Add
MTGE to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| MTGE > SEC Filings for MTGE > Form 10-Q on 9-Nov-2012 | All Recent SEC Filings |
9-Nov-2012
Quarterly Report
• Financial Condition
• Results of Operations
• Liquidity and Capital Resources
• Forward-Looking Statements
EXECUTIVE OVERVIEW
We were incorporated in Maryland on March 15, 2011 and commenced operations on
August 9, 2011 following the completion of our IPO. We invest in, finance and
manage a leveraged portfolio of mortgage-related investments, which we define to
include agency mortgage investments, non-agency mortgage investments and other
mortgage-related investments. Agency mortgage investments include residential
mortgage pass-through certificates and collateralized mortgage obligations
("CMOs") structured from residential mortgage pass-through certificates for
which the principal and interest payments are guaranteed by a
government-sponsored entity ("GSE"), such as the Federal National Mortgage
Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation
("Freddie Mac"), or by a U.S. Government agency, such as the Government National
Mortgage Association ("Ginnie Mae"). Non-agency mortgage investments include
residential mortgage-backed securities ("RMBS") backed by residential mortgages
that are not guaranteed by a GSE or U.S. Government agency. Non-agency mortgage
investments may also include prime and non-prime residential mortgage loans.
Other mortgage-related investments may include commercial mortgage-backed
securities ("CMBS"), commercial mortgage loans, mortgage-related derivatives and
other mortgage-related investments.
We operate so as to qualify to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"). As such, we are required to, among other things, distribute
annually at least 90% of our taxable net income. As long as we qualify as a
REIT, we will generally not be subject to U.S. federal corporate taxes on our
taxable net income to the extent that we distribute all of our annual taxable
net income to our stockholders.
We are externally managed by American Capital MTGE Management, LLC (our
"Manager"), an affiliate of American Capital, Ltd. ("American Capital"). We do
not have any employees.
Our Investment Strategy
Our objective is to provide attractive risk-adjusted returns to our stockholders
over the long-term through a combination of dividends and net book value
appreciation. In pursuing this objective, we rely on our Manager's expertise to
construct and manage a diversified mortgage investment portfolio by identifying
asset classes that, when properly financed and hedged, are selected to produce
attractive returns across a variety of market conditions and economic cycles,
considering the risks associated with owning such investments. Specifically, our
investment strategy is designed to:
• manage a leveraged portfolio of mortgage-related investments to
generate attractive risk-adjusted returns;
• capitalize on discrepancies in the relative valuations in the
mortgage-related investments market;
|
• manage financing, interest, prepayment rate and credit risks;
• preserve our net asset value within reasonable bands;
• provide regular quarterly distributions to our stockholders;
• qualify as a REIT; and
• remain exempt from the requirements of the Investment Company Act.
The size and composition of our investment portfolio depends on investment strategies implemented by our Manager, the availability of investment capital and overall market conditions, including the availability of attractively priced investments and suitable financing to appropriately leverage our investment portfolio. Market conditions are influenced by, among other things,
current levels of and expectations for future levels of, interest rates,
mortgage prepayments, market liquidity, housing prices, unemployment rates,
general economic conditions, government participation in the mortgage market,
evolving regulations or legal settlements that impact servicing practices or
other mortgage related activities.
Trends and Recent Market Impacts
On September 13, 2012, the Federal Reserve announced their third quantitative
easing program, commonly known as QE3, and extended their guidance to keep the
federal funds rate at "exceptional low levels" through at least mid-2015. QE3
entails large-scale purchases of agency mortgage-backed securities ("MBS") at
the pace of $40 billion per month in addition to the Federal Reserve's existing
policy of reinvesting principal payments from its holdings of agency MBS into
new agency MBS purchases. The program is open-ended in nature, and is intended
to put downward pressure on longer-term interest rates, support mortgage
markets, and help make the broader financial conditions more accommodative. The
Federal Reserve plans to continue their purchases of agency MBS and employ other
policy tools, as appropriate, until they foresee substantial improvement in the
outlook for the U.S. labor market.
