American Capital Mortgage Investment Corp. Reports $0.85 Net Income Per Common Share For The Second Quarter And $19.47 Net Book Value Per Common Share

BETHESDA, Md., Aug. 1, 2016 /PRNewswire/ -- American Capital Mortgage Investment Corp. ("MTGE" or the "Company") (Nasdaq: MTGE) today reported net income for the quarter ended June 30, 2016 of $39.0 million, or $0.85 per common share, and net book value of $19.47 per common share.  Economic return, defined as dividends and the change in net book value, was 4.4% for the quarter, or 17.8% on an annualized basis.

SECOND QUARTER 2016 FINANCIAL HIGHLIGHTS

• $0.85 net income per common share
• $0.46 net spread and dollar roll income per common share, excluding estimated "catch-up" premium amortization expense, compared to $0.44 per common share for the previous quarter ⁽¹⁾
  • Includes $0.06 per common share of dollar roll income associated with the Company's $0.5 billion average net long position in forward purchases and sales of agency mortgage-backed securities ("MBS") in the "to-be-announced" ("TBA") market
  • Excludes $(0.05) per common share of estimated "catch-up" premium amortization expense due to change in projected constant prepayment rate ("CPR") estimates
  • Excludes $(0.13) per common share of net servicing loss 
  • Excludes $(0.04) per common share of non-recurring costs associated with the American Capital, Ltd. strategic review process and subsequent acquisition of our external manager by American Capital Agency Corp.
• $0.40 dividend per common share
  • 10.1% annualized dividend yield based on June 30, 2016 closing stock price of $15.79 per common share
• $19.47 net book value per common share as of June 30, 2016
  • Increased $0.44 per common share, or 2.3%, from $19.03 as of March 31, 2016
• 4.4% economic return on common equity for the quarter, or 17.8% annualized
  • Comprised of $0.40 dividend and $0.44 increase in net book value per common share

ADDITIONAL SECOND QUARTER 2016 HIGHLIGHTS

• $5.1 billion investment portfolio as of June 30, 2016
  • $3.5 billion agency securities
  • $0.3 billion net long TBA
  • $1.3 billion non-agency securities
  • $0.1 billion mortgage servicing rights ("MSR")
  • $0.1 billion healthcare and senior living facilities
• 4.9x "at risk" leverage on agency and non-agency securities as of June 30, 2016, compared to 4.6x as of March 31, 2016
  • 4.5x excluding net long TBA mortgage position as of June 30, 2016
• 11.7% agency securities actual CPR for the quarter
  • 10.1% projected life CPR for agency securities as of June 30, 2016
• 2.17% annualized net interest rate spread and TBA dollar roll income for the quarter, excluding estimated "catch-up" premium amortization expense
  • Excludes 18 bps of "catch-up" premium amortization expense due to changes in projected CPR
  • A decrease from 2.21% for the prior quarter, excluding 31 bps of "catch-up" premium amortization expense

MANAGEMENT REMARKS

"We are extremely pleased with MTGE's performance in the second quarter," said Gary Kain, the Company's Chief Executive Officer, President and Chief Investment Officer.  "Despite volatile market conditions, MTGE delivered a 17.8% annualized economic return, with both the agency and non-agency portfolios performing well.

"The housing market continues to display strong underlying fundamentals, providing significant support for our credit investments.  These fundamentals, coupled with strong demand from global investors as they search for yield in the current low rate environment, drove spread tightening across the credit spectrum in the second quarter.  In particular, our credit risk transfer (CRT) investments were strong performers in the second quarter, and we continue to be optimistic about the longer term opportunities in this sector.

"Our agency investments also performed well, particularly in light of the significant rally in interest rates following the Brexit vote. With interest rates near historic lows, we believe that asset selection will be a key driver of investment performance.  Although the prepayment landscape is no longer benign, we do not currently anticipate a prepay environment as we experienced in 2012.  That said, given the high percentage of our agency portfolio that has favorable prepayment characteristics, we are optimistic about the performance of our portfolio across a wide range of possible scenarios.

