TPG Mortgage Investment Trust Inc (MITT) Q3 2019 Earnings Report, Transcript and Summary

Welcome to the AG Mortgage Investment Trust's Third Quarter 2019 Earnings Call. My name is Hilda, and I will be your operator for today. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note that this conference is being recorded.I will now turn the call over to Mr. Raul Moreno. Mr. Moreno, you may begin.

Thank you, Hilda. Good morning, everyone, and welcome to the third quarter 2019 earnings call for AG Mortgage Investment Trust, Inc. Before we begin, please note that the information discussed on today's conference call may contain forward-looking statements. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the Risk Factors section in our most recent annual and quarterly SEC filings. The Company's actual results may differ materially from these statements. We encourage you to read the disclosure regarding forward-looking statements contained in our earnings release, in our earnings presentation and in our SEC filings.During the call today, we will refer to certain non-GAAP financial measures. Please refer to our SEC filings for reconciliations to the most comparable GAAP measures. We will reference the earnings presentation that was posted to our website after the market closed yesterday. To view the slide presentation, turn to our website, www.agmit.com, and click on the Q3 2019 earnings presentation link on the home page. Again, welcome and thank you for joining us today.With that, I would like to turn the call over to our CEO, David Roberts.

Thanks, Raul, and good morning to everyone.I'd like to begin by briefly reviewing our comments on last quarter's call. We discussed then, our intention to recalibrate our dividend to $0.45 from $0.50 per share, to better reflect our expectations for core earnings over the near to intermediate term.We cited the yield curve compression that we were experiencing and the relative stickiness of our funding costs, as the Fed lowered rates versus our asset yields. As we expected, we did declare a $0.45 quarterly dividend and we can still say what we said last quarter, that the $0.45 dividend rate continues to reflect our view of core earnings over the near to medium term.Core earnings for the third quarter was $0.40 per share after a negative $0.02 per share retrospective adjustment. GAAP book value for the third quarter was $17.16 per share, down about 1.5% from the prior quarter.Some of the book value declines, includes expenses of successful securitization transactions during the quarter, which Brian will provide more detail on.In T.J.'s comments, he'll discuss the quarters activities. And in particular, he'll share several investment highlights, underscoring our view, that the opportunity set and credit for MITT is broad, diverse and growing.As we've mentioned in prior quarters, our opportunity set also reflects the value proposition of being part of the broader Angelo Gordon platform. For example, during the quarter, MITT added non-U.S. exposure, leveraging the expansion of our investment team into Europe.Finally, we are pleased that during the quarter, we raised net proceeds of approximately $111 million through a preferred stock offering. We fully invested the proceeds into Agency RMBS. But as has been our historical practice with capital raises, we intend to rotate much of those proceeds into credit over time.With that, I will turn the call over to T.J.

