Welcome to the AG Mortgage Investment Trust First Quarter 2016 Earnings Call. My name is Christine and I’ll be the 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’ll now turn the call over to Ms. Karen Werbel.

You may begin..

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.

The Company’s actual results may differ materially from those projected due to the impact of many factors beyond its control, including changes in interest rates, the availability and terms of financing, prepayment rates, changes in the market value of our assets, economic and market conditions, and legislative and regulatory changes that could adversely affect the business of the Company.

All forward-looking statements included in this conference call and the slide presentation are based on our beliefs and expectations as of today, May 6, 2016.

Please note that information reported on today’s call speaks only as of today and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

Additional information concerning the factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the Risk Factor section of the Company’s periodic reports filed with the Securities and Exchange Commission, including its most recent annual report on Form 10-K and subsequent filing.

Copies of the reports are available on the SEC’s Web site at www.sec.gov. Finally, we disclaim any obligation to update our forward-looking statements unless required by law. Now David Roberts, I’ll turn to you..

Thanks, Karen. Good morning. Credit spreads across fixed income asset classes widened materially during January and February. Since this dislocation we’ve seen a rebound in March and April from the February lows. Our book value declined during the quarter by 3.7% to $17.22 per share at quarters end.

This is entirely due to the credit portion of our portfolio, which declined due to credit spreads widening. On the agency side to larger portfolio duration gap we had in place since the middle of the fourth quarter more than offset the modest basis widening experience.

Given the substantial rally in rates, which positively impacted book value, but certainly not enough to make up to the credit spread widening. Our core earnings for the quarter were $0.45 per share before a negative retro adjustment of $0.05 per share.

The decline in core earnings was due to the decline in interest income from last quarter and that was primarily due to lower yields and also lower leverage and thus a smaller portfolio.

We declared a dividend of $0.475 per share for the first quarter, reflecting our best estimate at the most likely range of our core earnings going forward, given the current market environment.

During the quarter, we continued our strategic objective of rotation and reallocation to credit investments with credit assets representing 56.9% and agency assets representing 43.1% of our portfolio at the end of the quarter.

In this current quarter, we’ve continue to see the second quarter; we continue to see opportunities to add to our credit portfolio. As we discussed in the last call, our mortgage banking ability at Arc Home entered into a definitive agreement to acquire a Fannie May Freddie Mac and Ginnie Mae mortgage originator.

The necessary licenses and approvals are ahead of schedule and we hope to receive the requisite consents to complete the acquisition sometime this quarter. Arc Home’s model is to create a highly variable and diversified mortgage origination business, which itself can be profitable.

And at the same time, provide MITT and other AG affiliates with value-added mortgage and mortgage servicing rights investment opportunities. Last year our Board authorized a $25 million share buyback program, to give us the potential means to increase book value per share.

During the first quarter, we repurchased a 119,506 shares or about $1.5 million of common stock at an average share price of $12.86. This resulted in $0.07 of book value accretion. With that, I’ll return -- I'll turn the call over to our Chief Investment Officer, Jonathan Lieberman..

Thank you, David. Good morning all. The first quarter of this year was certainly one of the most challenging quarters to navigate credit markets since the post recession period.

The weakness in the energy sector and fears of an increasing global slowdown and growth slowdown in China that began in the fourth quarter of last year, mutated into fears of global recession during the first part of this year. Mortgage credit and asset-backed securities experienced the most severe dislocation since 2011.

Unlike the ’07 to 2009 credit dislocation, the epicenter initially occurred in energy, CCC high yields, then spread to levered loans, CLOs, CMBS before finally hitting the RBS and ABS markets hard in January and February.

RMBS and ABS credit spreads leaped wider as the price of oil continued to slide and as the lack of liquidity spread across most capital markets.

However, from late February through quarter end, there was a recovery in risk assets which has helped in large part by the Fed tempering its forecast for the trajectory and ultimate resting place for short-term policy rates.