"In addition, MTGE closed its first two investments in healthcare and senior living facilities in the second quarter, deploying $22 million of capital, and largely completed the transition of its servicing operations to a servicing oversight platform.  As a result of these initiatives and the favorable composition of our non-agency and agency investment portfolios, we are enthusiastic about the outlook for MTGE."

INVESTMENT PORTFOLIO

As of June 30, 2016, the Company's investment portfolio included $3.5 billion of agency MBS, $0.3 billion of net long TBA positions, $1.3 billion of non-agency securities, $0.1 billion of MSR and $0.1 billion of healthcare and senior living facilities.

As of June 30, 2016, the Company's fixed rate agency investments were comprised of $0.6 billion 15 year MBS, $0.2 billion 20 year MBS, $2.6 billion 30 year MBS, $0.1 billion 15 year net long TBA securities and $0.2 billion 30 year net long TBA securities.  As of June 30, 2016, 15 year fixed rate investments represented 19% of the Company's agency investment portfolio, consistent with March 31, 2016, and 30 year fixed rate investments represented 73% of the Company's agency portfolio, an increase from 72% as of March 31, 2016.

As of June 30, 2016, the Company's agency fixed rate assets, inclusive of the net long TBA position, had a weighted average coupon of 3.48%, down from 3.53% at March 31, 2016, comprised of the following weighted average coupons:

• 3.22% for 15 year securities;
• 3.30% for 20 year securities; and
• 3.56% for 30 year securities.

As of June 30, 2016, the Company's $1.3 billion non-agency portfolio was comprised of approximately 31% Alt-A, 26% credit risk transfer, 16% prime, 12% option ARM securities and 15% subprime.

As of June 30, 2016, the Company's net long TBA mortgage portfolio had a fair value and cost basis of approximately $0.3 billion, with a net carrying value of $7.8 million reported in derivative assets/(liabilities) on the Company's consolidated balance sheet.  The Company accounts for TBA securities as derivative instruments and recognizes dollar roll income and other realized and unrealized gains and losses on TBA securities in other gains (losses), net on the Company's consolidated statements of operations.

CONSTANT PREPAYMENT RATES

The actual CPR for the Company's agency portfolio during the second quarter of 2016 was 11.7%, up from 8.0% during the first quarter.  The CPR published in July 2016 for the Company's agency portfolio held as of June 30, 2016 was 13.3%, and the weighted average projected CPR for the remaining life of the Company's agency securities held as of June 30, 2016 was 10.1%, consistent with March 31, 2016. 

The Company amortizes and accretes premiums and discounts associated with purchases of agency securities into interest income over the estimated life of such securities based on actual and projected CPRs using the effective yield method.  As such, slower actual and projected prepayments can have a meaningful positive impact, while faster actual or projected prepayments can have a meaningful negative impact on the Company's agency asset yields.

The amortization of premiums (net of any accretion of discounts) on the agency portfolio for the quarter was $(7.7) million, or $(0.17) per common share. The Company recognized approximately $(2.1) million, or $(0.05) per common share, of "catch-up" premium amortization expense during the quarter, due to changes in projected CPR estimates for the Company's existing agency securities during the quarter. The weighted average cost basis of the Company's agency securities was 105.1% of par and the unamortized agency net premium was $164.8 million as of June 30, 2016. 

NON-AGENCY ACCRETION INCOME

The weighted average cost basis of the Company's non-agency portfolio was 86.5% of par as of June 30, 2016.  Accretion income on the non-agency portfolio for the quarter was $6.7 million, or $0.15 per common share.  The total net discount remaining was $194.3 million as of June 30, 2016, with $96.9 million designated as credit reserves.

ASSET YIELDS, COST OF FUNDS AND NET INTEREST RATE SPREAD

The Company's average annualized net interest rate spread on its balance sheet and dollar roll funded assets for the second quarter was 1.99% compared to 1.90% in the first quarter.  Excluding estimated "catch-up" expense of 18 bps due to changes in projected CPR, the Company's average annualized net interest rate spread was 2.17% for the second quarter, compared to 2.21% in the first quarter.

