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Anworth Mortgage Asset Corp (ANH) Q1 2019 Earnings Call Transcript

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Anworth Mortgage Asset Corp  (NYSE: ANH)
Q1 2019 Earnings Call
May. 06, 2019, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Anworth First Quarter Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

Before we begin the call, I will make a brief introductory statement. Statements made on this earnings call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and section 21E of the Securities Exchange Act of 1934 as amended and we hereby claim the protection of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to any such forward-looking statements.

Forward-looking statements are those that predict or describe future events or trends that do not relate solely to historical matters. You should not rely on forward-looking statements because the matters they describe are subject to assumptions, known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control.

Statements regarding the following subjects are forward-looking by their nature, our business and investment strategy, market trends and risks, assumptions regarding interest rates and assumptions regarding prepayment rates on the mortgage loan securing our mortgage backed securities. Our actual results may differ materially and adversely from those expressed in any forward-looking statements as a result of various factors and uncertainties.

Certain risks, uncertainties, and factors including those discussed under the heading of Risk Factors in our annual report on Form 10-K and other reports that we filed from time-to-time with the Securities and Exchange Commission could cause our actual results to differ materially and adversely from those projected in any forward-looking statements we make.

All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information or expectations, future or change in events, conditions or circumstances or otherwise.

Thank you. I would like to now turn or I would like to now introduce Mr. Joe McAdams, the Chief Executive Officer of Anworth. Please go ahead sir.

Joseph E. McAdams -- President, Chief Executive Officer and Chief Investment Officer

Thank you for joining our call today to discuss Anworth's first quarter 2019 results. With me today on the call are Bistra Pashamova, Senior Vice President and Portfolio Manager; Brett Roth, Senior Vice President and Portfolio Manager; and Chuck Siegel, Anworth's Chief Financial Officer.

Turning to the quarter's financial results. Anworth's earnings improved from the fourth quarter driven largely by higher yields on our agency MBS portfolio as we shifted the portfolio allocation to higher yielding 30-year fixed rate MBS from 15-year fixed. Although, part of this yield increase was offset by a less attractive repo financing of these agency assets as repo rates did not decline in line with LIBOR during the quarter.

Core earnings were $11.9 million or $0.12 per common share up from $0.11 in the fourth quarter of 2018. GAAP net income was a loss of $22 million or $0.23 per share for the quarter and comprehensive income which includes all realized and unrealized gains and losses in the market value of the entire portfolio and related liabilities was a gain of $20.5 million for the quarter.

Looking at the investment portfolio. Total agency assets were little changed at $4.5 billion at quarter end. Non-agency MBS fell slightly and we added approximately $100 million of residential mortgage loans that are being held for securitization and currently financed utilizing the warehouse line of credit.

With that I'll turn the call over to Bistra Pashamova to discuss the agency MBS portfolio in more detail.

Bistra Pashamova -- Senior Vice President and Portfolio Manager

Thank you, Joe. Looking at the composition of our agency MBS portfolio you'll notice we rotated our fixed rate MBS allocation from 15-year fixed rate securities to 30-year fixed rate. At quarter-end, 30-year fixed rate investments including TBA positions comprised 52% of our agency MBS portfolio. 15-year and 20-year fixed rate securities combined were 16% and adjustable rate MBS were 32%.

Following the significant widening of mortgage spreads in the fourth quarter, we viewed certain 30-year fixed rate sectors as providing more attractive risk adjusted returns than 15-year fixed rates. Our new investments included specified pools with characteristics that mitigate prepayment risk as well as TBAs. Payups for specified pools with prepayment protection characteristics especially loan balance appreciated significantly as the quarter progressed and the March rates rally led to further increase in investor demand.

Later in the quarter and so far in the second quarter we have continued to focus our new agency purchases on 30-year fixed rate securities, but with a preference for pools with more moderate prepayment protection and relatively low payups.

Turning to our adjustable rate MBS allocation, you'll see currently resetting ARMs constituted 20% of the agency portfolio and continued to increase the coupon with the average coupon up 25 basis points on the quarter to 4.34%. Combined with the high allocation to 30-year fixed rate MBS, this resulted in a 30 basis point increase in the average coupon of the total agency portfolio to 3.84%.

With regards to agency prepayments, the overall portfolio prepayment rate decreased slightly from 14% CPR in the fourth quarter to 13% CPR in the first quarter. Adjustable rate MBS prepayments similarly decreased from 21% CPR to 19% CPR. So far in the second quarter, agency MBS prepayments have remained subdued with 14% CPR for the overall portfolio and 21% CPR for the ARMs in April.

We do anticipate higher prepayments in the next several months as a result of increased refinancing activity following the mortgage rates low in March and seasonally higher housing turnover.

Joseph E. McAdams -- President, Chief Executive Officer and Chief Investment Officer

Thanks, Bistra. At this point, we'll turn the call over to Brett Roth to discuss our mortgage credit investments.

