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

Q1 2014 Results Earnings Conference Call

May 07, 2014 08:38 AM ET


Lisa Yahr - Head Investor Relations

David Roberts - Chief Executive Officer

Jonathan Lieberman - Chief Investment Officer

Brian Sigman - Chief Financial Officer


Douglas Harter - Credit Suisse

Trevor Cranston - JMP Securities

Joel Houck - Wells Fargo

Jason Stewart - Compass Point


Welcome to the AG Mortgage Investment Trust’s First Quarter 2014 Earnings Call. My name is Lorraine 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. Please note that this conference is being recorded.

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

Lisa Yahr

Thanks Lorain and good morning, everyone. We appreciate you joining us for today’s conference call to review AG Mortgage Investment Trust’s first quarter 2014 results and recent developments. Joining me on today’s call are David Roberts, our Chief Executive Officer; Jonathan Lieberman, our Chief Investment Officer; and Brian Sigman, 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 the Reform Act.

Statements regarding the following subjects are forward-looking statements by their nature. Our business and investment strategy, market trends and risks, assumptions regarding interest rates and prepayments, changes in the yield curve, and changes in government programs or regulations affecting our business. 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, May 7, 2014. Please note that information reported on today’s call speaks only as of today and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. 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 Finally, we disclaim any obligation to update our forward-looking statements unless required by laws.

With that, I’ll turn the call over to David Roberts.

David Roberts

Thank you, Lisa. And good morning everyone. MITT has solid and positive performance on all fronts in the first quarter of 2014. We are pleased with our $0.62 per share of core earnings, particularly given our continued conservative portfolio positioning. We were also pleased to have made progress and increasing our portfolios allocation to value add credit assets. With regard to these types of assets Angelo, Gordon continues to add personnel to our residential and commercial home loans teams with source analyze and structure of these investments.

With that very short introduction I will turn things over to Jonathan Lieberman, Chief Investment Officer of Mitt.

Jonathan Lieberman

Thank you, David. Good morning, all. Appreciate you getting up early for us. During 2013, we navigated fixed income markets characterized by very low interest rates, variable prepayments fees, uncertain economic conditions and -- overbought Agency MBS sector and a volatile mid-year market reaction to anticipated taper into the federal reserve’s quantitative easy program.

Despite these challenges, we are pleased that MITT distributed cash dividends $3 during calendar year 2013 to our shareholders. We executed on several key metrics such as yield on interest-earning assets, net interest-rate spread, debt to equity ratio, asset liability gap and a ratio of credit assets relative to our Agency MBS allocation.

Our asset manager as David mentioned, Angelo Gordon continues to hire several and many talented investment and financial professionals and continues to invest in technology and portfolio systems which will benefit MITT’s shareholders in 2014 and future years.

During the first quarter, technicals and fundamentals were favorable from both the housing and mortgage markets. On our last earnings call, I set out several investment objectives for 2014. The key observable metrics were continued rotation of capital into credit assets, protection of book value and restoration of optimal risk-adjusted earnings capacity for the company. The investment team executed on all key objectives from MITT including core earnings covering our quarterly dividend, growing book value per share, continuing our ongoing migration into credit assets.

During the quarter, we closed investments in both residential and commercial loans and we are very excited about the investment opportunities we are seeing today through the AG platform to deploy additional capital in both markets.

More specifically, MITT earned $0.98 of net income during Q1; $0.62 was attributable to core earnings as noted in our presentation. Book value rose to $19.53, netted for the impact of our dividend paid to our shareholders on April 28th. Undistributable taxable income rose to $1.88, portfolio size was roughly the same as the prior quarter at roughly $3.8 billion.

Our hedge ratio stood at 106% of our Agency MBS portfolio and 69% of our total repo notional. Prepayments fees of our Agency book remained well channeled and contained at six CPR. Leverage at 4.36 times was modestly lower than last quarter due to our rotation of capital in the credit assets from higher leverage agency securities.

Net interest margin rose by approximately 15 days points of 2.61% from fourth quarter. Our NIM benefited from a better mix of higher yielding assets, lower hedging cost and improved funding cost. During the quarter, we acquired approximately $59 million of phase-in legacy residential mortgage loans and deployed $10 million of capital into a mezzanine commercial real estate investment.

Now on to book value and earnings trends for Q2; as of April 30th, [debt] continue to be favorable. We are cautiously optimistic on our portfolio housing and the mortgage market. We are diligently monitoring market conditions and the risk to the company and we are pleased with the high quality of earnings and the portfolio of composition as it stands today. Before turning to more details in the portfolio, I’d like to share a few brief thoughts on our 2014 outlook, which we outlined on slide five.

