Apollo Residential Mortgage, Inc. (NYSE:AMTG)
Q4 2012 Earnings Call
March 07, 2013, 10:00 am ET
Michael Commaroto - CEO
Stuart Rothstein - CFO
Trevor Cranston - JMP Securities
Mike Widner - KBW
I would like to remind everyone that today’s call and webcast are being recorded. Please note that they are the property of Apollo Residential Mortgage, Inc. and any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release.
I would also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking statements. Today’s conference call and webcast may include forward-looking statements and projections and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these statements and projections.
We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.apolloresidentialmortgage.com or call us at 212-822-0600.
At this time, I would like to turn the call over to Michael Commaroto, Chief Executive Officer of Apollo Residential Mortgage, Inc.
Good morning, and thank you for joining us on the Apollo Residential Mortgage, Inc. fourth quarter 2012 earnings call. Joining me in New York this morning is Stuart Rothstein, our Chief Financial Officer; Keith Rosenbloom, our Agency Portfolio Manager; Paul Mangione, our Non-Agency Portfolio Manager and Teresa Covello, the Controller of our Manager.
We are extremely pleased with AMTG’s operating and financial performance in 2012, our first full year as a public company. AMTG achieved several notable accomplishments this year. We constructed a $4.2 billion investment portfolio of agency and non-agency RMBS at a 2.7% blended net interest spread and 17.3% levered asset yield as of December 31, 2012. We believe our diligent asset selection strategy resulted in a well balanced, well diversified portfolio.
The company’s growth was accomplished through the completion of both the common stock offering and preferred stock offering resulting in net proceeds of $416 million. In addition, we increased the number of our repurchase agreement counterparties to 23. As of December 31, 2012, we had outstanding borrowings of $3.7 billion with 17 of those counterparties.
Our book value per share at December 31, 2012, was $22.49 which represents a 13% increase over book value per share at December 31, 2011, and a 5% increase over book value per share at September 30, 2012. Most importantly, we achieved our main goal of delivering shareholder value. I am pleased to report that our cumulative total return to common shareholders for 2012 was 56%, reflecting share price appreciation and $3.40 per share in dividends.
As of December 31, 2012, the equity allocation of our portfolio was comprised of 59% agency RMBS, 25% non-agency RMBS and 16% cash. Our hybrid restructure enabled us to reallocate our equity in a manner that we believe will maximize returns to our stockholders and allow us to take advantage of opportunities across a broad spectrum of the residential mortgage market.
As I will discuss later in the call, AMTG recently completed our first securitization of a whole loan pool. We expect AMTG will continue to diversify in 2013 as our hybrid structure allows us to optimize our portfolio based upon market conditions.
During the fourth quarter, agency RMBS spread slowly allowed a portion of the spread tightening caused by QE3. AMTG’s agency investment strategy, continue to focus on prepayment protective stories, such as lower loan balance RMBS, where securities backed by loans that already been through HARP. Our agency investment strategy, continue to show its strength as evidenced by our sustained low CPRs, which outperformed the broader market in the fourth quarter. AMTG’s agency RMBS portfolio experienced prepayments at an average one month CPR over the quarter ended December 31, 2012 of 5.6% and 5.8% when including our Agency interest only and Agency inverse interest only securities as compared to 28.9% for all Fannie Mae fixed rate RMBS.
During the fourth quarter, the company sold $203.6 million of RMBS primarily comprise of 15 and 20 year Agency pass through securities and some non-Agency RMBS and realized net gains of approximately $7.6 million with $0.31 per common share. And then we redeployed the proceeds primarily into specified Agency polls which we believed exhibited attractive risk adjusted yields.
Shifting to the credit side of our portfolio, non-Agency prices continued their significant rally throughout the fourth quarter as investors seeking yield increased capital allocations to the non-Agency sector. Spreads in this market continue to tighten due to supply demand technical’s driven by shrinking pool of investible bonds.
Beyond just technical drive in the market, we also seeing a real improvement in fundamentals S&P's Case-Shiller Index showed an annual gain of 5.8% in home prices across 20 cities in December and we believe that housing market is finally showing signs of full recovery.
In addition, we have seen improvements across key metrics such as [overall] one to volume and delinquency of outstanding loans. During the three months ended December 31, 2012; the company purchased non-Agency RMBS at a weighted average purchase price of 74% of par value. Well, our focused primarily remains on seasoned sub-prime similar to last quarter, we found value in some lower credit RMBS secured by Alt-A and pay-option adjustable rate mortgages.
