AG Mortgage Investment Trust's (MITT) CEO David Roberts on Q1 2018 Results - Earnings Call Transcript

AG Mortgage Investment Trust, Inc. (NYSE:MITT) Q1 2018 Earnings Conference Call May 3, 2018 9:30 AM ET

Executives

Karen Werbel - Head, IR

David Roberts - CEO

T.J. Durkin - CIO

Brian Sigman - CFO

Analysts

Doug Harter - Credit Suisse

Eric Hagen - KBW

Trevor Cranston - JMP Securities

Operator

Welcome to the AG Mortgage Investment Trust's First Quarter 2018 Earnings Call. My name is Christine 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 Karen Werbel, Head of Investor Relations. You may begin.

Karen Werbel

Thanks Christine and good morning everyone. We appreciate you joining us for today's conference call to review AG Mortgage Investment Trust's first quarter 2018 results and recent development.

Before we begin, I'd like to review our Safe Harbor Statements. Today's conference call and corresponding slide presentation contains 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 Safe Harbor protection [ph] provided by the Reform Act. Statements regarding 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 are forward-looking statements by their nature. The company's actual results may differ materially from those projected due to the impact of these factors and others beyond its control.

All forward-looking statements included in this conference call and slide presentation are made as of today, May 3, 2018 and we disclaim any obligation to update them. We will refer to certain non-GAAP measures on this call. And for reconciliations, please refer to the earnings press release and 8-K, which are posted on our website and have been filed with the SEC.

At this time, I would like to turn the call over to David Roberts.

David Roberts

Thank you Karen and good morning everyone. I'd like to share some highlights of our first quarter 2018 results with you today. Our core earnings for the quarter was $0.59 per share with three notable items I'd like to highlight. First; core benefited $0.02 per share from a retrospective adjustment. Second; core benefited $0.03 per share from a one-time positive impact from a commercial loan pay offs and have been subsequent to product quarter end. Third, core also benefited by approximately $0.03 per share due to the rise in three months LIBOR that we received as part of our swap hedge book. That increase was above the increase of our repo funding costs. This dynamic was unusual and was driven by various supply- demand technicals within the short-term REITs market. We do not anticipate that this dynamic will persists beyond the next quarter or so.

During the first quarter, we declared a regular common dividend of $0.475 per share for the 10^th quarter in a row. Book value per share decreased 1.5% from the prior quarter primarily due to the rise in interest rates and modest spread widening in the agency sector. We continue to see fundamentals in the agency RMBS sector as supportive evaluation and agencies as a sector with an attractive risk reward return profile, should spreads widen much further in response to reduced bad influence. The flexibility we maintain in our agency book leverage, would allow us to opportunistically increase our exposure to the sector at favorable risk return profiles.

During the quarter, we focused on purchasing credit assets that played to the sourcing and diligent strengths of our extensive RMBS ABS team as well as the extensive strengths of the Angelo, Gordon platform. These purchases which were done alongside other Angelo, Gordon funds included two pools of RPL whole loans, two pools of non-QM pool loans. Excess mortgage servicing rights and the credit card ABS note. We plan to continue to emphasize these kinds of internally sourced assets as part of our credit book.

With that, I'll turn the call over to T.J. Durkin.

T.J. Durkin

Thank you, David. Good morning, everyone. The Feds in its March meeting raised the Federal Funds rate by 25 basis points and continue to reduce its holdings of agency mortgage by curtailing its monthly reinvestment of paid debts [ph]. Progress continues to be made with respect to the feds dual mandate of full employment and price stability, as unemployment remains below 5%.

Agency mortgages began the first quarter well supported by yield buying, a robust Federal Reserve purchase and manageable supply. Throughout the quarter, there was increased interest rate volatility and interest rates rose 30 to 40 basis points across the yield curve with the front end moving marginally higher than low [ph] end. In response to the uptick and volatility and continued tapering by the feds, agency RMBS spreads widened five to six basis points versus the swap curve over the balance of the quarter.