Thank you, David. Good morning, everyone.As David mentioned, the third quarter continued to challenge levered investors, as the spread between 10 year swap rates and the three month overnight indexed swap or OIS, tightened another 26 basis points, to bottom out at 48 - negative 48 basis points in late August, just before the second of 225 basis points cuts by the Fed during the third quarter.On a positive note, the spread improved after the second Fed cut, to finish the quarter unchanged, at approximately minus 20 basis points. And has once again widened into positive territory, post quarter end, with the Feds third interest rate cut this year.While this period proved difficult, resulting in a $0.23 decrease in our undepreciated book value, we did produce a positive economic return during the quarter of 1.3%, generating an 8.6% economic return on equity for the first nine months of the year and 11.5% annualized year-to-date.Increased Agency MBS supply, low TBA carry in the face of elevated prepayment speeds, and disruption in the funding market for liquid assets, such as, agency mortgages, near quarter end, all contributed to underperformance of Agency MBS spreads during the quarter.This underperformance was minimized by the high percentage of quality specified pools in our Agency portfolio and was partially offset by strong performance in our various credit portfolios.Book value was also negatively impacted by marked-to-market losses on our mortgage servicing exposure, given the rallying rates, as well as the shortfall between our core earnings and our dividends.I'd like to highlight a few slides in our presentation. Turning to Slide 6 of our earnings presentation, our third quarter activity. Our overall agency MBS exposure increased into quarter end, as we have temporarily deployed the proceeds from our September capital raise into Agency mortgages, while we continue to source credit investments with longer settlements.We also increased our residential loan exposure in reperforming and non-performing loans, as well as newly originated non-QM loans. Additionally, on the credit side, we added our first non-U.S. dollar exposures through the acquisition of U.K. mezzanine RMBS backed by 10-year plus seasoned collateral and recently originated prime mortgages.Finally, on the commercial side, we originated one new CRE loan, continued to fund our existing CRE construction loans, and had one CRE loan payoff in full.Turning to our capital markets activity. We are pleased to announce that during the third quarter, MITT issued its first rated reperforming loan securitization, collateralized by existing inventory on clean pay reperforming loans, as well as a newly settled pool. We're able to securitize and sell AAA to B debtat a duration related spread of 174 over swaps.In addition, MITT, along with other Angelo Gordon funds, completed its second rated non-QM securitization in September. We were able to lock in the cost of funds from AAA to BB at a duration weighted average spread of 122 basis points over swaps.As we stated on last quarter's call, based on the current loan origination volumes we see, we envision being a quarterly issuer of non-QM loans via GCAT shelf. Both these securitizations provided MITT with a termed out and materially cheaper cost of funds in comparison to our warehouse lines.Slide 9 lays out our investment portfolio composition for the quarter. On the heels of our capital raise, the net carrying value of the aggregate portfolio increased from $4 billion to $4.9 billion for the quarter. And at quarter end was composed of approximately 60% agency, 37% credit and 3% single-family rental.For those of you who are looking at the right most column on the page, Brian will address the concept of economic leverage in his comments later.Focusing on our agency portfolio on Slide 10. We break at our current exposure by product type. As mentioned, we immediately deployed a majority of the capital from our preferred equity raise into Agency MBS.As I previously mentioned, we benefited from holding a large percentage of higher quality specified pools that have greatly outperformed TBA year-to-date.Our disciplined Agency MBS asset selection process allows us to position the portfolio for a variety of prepayment environments. The constant prepayment rate for our agency book was 9.8 CPR for the third quarter versus 17.7 for the overall 30-year Fannie Mae universe. And upwards of 61 CPR for [indiscernible] deliver pools.We expect the portfolio to continue to outperform the overall universe of Agency MBS with prepayment speeds anticipated to peak next month.Turning to Slide 12. During the quarter, we funded approximately $6 million of existing equity commitments related to our commercial real estate construction loans during the quarter, and have approximately $48 million remaining in existing equity commitments. These construction loans are primarily first mortgages and senior positions at the top of their respective capital structures.As I mentioned, we also originated one new $51 million CRE loan, and had $133 million loan payoff in full.On Slide 13 we report this quarter’s operating metrics for our single family rental portfolio. Both occupancy and margins remain stable quarter-over-quarter. Subsequent to quarter end we have entered into a purchase and sale agreement with an institutional investor for the entire single family rental portfolio. We anticipate this transaction to close in the fourth quarter and have a de minimis impact on book value.Slide 15 shows our current duration gap of 0.73 years which is down from 0.98 years at the end of the second quarter. We increased our overall hedge book in concert with the increase in our agency book. While at the same time the duration of our residential loan portfolio declined due to the securitizations I highlighted earlier.During the quarter, we were able to lower our weighted average pay fixed rate down to 1.7% from 1.9% through the recession of our swap book. We also added 450 million notional payer swaptions during the quarter, taking advantage of both low absolute rates and subdued implied volatility.Looking ahead, we continue to see a large pipeline of credit opportunities at favorable risk adjusted returns sourced via Angelo Gordon's platform. We are excited that we are able to successfully access the preferred equity capital markets and complete two rated securitizations during the third quarter.Looking forward, we intend to remain active and utilizing securitization markets to fund our various whole loan activities.With that I’ll turn the call over to Brian to review our financial results.