The Federal Reserve's purchases will likely be concentrated in newly-issued,
fixed-rate agency MBS (i.e., the part of the mortgage market with the greatest
impact on mortgage rates offered to borrowers). We expect that the combined
total purchases of agency MBS by the Federal Reserve will be $65 billion to $75
billion per month, which will likely be more than 50% of the average gross
agency MBS new issue volume during the fourth quarter of 2012. As of September
30, 2012, prices across the agency MBS spectrum had generally increased
following the Federal Reserve's QE3 announcement, with the lowest coupon,
30-year and 15-year fixed-rate agency MBS outperforming higher coupon agency
MBS. The table below summarizes interest rates and prices of generic fixed-rate
agency MBS for the nine months ended September 30, 2012.
September 30,
September 30, 2012 2012 Versus
Interest Versus June 30, December 31,
Rate/Security (1) September 30, 2012 June 30, 2012 March 31, 2012 December 31, 2011 2012 2011
LIBOR:
1-Month 0.21 % 0.25 % 0.24 % 0.30 % (0.04 ) (0.09 )
3-Month 0.36 % 0.46 % 0.47 % 0.58 % (0.10 ) (0.22 )
U.S. Treasury
Securities:
2-Year U.S. Treasury 0.23 % 0.30 % 0.33 % 0.24 % (0.07 ) (0.01 )
5-Year U.S. Treasury 0.63 % 0.72 % 1.04 % 0.83 % (0.09 ) (0.2 )
10-Year U.S.
Treasury 1.63 % 1.65 % 2.21 % 1.88 % (0.02 ) (0.25 )
Interest Rate Swap
Rates:
2-Year Swap Rate 0.37 % 0.55 % 0.58 % 0.73 % (0.18 ) (0.36 )
5-Year Swap Rate 0.76 % 0.97 % 1.27 % 1.22 % (0.21 ) (0.46 )
10-Year Swap Rate 1.70 % 1.78 % 2.29 % 2.03 % (0.08 ) (0.33 )
30-Year Fixed Rate
MBS Price:
3.5% $ 107.25 $ 105.11 $ 102.72 $ 102.88 $ 2.14 $ 4.37
4.0% $ 107.75 $ 106.44 $ 104.86 $ 105.03 $ 1.31 $ 2.72
4.5% $ 108.25 $ 107.28 $ 106.38 $ 106.42 $ 0.97 $ 1.83
15-Year Fixed Rate
MBS Price:
2.5% $ 105.13 $ 103.09 $ 101.42 $ 101.34 $ 2.04 $ 3.79
3.0% $ 106.00 $ 104.77 $ 103.56 $ 103.28 $ 1.23 $ 2.72
3.5% $ 106.41 $ 105.66 $ 104.92 $ 104.58 $ 0.75 $ 1.83
________________________
|
We expect during periods in which the Federal Reserve purchases significant volumes of mortgages, yields on agency MBS securities will be lower than yields would have been absent QE3 and that refinancing volumes will be higher than volumes would have been absent QE3. Since returns on agency MBS are highly sensitive to prepayment speeds, we have positioned our investment portfolio towards agency MBS that we believe have favorable prepayment attributes. As of September 30, 2012, 73% of our fixed-rate agency investment portfolio was comprised of agency securities backed by lower loan balance mortgages (pools backed by original loan balances of up to $150,000) and loans originated under the U.S. Government sponsored Home Affordable Refinance Program ("HARP") (pools backed by 100% refinance loans with original loan-to-values of ? 80%), which we believe have a lower risk of prepayment relative to generic agency securities. The remainder of our agency portfolio as of September 30, 2012 was primarily comprised of low coupon, new issuance fixed-rate agency securities. (See Financial Condition below for further details of our portfolio composition as of September 30, 2012).
