TPG Mortgage Investment Trust Inc (MITT) Q2 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the AG Mortgage Investment Trust Second Quarter 2018 Earnings Call. My name is Brandon and I will be your operator for today. 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. And I will now turn it over to Karen Werbel. You may begin.

Thanks Brandon. Good morning everyone. We appreciate you joining us for today’s conference call to review AG Mortgage Investment Trust second quarter 2018 results and recent developments. 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 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, August 7, 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.

Thank you Karen and good morning everyone. I’d like to share some highlights from our second quarter 2018 results with you today. We increased our dividends of $0.50 per common share for the second quarter of 2018 that represented 5.3% increased over the prior quarter’s dividend. Our core earnings for the quarter was $0.55 per share. Core benefited by approximately $0.05 per share due to the rise in three month LIBOR that we receive, as part of our swap hedge book which was above the increase of our repo funding costs. This benefit compares to a $0.03 benefit in Q1 of 2018. As we said last time, we do not anticipate this dynamic will persist at these magnitudes going forward. Book value per share decreased 1.8% from the prior quarter, primarily due to a modest rise in interest rates given our positive duration gap. Acquisition and securitization expenses related to residential whole loans acquisitions. Spread widening and mortgage derivatives and under performance of specified pools versus TBA. Book value increased approximately 2% in the month of July due to an increase in the value of our credit portfolio. Although, we generally do not comment on interquarter moves in book value in this case, given the second quarter's book value decline, we felt it was appropriate to provide a rough sense of current book value. We continue to see fundamentals in the agency RMBS sectors, supportive evaluations and agencies as a sector with a favorable risk reward return profile. Should spreads widen further in response to reduce fed influence the flexibility we maintain on our agency book leverage would allow us to opportunistically increase our exposure to the agency sector. As we continue to rotate mix credit portfolio away from legacy NPL securities and into areas that require greater specialized housing and credit expertise. I’d like to emphasize the advantages that MITT enjoys from being part of the Angelo Gordon structured credit platform and part of the overall Angelo Gordon family. The Angelo Gordon structured credit platform is co-managed by T.J. Durkin and Andy Solomon, and has over 25 investment professionals. For the past decade, the group has been a leader in investing in a wide range of housing and credit transactions, and accordingly has a wealth of experience and a strong reputation on Wall Street that has led to a robust deal flow of diverse and attractive opportunities. Angelo Gordon is a 30-year old firm with approximately $30 billion of assets under management and over 170 investment professional. The firm’s specializes in and has long been recognized leader in both real estate and in credit. MITT benefits significantly from the resources of both the structured credit group and the overall firm Angelo Gordon, particularly as markets evolve. As TJ will discuss many of the more exciting credit opportunities we are pursuing require both greater due-diligence experience and expertise and in-house asset management capabilities which MITT is fortunate to have available to it. With that I will turn the call over to T.J. Durkin.

