Apollo Residential Mortgage, Inc. (NYSE:AMTG)
Q3 2012 Earnings Call
November 7, 2012 10:00 AM ET
Michael Commaroto – CEO
Stuart Rothstein – CFO, Treasurer and Secretary
Douglas Harter – Credit Suisse
Good morning. My name is Christy and I will be your conference operator today. At this time, I would like to welcome everyone to the AMTG Third Quarter 2012 Earnings Release Conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. (Operator Instructions) 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. third 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.
Before I turn the call over to Stuart to discuss the financial results, I would like to discuss our investment strategy in the third quarter as well as provide some color on opportunities we are seeing in the marketplace currently.
The company reported GAAP net income of $70.4 million, or $2.91 per common share and operating earnings of $16.3 million or $0.67 per common share for the quarter ended September 30, 2012. AMTG’s strong third quarter operating performance was driven by a well constructed $4.23 billion RMBS portfolio which generated a 2.8% blended net interest spread and an 18.4% leverage asset yield.
AMTG’s book value per common share at September 30, 2012 was $21.46 as compared to $19.65 at June 30, 2012 reflecting a 9.2% increase. We’re extremely pleased with our operating results in book value appreciation during the third quarter which the company accomplished at the backdrop of the extreme market volatility. The Fed announcement of QE3 on September 13, 2012 has substantial impact on prices in both the Agency and Non-Agency RMBS markets. QE3 was beneficial for the company’s existing securities as spreads tightening and price appreciation in the market increased the value of our existing portfolio.
However the same spread tightening made investing in new Agency RMBS that much more challenging as agency yields neared historic lows. During the third quarter, AMTG’s Agency investment strategy continued to focus on prepayment protected securities such as lower loan balanced RMBS or securities backed by loans that have already been through HARP.
Additionally, we continue to find a new production collateral from selling servicers [ph] that are not efficient at pooling tightly constructed specified pools often relative value within the sector. Our Agency investment strategy continued to show its strength witnessed by our sustained low constant prepayment rates or CPRs which outperformed the broader market in the third quarter. AMTG’s Agency RMBS portfolio experienced prepayment at an average one month CPR over the quarter ended September 30, 2012 of 5% and 5.2% when including our Agency Interest Only and Agency Inverse Interest Only Securities.
Consistent with our strategy to optimize our asset allocation within our Agency portfolio during the third quarter, the company sold $674 million of Agency RMBS primarily comprised of 15 and 20 year past-through securities and realized net gains were approximately $13 million or $0.57 per common share. It is worth noting that subsequent to quarter end Agency RMBS spreads slowly unwound a portion of the tightening caused by QE3. As a result, the company continues to be able to identifying investment specified pools at attractive risk-adjusted yield as we manage our capital and optimize our portfolio.
Non-Agency prices also rallied significantly throughout the third quarter and investor seeking yield increased the capital allocation to the Non-Agency sector. Spreads in this market continue to tighten due to supply demand technicals driven by shrinking pool and investable bonds. Specifically as legacy Non-Agency RMBS continue to pay down there has been very limited supply created to replace this run-off.
Beyond just technicals driving the market, we also have seen an improvement in fundamentals, which bodes well for our existing securities. Home prices appear to have stabilized in most major markets. S&P’s Case-Shiller Index shows an annual gain of 1.2% in home prices across 20 cities in July. And consistent with our investment thesis and launching our hybrid REIT last year, we believe that housing market is finally finding a bottom.
During the three-months ended September 30, 2012 the company purchased Non-Agency RMBS at a weighted average purchase price of 60.6% of par value. While our focus primarily remains on seasoned, sub-prime, similar to last quarter, we did find value in some lower credit Alt-A securities as well as pay-option adjustable-rate mortgages. We also find value in (inaudible) and RMBS with smaller outstanding principal balances. However given the increased pressure on pricing in the Non-Agency market, yields on Non-Agency RMBS applied to the third quarter were lower than the previous quarters, causing a slight decline in our return on equity for Non-Agency investments.
As of September 30, 2012 the equity allocation of our portfolio was comprised of 63% Agency RMBS, 22% Non-Agency RMBS and 15% cash. Our hybrid REIT structure enables us to reallocate our equity in a manner that we believe will maximize return to our stockholders and allows us to take advantage of opportunities across our broad spectrum of the residential mortgage market.