Brett I. Roth -- Senior Vice President and Portfolio Manager

Thanks, Joe. During the fourth quarter spreads on mortgage credit assets tightened in, not quite recapturing all the widening from the previous quarter, but retracing approximately two-thirds of that widening. As mentioned last quarter during the fourth quarter we took advantage of spread widening and added securitized credit assets to the portfolio at attractive yield.

That portfolio growth gave us the room to focus our acquisition appetite on non-QM loans for the portfolio, which allowed us to acquire approximately $118 million of these loans during the quarter. Thus during the quarter, we saw the securitized credit portfolio shrink due to runoff with the reinvestment dollars being committed to the growth of our loan portfolio. As we move forward in the second quarter, we continue to see spreads in the securitized mortgage credit sector tightened.

In the non-QM loan space the flow of product continues to grow and investor appetite remains strong. In terms of valuations during the first quarter, overall our portfolio benefited from this tightening of credit spreads and market movements. Thus far this quarter we are again seeing positive changes in the valuation of the portfolio.

Looking at our loans held in securitization trust, the credit performance of these assets continues to remain strong with defaults remaining at zero CDR. In regard to the non-QM loans we acquired during the quarter, we are focused on higher credit quality near-miss type non-QM loans.

Currently, our acquired assets have a weighted average FICO of 745 and LTV of 69% and DTI of 39%. Most of these assets use non-traditional forms of documentation. On the funding side, we continue to prudently manage our financing book and therefore our cost of funds. Over the quarter we were able to further improve on the spread we pay on our funds. Looking forward, we continue to feel that we are in a good position to take advantage of the investment opportunities as they arise in the current market. We are actively pursuing opportunities to add attractive assets to the credit portfolio across all sectors of the residential mortgage credit.

Our investment activities in the non-QM loans is continuing to expand, and we anticipate that we will continue growing our network of sources for these assets and we'll continue to increase our footprint in this sector of the market. Thank, Joe.

Joseph E. McAdams -- President, Chief Executive Officer and Chief Investment Officer

Great. Turning to our portfolio financing. You'll see that our total repo borrowing stood at $3.8 billion at March 31st. The average interest rate on those repos rose from 2.67% at year-end to 2.81% at March 31st. After taking into account, our interest rate hedges, this 14 basis point increase was reduced to a nine basis point increase in the average to 2.32% at quarter-end.

So, you can see that our interest rate swaps are not entirely effective in offsetting the effects of the Fed's raising interest rates during December, as our repo rates increased quarter-end over quarter-end relative to LIBOR, which is the rate we are paid on our interest rate swaps. The company's overall leverage multiple was 6.05 times at March 31st and when you include the synthetic financing embedded in our agency TBA transactions, our total effective leverage stood at 7.18%, sorry, 7.18 times.

Well, this is a small decrease from year-end levels, I would point out that there were approximately 340 million in payables for unsettled MBS and loan purchases at March 31st. So, on a pro forma basis, leverage would be little changed once those trades settle. Our swap position remained similarly positioned on the quarter with a notional value of $3.4 billion and with an average fixed rate of 2.13% and 3.9 years of average maturity.

Looking at our net interest rate spread across all investments, you'll see an increase in the average asset yield for the entire quarter of 10 basis points while the average expense -- interest expense net of hedges was unchanged on the quarter resulting in a 10 basis point increase in spread on the quarter. During the quarter, we declared a $0.13 dividend per common share based on the closing stock price at quarter-end.

This reflected an annualized dividend yield of 12.9%. Book value per common share increased by $0.05 on the quarter to $4.76. So, if you take into account the $0.13 dividend paid and the book value increased, the total economic return to common shareholders was 3.8% for the quarter.

At this point, I'd like to turn the call back over to Jake, our operator, and would welcome any questions you have at this time.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Doug Harter with Credit Suisse. Please go ahead.

Douglas Harter -- Credit Suisse -- Analyst

Thanks. Can you talk about where you think you are in terms of your agency portfolio rotation. Do you expect to move more into 30-years or do you like where your mix is today?

Joseph E. McAdams -- President, Chief Executive Officer and Chief Investment Officer

I don't think we expect to see as significant a shift in the future also as Bistra pointed out, we have seen some increase in the payups on some of the specified pools. So, I think, we may be a little slower in terms of adding additional 30-year positions unless we find pools with prepayment characteristics we like and what feel like attractive payups relative to TBA.

So, I think, where we stood at March 31st is pretty similar to where we are now. We may see some continued rotation. They may be more opportunistic. Also as we mentioned, we did have a fair number of trades that either settled during the quarter or yet to settle at quarter-end. So, I would expect to see from a yield standpoint or a coupon standpoint some continued sort of a positive impact from the effect of those trades and that shift being in place for a full quarter.

Douglas Harter -- Credit Suisse -- Analyst

Got it. And then also sticking with the yield, can you help us think through the impact of rising CPRs later in the quarter. What that might have on the asset yield in the second quarter?

