TPG Mortgage Investment Trust Inc (MITT) Q4 2019 Earnings Report, Transcript and Summary

Good morning and welcome to the AG Mortgage Investment Trust, Fourth Quarter 2019 Earnings Call. My name is Brandon and I’ll be your operator for today. At this time all participants are in a listen-only mode. [Operator Instructions] Please note, this conference is being recorded.And I will now turn the call over to Raul Moreno. You may begin, sir.

Thank you, Brandon. Good morning everyone and welcome to the fourth 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 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 also 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 Q4 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. We are very pleased with MITTs performance in the fourth quarter. Core earnings were $0.52 per share and book value per share rose by 2.6%. T. J. and Brian will provide further detailed comment on our financial results for the quarter and for the year.During the quarter, we continue to rotate more of the portfolio into credit investments, both residential and commercial. This is consistent with our long term strategy of leveraging the Angelo Gordon Credit and Real Estate engines that have 85 investment professionals who touched upon a wide range of MITTs opportunity set in credit.An important example is our activities in non-QM. In 2019 we successfully launched our non-QM platform and completed three securitizations under our GCAT Securitization Program for MITT and other Angelo Gordon funds. Our GCAT securitization platform is already well known to the market based on our many past whole loan securitizations. This calendar year we've already come to market with our first of what we would expect to be many non-QM securitizations transactions this year.We have a slide in our presentation, slides five, that shows the total return to our MITT shareholder over the period from our IPO in July of 2011 to the end of 2019, and we compare that to the FTSE mortgage REIT index. Both calculations assume reinvestment of dividends. The MITT cumulative return is 125% versus the index's cumulative return of 103%.We also have a slide, slide six, that looks at the two key related metrics of price-to-book ratio and dividend yield. As of year-end, MITT traded at a steeper discount to book and had a higher dividend yield than our peer group. Looking forward, we intend to address this through continuing to execute on our differentiated credit strategy in which we leverage the AG platform, as well as providing greater clarity in communicating what we believe to be a very good and appropriate strategy in this environment.Before turning the call over to T.J., I'll end my remarks by saying that I'm very proud to be part of both Angelo Gordon and our MITT team.