The Company's average agency and non-agency securities asset yield excluding TBAs for the second quarter was 3.28%, compared to 3.26% for the first quarter.  Excluding the impact of "catch-up" premium amortization, the Company's annualized weighted average yield was 3.46% for the second quarter, compared to 3.57% for the first quarter.  The Company's agency and non-agency securities asset yield excluding TBAs as of June 30, 2016 was 3.38%, down 5 bps from 3.43% as of March 31, 2016.

The Company's average cost of funds was 1.31% for the second quarter, compared to 1.39% for the first quarter.  The Company's average cost of funds includes the cost of repurchase agreements, FHLB advances and effective interest rate swaps (including those used to hedge the Company's dollar roll funded assets) measured against the Company's daily weighted average repurchase agreement and Federal Home Loan Bank advances balances outstanding. The Company's average cost of funds of 1.27% as of June 30, 2016 was down 5 bps from 1.32% as of March 31, 2016.

On a per share basis, the Company recognized $0.42 per common share of net spread and dollar roll income (a non-GAAP financial measure) for the second quarter, compared to $0.37 for the prior quarter. Excluding "catch-up" premium amortization cost, the Company's net spread and dollar roll income was $0.46 per common share for the second quarter, an increase from $0.44 for the prior quarter. Net spread and dollar roll income for the second quarter included $0.06 per common share of dollar roll income, compared to $0.00 for the prior quarter, and excluded $(0.04) per common share of non-recurring costs associated with the American Capital, Ltd. strategic review process and subsequent acquisition of the Company's external manager by American Capital Agency Corp.  A reconciliation of the Company's net interest income to net spread and dollar roll income and additional information regarding the Company's use of non-GAAP measures are included later in this release.

LEVERAGE AND HEDGING ACTIVITIES

As of June 30, 2016, all of the Company's repurchase agreements and Federal Home Loan Bank advances were used to fund purchases of agency and non-agency securities.  Including TBA securities, the Company's "at risk" leverage ratio for agency and non-agency securities was 4.9x as of June 30, 2016 and averaged 4.7x during the second quarter.

The $3.3 billion borrowed under repurchase agreements as of June 30, 2016 had remaining maturities consisting of:

• $2.1 billion of one month or less;
• $0.1 billion between one and two months;
• $0.4 billion between two and three months;
• $0.2 billion between three and twelve months; and
• $0.5 billion greater than twelve months.

As of June 30, 2016, the Company's agency and non-agency repurchase agreements had an average of 162 days remaining to maturity, down from 168 days as of March 31, 2016.

As of June 30, 2016, financing with the Federal Home Loan Bank of Des Moines had an outstanding balance of $0.3 billion and an average of 215 days remaining to maturity.

As of June 30, 2016, the Company had repurchase agreements with 32 financial institutions and less than 5% of the Company's equity was at risk with any one counterparty, with the top five counterparties representing less than 23% of the Company's equity at risk.

The Company's interest rate swap positions as of June 30, 2016 totaled $2.2 billion in notional amount, with a weighted average fixed pay rate of 1.63%, a weighted average receive rate of 0.64% and a weighted average maturity of 3.2 years.  Excluding forward starting swaps, the Company's interest rate swap portfolio had a notional balance of $1.7 billion, an average fixed pay rate of 1.17% and a weighted average receive rate of 0.64% as of June 30, 2016 compared to a notional balance of $1.5 billion, an average fixed pay rate of 1.44% and a weighted average receive rate of 0.62% as of March 31, 2016.  The Company enters into interest rate swaps with longer maturities with the intention of protecting its net book value and longer term earnings potential. 

The Company utilizes interest rate swaptions to mitigate the Company's exposure to larger, more rapid increases in interest rates.  As of June 30, 2016, the Company held payer swaption contracts with a total notional amount of $0.2 billion and a weighted average expiration of 1.0 year.  These swaptions have an underlying weighted average interest rate swap term of 5.8 years and a weighted average pay rate of 3.14% as of June 30, 2016.