Given our management team a significant credit experience and track record, we began exploring other residential mortgage investments in order to expand the scope of our portfolio. In February 2013, we purchased approval of 755 residential mortgage loans with an unpaid principal balance of approximately $155 million and simultaneously completed the securitization transaction collateralized by these mortgage loans.
As part of the securitization, we sold through private placement an aggregate of approximately $50 million in principal value non-Agency RMBS of par value which effectively financed a portion of the transaction with non recourse debt with the stated fixed rate of approximately 4%.
In addition, we financed the portion of Non-Agency RMBS created through the securitization using borrowings under repurchase agreement. AMTG expects to earn an attractive low double-digit return on equity for this transaction. We believe AMTG is well positioned for success in 2013. Our balance sheet is healthy and we continue to see compelling investments in our core Agency and non-Agency RMBS business.
In addition, we will explore transaction similar to the whole on securitization which is for legacy performing loans as well as additional residential mortgage investments such as new production mortgage loans and mortgage servicing rates.
At this point I would like to turn the call over to Stuart Rothstein to review our financial results for the quarter, Stuart?
Thanks Michael. Turning to our fourth quarter performance, AMTG reported operating earnings of $15.7 million or $0.65 per common share representing a 27% increase over operating per common share for the fourth quarter of 2011.
Our earnings release and the supplemental information package both of which are available in the Investor Relation section of our website contain a detailed reconciliation of GAAP net income to operating earnings.
As detailed in the reconciliation, the significant variance between GAAP net income per common share and operating earnings per common share was due to realized gains of $0.31 per common share from the sale of certain RMBS in addition to unrealized mark-to-market gains on our RMBS and our derivative instruments which net to $1.20 per share.
I would also like to highlight that operating earnings for the fourth quarter were impacted by an updating of our assumptions about CPRs for our Agency RMBS portfolio as well as higher G&A costs incurred associated with our whole loan purchase.
With respect to our financing, at quarter end the company had $3.7 billion of outstanding borrowings with 17 counter parties. Our costs for repo financing for both Agency and non-Agency RMBS increased slightly in the fourth quarter as we strategically extended most of our borrowings over year end.
Our weighted average borrowing rate was 70 bps at December 31, 2012 as compared to 60 basis points at September 30, 2012. However, AMTG's effective cost of funds as of December 31, 2012 which is calculated on an annualized basis and includes the interest component for our swaps remained at 1% which was the same as the effective cost of funds as of September 30, 2012.
Subsequent to quarter end, we have seen pricing retract slightly. Financing continues to be readily available for both Agency and non-Agency RMBS and we continue to work with our repo providers to extend the terms of our financing.
Our leverage levels have remained relatively constant and we continue to target between six and 10 times leverage to finance our Agency RMBS and between one and three times leverage to finance our non-Agency RMBS.
Turning our attention to hedging strategy, AMTG had $1.6 billion of notional derivative instruments outstanding as of December 31, 2012. The majority of our derivative instruments are five or 10 year interest rate swaps. In the fourth quarter, in anticipation of rising interest rates the company entered into our first swaption with the notional amount of $75 million.
Subsequent to year end, we entered into another swaption with a $50 million notional amount. Due to the combination of the Fed’s indication that interest rates will remain low, the slowly improving economy and the extension risk inherent in mortgage investing, we believe our current hedging activities are prudent from an interest rate management perspective.
At this point, we will open the line up for questions. Operator?
(Operator Instructions) Our first question comes from Trevor Cranston of JMP Securities.
Trevor Cranston - JMP Securities
Just to follow-up a little bit on the whole loan investment you guys made in the first quarter, can you talk a little bit about just generally the supply of investment opportunities you are seeing in the market and how big you think that bucket might be able to get for you guys over the next couple of quarters?
Right now this transaction was focused on what we call legacy performing loans. So it was an interesting trade because it was a pretty large pool of assets which we were able to buy in one whole transaction and then securitization take out all at the same time so there are lots of moving parts and we did it in (inaudible) way to minimize all of our risk and maximize our ability to term out the assets we are buying.
So I think that there should continue to be other asset pools like this coming out there, but they tend to be more at this size and the ability to securitize on a one-off basis like that. I would say they tend to be less problematic and more as offered.
Trevor Cranston - JMP Securities
And you guys had mentioned I think last quarter also and you briefly touched on it in your prepared remarks, looking in to buying some servicing as a potential investment opportunity. I know it can be pretty complex trades. Do you have any update on kind of where you stand or how close you might be able to be to start making investment in that space?