Thank you, David. Good morning everyone. On slide eight of our presentation we walk through our 2019 fiscal year highlights. We reported $2.39 of net income per share and $1.70 of core earnings per share, while producing an economic return on equity of 13.4%.During the year, we launched our Non-QM securitization program by issuing free rated deals throughout the course of the year. Additionally we issued our first rated RPL deal this summer, further expanding our securitization footprint away from just our historical unrated three year step-up structures.And finally on capital raising, we are very pleased we were able to access the equity capital markets in February 2019 for the first time in seven years, and we're able to follow-up thereafter with our preferred capital raise in September, raising a net total of $177 million in 2019.Turning to slide 10, as David mentioned the investment portfolio performed well in the fourth quarter. After several challenging quarters for the Agency MBS and rate markets, those headwinds faded and some even turned to tailwinds during the fourth quarter.A return to more normalized funding markets and a third federal reserve rate cut helped boost net interest margins for levered investors such as ourselves. A modest rise in longer term rates, the resulting steeper yield curve and declining implied volatility further helped create an environment where Agency RMBS valuations could tighten along with other spread product.Our core earnings in the quarter were $0.52 per share, including a $0.02 retrospective adjustment. After accounting for a one-time positive $0.05 impact due to a discounted security paying off earlier than expected, our run rate core came in at $0.45, covering our current dividend.I wanted to provide some more color with respect to the one time positive $0.05 contribution to core this quarter. Non agency mortgage backed securities have clean up calls, which the holder of the call rights can exercise when the outstanding deal balance falls below a certain threshold, typically 10% of the original balance.These calls typically result in the debt paying off at par. As Legacy non-agency bonds continue to season, strong collateral performance, low interest rates and healthy securitization markets continue to incentivize these call rights to be exercised.So while I would characterize this as one-time from an accounting perspective this quarter, we do not think it's unreasonable for our portfolio to potentially experience this type of activity in the future. A $0.45 increase in book value, coupled with core earnings of $0.07 above our $0.45 dividend, resulted in an economic return during the quarter of 5.2%. The tightening in agency mortgages that I previously mentioned, more than offset modest spread widening in the CMBS sector and drove the fourth quarter's book value increase.I'd like to highlight a few additional slides in our presentation. Slide 11 includes details on our fourth quarter activity. As we stated on last quarter's call, our agency exposure was temporarily elevated as a result of our September preferred capital raise.Throughout the fourth quarter we rotated into residential whole loans, both non-QM and seasoned NPL and RPLs. Additionally in December we entered into a purchase agreement on approximately $480 million of clean re-performing loans, which settled subsequent to year-end and is therefore not yet reflected on our balance sheet. Finally, we increased our allocation to commercial credit, net purchasing about $138 million of investments during the quarter.Turning to our capital markets activity, we are active in the securitization space. MITT along with other Angelo Gordon funds completed its third rated non-QM securitization in November. We were able to lock in a cost of funds from AAA through BB at a duration weighted average spread of 119 basis points over swaps.As we stated on last quarter's call, based on the current loan origination volumes, we envision being a quarterly issuer of non-QM loans via our GCAT program. Additionally in November, MITT along with other Angelo Gordon funds completed a non-rated securitization of RPL’s by exercising call rights on approximately $237 million of unpaid principal balance.We are able to lower our cost to funds from a floating rate of LIBOR plus 315 basis points to a fixed rate of 3.25%, and increase our advance rate on par from 50% to 75%. Both securitizations provide MITT with termed-out and materially cheaper cost of funds in comparison to our warehouse lines and previous securitizations.Lastly, we announced on last quarter's call, we had entered a purchase and sale agreement to sell our Single-Family Rental Portfolio. We completed this transaction in November and it resulted in an immaterial realized gain from our current carrying value. We believe this is the best outcome for the long term earnings power of the investment portfolio as we continue to find attractive opportunities in both residential and commercial credit space.Slide 12 lays out our investment portfolio composition for the quarter. The fair value of the aggregate portfolio decreased from $4.8 billion to $4.4 billion for the quarter and at quarter end was composed of approximately 35% agency, 42% residential credit, and 23% commercial credit. The bar chart at the bottom of the page displays the portfolio allocation over time and we expect to continue this rotation into credit form our agency allocation as we continue to expand our residential mortgage strategy.Turning to slide 13, we break out our current agency portfolio by product type. As previously mentioned, we rotated the capital initially deployed into agencies from our September preferred equity rates into credit investments. Our disciplined Agency MBS asset selection process allows us to position the portfolio for a variety of prepayment environments.We continue to hold close to 80% of our Agency MBS in high quality specified pools, with the remainder in new issue, lower coupon pools. As a result, the constant prepayment rate for our agency book was 11.2 CPR for the fourth quarter, versus 18.8 CPR for the overall 30 year Fannie Mae universe. We expect our portfolio to continue to outperform the overall universe of Agency MBS in terms of prepayment fees.As previously mentioned, on slide 14 you can see we continue to increase our exposure to residential loans and reduce our exposure to non-Agency RMBS securities at current market levels.Quickly turning to our commercial portfolio on slide 15, you can see we had a particularly active quarter in the Freddie K–B piece space, as we sourced investments in both the primary market and secondary markets, which is particularly unusual given the high demand and limited trading volume for this product.Additionally during the quarter we funded approximately $7 million of existing equity commitments related to our commercial real-estate construction loans, resulting in approximately $41 million remaining in existing equity commitment.Slide 17 shows our duration gap of 1.17 years, which is up from 0.7 three years at the end of the third quarter, largely due to a lower hedge ratio, our newly acquired residential loans and some minor extension of our Agency MBS portfolio. With respect to hedges, slide 18 shows we were able to lower our weighted average paid fixed rate down to 1.6% from 1.7% through the restructuring of our swap book.Looking ahead, we continue to see a large pipeline of credit opportunities at a favorable risk adjusted return sourced via Angelo Gordon's platform. As we’ve been mentioning throughout the course of the year, we have invested both time and resources into the creation and growth of our non-QM conduit or aggregation strategy and we are now well on our way to being a well-known issuer within the debt investor community.Our securitization activities in 2019 and our forward-looking pipeline as a result of the energy and focus the team devoted in 2018 and 2019 to developing relationships with strategic mortgage origination partners, ranging from banks, community development financial institutions or CDFI’s as they are commonly known, to as well as traditional specialty finance companies.What may not be apparent just yet is the significant work being done by Angelo Gordon Investment Team in New York with Arc Home, a fully licensed mortgage originator owned by MITT and other Angelo Gordon managed funds.As we look forward into 2020, we fully expect Arc Home’s origination to be a more meaningful part of our non-QM program and continue to raise Angelo Gordon's profile in the securitization ecosystem for non-agency credit and thereby help enhance our returns within the space.Before I turn the call over to Brian to review our financial results, I wanted to provide some brief commentary on the markets this week. In reaction to the coronavirus, the interest rate market has now effectively priced in three rate cuts this year, starting in March. Prior to this week, the agency basis had widened from the previous move lower in rates and therefore despite the drastic move in rates this week, the basis is holding in well all things considered.Moving to the credit markets, we've witnessed very little trading volume this week, but the tone to the market is obviously weaker. We believe new issued deals will be the best benchmark to reset spreads across the stack and based off the information we know today, there is a heavy calendar that at least was originally due to come to market over the next few weeks.We continue as always to look prudently to deploy capital into new opportunities. Thank you. Brian?