The following table illustrates the impact of favorable prepayment characteristics on constant prepayment rates ("CPR"), comparing the actual annualized monthly CPR for our agency portfolio to the Fannie Mae 2011 30-year 4.0% fixed-rate TBA for the nine months ended September 30, 2012.
Annualized Monthly Actual Constant Prepayment Rates January 2012 February 2012 March 2012 April 2012 May 2012 June 2012 July 2012 August 2012 September 2012 Agency securities (1) 4% 6% 7% 5% 5% 5% 7% 8% 7% Fannie Mae 2011 30-year 4.0% fixed rate universe (2) 11% 13% 19% 21% 14% 15% 21% 29% 35% _______________________ |
(2) Source: JP Morgan
The non-agency market environment showed significant signs of improvement with
broad market participation during the nine months ended September 30, 2012, as
compared to the end of 2011. However, trading volumes remain below those
experienced during the first half of 2011, and non-agency security liquidity
remains a concern. While market sentiment concerning the general housing market
has improved, we believe that any housing recovery will be uneven across the
country and are cognizant that other events, such as additional U.S. regulatory
actions or further economic weakness in Europe, could have a material negative
impact on the market for non-agency securities. As such, we will continue our
selective approach to increasing our non-agency portfolio.
Summary of Critical Accounting Estimates
Our critical accounting estimates relate to the fair value of our investments,
recognition of interest income, and derivatives. Certain of these items involve
estimates that require management to make judgments that are subjective in
nature. We rely on our Manager's experience and analysis of historical and
current market data in order to arrive at what we believe to be reasonable
estimates. Under different conditions, we could report materially different
amounts using these critical accounting policies. All of our critical accounting
policies are fully described in our MD&A in our Annual Report on Form 10-K for
the year ended December 31, 2011. Our significant accounting policies are
described in Note 3 to the consolidated financial statements included under Item
1 of Part I of this Quarterly Report on Form 10-Q.
We have elected the option to account for all of our financial assets, including
all mortgage-related investments, at fair value, with changes in fair value
reflected in income during the period in which they occur. We believe this
election more appropriately reflects the results of our operations for a
particular reporting period, as financial asset fair value changes are presented
in a manner consistent with the presentation and timing of the fair value
changes of economic hedging instruments.
FINANCIAL CONDITION
The following analysis of our financial condition should be read in conjunction
with our interim consolidated financial statements and the notes thereto. The
table below presents our condensed consolidated balance sheets as of
September 30, 2012 and December 31, 2011 (dollars in thousands, except per share
amounts):
September 30, 2012 December 31, 2011
Balance Sheet Data:
Total assets $ 7,546,299 $ 2,170,322
Repurchase agreements $ 6,117,783 $ 1,706,281
Total liabilities $ 6,631,959 $ 1,961,521
Total stockholders' equity $ 914,340 $ 208,801
Net asset value per common share (1) $ 25.21 $ 20.87
--------
|
The following tables summarize certain characteristics of our investment portfolio by issuer and investment category as of September 30, 2012 and December 31, 2011(dollars in thousands):
As of September 30, 2012
Amortized Cost Weighted Average
Fair Value Basis Par Value Coupon Yield (1)
Fannie Mae $ 5,376,865 $ 5,224,646 $ 4,970,551 3.45 % 2.40 %
Freddie Mac 960,373 933,781 885,768 3.60 % 2.61 %
Agency total / weighted average 6,337,238 6,158,427 5,856,319 3.47 % 2.43 %
Non-agency securities (2) 552,787 517,896 879,042 1.81 % 7.24 %
Total / weighted average $ 6,890,025 $ 6,676,323 $ 6,735,361 3.26 % 2.80 %
As of December 31, 2011
Amortized Cost Weighted Average
Fair Value Basis Par Value Coupon Yield (1)
Fannie Mae $ 1,316,275 $ 1,305,135 $ 1,240,435 3.95% 2.85%
Freddie Mac 423,816 421,139 396,625 4.19% 2.91%
Agency total / weighted average 1,740,091 1,726,274 1,637,060 4.01% 2.87%
Non-agency securities 25,561 25,994 47,151 2.63% 8.10%
Total / weighted average 1,765,652 1,752,268 1,684,211 3.97% 2.94%
Non-agency securities underlying
Linked Transactions 50,193 52,050 88,671 1.94% 7.08%
Adjusted total / weighted average $ 1,815,845 $ 1,804,318 $ 1,772,882 3.87% 3.06%
|
(2) As of September 30, 2012, there are no non-agency securities accounted for as Linked Transactions.