Joseph E. McAdams -- President, Chief Executive Officer and Chief Investment Officer

Well, sure, if you think about where the total amount of non-amortized premium stood at approximately $100 million at March 31st, just sort of a rough ballpark, if you had a one CPR increase that's going to be 1% of that amount on an annualized basis. So, I think, if you had a three or four CPR increase that could have a drag of about $0.01 per share, but Bistra pointed out so far we have not seen an increase in prepayments yet this quarter.

Douglas Harter -- Credit Suisse -- Analyst

Great. Thank you very much.

Operator

(Operator Instructions) The next question comes from Mikhail Goberman with JMP Securities. Please go ahead.

Mikhail Goberman -- JMP Securities -- Analyst

Hi. Good morning. First question, what is sort of your appetite for perhaps taking leverage up a little bit higher, I noticed, it went down to about 7.2 including TBAs. Some of your peers are running around 9, I guess, the pure median. So, just your thoughts maybe on maybe taking that higher?

Joseph E. McAdams -- President, Chief Executive Officer and Chief Investment Officer

Well, thanks. This is Joe. I think, the first point, which I made, I think, I alluded to a bit in the prepared remarks was that our leverage, from the way, we see it was fairly consistent over the quarter we did because of the timing of how some of the trade settled as well as the addition of the non-QM residential mortgage loans.

We had a larger than average payable for securities and loan purchased at quarter end. So, obviously, there is going to be paydowns in the portfolio coming, but net of all that, I still, think pro forma where we're probably running closer to where the leverage was at year-end than the March 31st number.

In terms of your bigger question. I feel we're comfortable with our leverage where it is, that is the blended leverage between not only our agency portfolio, but also the non-agency residential credit investments as well as, as we move forward the leverage embedded in the warehouse line financing for the loans held for securitization.

So, I do think that while officially leverage may rise over the next quarter. It's still going to be sort of back in that range of where it was at December 31st.

Mikhail Goberman -- JMP Securities -- Analyst

Okay. Thanks for that and just a question on repo, obviously, this past quarter was a bit of a dislocation in terms of the repo costs going up, and I think you said it's about 2.81% as of March 31st. Can you perhaps give any color on what you're seeing where it is now?

Joseph E. McAdams -- President, Chief Executive Officer and Chief Investment Officer

Well, right, that was the -- so the trend of the quarter was that while three-month LIBOR came down over the quarter, which is what we receive on our swap payments. The actual repo cost didn't come down nearly as much over the quarter. And I think we are seeing a little bit of that continuation so far to-date while we have seen some decreases in the actual repo rates we're paying. We've continued to see sort of another five plus basis points or more of decrease in the LIBOR rates. So, the trend of sort of repo rates increasing relative to LIBOR even though they're coming down has continued not to the same magnitude as it did in the first quarter, but has continued so far during the first month of this quarter.

Mikhail Goberman -- JMP Securities -- Analyst

Got you. Thank you. And just one more question, I know, in your prepared remarks you mentioned your non-QM purchases during the first quarter. What is your appetite to get to buy some more in the second quarter and how much in principal would you need to complete a securitization perhaps.

Joseph E. McAdams -- President, Chief Executive Officer and Chief Investment Officer

Do you want to take that question?

Brett I. Roth -- Senior Vice President and Portfolio Manager

Sure. In terms of how much more of an appetite do we have during this quarter. We definitely do have an appetite. We are continuing to grow our footprint, if you will, in the non-QM space. In terms of what makes a securitization economically makes sense, I think, that number is somewhere around $250 million.

Just as we kind of think about the economics of what it cost to do the securitization. I think, $250 million, I should say, $250 million to $300 million. I think if we get much larger than that, that creates some other issues for us. So that seems to be the sweet part of what we're shooting for here.

Mikhail Goberman -- JMP Securities -- Analyst

Got you. It was maybe the coupon on the loans that you bought in the first quarter. Have you guys, I don't know, I didn't see that in the print anywhere.

Brett I. Roth -- Senior Vice President and Portfolio Manager

Sure. The net coupon on that portfolio now is 556.

Mikhail Goberman -- JMP Securities -- Analyst

556. All right. Thanks a lot. I appreciate it.

Joseph E. McAdams -- President, Chief Executive Officer and Chief Investment Officer

Thank you.

Operator

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Joe McAdams for any closing remarks.

Joseph E. McAdams -- President, Chief Executive Officer and Chief Investment Officer

So, thank you to everyone for your participation in today's call and for your continued interest in Anworth, and we look forward to talking to you again next quarter. Thanks.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 22 minutes

Call participants:

Joseph E. McAdams -- President, Chief Executive Officer and Chief Investment Officer

Bistra Pashamova -- Senior Vice President and Portfolio Manager

Brett I. Roth -- Senior Vice President and Portfolio Manager

Douglas Harter -- Credit Suisse -- Analyst

Mikhail Goberman -- JMP Securities -- Analyst

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