Thanks T.J. Overall for the fourth quarter we reported net income available to common stockholders of $29.4 million or $0.90 per fully diluted share. Core earnings in the fourth quarter were $16.9 million or $0.52 per share versus $13 million or $0.40 per share in the prior quarter. There was a positive $0.02 retrospective adjustment in the fourth quarter versus a negative $0.02 retrospective adjustment in the third quarter.Additionally, we recognize the positive $0.05 impact to core as a result of a discounted security paying off earlier than expected as T.J. previously mentioned. As described on Page 10 of our presentation, net interest margin increased from 2.1% at September 30 to 2.5% at December 31. This was comprised of an asset yield of 4.8%, offset by total cost of funds of 2.3%. The increase in net interest margin was driven mostly by steepening of the yield curve as T.J. previously mentioned.Our economic leverage ratio was 4.1x at December 31 as compared to 4.7x at September 30. The decrease is primarily a result of agency sales during the period as we rotated our capital into credit investments. As of December 31 we had 44% financing counter parties, and are financing investments with 30 of them. Despite the recent market volatility, the GC and credit repo markets have remained stable.At quarter end we had liquidity of approximately $163 million comprised of $82 million of cash and $81 million of unlevered agency whole pool and treasury securities. We closed the year with an elevated amount of liquidity, in anticipation of purchasing the pool of clean RPLs, T.J. previously mentioned.As previously mentioned, during the quarter we completed the sale of our SFR portfolio. We concluded that that disposition of this portfolio met the criteria for discontinued operations. As such, for all current and prior periods presented, we have reclassified the related assets and liabilities as held for sale on our balance sheet and related operating results as discontinued operations on our income statement.The operating results have also been excluded from our core earnings for all current and prior periods presented. Additionally, at quarter end our estimated undistributed taxable income was $36 million or $1.10 per share. We continued to evaluate this on a quarterly basis to make sure they weren’t in compliance with our REIT distribution requirement.That concludes our prepared remarks, and we’d now like to open the call for questions. Operator?

Thank you. [Operator Instructions]. And from KBW we have Eric Hagen. Please go ahead.

Hi, thanks, good morning. Thanks for the comment on spreads this week. But I know there's a lot of uncertainty that's kind of overhanging the market right now, but how do you think about deploying capital in this environment, just obviously given what’s happened this week. Do you think spreads have sort of over corrected in your view or is this a better time to wait or is it just better to wait for things to I guess kind calm down.And number two, another question separately, but what are the types of non-QM that you're originating and what are the cumulative losses that you expect in that portfolio.