Although the unusually harsh winter negatively impacted recent economic data, we fully expect the Fed state force can wind down QE3 related Treasury and Agency MBS purchases by November. Though on a historical basis the pace and strength of U.S. economy recovery is sluggish, we do believe the U.S. economy is firmly experiencing the new norm of modest growth. While housing will not repeat its 2013 gain, we believe home price appreciation will continue slower and at different levels across different geographies and regions.

With regard to interest rates, we believe LIBOR should remain anchored for the next year given high levels of worldwide liquidity. As for the interest rate curve, we would not be surprised to see ongoing volatility in both the short and long-term rates stemming from the economic data and geopolitical issues. Market participants will seek to use any new information displayed in interest rate market. We have seen rate markets for the past several months pop back and forth. Foreign exchange flows may also be influencing with treasury and interest rate markets. We remain vigilant and don't want to read too much into distorted worldwide rate markets.

Our portfolio outlook reflects our objectives and our [visions]. We anticipate a further rotation of capital in the credit securities, residential and commercial real estate launch. The portfolio and liquidity positioning is structured to withstand a wider range of interest rate, agency spreads and credit market movements than in early 2013.

Now moving on to our portfolio slide six details some of the top level sector metrics from the quarter, the fair value of our agency and credit was approximately 2.3 billion and 1.5 billion respectively. Focusing first on our agency book, we reduced the size of our agency portfolio by roughly $90 million of fair value quarter-over-quarter with most of the reduction occurring through sales of lower coupon MBS.

As the pie chart on bottom of slide 7 shows, hybrid adjustable rate mortgages represent approximately 22% of our agency portfolio exposure and over 50% of our fixed rate pools have some call protected characteristics. From a prepayment perspective, our pools continue to perform in line with expectations with Q1 CPR of approximately 6%.

Now moving to the credit side, we grew our credit by approximately 150 million of fair value during the quarter with increase coming across loans, non-agency securities, ABS and CMBS. As I discussed earlier, we are pleased to report deployment of 10 million of equity into a commercial real estate investment on a hotel property in New York City which bears a current interest rate of LIBOR plus 12.25.

We also acquired approximately 59 million of face of legacy residential home loans at an attractive risk adjusted yield. As we have noted on several calls, we believe Angelo Gordon is well positioned to source and originate active investment opportunities in loan space, both commercial and residential, and our investment teams are busy underwriting numerous investments as we speak.

Now turning to our financing and duration gap, we currently have 30 financing counterparties; during the quarter, we renewed our one year facility with Wells Fargo for non-agency MBS; and we also executed a committed whole loan facility with Wells for residential whole loans. Funding conditions for MITT are favorable and we continue to benefit from lower cost of funds and better financing terms. On the duration gap side our duration gap declined from 0.69 years to 0.29 years quarter-over-quarter. If we treat our agency whole pools as TDAs our recorded gap would narrow to [approximately] zero. Given the strength of the credit book and the agency basis throughout the Q1 period we elected to minimize our interest rate risk by allowing our interest rate gap to decline. Interest rates swaps positioning is overweight to front end and the [belly] of the interest rate curve. These areas of the rate curve have experienced the most severe widening and the greatest volatility in response to Fed monitory policy changes.

Looking forward we will be able to improve our earnings capacity by allowing the gap to wide now to a more normalized position in the future. Our hedging and interest rate sensitivity tables are on the next slide. We continue to optimize our hedge book for the current portfolio and believe additional expense savings is achievable. Given the construct of our assets and hedges we believe our portfolio today should be better able withstand a wider range of interest rate mark to market movements than our portfolio was over a year ago.

I’d like to wrap up by saying we believe our portfolio is appropriately sized and positioned for today’s market environment and we’re excited about the flow of investment opportunities we’re seeing in both the bond and loan market.

With that I’ll turn the call over to Brian to review our financial results.

Brian Sigman

Thanks Jonathan. In the first quarter we reported core earnings of $17.7 million or $0.62 per fully diluted share versus $19.1 million or $0.67 per share in the prior quarter. As we pointed out on the last call our Q4 earnings included a large fee from commercial loan payoff. Stripping out the fee Q1 core earnings would have been higher than the prior quarter and more importantly this again exceeded us $0.50 common dividend. This increase was primarily due to an increased in the yield we earn on our assets due to rotation into credit investments as well as better underlying asset performance.