You are absolutely right. The incredibly complex, we spend most of our time in the last quarter working on the home loan trade simply because that started I would say late in the year. So it was a fourth quarter trade where kicked off, now obviously funded in February. But at the same time we also continue to pursue the MSR opportunity. We had looked at one opportunity jointly with another Apollo affiliate that felt like it might have some potential, but I think that one may not come to fruition but beyond that, we're in discussion. I would couch you it is a very preliminary discussion with a couple of other counter parties, just about the concept and right now that’s all we can say about that.
So we continue to like this space. We think it definitely fits well with our risk profile, especially in our agency book, but it's just going to be a very long tail trade to try and put something on, especially of size. I think the way these might work would be rather than try to do something in a bulk transaction; it will be much more a flow opportunity overtime.
(Operator Instructions) Our next question comes from Mike Widner of KBW.
Mike Widner - KBW
Let me ask a real quick one on the maybe two actual quick ones, the ones you bought in the securitization. Just first a clarification, are those, you said performing loans but are those performers, where a lot of people would call reperformers, ex-non-performers that have been queued and potentially restructured and what not.
I think there they are combination of both. We consider these assets legacy assets. So these are assets that will come out of kind of pre-crash environment, so ‘06 to ‘07ish vintage and some of those assets have been performing for that period of time, and there has been some assets within that pool that have been modified and then given the vintage on the assets, the current LTV on these assets is going to be above 100.
Mike Widner - KBW
Okay. And then just as far as the underlying collateral, would you describe these generally as prime, or Alt-A, or sub-prime, or any particular?
Yeah. I think about them as a mix of sub-prime and may be some Alt-A. So I view these as assets that are consistent with everything that we have done historically to Apollo through (inaudible) and then consistent with the focus that we have in our non-agency book in the sub-prime space.
Mike Widner - KBW
Got you. And then if you could just talk may be a little more about the pipeline of opportunities you see there, and the reason I ask is because we’ve heard, it's been probably four or five quarters now about the emerging opportunity of banks want to get out of bunch of stuff, likely is because of either regulatory treatment or capital requirements or whole bunch of reasons why banks may be very eager to sell a lot of this stuff yet we’ve seen relatively huge transactions so far, and a lot of them are complicated transaction. So just wondered if you can talk a little bit about how that pipeline looks and where do you think there is a lot more coming, just general sense.
Again my gut reaction is there will be transactions over the course of the year. I tend to view large pools, like this was an extremely large pool, but it was a pretty good size pool, will be out there, but I don't see any program wave of these coming. I do think banks are probably more positioned now to be a seller of these assets, just given how the balance sheet have healed over the past four to five years, and beyond that how the values on these have accreted up, given what is happening with property values and given the fact that they have worked some of these assets through their modification programs to meet out some credit for doing modifications on this assets.
So I think you may see banks be a seller. We have also seeing some bonds be a seller, guys who had bought the stressed assets over the course of the past few years as well then get them rehabilitated and get them performing and put those out for a bid. So those have been in the market. I think they will probably be right now just thinking about what is the pipeline of some assets we’ve looked at, probably a bigger pipeline of NPLs coming out of larger banks, some guys again looking to just exist risk that they’ve accumulated kind of pre-crisis. And at this point I haven’t made a determination if NPL is really fit within really trying to bring the business of there are NPL pools that we are coming to the market this year.
I think but then there is also new participants and just again there is a large NPL pool coming out of [Hud], I think at the end of this month. But we are right now much more focused on cash flowing assets, and then when we are going to cash flowing assets, then the next pool of assets or next type of assets to take a look at would be current coupon or new production performing loans.
So we are starting to see some pools of those assets and we are starting to do some work on those in terms of seeing where the securitization odd might be, in terms where we could pool of assets like that and then retain the subordinator bonds and turn up the financing with the seniors.
And right now we are just in the process of running pools we’ve looked at, but we are not close to doing a transaction.
Mike Widner - KBW
And so on that latter category that you are talking about, I mean obviously you would be talking about non-sandy [Friday], so I mean we are talking to the jumbo or are you thinking about non-QM opportunities or well how would you characterize those opportunities?
I think right now the easiest place to start is with jumbo, but again it’s all very preliminary. I mean its stuff that we are seeing in the market because again what we want to try and do with the business is continue to move into different product types. So we are just trying to be very prudent in terms of how we do that, but I think the next logical extension is probably jumbo and then beyond that would be what you are calling non-QM, I would maybe call non-conforming credit, but we are not at that point yet.
(Operator Instructions) At this time there are no further questions.
We'd like to thank everybody for your continued interest in the company and thank you for being on the call this morning.
Thank you. This concludes today's conference call. You may now disconnect.
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