In addition to its interest rate swaps and swaptions, the Company held a $(0.4) billion net short position in  U.S. Treasury securities and futures as of June 30, 2016.

As of June 30, 2016, 70% of the Company's combined funding and net TBA balance was hedged through a combination of interest rate swaps, interest rate swaptions and U.S. Treasury securities and futures compared to 67% as of March 31, 2016.

SERVICING

As of June 30, 2016, our servicing subsidiary Residential Credit Solutions ("RCS") owned a portfolio of MSR with a fair market value of $53.3 million, representing approximately 29,000 residential mortgage loans and $5.9 billion in unpaid principal balances.  During the second quarter, the Company recorded $4.2 million in servicing revenues and $(9.9) million in servicing expense, which included $(2.8) million in realization of cash flows on MSR.  During the second quarter, RCS completed the transfer of all subservicing clients to Ditech and transitioned to a servicing oversight platform.  Ditech continues to subservice RCS's MSR ($5.9 billion in unpaid principal balances).

HEALTHCARE REAL ESTATE INVESTMENTS

During the second quarter, the Company, through its wholly owned subsidiary Capital Healthcare Investments, LLC ("CHI"), invested in five skilled nursing facilities and one senior housing facility with a combined purchase price of $70 million.  These investments were financed through $49 million of secured notes payable with a weighted average interest rate of 4.81% as of June 30, 2016.  During the three months ended June 30, 2016, CHI recorded revenues of $0.9 million and expenses of $1.1 million, including acquisition costs of $0.5 million.

OTHER GAINS (LOSSES), NET

The Company has elected to record all agency and non-agency securities at fair value with all changes in fair value recorded in current GAAP earnings as other gains (losses) and record all real estate investments at their cost basis net of depreciation.  In addition, the Company has not designated any derivatives as hedges for GAAP accounting purposes and therefore all changes in the fair value of derivatives are recorded in current GAAP earnings as other gains (losses).

During the second quarter, the Company recorded $27.9 million in other gains (losses), net, or $0.61 per common share.  Other gains (losses), net, for the quarter are comprised of:

• $6.3 million of net realized gain on agency and non-agency securities;
• $25.1 million of net unrealized gain on agency securities;
• $15.9 million of net unrealized gain on non-agency securities;
• $(2.5) million of net realized loss on periodic settlements of interest rate swaps;
• $(9.7) million of net realized loss on other derivatives and securities;
• $(3.3) million of net unrealized loss on other derivatives and securities; and
• $(3.8) million of unrealized loss on mortgage servicing rights.

Realized and unrealized net losses on other derivatives and securities during the second quarter primarily include $(13.7) million of net loss on interest rate swaps and swaptions and $(9.8) million of net loss on U.S. Treasury securities and futures, offset, in part by $9.9 million of net gain and dollar roll income on TBA securities.

ESTIMATED TAXABLE INCOME

REIT taxable income for the second quarter is estimated at $0.26 per common share, or $0.59 lower than GAAP net income of $0.85 per common share.

The primary differences between GAAP net income and estimated REIT taxable net income are (i) unrealized gains and losses associated with investment securities, interest rate swaps and other derivatives and securities marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized or settled, (ii) timing differences, both temporary and potentially permanent, in the recognition of certain realized gains and losses, (iii) losses or undistributed income of taxable REIT subsidiaries and (iv) timing differences related to the amortization and accretion of net premiums and discounts paid on investments.

The Company's estimated taxable income for the second quarter excludes $0.26 per common share of estimated net capital gains, which will be subtracted from the Company's net capital loss carryforwards from prior periods. 

As of June 30, 2016, the Company had approximately $(7.2) million of distributions in excess of estimated taxable income, or $(0.16) per common share.  This amount is in addition to the Company's remaining unutilized net capital loss carryforwards and net deferred gains from terminated or expired swaps and swaptions.  As of June 30, 2016, the Company had estimated remaining unutilized net capital losses of $(2.77) per common share compared to $(3.03) per common share as of March 31, 2016, which may be carried forward and applied against future net capital gains through 2018.  Additionally, as of June 30, 2016, the Company had estimated net deferred losses from terminated swaps and swaptions of $(0.69) per common share, which will be amortized into future ordinary taxable income over the remaining terms of the underlying swaps.