Overall for the quarter we reported net income available of common stockholders of $27.8 million or $0.98 per fully diluted share. In addition to $0.62 of core earnings our net income included realized and unrealized gains of $0.36 per share, the $0.36 net gain was primarily due to $0.35 of net unrealized gains on our securities and derivative portfolio and additionally we had $0.04 of realized gains on our securities and derivatives portfolio that was offset by $0.03 of realize losses upon the recognition of other than temporary impairment unlinking of links transactions.

To give you a better sense of our current $3.8 billion portfolio, I would like to highlight a few more statistics, as describe on page 4, of our presentation. The portfolio at March 31, 2014 had a net interest margin of 2.62% this was comprised of an asset yield of 4.27% offset by repo and swap cost of 0.86% and 0.79% respectively for total cost of funds of 1.65%.

We are pleased that our net interest margin continues to trend higher as the increase was driven by an increase in our weighted yield with the location into the higher yielding credit investments away from low yielding agency securities as well as the improved underlying performance of our portfolio.

Our funding cost remains flat quarter-over-quarter as the increase due to the continued rotation to credit investments which come with a higher funding cost for the agency securities was offset by lower overall funding cost throughout the portfolio. In January we exited out of our only forward starting swap and our swap cost reflected the true cost of our swap.

In March 31st, our book value was $19.53, an increase of $0.39 or 2% from last quarter end. This increase was primarily result of a total $0.36 gain on our securities and derivatives portfolio as I described before as well as core earnings exceeding the common dividend by $0.02.

Our undistributed taxable income of the $1.88 per share as 3/31 and as you can see from our roll forward in our supplement we had a onetime adjustment resulted from a reclass and expected capital gain to ordinary income.

Our liquidity remained strong and at quarter end, we had a total liquidity of about $199.3 million, which was comprised of $33 million of cash, $84 million of unlevered agency household securities and $82 million of agency IO securities.

On the funding side, we continue to be active and as previously mentioned, we entered into a $100 million facility with a two year term to facilitate investing in non-performing and reperforming residential loans.

In April, we extended the maturity of our one year facility to finance to some of our Non-Agency securities. This facility was extended for another year and as part of the renewals, we increased its size to $155 million, while also lowering the borrowing rate as well as certain bond specific share cuts.

We are in discussions with some banks on other types of facilities for both loans and securities in both the residential and commercial sectors and in addition we continue to explore ways to extend our maturities and lower our cost on our existing investments.

That concludes our prepared remarks and we would now like to open the call for questions. Operator?

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Douglas Harter from Credit Suisse. Please go ahead.

Douglas Harter - Credit Suisse

Thanks. I was hoping you guys could give a little color as to where you might see the duration gap trending in the next couple quarters.

David Roberts

I think, we would like to see the duration gap slightly over half of the year, somewhere between half a year and one year, but it is dependent upon what we see in the interest rate market as well as we see on the policy side. At this time, as I mentioned, we elected to allow the gap to narrow when we were basically selling off agency securities and rotating it to some of the credit assets we adjusted, minimally in respect of that and we've elected to basically keep our hedges in place with a predominantly or they are overweight, they are not predominantly. They are overweight at the front end of the curve as well as the [belly] of the curve and so they performed very, very well with recent volatility.

Douglas Harter - Credit Suisse

So, is that something we should expect in the near-term or would you like to see rates move higher first before you would be comfortable the sort of what that duration gap move out?

David Roberts

I think, I would probably say over the next six months. We would like to see a movement in rates that is sustained where we would potentially basically reduce some of the hedges at the front end.

Douglas Harter - Credit Suisse

And then, shifting to the residential and commercial loan opportunities, can you talk about the pipeline to continue the activity that you have there in the first quarter?

David Roberts

Sure. Starting with the residential home loan side, we saw several pools in the first quarter. Activity was a little bit more subdued than anticipated. Several of the potential sellers that we expected to market ran into some operational difficulties. And we fully expect that over the next several months; three, four months, there will be material supply that will be hitting the market.

We were quite disciplined in the first quarter. And several of the pools created at levels that we felt were not as attractive as assets we have typically acquired. But we do anticipate that there will be more supply in the balance of this year. And we're not prepared to basically deploy capital for the sake of to simply deploying it.

On the commercial side, we added Peter Gordon last summer. Peter Gordon is adding staffing and he has several transactions in the pipeline. So, not to get ahead of ourselves, but I think that we will have some favorable developments to report next quarter.

Douglas Harter - Credit Suisse

Great, thank you.


Thank you. And our next question comes from Trevor Cranston from JMP Securities. Please go ahead.