While we may experience some further spread volatility over the course of this year. We think the fundamental outlook for agencies mortgages remains favorable given reduced prepayment concerns manageable rate volatility and favorable relative value compared to other liquid spread products. During the first quarter in the credit market, spread performance of mortgage and asset backed securities was somewhat mixed. Although investor demand remained an ongoing scene for both sector.

CRT spreads were more volatile and tightening to early in the quarter, so levels lasting prior to hurricanes Harvey and Irma, but then widened as new supply and broader market volatility laid on the sector. Spreads for pre-crisis RMBS continue to tighten due to the persistently strong net demand technical coupled with continued strength in the fundamentals. The CMBS market was relatively calm despite the significant uptick in rate volatility and noise around the retail sector. Within CMBS, the credit curve flattens as Triple AAA rating securities widened and lower rate of securities tightened reflecting a bifurcated buyer base with opportunistic investors displaying a strong reach for yield while more risk averse buyers invested with increased cost.

With respect to interest rates, the rate move year-to-date largely reflects the significant improvement in the US economy. We continue to anticipate a modest rise in interest rates this year as the fed continues to tighten monetary policy in response to the substantial progress made on each of its dual mandates. However, we do not anticipate the material increase in rates because the gap between the market pricing of interest rates and the feds medium forecast for the feds fund rates has narrowed and market positioning remains defensive regarding interest rates.

Focusing on Slide 5 of our quarterly earnings presentation. We outlined the first quarter activity. We actively manage the agency book and credit book increasing our investments in both categories by a total net equity amount of $23 million. During the quarter on the agency side, we added excess MSR stripped from government and conventional loans and on the credit side MITT alongside another Angelo, Gordon fund purchased two pools of primarily reperforming residential mortgage loans. Additionally, MITT purchased two non-QM pools alongside other Angelo, Gordon funds.

MITT also purchased a revolving note on a credit ABS securitization. During the quarter we sold securities in the credit books capitalizing on relatively tight CRT spreads to shed some exposures ahead of anticipated new issue supply which openly put pressure on spreads. We realized gains from sales on Freddie K securities and there were sales and pay offs of legacy RMBS securities during the quarter.

In terms of credit investments, we're finding value both in the new issue market as well as in lesser known niche opportunities we obtained to the Angelo, Gordon platform. On Slide 9, we've laid out the investment portfolio composition for the quarter. The fair value of the aggregate portfolio was $3.8 billion for the quarter comprised of our agency book which was approximately $2.3 billion and the fair value of our credit book which was approximately $1.5 billion.

Focusing on our agency portfolio on Slide 10, you'll see a break out on our current exposure by product type. The constant prepayment rate for agency book was 6.3% for the first quarter because of the size of our agency portfolio relative to the overall market. The discipline and selectiveness of the investment when adding into C Risk [ph], we inspect pre-payment deeds [ph] for our portfolio to generally outperform the overall universe of agency collateral.

On Slide 11 and 12, we'd like to highlight that 44% on our residential credit investments excluding whole loans and 71% of our commercial and ABS investments are floating rate in nature and are directly benefiting from the recent increases in the fed funds rate. The decline in the our residential credit investments 48% [ph] this quarter was a result of our rotation out of CRT securities during the quarter.

Moving ahead to Slide 14, of the quarterly earnings presentation, we lay out the duration gap of our portfolio which increase modestly this quarter to 1.25 years versus 1.15 in the prior quarter. The overall duration contribution of our agency MBS portfolio held confident 2.7 years and some minimal duration extension was offset by shift to higher coupon agency pools and therefore shorter duration volumes [ph].

