MTGE Investment Corp. Announces Third Quarter 2017 Financial Results

BETHESDA, Md., Oct. 30, 2017 /PRNewswire/ -- MTGE Investment Corp. ("MTGE" or the "Company") (Nasdaq: MTGE) today announced financial results for the quarter ended September 30, 2017.

THIRD QUARTER 2017 FINANCIAL HIGHLIGHTS

• $1.06 net income per common share
• Includes all unrealized gains and losses on investment securities and hedging instruments
• $0.50 net spread and dollar roll income per common share, excluding estimated "catch-up" premium amortization, compared to $0.54 per common share for the previous quarter ⁽¹⁾
• Includes $0.19 per common share of estimated dollar roll income associated with the Company's $1.9 billion average net long position in forward purchases and sales of agency mortgage-backed securities ("MBS") in the "to-be-announced" ("TBA") market
• Excludes $(0.01) per common share of estimated "catch-up" premium amortization expense due to change in projected constant prepayment rate ("CPR") estimates
• $0.04 per common share of net healthcare investment income
• $0.08 per common share, excluding $(0.04) of depreciation expense on real property
• $0.45 dividend per common share
• $20.61 net book value per common share as of September 30, 2017
• Increased $0.61 per common share, or 3.1%, from $20.00 as of June 30, 2017
• Includes $(0.12) per common share of cumulative depreciation of real property
• 5.3% economic return on common equity for the quarter
• Comprised of $0.45 dividend and $0.61 increase in net book value per common share

ADDITIONAL THIRD QUARTER 2017 HIGHLIGHTS

• $6.8 billion investment portfolio as of September 30, 2017
• $3.7 billion agency securities
• $1.9 billion net long TBA
• $0.9 billion non-agency securities
• $0.3 billion healthcare real estate investments
• 6.3x "at risk" leverage on agency and non-agency securities as of September 30, 2017, consistent with June 30, 2017
• 4.2x excluding net long TBA mortgage position as of September 30, 2017
• 8.5% projected life CPR for agency securities as of September 30, 2017
• Decreased from 8.8% at June 30, 2017
• 10.5% agency securities CPR for the quarter
• 1.76% annualized net interest rate spread and dollar roll income for the quarter, excluding estimated "catch-up" premium amortization
• Excludes 4 bps of "catch-up" premium amortization expense
• A decrease from 1.96% for the prior quarter, excluding 5 bps of "catch-up" premium amortization expense

MANAGEMENT REMARKS
"MTGE's investment portfolio produced an economic return of 5.3% in the third quarter, comprised of its $0.45 dividend per common share and a 3.1% increase in net asset value," commented Gary Kain, the Company's Chief Executive Officer, President and Chief Investment Officer.  "The investment environment for residential mortgage investments remained very favorable as strong housing fundamentals and low interest rate volatility continued to support attractive returns.  Despite the Federal Reserve's announcement of its long-anticipated plan to reduce MBS reinvestments, agency MBS valuations improved modestly during the quarter.  Non-agency assets continued their strong 2017 performance, albeit at a more modest pace than prior quarters, as global yield investors drove further spread tightening.  MTGE's healthcare investments also continued to perform according to expectations, generating strong cash flows."

"We are very pleased with MTGE's year-to-date economic return of 14.6% and total stock return of 33% through the end of the third quarter," added Peter Federico, Executive Vice President and Chief Financial Officer.  "These metrics reflect the beneficial macroeconomic environment and a flexible investment mandate that allows MTGE to allocate capital across a broad spectrum of opportunities as market conditions dictate.  Although the fundamental drivers of mortgage credit performance remain positive, valuations of non-agencies are elevated.  As such, we continue to anticipate increasing our capital allocation toward agency and healthcare investments until the relative risk/return landscape changes."

NET BOOK VALUE
As of September 30, 2017, the Company's net book value per common share was $20.61, an increase of $0.61 per common share, or 3.1% from its June 30, 2017 net book value per common share of $20.00. The increase in the Company's net book value per common share was primarily due to net fair value gains on agency and non-agency investments during the quarter.