The following tables summarize certain characteristics of our agency securities portfolio as of September 30, 2012 and December 31, 2011 (dollars in thousands):
As of September 30, 2012
Amortized Cost Weighted Average
Fair Value Basis Par Value Coupon Yield Projected CPR
HARP (1) $ 1,869,072 $ 1,808,871 $ 1,709,347 3.74 % 2.74 % 10 %
Lower Loan Balance (2) 2,781,484 2,699,337 2,553,883 3.69 % 2.59 % 11 %
Other 1,686,682 1,650,220 1,593,088 2.84 % 1.84 % 18 %
Total $ 6,337,238 $ 6,158,428 $ 5,856,318 3.47 % 2.43 % 13 %
As of December 31, 2011
Amortized Cost Weighted Average
Fair Value Basis Par Value Coupon Yield Projected CPR
HARP (1) $ 538,146 $ 532,847 $ 499,893 4.45 % 3.22 % 12 %
Lower Loan Balance (2) 802,579 795,894 755,632 3.83 % 2.69 % 10 %
Other 399,366 397,533 381,535 3.79 % 2.74 % 13 %
Total $ 1,740,091 $ 1,726,274 $ 1,637,060 4.01 % 2.87 % 11 %
--------
|
(2) Lower loan balance securities represent pools with maximum original loan balances less than or equal to $150 thousand.
The following tables summarize certain characteristics of our agency securities
portfolio by term and coupon as of September 30, 2012 and December 31, 2011
(dollars in thousands):
As of September 30, 2012
Weighted Average
Fair Value Amortized Cost Basis Par Value Yield Projected CPR
15-Year
2.5% $ 1,152,375 $ 1,129,512 $ 1,095,785 1.55 % 18 %
3.0% 280,276 272,157 262,412 2.10 % 12 %
3.5% 364,331 352,713 337,985 2.30 % 15 %
4.0% 340,223 334,249 312,906 2.03 % 16 %
4.5% 23,339 22,698 21,220 2.60 % 14 %
Total $ 2,160,544 $ 2,111,329 $ 2,030,308 1.83 % 16 %
20-Year
3.5% $ 88,676 $ 85,527 $ 82,120 2.53 % 14 %
4.0% 9,779 9,441 9,038 2.54 % 21 %
5.0% 4,252 4,310 3,917 2.40 % 17 %
Total $ 102,707 $ 99,278 $ 95,075 2.52 % 14 %
30-Year
3.5% $ 2,352,965 $ 2,288,639 $ 2,178,590 2.68 % 10 %
4.0% 1,539,826 1,485,615 1,390,355 2.82 % 11 %
4.5% 129,042 123,311 115,431 3.20 % 12 %
5.0% 52,154 50,256 46,559 3.04 % 17 %
Total $ 4,073,987 $ 3,947,821 $ 3,730,935 2.75 % 11 %
|
As of December 31, 2011
Weighted Average
Fair Value Amortized Cost Basis Par Value Yield Projected CPR
15-Year
3.0% $ 53,265 $ 53,082 $ 51,448 2.35 % 8 %
3.5% 345,563 342,475 327,883 2.50 % 10 %
4.0% 245,936 244,080 230,404 2.48 % 13 %
4.5% 25,654 25,524 23,735 2.64 % 12 %
Total $ 670,418 $ 665,161 $ 633,470 2.48 % 11 %
20-Year
3.5% $ 187,075 $ 186,333 $ 180,216 2.78 % 8 %
4.0% 61,133 60,679 58,001 2.24 % 26 %
5.0% 54,421 54,427 50,174 2.95 % 15 %
Total $ 302,629 $ 301,439 $ 288,391 2.70 % 13 %
30-Year
4.0% 318,918 316,231 301,996 3.21 % 10 %
4.5% 328,106 324,686 303,853 3.33 % 11 %
5.0% 120,020 118,757 109,350 3.25 % 16 %
Total $ 767,044 $ 759,674 $ 715,199 3.27 % 11 %
|
Actual maturities of agency MBS are generally shorter than stated contractual
maturities primarily as a result of prepayments of principal of the underlying
mortgages. The stated contractual final maturity of the mortgage loans
underlying our portfolio of securities can range up to 40 years, but the
expected maturity is subject to change based on the actual and expected future
prepayments of the underlying loans.
