TPG Mortgage Investment Trust Inc (MITT) Q1 2017 Earnings Report, Transcript and Summary

Welcome to the AG Mortgage Investment Trust First Quarter 2017 Earnings Call. My name is Paulette, 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. [Operator Instructions] 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.

Thanks, Paulette. Good morning everyone. We appreciate you joining us for today's conference call to review AG Mortgage Investment Trust's first quarter 2017 results and recent developments. Before we begin, I'd like to review our Safe Harbor statements. Today's conference call and the 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 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 the slide presentation are made as of today, May 04, 2017 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.

Thank you Karen, and good morning everyone. I would like to share some highlights from the first quarter with you today. Our book value increased during the quarter by 1.7% to $18.17 per share at quarter’s end. The increase in book value was driven primarily by the credit portion of our portfolio as credit spreads tightened during the quarter. Our agency RMBS portfolio maintained book value stability during the quarter as spreads to both the treasury and swap curves were largely unchanged on the quarter. Our core earnings for the quarter were $0.41 per share including a de minimus retrospective adjustment and $0.01 per share from dollar role income associated with their net TBA position. During the quarter we declared a dividend of $0.475 per share for the sixth quarter in a row. During the fourth quarter of last year, we responded to the postelection rate rise and the increased uncertainty postal action by adding hedges, reducing leverage and added to our overall liquidity. Due to our conservative positioning at the end of the fourth quarter, as we mentioned on last quarter’s earnings call, we expected the different quarter earnings that we experienced in the first quarter. That being said, we have seen opportunities to deploy capital into both agency and credit. In the beginning of the second quarter, we have deployed much of the excess liquidity that contributed to lower core earnings in the first quarter. As always, we remain opportunistic and evaluate investment opportunities on a relative value basis. In the first quarter, we increased our equity allocation to Agency RMBS to approximately 35% from 29% in the prior quarter and have deployed additional equity into agency RMBS at attractive ROEs post quarter end. We also continue to see opportunities to add to our credit portfolio subject to 40 Act constraints through leveraging the Angelo, Gordon platform. I also would like to mention that we plan to set up an at the market equity offering program or ATM program within the next week. We believe having an ATM is a useful tool in order to raise capital accretively and opportunistically overtime. With that, I will turn the call over to TJ Durkin