Thanks T.J.Overall for the third quarter we reported net income available to common stockholders of 6.3 million or $0.19 per fully diluted share. Core earnings in the third quarter was 39 million or $0.40 per share versus 11.8 million or $0.36 per share in the prior quarter. There was a negative $0.02 retrospective adjustment is third quarter versus a negative $0.04 retrospective adjustments in the second quarter.As described on Page 5 of our presentation, net interest margin remained relatively unchanged for the quarter at 2%. This was comprised of an asset yield of 4.6% offset by total cost of funds of 2.6%. The declining yield was driven mostly by increase prepayments on our agency portfolio, as we previously mentioned, offset by decreased financing costs as a result of the Feds reduction in rates.The deployment of the proceeds from our preferred raise into agencies also contributed to the decrease as they carry lower yields and lower costs to financing than our credit portfolio. As T.J. mentioned, we executed on two securitizations during the quarter. One, including our first rate deal where MITT is consolidating the assets and liabilities on its balance sheet, and another three JV were MITT and other funds affiliated with Angelo Gordon, to sell senior tranches conscious to third-parties and retain the most subordinate tranches.As David alluded to these two transactions had upfront cost of 3.8 million or $0.12 per share, this was expensed directly into book value this quarter as we elect the fair value option and therefore do not capitalize these fees. However, these fees are excluded from core earnings. These fees do flow through our income statement, a portion in the G&A line item and the remaining portion in equity and earnings, given one of the securitizations occurred in a JV.We expect that these upfront transaction costs will be more than offset by the long-term benefits of the securitizations through better leverage and reduced funding costs. Given this new consolidation, we introduced a new non-GAAP leverage metric this quarter. We're calling it economic leverage, and this leverage number excludes non-recourse financing. We believe economic leverage enables investors to identify and track the leverage metric that we use to evaluate and operate the business.Our economic leverage ratio was 4.7 times at September 30, as compared to 4.3 times at June 30. The increase is primarily a result of agency purchases during the period in conjunction with our preferred equity raise. As of September 30, we had 45% financing counter parties, and our financing investments with 32 of them. In general our funding continues to be plentiful with new entrants in both the credit and agency space.In addition, we saw no ill effects from the overnight funding rates spike in Q3, as most of our financing have been rolled over quarter and prior to the spike. At quarter end we had liquidity of approximately 147 million comprised of 31 million of cash and 160 million of unlevered agency whole pool securities.Additionally, at quarter end our estimated undistributed taxable income was 36.3 million, or $1.11 per share. We continue to evaluate this on a quarterly basis to make sure that we're in compliance with our redistribution requirements.That concludes our prepared remarks and we now like to open the call for questions. Operator?

[Operator Instructions] We have a question from Doug Harter from Credit Suisse.

This is actually Josh on for Doug. Can you just talk a little bit about the pace of asset rotation that you expect for the preferred equity raised and how long that might take to fully deploy into more target assets? Thanks.

Sure I mean, I think, using on the residential mortgage side, if we're looking at pools that are out in the market, whether they be seasons, re-performing, non performing pools they're typically taking 45 I would say to 90 days to settle once trade date is awarded and on new originations its probably inside that, probably within 60 days.So I think, by call it within two quarters, I think we should be able to get a fair amount of that capital rotated into some credit assets, when you just think about the settlement process on the loan side. On the commercial side, it’s a little bit more episodic in terms of how we're getting new assets on the book, so it's a little bit harder to handicap that.

Great, thanks, T.J. that makes sense. And then just given the plan to be serial issuers of securitizations, you did the first RPL and then the non-QM opportunity. How much additional capital, if any do you think you need to support the current run rate or any thoughts around just the current non- QM market and the opportunity to scale up that piece of the portfolio? Thanks.

Yes, I think we're - on the non-QM side, I think we have a more well defined roadmap in terms of scaling. I think what we're trying - we aim to be quarterly issuers and that effectively lets us rotate that capital that's in the, the equity in a warehouse and we get a fair amount of that post securitization. So you'll see effectively the retain credit that we securitize, go on the books and that kind of constant equity capital in the warehouse will be there as we fund new origination.So, I think we have plenty of capital to rotate and fund that sort of business over the next, coming years.

The next question comes from Eric Hagen from KBW.

Just the announcement this morning to sell the SFR portfolio. Can you just shine some light on what drove the sale right now and where the cap rate is on that portfolio?