During the quarter our hedge book increased marginally as we added swaps throughout the quarter. This resulted in a duration gap of the most interest rate sensitive portion of our portfolio declining to de minimis 0.5 years while the overall duration gap increased with our newly purchased whole loan investments. As we look into 2018, we were confident that MITT was well positioned to deliver attractive returns to our investors while protecting book value. Given the purposeful construction of our portfolio we have ample flexibility to take advantage of opportunities that may arise of any increase in spread volatility in the future and we seek to deploy capital into investments that we find attractive in more liquid sectors such as agency mortgages and other residential or commercial credit investments and into larger opportunities in less liquid spaces presented us through the larger Angelo, Gordon platform.

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

Brian Sigman

Thanks T.J. Overall for the first quarter we reported net income available of common stockholder $4.9 million or $0.17 per fully diluted share. Core earnings in the first quarter was $15.5 million or $0.59 per share versus $14.2 million or $0.50 per share in the prior quarter. There was a $0.02 retrospective adjustment in the first quarter due to the premium amortization our agency portfolio versus de minimis retrospective adjustment prior quarter.

At March 31, our book value was $19.32 a decrease of $0.30 or 1.5% from last quarter due to the reasons David previously mentioned. To give you a better sense of our current $3.8 billion portfolio I'd like to highlight a few more statistics. As described on Page 4 of our presentation the portfolio at March 31 had a net interest margin of 2.69% this was comprised in an asset yield of 4.99% offset by total cost of funds of 2.3%. Net interest margin increased from the prior quarter due to the increase in yield primarily due to an increase in interest rate and a commercial loan pay off subsequent to quarter end. The increase in cost of funds was primarily due to an increase of 25 basis points in the federal funds raised in March which was partially offset by repo spread tightening versus LIBOR.

As of March 31, we had 39 financing cash parties and our financing investments to 28 of those counter parties. In the first quarter we do not see any ill effects in the financing market from the rate increase and in general, funding continues to be plentiful [ph]. The new entrants in both the credit and agency space. At quarter end, we had liquidity of $150 million this was comprised of $25 million of cash, $85 million of unlevered agency hopeful [ph] securities and $5 million of unlevered agency IO securities.

In addition, after the quarter we received $15 million of principal proceeds from the pay down of the unlevered commercial loan. Additionally at quarter end, our estimated undistributed taxable income was $1.54 and we continue to evaluate on a quarterly basis, to make sure that we're compliance with our distribution requirement.

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

Question-and-Answer Session

Operator

[Operator Instructions] and our first question is from Doug Harter of Credit Suisse. Please go ahead.

Doug Harter

I was hoping you could just help quantify some of the benefit you might from the faster increase in LIBOR in the second quarter and kind of your expectations just to quantify that a little bit as to how long it last and whether it goes all the way back to sort of prior levels - over the next couple quarters.

Unidentified Company Representative

Thanks Doug, this is Mike [indiscernible]. It's sort of difficult to quantify, it really depends on when the floating rates of our swaps reset, when our repo book rolls. We do expect it to be accretive to earnings in Q2 given that our floating rates were swap book we said in Q1. We expect it to be I would say at least the same as we saw in Q1, maybe a couple pennies more given that we'll have the benefit of the fourth [ph] quarter. the situation is really being driven by some short-term market technical's and it's difficult to really project - whether that's - whether it's more technical be it [indiscernible] or whether it's - whether there's some structural factors there given reduced commercial paper demand from the monies that repatriated. And it's hard to lock in for any period of time. This relationship has been historically very stable - have had some funding crisis in history. So we really have no reason to believe that it won't be hurt back, a good portion. We saw the spreads were to peak in late March and since then its reverted back by about seven or eight basis points through the yesterday.

We anticipate that will see some continued reversion back to more a normal relationship. It really is difficult to project at this time. I think the market is sort of trying to figure out what that dynamic is going to look like, which is really why we're not projecting it a whole lot further than say the next quarter to really trying to view that as just a tailwind that will benefit from, but really not counting on that persisting much beyond.

Doug Harter

Thank you. And then just on the some of the whole loans, you bought this quarter. If you could talk about the returns that you saw there and whether that's likely, that opportunity like [indiscernible] persists.