Thank you David, good morning. Mortgage mass affect markets rallied during the first quarter driven by a strong demand for yield and supported by the risk on sentiment in the broader capital markets. The rally was broad based and spreads for many subsectors within credit REIT's multiyear tights, while credit curves flattened Demand remained strong despite a large increase in non agency RMBS new issue supply. Investors flushed with cash stepped providing robust demand and contributing to the strong technical landscape. Overall, economic growth appears to be on sustainable path and despite some transitory first quarter softness, we see real GDP improving modestly over the balance of this year. This administration’s proposed agenda still offers some upside risk to growth but less so far this year as timelines for implementing fiscal measures continued to extend. In response to continued progress on its dual mandate of full employment and price stability the Fed at its March 15, meeting decided to raise the federal funds interest rate by an additional 25 basis points. Unemployment remains below 5% and the year-over-year price index for core personal consumption expenditures continued to move slowly toward the fed's 2% target. Our base case assumption regarding the fed's monetary policy remains with 50 basis points of additional increases this year and plans for a reduction in the fed's balance sheet to be announced towards year-end. As we said last quarter, we do not anticipate interest rates at the longer end of the yield curve to become unhinged in response to either policy rate increases or an adjustment to the fed balance sheet. Agency mortgages remained relatively stable in Q1 as benchmark interest rates traded in a well defined range, finishing the quarter approximately 5 basis points from where they began. The first quarter brought increased discussion over the future of the fed's balance sheet reinvestment program from both inside and outside the fed. Details are still limited, but the reduction in the fed's reinvestment program has not negatively impacted the market for Agency mortgages as much as previously predicted. The implementation of the reduction of the fed's reinvestment program and the resulting performance of Agency mortgages relative to benchmark interest rates had increased our comfort level for this sector, as David previously mentioned. Persistently favorable fundamentals and a strong net demand technical continue to support positive performance in the legacy residential mortgage sectors. Underlying collateral performance of residential mortgages continued to remain steady, and in some cases, is improving, benefiting from continued home price appreciation and borrower credit curing -- we think any rise in interest rates points to expectations of higher economic growth and rising personal incomes, both of which would be supportive of home prices and the fundamental collateral performance. We do not believe that higher interest rates will materially hamper housing affordability. We remain constructive on housing and believe home price stability is durable at this time with potential upside to prices. The credit risk transfer market saw some intra-quarter volatility, but otherwise performed well amid an active new issue calendar. The GSEs continue to modify and expand our structures and product offerings, which we think offers the market more interesting investment opportunities on a go-forward basis. Moving on to commercial. The CMBX 6 BBB minus index spreads widened during the quarter as persistent fears involving the retail sector were expressed in this synthetic index. However, cash bonds, in particular, new risk retention-compliant CMBS securitization, saw a healthy investor demand up and down the capital structure. Focusing on Slide five of our quarterly earnings presentation, we outlined the first quarter activity. We actively managed the Agency and Credit book, investing total net equity of $31.9 million during the quarter. Of note, we increased our allocation to Agency RMBS on a hedge basis during the quarter. We also participated in several new issue transactions across CRT, non-QM and the RPL and NPL sectors. On Slide seven of our quarterly earnings presentation highlights the investment opportunity set we currently see across the Agency, residential credit, commercial and ABS sectors as well as hypothetical gross-levered ROEs. It is important to note that the depth and availability to invest in each of these sectors varies over time, and the investment team constantly evaluates where the best long-term relative value lies for our shareholders. Turning to our portfolio composition on Slide eight we've laid out the investment portfolio breakdown for the quarter. The aggregate portfolio size increased to approximately $2.6 billion from $2.5 billion in the prior quarter. The fair value of our Agency book was approximately $1.2 billion and the fair value of our Credit book was approximately $1.4 billion. Focusing on our Agency portfolio on Slide nine, the constant prepayment rate for our Agency mortgage book was 9.3% for the first quarter. Prepayment speeds for our portfolio remain benign and stable owing to the favorable characteristics of our holdings. Moving on to Slide 13 for the quarterly earnings presentation. We lay out the duration gap of our portfolio, which remains essentially flat this quarter at 1.52 years versus 1.53 in the prior quarter. During the quarter, as we increased our allocation to agencies, we added hedges to maintain a consistent duration gap. And as we look forward into 2017, we believe MITT is well positioned to take advantage of a wide range of Agency and Credit market opportunities at favorable returns. We continue to deploy our liquidity into investments that we find attractive to add such as commercial assets sourced by Angelo, Gordon CMBS and real estate private equity group, certain Agency MBS and newly originated residential whole loans and MSRs. With that, I'll turn the call over to Brian to review our financial results.

Thanks, TJ. Overall for the first quarter, we reported net income available to common stockholders of $21.8 million or $0.70 per -- $0.78 per fully diluted share. Core earnings in the quarter was $11.5 million or $0.41 per share versus $15.8 million or $0.57 per share in the prior quarter. There was a de minimis retrospective adjustment in the first quarter due to the premium amortization on our Agency portfolio versus a $0.06 positive retrospective adjustment in the prior quarter. At March 31, our book value was $18.17, an increase of $0.31 or 1.7% from last quarter due to the reasons David previously mentioned. To give you a better sense of our current $2.6 billion portfolio, I'd like to highlight a few more specifics, as described on Page four of our presentation. The portfolio at March 31, 2017 had a net interest margin of 2.86%. This was comprised of an asset yield of 5.02% offset by repo and hedging costs of 1.78% and 0.38%, respectively, for a total cost of funds of 2.16%. The increase in cost of funds on the prior quarter was due to the addition of hedges, coupled with the increased cost of financing, resulting from the increase in the fed funds rate. As of March 31, we had 39 financing counterparties and are financing investments at 24 of the counterparties. Subsequent to quarter-end, we terminated a $200 million repo facility and instead financed the securities on the facility with multiple accounts parties at a lower cost and higher advance rate. In the first quarter, we did not see any ill effects in the financing market from the rate increase, and in general, funding continues to be plentiful with new entrants in both the Credit and Agency space. At quarter end, we had liquidity of $153 million, comprised of approximately $30 million of cash, $99 million of unlevered Agency hopeful securities and $34 million of unlevered Agency IO securities. Additionally, at quarter-end our estimated undistributed taxable income was $1.84. We continued to evaluate this on a quarterly basis to make sure that we're compliant with our distribution requirements. As a reminder, we have until September of 2017 to distribute out our 2016 taxable income. I also want to point out that we added additional slides and information into our earnings presentation this quarter in order to provide you with more transparency into MITT's investment portfolio. That concludes our prepared remarks, and we'd now like to open the call for questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Eric Hagen from KBW. Please go ahead.