Yes, sure. So, Eric will be in a better position to discuss the details next quarter post-closing. I guess the few comments I'll make today are, we still agree with the original macro thesis that there's a shortage of affordable housing stock in the U.S. We're a year into this investment. And we haven't found ways to scale this as a bigger part of the portfolio in a meaningful way like we had hoped when we entered this.So, I think given all that we thought it was prudent to basically redeploy the capital into the other target asset classes, both agency and credit, which I would say over the last 12 months have been producing higher ROEs for the shareholders.

And if I'm looking at it correctly, it looks like about $30 million to $35 million of capital get freed up from that sale?

Yes, exactly.

And then just switching over to the agency segment actually agency and residential credit. In the deck, you guys note that the ROEs there are between 9% and 14% on agency and 8% and 14% on residential credit. I mean, that's a fairly wide range. I mean, can you just give us a sense for where the ROEs in that each of those specific buckets are currently falling?

Yes, so on the agency side, it really depends on how much leverage you want to use. I think that's probably the biggest differentiator where we're running the book today with the current leverage is probably in the low double digits, call it 10 to 12. And when we look at, something - just taking like non-QM as an example, when it's in the warehouse and that carries probably around 10. I think post securitization, those retain credit pieces are probably in the mid-teens from an ROE perspective.

How are you guys thinking about leverage overall in the book going forward? I mean, I realized there's going to be some transition maybe into agency over the near-term, which could pick leverage up but on a kind of organic basis, the way you guys think about increasing or decreasing leverage, irrespective of the mix. How are you guys thinking about that?

Sure. I mean, I think we're generally focused on getting higher yielding assets that require less leverage. We're probably at the higher end of our leverage range given that we did deploy at the end of the quarter, or near the end of the quarter the capital raised into agencies and I would expect that to, you know, start to come down over the next coming quarters. So I think we're probably at the higher bound of what we've been running from a leverage perspective on a portfolio basis.

[Operator Instructions] The next question comes from Trevor Cranston.

Just first a question on the gap between the core earnings number in the dividend this quarter. You had the comment in the press release that the dividend still reflects your expectations for core earnings in the near term, intermediate term. So I was wondering, if you could maybe provide a little bit of commentary around kind of what you think the primary drivers are there expected to close the gap going forward. I know there's the earnings, obviously, on the preferred capital, but I was wondering if there's any other key things that we should be focused on it driving that, thanks?

Well, it's David Roberts. As T.J. noted, and as I commented, there's a stickiness to our funding costs that takes some time to be reflected. So that is - that's part of what our expectation is. And as well, as T.J. just commented on, as we find and rotate into credit, we expect that to be a positive. So I guess I would highlight those two factors in answering your question and, T.J., I don't know if you want to add anything?

You know, I just - I think, you know, now that we're through three Fed cuts, that just the profile for us is as any other levered investor, I think has gotten a bit easier. So I think that part of the calendar or at least 2019 was the most stressful part of earnings. And based on where we are in the rate market and where we are now through the Fed cuts earnings profile just looks better than it did in August.

And then you guys also noted that you deployed a little bit into some non-U.S. dollar opportunities. I was wondering if you could add some additional context around that if that was sort of a one off thing you guys found or if you're finding enough opportunities outside the U.S. where you might expect that to, to grow a little bit going forward. Thanks.

Yes. So in a whole, I think we have seen an uptick in activity and securitization activity out of Europe, and particularly the U.K. some larger portfolios. We are being refinanced. And so that was the majority of the capital where we deployed, this past quarter, we wouldn't say that was one off we would look to continue to deploy capital there on a just risk adjusted basis if we think it's compelling.There's probably a little less competition there and the credit part of the capital structure on the downside, some of the securitizations themselves tend to be smaller. So it can be a bit harder to put capital to work. But in June of this year, we had a full time employee, starting out in London office, which is helping us access more investments coming out of the various jurisdictions in Europe.

[Operator Instructions] At this moment, we show no further questions. Mr. Moreno, do you have any final remarks?

Thanks, everyone. Look forward to speaking with everyone next quarter.

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.