INVESTMENT PORTFOLIO
As of September 30, 2017, the Company's investment portfolio included $3.7 billion of agency MBS, $1.9 billion of net long TBA positions, $0.9 billion of non-agency securities and $0.3 billion of healthcare real estate investments.

As of September 30, 2017, the Company's fixed rate agency investments were comprised of $0.5 billion 15 year MBS, $0.1 billion 20 year MBS, $3.0 billion 30 year MBS, $0.3 billion net long 15 year TBA securities and $1.6 billion net long 30 year TBA securities.  As of September 30, 2017, 15 year fixed rate investments represented 14% of the Company's agency investment portfolio, consistent with June 30, 2017, and 30 year fixed rate investments represented 82% of the Company's agency portfolio, consistent with June 30, 2017.

As of September 30, 2017, the Company's net long TBA mortgage portfolio had a fair value and cost basis of approximately $1.9 billion, with a net carrying value of $(4.4) 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.

As of September 30, 2017, the Company's agency fixed rate assets, inclusive of the net long TBA position, had a weighted average coupon of 3.55%, down from 3.57% at June 30, 2017, comprised of the following weighted average coupons:

• 3.10% for 15 year securities;
• 3.29% for 20 year securities; and
• 3.64% for 30 year securities.

As of September 30, 2017, the Company's $0.9 billion non-agency portfolio was comprised of approximately 36% Alt-A, 33% credit risk transfer, 16% prime, 11% option ARM, 2% subprime and 2% commercial mortgage backed securities ("CMBS").

CONSTANT PREPAYMENT RATES
The CPR for the Company's agency portfolio during the third quarter of 2017 was 10.5%, up from 9.2% in the second quarter.  The weighted average projected CPR for the remaining life of the Company's agency securities held as of September 30, 2017 was 8.5%, down from 8.8% as of June 30, 2017 largely due to the mix of assets acquired during the third quarter. 

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 weighted average cost basis of the Company's agency securities was 105.3% of par and the unamortized agency net premium was $187.7 million as of September 30, 2017.  The amortization of premiums (net of any accretion of discounts) on the agency portfolio for the quarter was $7.0 million, which includes "catch-up" premium amortization expense of $0.7 million due to changes in the Company's projected CPR estimates for securities acquired prior to the third quarter. This compares to net premium amortization cost for the prior quarter of $6.6 million including a "catch-up" premium amortization expense of $0.7 million.

NON-AGENCY ACCRETION INCOME
The weighted average cost basis of the Company's non-agency portfolio was 85.1% of par as of September 30, 2017.  Accretion income on the non-agency portfolio for the quarter was $4.2 million.  The total net discount remaining was $141.1 million as of September 30, 2017, with $88.7 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 TBA securities for the third quarter was 1.72% compared to 1.91% in the second quarter.  Excluding estimated "catch-up" premium amortization due to changes in projected CPR, the Company's average annualized net interest rate spread was 1.76% for the third quarter, compared to 1.96% in the second quarter.

The Company's average agency and non-agency securities asset yield excluding TBAs was 3.35% for the third quarter, compared to 3.40% for the second quarter and 3.47% as of September 30, 2017, down 1 bp from 3.45% as of June 30, 2017.

The Company's average cost of funds was 1.72% for the third quarter, compared to 1.65% for the second quarter.  The Company's average cost of funds includes the cost of effective interest rate swaps, including those used to hedge the Company's TBA assets. The Company's average cost of funds as of September 30, 2017 was 1.63%, compared to 1.54% as of June 30, 2017.

The Company recognized $0.50 per common share of net spread and dollar roll income excluding "catch-up" premium amortization (a non-GAAP financial measure) for the third quarter, compared to $0.54 for the prior quarter.  Net spread and dollar roll income for the third quarter included $0.19 per common share of dollar roll income, compared to $0.21 for the prior quarter.  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
The Company uses repurchase agreements 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 6.3x as of September 30, 2017 and averaged 6.2x during the third quarter.

The $3.8 billion borrowed under repurchase agreements as of September 30, 2017 included $1.7 billion with remaining maturities of one month or less and all but $0.3 billion with remaining maturities of less than twelve months.