Hey thanks, good morning. The additional disclosures are really helpful, so thank you for those. It looks like maybe the CMBS leverage went down. It looks like there was some repo that was removed from that segment of the portfolio during the quarter. Was that -- and I missed some of the opening remarks, so I apologize for that. But was that -- did that contribute to the lower earnings during the quarter? And if leverage were to ramp up again in that segment, would you expect levered ROEs to return to something more normalized?

It's Brian. The only thing that really kind of happened on the commercial side is we had one large payoff that we replaced with a new investment. Some of our loans are treated as unlevered there, which is why the low leverage is kind of in that sector. But I think overall, really, the kind of decrease to the core was resulting in the lower leverage on the entire portfolio throughout the quarter, as well as sitting on the extra cash that we kind of guided to on the last call. And we think as we've invested that up, we do think that the earnings power will increase.

Right. So just to make sure I'm clear on slide eight you are showing the onetime leverage on the commercial investment portfolio. I actually expect that to increase over time. Okay.

No, no, no. Sorry, not specific to commercial. My comments were outside of commercial. They were on the overall portfolio, the Agency, residential. And I think now, we've described -- instead of just breaking out between Agency and Credit, we have broken credit into those three components at a little bit of a different level. So I think that's kind of just what you're seeing the onetime.

Okay, got it. And then with the ATM, any additional capital that's raised through that? Where do you see that being deployed, and do you see your overall equity allocation mix staying relatively constant, or would it shift at all? Would you like it to shift at all?

I think -- this is David. As always, we're going to look at the range of opportunities we've been deploying both to Agency and to Credit. So we found opportunities in both buckets. So it will depend on where we see the best dress for work.

Okay, however thanks for the comment.

[Operator Instructions] Our next question comes from Trevor Cranston from JMP Securities. Please go ahead.

Hi, thanks good morning. I think in your prepared comments, you mentioned CMBS as one of the sectors you were finding opportunities in on the Credit side. Can you give us a little more color on specifically where in the CMBS market you guys are finding opportunities given the spread tightening we've seen over the last few months? Thanks.

Sure, this is TJ. Generally speaking, we probably focused a large percent of our CMBS allocation to the Freddie K multifamily sector, which doesn't move in lockstep with, I would say the broader sort of conduit markets. So we continue to focus on that sector. In particular, we also have a decent IO percentage of that of the CMBS allocation, which again is not going to move in lockstep with just general spreads in the capital structure. We think also there could be more new issue supply as we head into the second, third, fourth quarters, which from just a technical point of view, could put some pressure on spreads.

Got it. Okay. Then can you guys give us an update on how Arc Home has performed over the beginning of 2017 and if it's still sort of tracking with what your expectations were for you when you entered into that joint venture?

Sure. So I mean, at a high level, we're very pleased with how management is expanding the business. Monthly originations continue to grow, and we are starting to utilize the platform to source other assets, as we mentioned, MSR, and potentially forward-looking non-Agency new issue origination coming directly from them.

Okay. Got it, appreciate the comments. Thank you.

[Operator Instructions] And we are showing no further questions. I will now turn the call back to Karen Werbel for closing comments.

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

Take care