In determining the estimated weighted average years to maturity and yields on
our agency MBS, we estimate the percentage of outstanding principal that is
prepaid over a period of time on an annualized basis, or CPR, based on
assumptions for each security using a combination of a third-party service,
market data and internal models. The third-party service estimates prepayment
speeds using models that incorporate the forward yield curve, mortgage rates,
current mortgage rates of the outstanding loans, loan age, volatility and other
factors. We have estimated that the CPR over the remaining life of our aggregate
agency investment portfolio is 12.7% and 11.5% as of September 30, 2012 and
December 31, 2011, respectively. Based on these prepayment assumptions, the
weighted average expected life of our agency securities was 6.0 years and 5.9
years as of September 30, 2012 and December 31, 2011, respectively. We amortize
or accrete premiums and discounts associated with purchases of our agency MBS
into interest income over the estimated life of our securities based on
projected CPRs, using the effective yield method. Since the weighted average
cost basis of our agency MBS portfolio was 105.2% of par value as of
September 30, 2012, slower actual and projected prepayments can have a
meaningful positive impact on our asset yields, while faster actual or projected
prepayments can have a meaningful negative impact on our asset yields.
The following table summarizes our agency securities at fair value, according to their estimated weighted average life classifications as of September 30, 2012 and December 31, 2011 (dollars in thousands):
As of September 30, 2012 As of December 31, 2011
Weighted Weighted
Fair Amortized Average Fair Amortized Average
Weighted Average Life Value Cost Yield Value Cost Yield
Greater than one year
and less than or equal
to three years $ - $ - - % $ 55,582 $ 55,260 2.17 %
Greater than three years
and less than or equal
to five years 2,366,106 2,308,621 1.92 % 425,251 422,406 2.49 %
Greater than five years
and less than or equal
to 10 years 3,949,518 3,828,590 2.74 % 1,259,258 1,248,608 3.02 %
Greater than 10 years 21,614 21,216 2.75 % - - - %
Total / weighted average $ 6,337,238 $ 6,158,427 2.43 % $ 1,740,091 $ 1,726,274 2.87 %
|
Non-agency MBS yields are based on our estimate of the timing and amount of future cash flows and our cost basis. Our cash flow estimates for these investments are based on our observations of current information and events and include assumptions related to interest rates, prepayment rates and the timing and amount of credit losses and other factors. The following table summarizes our non-agency securities (including those underlying Linked Transactions) at fair value, by their estimated weighted average life classifications as of September 30, 2012 and December 31, 2011 (dollars in thousands):
As of September 30, 2012 As of December 31, 2011
Weighted Weighted
Amortized Average Amortized Average
Weighted Average Life Fair Value Cost Yield Fair Value Cost Yield
Less than or equal to five
years $ 77,542 $ 74,166 6.46 % $ 12,394 $ 12,423 6.25 %
Greater than five years and
less than or equal to seven
years 248,776 233,890 6.75 % 63,360 65,621 7.64 %
. . .
|
|
|