The Fed in its March meeting sent a strong message that while there is reason to be optimistic about economic improvement, uncertainties about the sustainability of the increase in inflation, U.S dollar strength, and international growth landscape will cause the Fed to have an increasingly patient attitude in normalizing monetary policy.

We’ve asserted for some time that the Fed will find it both difficult and inappropriate to run a divergent path from monetary policy that is counter to the direction of other global central banks.

We’ve been skeptical of their ability to raise policy rates more than one or two times this year, and both the Fed themselves and other market participants have finally begun to revise their expectations for further policy to move low. Against this benign, interest rate back dropped, we’re optimistic about the future of the REIT sector.

For the most part, agency MBS collateral performed in line with prepayment expectations. During the quarter, agency RMBS spreads were well supported by investors seeking greater liquidity and avoidance of the turmoil taking place in the credit sector.

As a result, spread widening of agency RMBS was more than contained compared to other credit spread or other spread products.

Swap spreads did exhibit some amount of volatility during the quarter, but finished the quarter roughly flat to where they began at the quarter, and as a result swaps proved to be a more stable hedge than in the prior two quarters.

Given our economic outlook, we’ve increased our duration gap during the fourth quarter of 2015 and this served us well during Q1.

As the rates market rallied in the quarter and the duration of our assets shortened in response to faster projected prepayment speeds, we maintained our duration gap and actually increased it marginally by under -- unwinding swaps and adding treasury positions.

In response to the recent widening in the swap spread, we’ve begun to collapse our pay fixed swaps versus long treasury positions at a favorable economic outcome post quarter end.

Fundamental collateral performance legacy mortgages continues to -- continues to remain steady, and in some case improved benefiting from continued home price appreciation and credit curing. Housing affordability including first time homebuyers remains still above historical averages and consumer confidence stands reasonably high.

Favorable net supply technicals and strong reinvestment demands for price performance of RMBS versus other spread asset classes. It’s important to emphasize that many of the assets held by MITT performed better than the broader hedge fund community, because they were higher up in the capital structure and had better carry characteristics.

Additionally, we increased resources to our sourcing organic investment opportunities in consumer, commercial, residential finance markets.

Consistent with the mandate in January, Arc Home entered into a definitive agreement to acquire Fannie Mae, Freddie Mac and Ginnie Mae mortgage originator, and we hope to receive as David mentioned the requisite consents to complete this acquisition by the second quarter of 2016.

For the quarter, MITT reported a loss of $0.21 net and core earnings of $0.40. Unlike past periods the decrease in net income from last was primarily attributable to the credit segment of the investment portfolio.

Core earnings mainly decreased due to the reversal of retro from positive $0.01 to negative $0.05, as well as due to lower yields and a smaller overall portfolio. Book value declined to $17.22, which represents a decrease of $0.66, inclusive of the impact of our dividend paid to shareholder on April 29.

Book value came under pressure during the quarter, because of credit spread widening, led by CMBS, non-agency and ABS. We've seen some rebound in the credit markets in March and April and it’s our belief that should capital markets heal and stabilize, there will be some recovery on the credit side.

The aggregate portfolio size decreased to approximately 2.7 billion. As a result, the continued rotation into less levered credit assets and a organic amortization of our agency assets. At March 31, our hedge ratio was 47% of our agency financing and 22% of total financing.

At the end of April, the hedge ratio was lower at 34% of agency financing or 16% of total financing. Leverage declined modestly to 3.36 times down from 3.53 times last quarter. Quarter ending net interest margin decreased slightly to 3.02%.

On Slide 10 of our quarterly earnings presentation, we laid out the investment portfolio composition for the quarter. The fair value of our agency book was approximately $1.2 billion and a fair value of our credit book was approximately $1.6 billion.

Focusing first on our agency MBS portfolio, the constant prepayment rate for agency book was 8.1% for the first quarter. Prepayment speeds for our portfolio remained benign and stable, and notwithstanding the recent interest rate rally owing to the favorable prepayment characteristics of our holdings as shown on pie chart listed on slide 11.

