do you have the sense that you would end up with doing securitization or having a securitization platform?

Frank Stadelmaier

I think long-term you have to have a method of placing leverage on jumbo mortgages or those mortgages given the low yield. So you have to have a way of basically putting some amount of term leverage in place, and potentially mitigating interest rate exposure.

So, it could be bank facilities, securitization is an off balance sheet kind of terminology in segregation of assets. I think, we have some thoughts around it, I think it’s still evolving, what the format for financing jumbos long-term will be. And we’re kind of open to all of them and also maybe blazing our own path.

Boris Pialloux – National Securities

Okay, thank you.

Operator

Thank you. (Operator Instructions). We have Ken Bruce on line with the question from Bank of America Merrill Lynch. Please go ahead.

Kenneth Bruce – Bank of America Merrill Lynch

Thanks good morning. I just want to make sure I understand what your intentions are in the whole loan market, is this an area that you envision setting up a platform or do you see yourself being more just opportunistic in terms of acquiring bulk whole loans just as it became available. How are you looking at that business, it’s been obviously a very high profile platform development initiatives from some others, I’m just trying to understand where you’re kind of seeing yourself fit into this ecosystem?

Frank Stadelmaier

Okay, well I think we are always going to be an opportunistic investor. So that’s the basic D&A of Angelo, Gordon and the company MITT, that it will always have an opportunistic aspect, that if we see source, our shown opportunities that we think are attractive, or we can engineer in a way that makes them attractive, we will use our intellect, we’re certainly going to be continuing that for the foreseeable future of the company.

In addition, we are typically in the flows of markets on a daily basis. So, with all of our funds and we have built businesses over long-term. So, take our brick-and-mortar commercial business, the business has been in existence since 1994.

It is a history of financing and acquiring and redeveloping buildings. We have a triple net lease business. We have other businesses here that have been much in existence for years, we would expect that we will find a way to incorporate the expertise of our private equity group that has quite a bit of expertise in specialty finance.

The RMBS Group that has quite a bit of expertise with whole loans and if we feel that branding a MITT, quote, shelf or acquisition platform is the best way to achieve our objectives, which is to produce good risk adjusted returns for our shareholders.

We will do so, I think we’re developing that. And I think when the time is right, we’ll kind of more fully play that out. But, I think you can see that we’re beginning to put in place the human capital not only for opportunistic trades, but for more long-term businesses for the REIT to invest in.

Kenneth Bruce – Bank of America Merrill Lynch

Okay, thank you. And are you envisioning participating in the risk transfer initiatives that the agencies are discussing, I’m sorry, if I missed that in your prepared remarks.

Frank Stadelmaier

No, you didn’t miss it, we are in Washington quite a bit. I said on the board of the Association of Mortgage Investors, we have regular dialogue with regulators, as well as the agencies and we look forward to seeing opportunities from the agencies both in the near-term and in the future and when opportunities do present themselves for risk transfers we certainly hope that we are among the first investors.

Kenneth Bruce – Bank of America Merrill Lynch

And this might be pre-matured, but is there any price talk around what those returns in that, in that structure will look like, is there anyway to sense that, there has already been some capital raising that’s done with the understanding that that’s part of the target asset class? I’m trying to maybe better understand what the economics are looking like for yourself?

Frank Stadelmaier

None that I'm aware of. I'm not aware of any pricing, but, you can see where mortgages are being originated, the levels you can see what credit losses are, you can see what the cost of funds and you can back into some of the first loss pieces have to be in the teens to basically the reasonable risk adjusted returns given the duration, given the interest rates and the liquidity of those assets.

There is a bunch of things to be determined, whether you know what’s the tax treatment of those assets, whether you can get comfortable with the loss severity, given the periodic intervention of government in foreclosure activities. And whether you will have to hold 5% of the capital structure from the life of the deal, which makes REIT or one in a vehicle that has permanent equity, an ideal buyer of this risk.

Kenneth Bruce – Bank of America Merrill Lynch

Right and last question is there any – do you have any kind of upper bound in terms of how much portfolio turnover you’re willing to accept within the portfolio, whether be across asset mix or just in terms of optimizing within a particular part of the portfolio?

Frank Stadelmaier

We do not have a Governor on what percentage of the portfolio we’re willing to turnover. If the assets have appreciated to terminal value and we think that we can better deploy the capital in a new asset or even in cash, we will certainly take that approach. We are mindful of basically making sure that the integrity of the portfolio holds together. And then we’re not introducing new risks to one portion of the portfolio by selling of another portion.

Kenneth Bruce – Bank of America Merrill Lynch

Okay, thank you very much for your comments this morning.

Operator

Thank you. At this time we have no further questions. Do have any closing remarks.

David Roberts

Yeah, just to thank everyone for attending the call and we look forward to speaking with you in next quarter. Thank you very much.

Operator

Thank you ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.

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