STOCK REPURCHASE PROGRAM

During the quarter, the Company made no open market purchases of shares of its common stock.  Since commencing a stock repurchase program in the fourth quarter of 2012, the Company has repurchased 13.7 million shares, or approximately 23%, of its common stock for total consideration of approximately $244.9 million, including expenses.  As of June 30, 2016, the Company had $55.1 million available under current board authorization for repurchases of its common stock through December 31, 2016.

SECOND QUARTER 2016 DIVIDEND DECLARATION

On June 13, 2016, the Board of Directors of the Company declared a second quarter dividend on its common stock of $0.40 per share, which was paid on July 27, 2016 to common stockholders of record as of June 30, 2016.  Since its August 2011 initial public offering, the Company has declared and paid a total of $544.8 million in common stock dividends, or $12.85 per common share.

On June 13, 2016, the Board of Directors of the Company declared a second quarter dividend on its 8.125% Series A Cumulative Redeemable Preferred Stock ("Series A Preferred Stock") of $0.5078125 per share. The dividend was paid on July 15, 2016 to preferred stockholders of record as of July 1, 2016.  Since the May 2014 Series A Preferred Stock offering, the Company has declared and paid a total of $9.4 million in Series A Preferred Stock dividends, or $4.3615500 per share.

FINANCIAL STATEMENTS, OPERATING PERFORMANCE AND PORTFOLIO STATISTICS

The following tables include certain measures of operating performance, such as net spread income and estimated taxable income, which are non-GAAP financial measures.  Please refer to "Use of Non-GAAP Financial Information" later in this release for further discussion of non-GAAP measures.

STOCKHOLDER CALL

MTGE will hold a stockholder call and live audio webcast on August 2, 2016 at 11:00 am ET. Callers who do not plan on asking a question and have access to the internet are encouraged to utilize the free live webcast at www.MTGE.com. Those who plan on participating in the Q&A or do not have the internet available may access the call by dialing (877) 503-6874 (U.S. domestic) or (412) 902-6600 (international). Please advise the operator you are dialing in for the American Capital Mortgage Investment Corp. stockholder call.

A slide presentation will accompany the call and will be available at www.MTGE.com. Select the Q2 2016 Earnings Presentation link to download and print the presentation in advance of the stockholder call. An archived audio of the stockholder call combined with the slide presentation will be available on the MTGE website after the call on August 2, 2016. In addition, there will be a phone recording available one hour after the live call on August 2, 2016 through August 16, 2016. If you are interested in hearing the recording of the presentation, please dial (877) 344-7529 (U.S. domestic) or (412) 317-0088 (international). The conference number is 10087923.

For further information or questions, please contact Investor Relations at (301) 968-9220 or [email protected].

ABOUT AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

American Capital Mortgage Investment Corp. is a real estate investment trust that invests in and manages a leveraged portfolio of agency mortgage investments, non-agency mortgage investments and other real estate-related investments. The Company is externally managed and advised by American Capital MTGE Management, LLC, an affiliate of American Capital Agency Corp. The Company, American Capital MTGE Management, LLC, and American Capital Agency Corp. are no longer affiliated with American Capital, Ltd. For further information, please refer to www.MTGE.com.

FORWARD LOOKING STATEMENTS

This press release contains forward-looking statements.  Forward-looking statements are based on estimates, projections, beliefs and assumptions of management of the Company at the time of such statements and are not guarantees of future performance or results.  Forward-looking statements involve risks and uncertainties in predicting future results and conditions.  Actual results could differ materially from those projected in these forward-looking statements due to a variety of important factors, including, without limitation, changes in interest rates, changes in the yield curve, changes in prepayment rates, the availability and terms of financing, changes in the market value of the Company's assets, the receipt of regulatory approval or other closing conditions for a transaction, general economic conditions, market conditions, conditions in the market for agency and non-agency securities and mortgage related investments, and legislative and regulatory changes that could adversely affect the business of the Company.  Certain important factors that could cause actual results to differ materially from those contained in the forward-looking statements, are included in the Company's periodic reports filed with the Securities and Exchange Commission ("SEC").  Copies are available on the SEC's website, www.sec.gov.  The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt or new information, or otherwise.