Capital allocation to agency MBS declined slightly due to organic run off. Our aggregate credit book, which comprises the majority of our portfolio at this time was approximately $1.6 billion fair value at quarter end. Performance of our credit book continues to be generally in line with our investment underwrite.

During the first quarter, we selectively took advantage of the dislocation to purchase additional non-agency MBS, credit risk transfer securities ABS, CMBS IO and to originate a commercial real estate loan.

Specifically, we invested in current face value of $3.7 million of prime securities, $1.3 million of securitized whole loans $5.6 million of CRT Securities. We also purchased current face value of approximately $4.4 million of CMBS IO and originated a $12 million commercial loan, of which $1.8 million was transferred to a third-party at fair value.

Additionally, we purchased current face value of approximately $11.2 million of ABS. Now turning to Slide 14, we provide an update on our financing. We currently have 37 financing counterparties, excluding the FHLB and our financing investments with 21 of the counterpart. In general, funding continues to be plentiful and stable for the Company.

The portfolios duration gap inclusive of agency and credit increased from 1.79 to 1.94 years. The wider gap resulted from a reduction in hedges in response to a more favorable outlook on interest rates. Our hedging and interest rate sensitivities were laid out on the next slide.

We continue to adjust for our hedge positions in responses to changes in our portfolio, U.S economic conditions, and the potential normalization of U.S monetary policy. Before I turn this call over to Brian, I’d like to comment on the attractiveness of our equity and investment opportunities.

During the first quarter in the midst of extreme volatility, we practically invested available cash flow in our share repurchase program CRT Securities, CMBS and ABS. With the rebound in credit in March and April, the attractiveness of buying back equity looks increasingly attractive, given the sizable discount to book value at which MITT trades.

Next, we believe that keeping some dry power available, should we see a volatile -- an increase in volatility should be prudent and appropriate given liquidity conditions. And finally, we will continue to identify attractive credit on a trade-by-trade basis with approximately stress testing and liquidity analysis.

We believe that 2016 as it unfolds, we have MITT well position to take advantage of the wider range of credit market opportunities that are increasingly available to us today at favorable returns. With that, I’ll turn the call over to Brian, to review our financial results..

Thanks, Jonathan. In the first quarter we reported core earnings of $11.3 million or $0.40 per fully diluted share versus $16.7 million or $0.55 per share in the prior quarter. At March 31, we did have a negative $0.05 retrospective adjustment and our premium amortization on our agency portfolio.

The decrease in core earnings for the last quarter was due to a number of factors and more in line with where we set our dividend. The larger struggle of the decrease was in our portfolio earnings as well as some quarter-over-quarter change in G&A expenses.

Overall for the quarter we reported a net loss available to common stockholders at $5.8 million or $0.21 per fully diluted share. In the first quarter, the $0.40 of core was offset by net realized and unrealized losses of $0.60 per share.

The $0.60 loss was primarily due to $0.71 of net realized and unrealized losses on the credit portfolio offset by $0.11 of net realized and unrealized gains on our agency securities and derivatives portfolio. As part of these net realized and unrealized losses, $0.33 was considered other than temporary impairment or OTTI and certain securities.

We record OTTI when there is a decrease in our projected cash flows where the fair values of security is less than its carrying amount. The decrease in cash flow is to result from lower expected principle or interest collection.

As a result of the decrease in long-term rates this quarter, we did see a decrease in our projected future interest collection, our agency isle and floating rate credit book which contributed $0.17 of the OTTI. At March 31, our book value was $17.22, a decrease of $0.66 or 3.7% from last quarter.

This decrease is mostly attributable to losses I previously mentioned. Additionally, we repurchased 120,000 shares or 1.5 million of common stock during the quarter, which was accretive to book value by $0.07 per share. To give you a better sense of the current portfolio, I’d like to highlight a few more statistics.

As described on Page 6 of our presentation, the portfolio at March 31 having net interest margin of 3.02%. This was composed of an asset yield of 4.75% offset by repo and hedging cost of 1.53% and 0.20% respectively, for a total cost of fund of 1.73%. Our cost of hedging did decrease this quarter due to the addition of treasury long position.