Thank you, David. Good morning, everyone. The economy continues to grow at and above trend pace underpinned by Tax Cuts, reduced regulation, accommodative monetary policy and a labor market that is still showing improvement. Inflation remains subdued but has improved to levels close to defense 2% target as transitory factors from 2017 have faded. In response the Fed at its June meeting raised the federal funds rate by 25 basis points and continued to reduce its holdings of agency MBS by further curtailing its multi reinvestment of pay downs. Agency MBS finished the second quarter flat to marginally tighter versus the swap curve, while the continued reduction of the Fed's holdings of agency MBS poses a headwind. Net origination in 2018 is running at a slower pace than 2017 and slower than most industry forecasts for 2018 providing some offset. Meanwhile, demand for the sector remained robust, supply was manageable and interest rate volatility was muted. During the quarter, spread performance was somewhat mixed across mortgage credit factors, legacy RMBS spreads which were at or near all time tights to start the quarter maintained these levels by quarter end as market participants continue to reinvest monthly proceeds back into the sector. The CRT markets are indications of spreads earnings in the mezzanine subordinated tranches, as investors favor season deals with comparatively better underwritten collateral. There are also several large legacy loans out throughout the quarter which gave the market access to pools of different quality and return assumptions. The slow and steady positive performance in the CMBS market continued during the second quarter of 2018 and the credit curve continued to flatten. Also note, single asset, single bar deal volume is up more than 60% this year versus last. We find this market attractive as the lower rate in tranches of these deals are often preplaced with one or just a handful of buyers and the Angelo Gordon continues to be one of the industry participants are often shown these deals in advance. Focusing on Slide 5 of our quarterly earnings presentation, we outlined our second quarter activity. On the credit side, the net purchase to pool primarily re-performing residential mortgage loans investing $18.8 million of equity, pay-off to sales of commercial investments returned $7.2 million of equity which was primarily reinvested in a commercial whole loan at the end of July. And additionally, net of all other Angelo Gordon funds participated in the term securitization in June, which refinanced weak performing mortgage loans returning $12.7 million of equity capital back. We maintain exposure to securitization to interest in the subordinated tranches as well as through in ownership of vertical risk retention portion of the securitization. On Slide 8, we’ve laid out investment portfolio composition for the quarter, the fair value of the aggregate portfolio was $3.6 billion for the quarter comprised of our agency book which was approximately $2.2 billion and our credit book which was approximately $1.4 billion. Focusing on our agency portfolio on slide nine, you’ll see a breakout of our credit exposure by product type. The constant prepayment rate for our agency book was 6.4% for the second quarter, because of the size of our agency portfolio, relative to the overall market and the discipline and selectiveness of the investment team when adding agency risk we expect prepayments fees for our portfolio to generally outperform the overall universe of the agency collateral. On Slide 10 and 11, we’d like to highlight that 45% of our residential credit investments excluding whole loans and 72% of our commercial and ABS investments are floating rate in nature and are directly benefiting from the recent increase in the fed funds rate. Moving ahead to Slide 13, of the quarterly earnings presentation, we lay out the duration gap of our portfolio which decreased modestly this quarter to 1.08 years versus 1.25 years in the prior quarter. As we look ahead, we believe MITT is well positioned to take advantage of the large pipeline of opportunities at favorable returns at our source fee and the Angelo Gordon platform. We continue to explore ways to deploy capital into our target credit asset classes such as newly originated and season residential whole loans, MSRs, CMBS, CRE debt, and other real estate related assets including single family rental and manufactured housing. Our agency MBS assets provide MITT with a high quality liquid core holding space, which we can increase or decrease depending on the relative value we see within different market conditions. With that, I will turn the call over to Brian to review our financial results.

Thanks T.J. Overall for the second quarter we reported net income available to common stockholder of 4.8 million or $0.17 per fully diluted share. Core earnings in the second quarter was 15.4 million or $0.55 per share versus 15.5 million or $0.59 per share in the prior quarter. In the prior quarter, the $0.59 included a $0.02 retrospective adjustments and $0.03 from a commercial loan payoff. Given our large recent purchase of whole loans and the securitization of one of those pools in the second quarter, we had 1.2 million of upfront transaction costs that were excluded from core earnings. The 1.2 million was comprised of 300,000 of other operating expenses and 900,000 of expenses that flows through the equity in earnings from affiliate line item, given that reconducts in the pool within other AG funds. To give you a better sense of our current 3.6 billion portfolio, I’d like to highlight a few more statistics. As described on page 4 of our presentation, the portfolio at June 30th had a net interest margin of 2.71%. This was comprised of an asset deal of 5.08% offset by a total cost of fund of 2.37%. Net interest margin remained relatively unchanged from the prior quarter. The increase in costs of funds was primarily due to an increase of 25 basis in federal funds rate in June just partially offset by repo spread tightening versus LIBOR. As of June 30th, we had 40 financing cash parties and our financing investments to 29 of them. In the second quarter we do not see any ill effects in the financing market from the rate increase in general funding continues to be plentiful with new entrants in both the credit and agency space. At quarter end, we had liquidity of 123 million comprised of 31 million of cash and 92 million of unlevered agency whole loan securities and CMOs. Additionally at quarter end, our estimated undistributed taxable income was $1.57 and we continue to evaluate it on a quarterly basis, to make sure that we’re in compliance with our distribution requirement. That concludes our prepared remarks and we would now like to open the call for questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And from Credit Suisse, we have Douglas Harter. Please go ahead.

If you could just talk about a little more detail about the whole loan strategy just where exactly are seeing the opportunities and if kind of some of the activities you mentioned in your prepared remarks, TJ. How much that sort of changed the pricing during the quarter and kind of if they’re still attractive today?

Sure. I mean, I think where we’ve been focusing hasn’t changed in that we’re probably targeting the middle to smaller size pools that have been out there, round numbers in the $250 million range. I think there has been a lot of coverage on some of the larger multibillion dollar pools that have traded and we're just finding better value in the smaller transaction sizes. So, I’ll say the return profile hasn’t dramatically changed in that size, of an opportunity versus some of the larger ones have attracted different types of money and I think potentially driven yields.