USE OF NON-GAAP FINANCIAL INFORMATION

In addition to the results presented in accordance with GAAP, the Company's results of operations discussed in this release include certain non-GAAP financial information, including "net spread and dollar roll income," "net spread and dollar roll income, excluding 'catch-up' premium amortization," "estimated taxable income" and the related per common share measures and certain financial metrics derived from such non-GAAP information, such as "cost of funds" and "net interest rate spread."

"Net spread and dollar roll income" is measured as (i) net interest income (GAAP measure) adjusted to include other interest rate swap periodic costs, TBA dollar roll income and dividends on REIT equity securities (referred to as "adjusted net interest and dollar roll income") less (ii) total operating expenses (GAAP measure) adjusted to exclude non-recurring transaction costs. "Net spread and dollar roll income, excluding "catch-up" premium amortization," further excludes retrospective "catch-up" adjustments to premium amortization cost or benefit due to changes in projected CPR estimates.

By providing users of the Company's financial information with such measures in addition to the related GAAP measures, the Company believes users will have greater transparency into the information used by the Company's management in its financial and operational decision-making.  The Company also believes it is important for users to consider information related to its current financial performance without the effects of certain measures that are not necessarily indicative of its current or expected investment portfolio performance and operations.

Specifically, in the case of "adjusted net interest and dollar roll income," the Company believes the inclusion of TBA dollar roll income is meaningful as TBAs, which are accounted for under GAAP as derivative instruments with gains and losses recognized in other gain (loss) in the Company's statement of operations, are economically equivalent to holding and financing generic agency MBS using short-term repurchase agreements. Similarly, the Company believes that the inclusion of periodic interest rate swap settlements, which are recognized under GAAP in other gain (loss), is meaningful as interest rate swaps are the primary instrument used to economically hedge against fluctuations in the Company's borrowing costs and the inclusion of all periodic interest rate swap settlement costs is more indicative of the Company's total cost of funds than interest expense alone. In the case of "net spread and dollar roll income, excluding 'catch-up' premium amortization," the Company believes the exclusion of "catch-up" adjustments to premium amortization cost or benefit is meaningful as it excludes the cumulative effect from prior reporting periods due to current changes in future prepayment expectations and, therefore, exclusion of such cost or benefit is more indicative of the current and expected earnings potential of the Company's investment portfolio. The Company also believes the exclusion of non-recurring costs associated with the American Capital, Ltd. strategic review process and subsequent acquisition of the Company's external manager by American Capital Agency Corp. reported in general and administrative expense under GAAP is meaningful as they are not representative of ongoing operating costs. In the case of estimated taxable income, the Company believes it is meaningful information as it is directly related to the amount of dividends the Company is required to distribute in order to maintain its REIT qualification status.

However, because such measures are incomplete measures of the Company's financial performance and involve differences from results computed in accordance with GAAP, they should be considered as supplementary to, and not as a substitute for, results computed in accordance with GAAP. In addition, because not all companies use identical calculations, the Company's presentation of such non-GAAP measures may not be comparable to other similarly-titled measures of other companies. Furthermore, estimated taxable income can include certain information that is subject to potential adjustments up to the time of filing the Company's income tax returns, which occurs after the end of its fiscal year.

A reconciliation of GAAP net interest income to non-GAAP net spread and dollar roll income, excluding "catch-up" premium amortization and a reconciliation of GAAP net income to non-GAAP estimated taxable income is included in this release.

CONTACT:
Investors -   (301) 968-9220
Media -       (301) 968-9215

SOURCE American Capital Mortgage Investment Corp.

Related Links

http://www.MTGE.com