Additionally, during the quarter we repaid our FHLB financing as a result of the FHFA final rule issued on January 12, 2016, which is terminating the captive insurance subsidiary membership in February of 2017.

We were eagerly able to finance these assets with our current banking relationships and continue to have ample sources of funding available to us.

Our liquidity remains strong and at quarter end we had a total liquidity of $138 million which was composed of $40 million of cash, $49 million of unlevered agency hold full securities, and $49 million of unlevered agency IO security. That concludes our prepared remarks, and we’d now like to open the call for questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from Samuel Cho from Credit Suisse. Please go ahead..

Hi. I’m filling in for Doug Harter today. So, I was wondering if you could give us an update as to when the mortgage banking platform will be fully operational. I think you mentioned in the prior call that, Arc Home will breakeven around 3Q.

Does that still hold?.

Yes, I actually said that, it’s Brian on the last call. And given the timing that, David and Jonathan said which we do think we’ll get the final approval this quarter and therefore complete the transaction this quarter. It is going in line with projection..

Got it.

So, given current -- the current environment with the rates remaining lower for longer, do you have a general sense as to what the additive impaired will be from Arc Homes as you ramp up that business?.

I think that we believe that it should be accretive to the company in a relatively short period of time. The cost structure is quite variable. The lower interest rate environment, and if it potentially even goes down lower would might act as a very nice hedge on basically asset attrition through prepayments.

There is, we believe that the company will be in a position with a booker business that should day one, be very helpful in amortizing cost structure..

Got it..

I’d also add, this is David Roberts. I’d just add that, one of the key attractions for us doing the Arc Home transaction was the management. They’ve been through a lot of different cycles. They’re very entrepreneurial, very opportunistic.

And I think, we believe that, in just that every cycle they’re going to find some interesting opportunities to make money for Arc Home and to provide portfolio opportunities for us..

Okay. Thank you so much..

Thank you. Our next question comes from Joel Houck from Wells Fargo. Please go ahead..

Hi, good morning. So, given the spread volatility on a credit side in the first quarter, no surprise with the book value move, however intra-quarter, one would imagine that the mark had there been one, it would have been even greater.

Have you -- and in conjunction with that, we also see that your allocation in credit is the highest ever -- it’s ever been.

Have you guys given kind of pause to, or is there some limit as to how much capital you’re going to allocate to credit, warning your competitors who had been going down the same track in terms of credit allocation kind of back track yesterday and talked about increasing more to agency exposure, because the relative returns there were starting to look better.

I’m just curious as to how you weigh the relative attractiveness of agency versus credit given the volatility that we saw in Q1, and the possibility that that maybe with us for a while..

Great, question. I would first start to say that within credit there is different levels of volatility. And so, we saw distinct differences in the way different parts of our book and different parts of the market behaves. The greatest volatility occurred in anything that was more corporate oriented, so see a lot for instance.

You saw CMBS which had a lot more volatility and has not fully recovered from the declines with the first two months, but has made some steady progress back.

The least impacted were your senior non-agency RMBS securities with great carry characteristic, where there is very good sponsorship, the technicals are favorable because there is really no net new issuance and the fundamentals are really stable. So yes, did yields come off a little bit? Yes. But there really is a shortage of good bonds there.

And then you move down and go to the sector of the non-agency side that were to put the biggest beating was sub prime as a [Indiscernible] securities with low carry characteristics and floating rate assets where unfortunately you’re just not going to see the benefit of a policy rate increase.

And so, I think we were very cognizant of what our allocation is in the deeper credit, that we’re very cognizant of our allocation to floaters which kind of the offset there is you don’t need to worry about hedging.

But the offset, further offset is you just may not ever see the income from projected for LIBOR show up that you would hopefully envision. I would say that, given 40 Act considerations and this portfolio construction we’re approaching really kind of almost the limits of what we can do with credit bonds.