T.J. Durkin

Sure. I think we're seeing opportunity in the RPL and NPL space. Generally we're finding ourselves to be more competitive some of the smaller pools that are upper bids versus some of the larger ones and I think we're anticipating levered ROEs in the low-to-mid double digits.

Doug Harter

All right. Thank you.

Operator

Thank you. Our next question is from Eric Hagen of KBW. Please go ahead.

Eric Hagen

My first question is on asset yields, rates have obviously risen since the end of the quarter, have you been able to capture or even higher yields either in run off or anything you sold since quarter end.

T.J. Durkin

On the margin I wouldn't say it's been that meaningful since the end of the quarter ago.

Eric Hagen

Okay. My second question is just on the non-QM strategy. I mean, I'm assuming the goal there is to eventually securitized some pool of those assets, but until you do I mean until there are as they're just sitting on your balance sheet. I mean what kind of financing are you getting on those and what are the ROEs. Thanks.

Brian Sigman

Sure. We have on our regular warehouse facility, the program is being. The warrant is being purchase in conjunction with other Angelo, Gordon. So we see on our balance sheet is just net proportion, but we have a typical warehouse type facility to learn to the ones that we've setup on the RPL and NPL pools that we've bought over the years and we're pretty comfortable with that facility. But certainly securitization is what we'd like to get to. The returns I think, we don't typically early on the stage this goes the - expect the returns. But we wouldn't expect them to be much different than the rest of the portfolio and obviously [indiscernible] securitization that could change as well.

Eric Hagen

Yes, that's helpful Brian. Thanks.

Operator

Thank you. Our next question is from Trevor Cranston of JMP Securities. Please go ahead.

Trevor Cranston

Question on the Excess MSR's you guys bought in the quarter. Can you give a little more detail on that and if it's new issuance or slightly older stuff? And also maybe comment on - if that was sort of unique opportunity or if you're just in general finding more opportunities within the MSR market. Thanks.

Brian Sigman

Sure on the seasoning, they're typically less than two years season, so generally new origination. We see in more supply come because I think originators are looking to get more cash on the balance sheet, so they're selling their retained MSRs in the market. I think we see generally unlevered yield on that space depending on the size of the pool and Fannie, Freddie versus Ginnie very high single digits unlevered to potentially on some transactions in the Ginnie space were double-digit [indiscernible].

Trevor Cranston

Got it. Okay. And then question on the asset yields, you guys have on Slide 4 there. There is a comment that the increase this quarter was due to higher rates in the commercial loan pay off. I was curious on the higher rates component. Is that more the sort of the retro adjustment on prepaid speeds or is there an element there that, some of your assets are resetting to hire LIBOR type rates?

Brian Sigman

Yes, I think it's a little both I think obviously we disclose that we own a fair amount of floating rate paper that's directly tied to LIBOR and the assets themselves typically reset monthly and then moving over to the agency phase given the higher yield curve just absolute yield is respectively higher than it was entered in Q1.

Trevor Cranston

Okay, can you quantify how of it was like coupons reselling to higher rates?

Brian Sigman

I think it probably be easier to quantify how much was the commercial loan pair off. I think it was around 10 basis points. We owned this loan at a fairly sizable discount. We had bought, it would pay off in about a year from now. So we're amortizing over the period. Our projections changed and as I mentioned the money came in a couple days after the quarter, so we got the truck which was worth about $0.03 of income which translated into a pick up in kind of the yield at 331, that will reset because as David mentioned not recurring and we'll be left with, as T.J. was saying the higher yield on the assets mainly due to the flat [indiscernible] floating rates going up.

Trevor Cranston

Got it. Okay. Thank you.

Operator

[Operator Instructions] and we have no further questions.

Karen Werbel

Okay, thank you everyone. We look forward to speaking with you next quarter.

Operator

Thank you and thank you, ladies and gentlemen.