Trevor Cranston - JMP Securities

Hi, thanks. To follow-up on the comments about how you’re thinking about the duration gap, can you share your thoughts on how you’re thinking about the agency bases over the next few quarters and how your thoughts on that impact how you are managing the duration gap and the portfolio overall?

David Roberts

Sure. The agency bases just had favorable performance over the last several months. There was quite a bit of concern about the agency bases. Earlier this year, there was obviously quite a bit of volatility last year mid-year in the bases. At this point in time, we have we are very much more constructive on the agency bases, many investors are under rate agencies, supply is quite constrained and reduced, you are not seeing the same mortgage level of mortgage production, you combine that with just vast under investment in the space and the lack of lot of duration out there. So, and you have many, many people who were less constructive on the bases we showed at the bases. The result is that the bases continue to outperform.

Now we are more constructive on the bases today than we had been last year, but we also at the same time mitigated some of our bases risk by running a much more diversified agency book and a smaller agency book. So, as we noted, I think 22% of the portfolio is hybrid. We have a mix of 30s, 50s and 20s in the portfolio, a mix of different coupons in the stack. We moved up in coupon, all once again in the pursuit of mitigating some of the bases exposure.

In terms of the duration gap, we are constructive on the bases of expanding that gap; right now it’s not optimal in our opinion to be running a zero gap. But we see if rates were to potentially rise especially at the front-end of the belly of the curve, we would perform very, very well under that scenario. And so, we’d like to see a potentially economic activity was to pick up potentially there will be more volatility and potentially further increases in interest rates at the front-end of the curve and we would potentially benefit from that and at that point we would be able to cut back our hedge ratio.

Trevor Cranston - JMP Securities

Okay. That’s helpful. And on the funding side some of your peers have announced that they have foreign subsidiaries that have become members of the federal home loan bank system. Can you comment on if that’s something you guys have looked at and if you think you’d be able to utilize FHLB borrowings underneath your existing portfolio?

Brian Sigman

Yes, it’s Brian. We have been in talks with some; we’ve looked at it pretty hard. And right now we haven’t chosen to set one up or else we would have announced. But if it ever does become something that we think would benefit our company and the shareholders then definitely we will pursue.

Trevor Cranston - JMP Securities

Okay, great. Thank you.


Thank you. And our next question comes from Joel Houck from Wells Fargo. Please go ahead.

Joel Houck - Wells Fargo

Thank you and good morning. I am wondering if you could maybe help us out or talk about directionally how much capital within a certain range you had planned to allocate your credit strategy which obviously include residential and commercial, obviously there is a floor on how much the whole pool you have to own. But it sounds like you’re more expensive on the agency side just given the kind of rate that are unpredictable and you are putting more capital in more I guess in intellectual debt on the credit side of the house?

Jonathan Lieberman

I would say the Angelo Gordon platform has a lot of value on the credit side and we have the ability to directly originate credit assets and leverage off of over 60 different investment professionals that is a value-add. And so, we are certainly going to increase the amount of capital allocated as the pipeline develops and as the opportunity set comes into existence.

With respect to agencies, the agency portfolio, as well as the credit portfolio has performed very well over the past four months. We like our positioning, we like the returns that we are earning on the agency portfolio. I would say that we had the luxury of being able to maintain a very high hedge ratio and being correctly positioned with our interest rate swaps for the volatility that’s occurred over the last 60 to 90 days.

I think that we have the luxury given how well we are performing and the earnings capacity of the credit book, as well as the agency book to basically spend a few insurance dollars on current earnings to protect book value very, very expensively and potentially take advantage of a rise in short-term rates.

David Roberts

David Roberts, I would just add on the credit side particularly on the origination and the home loan side, it’s an episodic type of activity. So, you could easily see quarters where there are few deals, you could see quarters where there are no deals, it's obviously a lot lumpier. So, I just think it's important to everyone to keep that in mind.

If we want to increase the part of the portfolio dedicated to those assets that is dependent upon finding deals that we really like and that is -- we can be very vigilant and urgent about looking for deals, but there has to be a match between a borrower and us, who are cool with us.

Jonathan Lieberman

Yes, I would say that we will continue to be very, very disciplined in this environment. We will, we do have capital available to push into distinct direct originated opportunities. And then we also have the ability to trade out of existing credit assets into higher yielding direct originated assets. So, we have a lot of flexibility and we look forward to in the next several months really kind of seeing if we can push the NIM further up and further enhance the profitability of the company.