And we really would need to have more 40 Act that was eligible [ph] assets if we were going to allocate additionally to credit. We thought the loan that we made on the commercial real estate side was excellent, and will be attractive. Some of the stuff we’ve done on the Freddie K side, really great assets, long duration, stable.

We think those are great. But agency will continue to have a place in the portfolio, and I think where we are now situated we have a lot of optionality to move one way or another..

Okay. If I can have a follow-up, that’s good color. Duration gap of 1.94 at the end of March presumably that’s even higher given that you disclosed that your hedge ratios were lower in, April.

Is there an other way to think about that Jonathan, that in a weaker environment where presumably where rates rally as you point out in your disclosures you get a 4.2% pickup in book equity with a 50 basis point decline presumably in long rate, that that would largely offset any marks on the credit book, or are you thinking about that kind of roughly -- equally or is there still some net exposure in the credit book that can't really be solved by having a higher duration gap?.

I would say that there is some net exposure on the credit side, because it’s not just a one for one type of movement. We didn’t see that in the first quarter, and I would not expect that, and we’re not sizing it that necessarily that one for one movement.

We do pick up some benefit and the agency book certainly performed very well in the first quarter. But once again it breaks decline too dramatically at some point the assets stop appreciating on us, and we kind of cap out..

Is it fair to say that the increased duration gap, I think two is relatively high in the space, that’s the reflection that you think rates are limited in terms of their ability to go up from here, not the short end, but the long end?.

Look I think -- I think it’s very, very difficult for the fed to raise rates more than once or twice. It’s very difficult for long-term rates to go up in a world where at least 25% of world severance, I believe are negative at this point in time.

I also think that look, its prudent for us if we have a risk loss situation like January and February, and you have a major flight to quality, that we have an appropriate hedge in place with the agency book so that we’re not having a repeat performance of 2013, taper tantrum where basically you have both the credit and rate exposure simultaneously hitting you..

Great. Thanks, Jonathan, its good color..

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

Thanks, good morning. Joel’s question was very similar to mine. The first question, I think you guys did a good job of answering that. I guess, I’ll switch to the RPL securitizations that you guys have done.

Have your assumptions changed about the losses or severities that you’re going to see in those deals? And on a sort of similar note do you think there was any additional opportunities to obtain non-recourse financing in the portfolio going forward?.

So our base assumptions have not changed. So the terminal delinquency or loss rates for those two positions -- those two securitizations have not changed. But we certainly are seeing some uptick in delinquencies at this point and the transactions life and the timing may be different.

We continue to evaluate those securities, continue to monitor them, work with the counterparties on those transactions and -- but we had not added additional exposure since those two transactions.

But can you repeat the second part of your question?.

Sure.

It was, do you think there was any additional opportunities to obtain non-recourse financing going forward?.

With respect to what asset class?.

To any asset class..

I think there is possibility depending upon LTV level and price for or cost of funds to achieve some level of non-recourse financing..

It’s Brian. I mean, I think we always look at that, because we’re very cognizant of it. But given kind of the ample funding sources and really the leverage of the portfolio and the mix of the assets, we’re very comfortable with where we’re at.

On the home loan side we have done as part of Angelo, Gordon and a number of securitizations which we’ve talked about. I think we did our last one with MITT involved in, that we disclosed in Q4, and that is also something that we continue to evaluate..

But the securitized debt on the balance sheet is all the [indiscernible] deals and only the two deals..

We also did a re-remic back -- we did a re-remic I think back in 2014, and that was something that we took advantage of a specific time period where those were getting done very favorably, and we were -- we did get accounting treatment as kind of a sale, it came up as a growth sub trade with a securitized piece of financing..

Got it.

And then the last question, just the duration on those treasury securities in the portfolio now, are you able to give the tenure of the treasury securities?.

I think we can follow-up with you on that..

Okay. Thanks guys..

All right..

Thank you. [Operator Instructions] We have no further questions. I would now like to turn the call back over to management for closing comments..

Thank you and we look forward to speaking with you the next quarter..

Thank you very much..

Thank you..

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