Great. And then Brian, it appeared that expenses fell sequentially this quarter once you serve out the deal expense. Can you give a little more detail as to just kind of what might going to - what might have been behind that?

Sure. The expense is actually in terms of by corporate ongoing run-rate methods were pretty flat roughly, we’ve been running at about 3-1, 3-2 per quarter, for the past couple of quarters. I think when you think about we have about those like I said 1.2 million of upper transaction cost. Those actually came into two lines items, only 300,000 of that are actually from other operating expenses so that line item was 3.4ish and you left that 300,000 and you get 3-1, 3-2 run-rate. The other 900,000 is actually baked into the equity and earnings line items. So that line item so that brunt of the 1.2, but going forward away from delta transaction which will continue to highlight we would expect the G&A other operating to be roughly 3.2. And in terms of NIM and the equity and earnings line items that would be about 900,000 higher.

Very helpful. Thank you, Brian.

Sure.

From KBW, we have Eric Hagen. Please go ahead.

Hi. Thanks. Good morning. Maybe I’m just not seeing in the report, but what was the margin benefit from TBAs during the quarter? Thanks.

You mean the dollar role?

Yeah. Not the - not the income component, but just the margin component?

Sorry, what do you mean by margin?

Well, you’re disclosing asset yield of funding cost, I mean are - just the income components from TBAs is that just included in your asset yield or do you take it - where is that included in the margin? In the net margin that you report.

It's in the -- we typically group it into the asset yield and as we breakout the dollar role in order to kind of give you a sense on how much, sorry I think it’s in the net realized gain and losses and that’s why we kind of strip it out and try and add it back into the dollar rolling curve in order to show how much of that would have come from there?

Got it. Okay. Great, great. Thank you. The 2% increase in book value during July, was that driven mostly by spread tightening on all credit assets or is there some particular positions that you can point to? Thanks.

I mean, I think credit has broadly done well in July, but our portfolio particularly benefited within the CMBS sector.

Okay. Got it, CMBS. Great. And then maybe you can just give us an update quickly on RCOM just maybe you can tell us what the origination volume they have done year-to-date is that would be really helpful. Thank you.

We haven’t historically commented on origination volume. It's still I would say it hasn’t dramatically increased or decreased from a year ago.

And what was it a year ago? I apologize if I missed that at some point.

We just have, we haven’t commented on that.

Okay.

It’s fairly committed I think to the core earnings of the REIT. So it's somewhat immaterial in that sense.

Okay. And then is there an intention to acquire additional MSR at this time and can you just discuss any trends or pricing that you’re seeing in that market and how attractive it looks to you?

Yeah, I mean we’re constantly in the market. I would say from the start of the year today, on the conventional side, probably marginally tighter by maybe a 100 to 200 basis points depending on the size of the portfolio. Again, it’s a similar theme, I would say, to the legacy loan space and that the larger MSR portfolio will trade tighter than say, a sub-billion dollar notional in this outflow. So again, that’s where we focused I would say our attention.

[Operator Instructions]. And from TMP Securities we have Trevor Cranston. Please go ahead.

Question on the new dividend level. Because if we look at second quarter earnings and take out the benefits from LIBOR, you guys basically covered the new dividend level. But can you have any additional commentary on when you made the decision to increase it. If there’s any consideration about the amount of undistributed taxable income you guys have or if it was primarily set with the intention that was kind of what you would be able to cover with the core earnings a little by itself? Thanks.

It’s really the latter. We don’t set the dividend based on the regular dividend based on the undistributed.

Got you, that helps. And then you guys made a comment on, in the prepared remarks about having the flexibility in the agency portfolio to increase if spread become more attractive at some point this year. Can you just comment on sort of how you’re thinking about leverage and how high you guys potentially would be willing to take leverage in the agency book in a more attractive spread environment? Thanks.

I think we look at it more on the overall portfolio leverage than the agency book in particular. So I think our band typically been in the, sort of the on the bottom-end or low 4 handle leverage up into the mid fours on the high end of our band. So I think we closed the quarter at 4.4, I think we certainly would have room to take that up a few per quarter of return say to the extent agencies widened. I think here on page 8 we show the equity allocation which has us running about 7.1 in terms of leverage on the agency book which I think is on the more conservative side versus some other REIT. But we do feel like we have some room there. And A.J. looks really shows how we look at equity allocation and leverage in more details.

We have no further questions at this time.

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

Thank you, ladies and gentlemen this concludes today’s conference. Thank you for joining. You may now disconnect.