Joel Houck - Wells Fargo

Well, I appreciate the color. And if I could maybe just ask a philosophical question, I mean do you have the 10 year on the back of what with (inaudible) paper strong drive report sitting at 260 huge bond market rally. Are you guys surprised at the bond market which is always forward-looking obviously it seems to be suggesting and much more subdued kind of economic growth the rest of the year, but yet we still have this notion from investors that the rise in rates is just around the corner. I guess the question is, are you surprised that the bond market did not sell off; I mean the other [jobs] report?

David Roberts

Not particularly. I mean I think 260 may not be reflective of where it would -- where the backend ultimately transitions. You also have to keep in mind that once again our portfolio is I think of roughly three nine asset duration. So we are -- we do focus on the backend but we are really more susceptible on and more interested where the belly of the curve is. But right now, I would say first Ukraine in geopolitical maybe weighing on the markets. And we’ve seen where the backend will jump up 5 to 10 basis points for an hour or two and then the headline will hit on Ukraine and then will come right back down to 260.

So that’s one aspect. I think there is questions of whether the Chinese or some other international offshore accounts, so I shouldn’t mention their name particularly is buying the backend because of 4x. And I mentioned that in my introductory remarks that foreign exchange rates maybe impacting our interest rate curve and causing this portion especially right now at the backend. And then finally, there is -- you’ve seen this debate kind of raising lately by economists on whether we have some sort of stagnation notwithstanding what the jobs number reflects, there is focus on participation rate; there is a focus on demographics; and then there is focus on wage growth. And so it's I think very difficult to really draw too many conclusions by looking at that one number of 260. And you'll see that once again in a way that we have positioned our hedges which are certainly overweighed front end of the curve and the belly of the curve. And that has been very appropriate positioning for the past four months.

Joel Houck - Wells Fargo

Right. Thank you guys very much.


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

Jason Stewart - Compass Point

Hi, good morning. Thank you. On the commercial real estate side, could you give us an idea for what returns look like at different parts of the capital structure? For example, should we expect you to focus on mezz opportunities going forward and then this LIBOR plus, the 12.5 is right area for us to think about in terms of return there?

David Roberts

So I think there is the commodity market and then there is the direct market. So I’ll focus on our direct origination, which is the predominant source of assets that we seek to add. The coupon for the loan that we need is LIBOR 12.25%, but when you include all of the other incidental fees; expenses; potential early payoff, we see returns for that asset potentially exceeding 15%. So, we see a pretty good risk adjusted return for the LTV and the attachment point. And I think that is for mezzanine type of investment, we certainly wish to be in the mid to high teens. For more of the unitranche transitional type of assets, there you are looking at first lien maybe up to let’s call it somewhere between 70 and 80 LTV. There you are somewhere between LIBOR 550 to 750. And there you are going to utilize some form of term leverage and you will be able to achieve greater than let’s say a 17% type of return potentially on a gross basis with 2.5 to 3 turns of leverage.

If you are dropping down to more of a traditional first mortgage, there you are going to be inside L plus 500.

Jason Stewart - Compass Point

And so would it be fair to say that you are focused on, your core DNA is more suited for that mezzanine product, not part of the capital structure?

David Roberts

Yes. That part for the unitranche with some sort of transitional nature to the property, so that we are paid for that risk.

Jason Stewart - Compass Point

Okay. And when you think about that as a direct lending opportunity versus some sort of direct opportunity in resi, how do you think about the two differently? Is there a meaningful return difference, does leverage play back or your ability to source assets, can you give us just a sense for where you think the opportunity more suites the Angelo Gordon platform?

David Roberts

The benefit of the Angelo Gordon platform is you get full, you get -- and both opportunities are apples and oranges. You have the returns, the gross returns are typically lower for the residential side; there you’re talking mid teens, low teens but you have a lot more optionality. There are a lot of potential outcomes, vectors that can arise that basically in one third of the case, we may seen an upside case that produces returns greater than 20%. So it can be an acceleration of economic activity that leads to higher prepayments to those people are moving out of their houses fast than we anticipated. It can be lower default rates than ones in the remodel, whereas on the mezz side or the unit tranche side you’re ultimately capped at par getting your capital back and an accelerated yield recapture.

Jonathan Lieberman

One is -- it’s useful to keep in mind though one being the resi or discount assets and commercial has not been set, it’s essentially par that’s whatever discount and other transaction benefits that you’re able to negotiate.

Jason Stewart - Compass Point

Okay. That’s helpful. Thank you.


Thank you. (Operator Instructions). And at this time, I am showing no further questions.

David Roberts

Thank you everyone. And have a great day. We look forward to speaking to you next quarter.


Thank you. And thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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