As of September 30, 2017, the Company's agency and non-agency repurchase agreements had an average of 113 days remaining to maturity, up from 94 days as of June 30, 2017.

HEDGING ACTIVITIES
As of September 30, 2017, 81% of the Company's funding and net TBA balance was hedged through a combination of interest rate swaps, interest rate swaptions and short positions in U.S. Treasury securities, consistent with June 30, 2017.

The Company's interest rate swap positions as of September 30, 2017 totaled $3.6 billion in notional amount, and had a weighted average fixed pay rate of 1.54%, a weighted average receive rate of 1.31% and a weighted average maturity of 4.0 years.  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 September 30, 2017, the Company held payer swaption contracts with a total notional amount of $350.0 million and a weighted average expiration of 2.3 years.  These swaptions have an underlying weighted average interest rate swap term of 8.0 years and a weighted average pay rate of 2.94% as of September 30, 2017.

The Company held a $(0.8) billion net short position in U.S. Treasury securities as of September 30, 2017.

HEALTHCARE REAL ESTATE INVESTMENTS
The Company's wholly owned subsidiary, Capital Healthcare Investments, LLC ("CHI"), held real estate assets of $282 million, financed with $187 million of secured notes payable with a weighted average interest rate of 4.49% as of September 30, 2017.  During the third quarter, CHI recorded lease and rental revenues of $7.7 million and expenses of $5.7 million, including $2.0 million of depreciation expense on real estate assets. 

The Company's real estate assets are accounted for at historical cost, net of accumulated depreciation, as applicable.

SERVICING
During the third quarter, the Company's servicing subsidiary Residential Credit Solutions ("RCS") recorded a net servicing loss of $1.2 million, down from $1.8 million during the second quarter, related to the wind-down of servicing operations.

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).  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 third quarter, the Company recorded $32.9 million in other gains (losses), net, or $0.72 per common share.  Other gains (losses), net, for the quarter are comprised of:

• $1.2 million of net realized gain on agency and non-agency securities;
• $8.8 million of net unrealized gain on agency securities;
• $9.0 million of net unrealized gain on non-agency securities;
• $(1.4) million of net realized loss on periodic settlements of interest rate swaps;
• $18.2 million of net realized gain on other derivatives and securities; and
• $(2.9) million of net unrealized loss on other derivatives and securities.

THIRD QUARTER 2017 DIVIDEND DECLARATION
On September 13, 2017, the Board of Directors of the Company declared a third quarter dividend on its common stock of $0.45 per share, which was paid on October 27, 2017 to common stockholders of record as of September 29, 2017.  Since its August 2011 initial public offering, the Company has declared and paid a total of $643.3 million in common stock dividends, or $15.00 per common share.

On September 13, 2017, the Board of Directors of the Company declared a third 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 October 16, 2017 to preferred stockholders of record as of October 1, 2017.  Since the May 2014 Series A Preferred Stock offering, the Company has declared and paid a total of $15.0 million in Series A Preferred Stock dividends, or $6.9006125 per share.

STOCK REPURCHASE PROGRAM
The Board of Directors of the Company has authorized an extension of the Company's existing stock repurchase plan through December 31, 2018. Under the stock repurchase plan, the Company is authorized to repurchase up to $100 million of its outstanding shares of common stock. The Company has not made any repurchases under the current plan.

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 October 31, 2017 at 8:30 am ET. Callers who do not plan on asking a question and have internet access 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 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 MTGE Investment Corp. stockholder call.

A slide presentation will accompany the call and will be available at www.MTGE.com. Select the Q3 2017 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 October 31, 2017. In addition, there will be a phone recording available one hour after the live call on October 31, 2017 through November 14, 2017. Those who are interested in hearing the recording of the presentation can access it by dialing (877) 344-7529 (U.S. domestic) or (412) 317-0088 (international), passcode 10112687.

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

ABOUT MTGE INVESTMENT CORP.
MTGE 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 MTGE Management, LLC, an affiliate of AGNC Investment Corp.  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 "net spread 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 AGNC Investment 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 MTGE Investment Corp.