Sure Eric. I think it's probably still too early to tell in terms of where spreads are shaking out, just given like I mentioned, the lack of real trading volume to, I guess I would say kind of reset the market, so I think it's too early to tell. I think we would expect potentially commercial mortgage investments, thinking about hotels to probably be more affected in credit spreads and say residential mortgages, just kind of thinking about the near to medium term effects of what's going on out there. So I mean that's how we're thinking about risk and just trying to see if the markets are pricing that accordingly.In terms of non-QM, we are buying a variety of products across the different – you know originators, each somewhat have their own programs or niches if you well, and we're sort of aggregating them to what we think is a well-diversified pool when we go to securitized. So I mean that’s everything from loan type in terms of investor property, alternative verification of income, etcetera. It’s a foreign national, so there's a mix going in there.We've generally stayed away from the lower, you know the lower month verification income programs that are out there, so one month bank statements etcetera has not really been our focus on today. So non-QM losses given the LTV’s I think are anywhere from – and they are in a single digits cume loss numbers depending on the profile.

Got it.

So again, generally it’s given the credit and then again it's a particularly, I think strong LTV profile. We are not seeing or expecting a lot of cume loss.

Right. Okay, so like low single digits I would imagine is kind of extrapolating from your comments.

Yeah, yeah.

Is that fair? Okay, okay. And then what percentage of your legacy non-agency portfolio is callable at this point.

I don't know that off the top of my head, we’d have to get back to you on that.

Okay, is it a large percentage or is it kind of relatively minor.

I would think it's a large percentage, but let us verify.

Sure. Okay, thank you very much for the comments.

From JMP Securities we have Trevor Cranston. Please go ahead.

Hey, thanks. Follow-up on the question about your capital deployment given what's going on in the markets over the last week or so. I guess are you guys comfortable continuing to acquire non-QM loans like over the last week and currently sort of pending seeing where spreads shake out and where securitizations would be executed, or at this point would you be more likely to sort of wait or sort of not acquire loans near term and wait and see where you think securitizations could be done with new loans you acquire.

So, just to take a step back, there hasn't been a lot of opportunities to deploy capital this week. For a variety of reasons, from starting with an Industry Conference at the beginning of the week to just generally people not looking to transact given the volatility.You know I think with regard to non-QM loans, I don't think we're overly concerned about securitization being able to get executed, albeit at probably wider spreads. And part of my comments from earlier were, you know we – from what we understand, there are a few deals that aren’t lined up to come, you know again originally next week, we’ll see if they potentially put that on hold given the market volatility and should try and weigh that out.The last part I would say is that we look at new loans today and in the current rate environment, you know we want to be sensitive to probably newer expectations on the duration or prepayment speeds, and so we’ll be very sensitive to the premiums that maybe some of these originators are looking for in today's rate environment.

Okay, that makes sense. And then I guess also related to you know how things have moved this quarter, can you provide any update on any changes you might have made to the portfolio or the hedge book as rates have come down.

Yes, I mean I wouldn't say there was anything materially different than what we would do in a normal situation where rates are coming down and trying to you know keep up with the complexity on the agency book. I wouldn't say its anything out of the ordinary. What I would say is you know, the drastic move lower of late, you know I think it will be hard for originators to keep up with potential volume, given that we were already seeing a rate declined before this week.So, I think a lot of – you know you're not going to see the same linear move on the 25 basis points this week as you would have seen coming from where we started this rate moved down and I think we're pretty comfortable with the way we’re positioned on the agencies and how we’re hedged and what the already high expectations of prepayments were coming into this week.

Okay gotcha. And I think I missed in the prepared remarks you guys said something about an RPL transaction that settled post quarter end, but I missed if any details about the size of that or anything else you guys provided. If you could comment on that again?

Yeah. Just prior to year end we entered a purchase agreement on $480 million UPB notional of RPLs that have subsequently settled this quarter.

Okay. Thank you.

Yep.

Yep, thanks.

[Operator Instructions]. Okay, I’m showing no further questions at the moment. I will turn it back to our speakers for closing remarks.

Thanks everyone. I 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.