In addition to Agency and Non-Agency RMBS investments, we begun to explore other residential mortgage investments in order to expand the scope of our portfolio. In particular, we’re spending meaningful time analyzing and bidding on whole loan pools, an asset class which our management team has extensive experience. We are in the preliminary stages of exploring our whole loan strategy and we’ll provide updates as warranted.
At this point I would like to turn the call over to Stuart to review our financial results for the quarter. Stuart?
Thanks, Michael. As Michael mentioned and as highlighted in our earnings release for the quarter ended September 30, 2012, the company reported GAAP net income of $70.4 million or $2.91 per common share and operating earnings of $16.3 million or $0.67 per common share. Our earnings release and the supplemental information package both of which are available in the Investor Relations 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 $0.57 per common share from the sale of RMBS, in addition to unrealized mark-to-market gains on our RMBS and unrealized and realized losses on our Swaps which net to a $1.67 per share.
With respect to our financing, at quarter-end the company had 20 lending relationships representing approximately $7.5 billion of liquidity of which $3.7 billion was drawn down from 16 of these relationships. We have seen a slight increase in cost for repo financing for both Agency and Non-Agency RMBS. Our weighted average borrowing rate was 0.6% at September 30, 2012 as compared to 0.5% at June 30, 2012.
AMTG’s effective cost of funds as of September 30, 2012 which is calculated on an annualized basis and includes the interest component for Swaps was 1% as compared to 0.8% as of June 30, 2012. We have made progress with terming out some of our repo financing and the weighted average remaining maturity for all of our borrowings was 55 days at quarter-end as compared to 30 days at June 30, 2012.
Significantly, the weighted average remaining maturity for our Non-Agency financing was 86 days as compared to 59 days at June 30. Before we open the call up for questions, I would like to comment on dividend policy. The company’s Board of Directors declared an $0.85 per share dividend to shareholders’ of record as of September 28, 2012. This was a 13% increase over the company’s dividend per common share for the second quarter. As we have previously stated, in determining the dividend, the Board considers a number of factors including compliance with REIT distribution requirements, our internal earnings forecasts and estimates of taxable income and any realized gains which the company ultimately needs to distribute pursuant to the REIT rule [ph].
In declaring a dividend AMTG’s Board seeks to minimize the volatility from quarter-to-quarter and will keep all of these factors in mind when setting the fourth quarter dividend level in mid December. Operator, we will now open the line for questions.
(Operator Instructions) You have a question from the line of Douglas Harter with Credit Suisse.
Douglas Harter – Credit Suisse
(Inaudible) some other investment opportunities. Could you just go into kind of what areas you think are attractive and how those returns might compare to what you can find in the Agency, Non-Agency?
Yes, Doug, you broke up a little bit at the start of the call but I think I heard the gist of it. Right now we’re spending a lot of time looking at legacy whole loan pools. So assets that I would say were originated pre-2008 which are substantially similar to the assets that are in the Non-Agency bonds that we buy already but these should be in an unsecuritized form, so we look to buy those as whole loans and then securitize those and term it or financing via the securitization market.
That’s really the first thing that we’re spending a lot of our time on as far as kind of different strategies. So it’s leveraging off the experience we have in the Non-Agency market plus the years of experience we have doing whole loans at Apollo through the (inaudible) private equity vehicle and before that Deutsche Bank and the Credit Suisse. So we think it’s a natural extension of our skill set.
Douglas Harter – Credit Suisse
Would that be performing or non-performing loans?
They’d be – right now we’re looking for performing assets because we want the cash flowing assets, so I view those as legacy performing loans because the performing, because they are modified at some point over the course of their existence but they’d be cash flowing assets for the most part. We may at some point look at NPLs as well, but right now we’re very focused on legacy performing loans.
Now you can say the second thing we spend some time working on, but I would say it’s farther down the pike in terms of doing something would probably be MSRs, mortgage servicing rights. We’ve had couple of discussions with people we think could be good strategic partners, but those are very complex trades to do so we’re still working through that but I think that the next thing we’ll move into most immediately would be the whole loan trade.
Douglas Harter – Credit Suisse
Great, thank you.
(Operator Instructions) I would like to hand the program back over to management for any further comments or closing remarks.
I think we also just like to thank the investment community for their continued support of our stock and look forward to speaking with you next quarter. Thank you.
This does conclude today’s conference call. You may now disconnect.
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