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Edited Transcript of ANH earnings conference call or presentation 6-May-19 5:00pm GMT

Q1 2019 Anworth Mortgage Asset Corp Earnings Call

Santa Monica May 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Anworth Mortgage Asset Corp earnings conference call or presentation Monday, May 6, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bistra Pashamova

Anworth Mortgage Asset Corporation - Senior VP & Portfolio Manager of Anworth Management, LLC

* Brett I. Roth

Anworth Mortgage Asset Corporation - Senior VP & Portfolio Manager of Anworth Management, LLC

* Joseph E. McAdams

Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC

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Conference Call Participants

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* Douglas Michael Harter

Crédit Suisse AG, Research Division - Director

* Mikhail Goberman

JMP Securities LLC, Research Division - VP & Research Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Anworth First Quarter Earnings Conference Call. (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 and 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 loans 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 file 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're 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 a change in events, conditions or circumstances or otherwise.

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.

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [2]

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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, a 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 and 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.

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Bistra Pashamova, Anworth Mortgage Asset Corporation - Senior VP & Portfolio Manager of Anworth Management, LLC [3]

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Thank you, Joe. Looking at the composition of our Agency MBS portfolio, you've noticed we rotated our fixed-rate MBS allocation from 15-year fixed-rate securities to 30-year fixed rates. 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 with 16% and adjustable rate MBS was 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.

Pay-ups for specified pools with prepayment projection 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 3-year fixed-rate securities, but with a preference for pause with more moderate prepayment protection and relatively low pay-ups.

Turning to our adjustable rate MBS allocation. You'll see currently resetting ARMS constituted 20% of the agency portfolio and continued to increase their coupon with the average coupon up 25 basis points on the quarter to 4.34%.

Combined with the higher 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.

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [4]

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

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Brett I. Roth, Anworth Mortgage Asset Corporation - Senior VP & Portfolio Manager of Anworth Management, LLC [5]

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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 2/3 of the 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 yields.

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 run-off 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 tightening. In the non-QM loans 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 $0 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, an LTV of 69% and DTI of 39%.

Most of these assets use nontraditional 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 non-QM mortgage 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.

Thanks, Joe.

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [6]

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Great. Turning to our portfolio financing. You'll see that our total repo borrowings stood at $3.8 billion at March 31. The average interest rate on those repos rose from 2.67% at year-end to 2.81% at March 31.

After taking into account our interest rate hedges, this 14 basis points increase was reduced to a 9 basis point increase in the average to 2.32% at quarter end. So you can see that our interest rate swaps were not entirely affective in offsetting the effects of the Feds raising interest rates during December as repo rates -- 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 6.05x at March 31 and when you include the synthetic financing embedded in our agency TBA transactions, our total effective leverage stood at 7.18% -- sorry, 7.18x. While 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 31, so on a pro forma basis, leverage would be a little changed once those trades settle.

Our swap position remained similarly positioned on the quarter with the 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 increase, 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Doug Harter with Crédit Suisse.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [2]

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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 you -- do you like where your mix is today?

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [3]

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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 pay-ups 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 at what feel like attractive pay-ups relative to TBA. So I think where we stood at March 31 is pretty similar to where we are now. We may see some continued rotation and may be more opportunistic. Also as we mentioned, we did have a fair number of trades that either settled during the quarter or had -- were 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.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [4]

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

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [5]

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Well, sure. If you think about where the total amount of unamortized premium stood at approximately $100 million on -- at March 31, just as sort of a rough ballpark, if you had a 1 CPR increase, that's going to be 1% of that amount on an annualized basis. So I think if you had a 3 or 4 CPR increase, that could have a drag of about $0.01 per share, but as Bistra pointed out, so far, we have not seen an increase in the prepayments yet this quarter.

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Operator [6]

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

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Mikhail Goberman, JMP Securities LLC, Research Division - VP & Research Analyst [7]

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First question, what is sort of your appetite for perhaps taking leverage up a little bit higher? I notice it went down to about 7.2 including TBA's. Some of your peers are running around 9, I guess, the peer median. So just your thoughts may be on -- may be taking that higher?

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [8]

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Well, thanks. This is Joe. I think the first point, which I might have -- 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 trades settled as well as the addition of the non-QM residential mortgage loans, we had larger-than-average payable for securities and loans purchased at quarter end. So obviously, there's going to be pay downs 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 31 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 31.

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Mikhail Goberman, JMP Securities LLC, Research Division - VP & Research Analyst [9]

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

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [10]

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So -- right. That was the trend of the quarter was that while 3-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 5-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 -- of this quarter.

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Mikhail Goberman, JMP Securities LLC, Research Division - VP & Research Analyst [11]

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Got you. Thank you. And just one more question on -- 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 principle would you need to complete a securitization, perhaps?

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [12]

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Do you want to take that, Brett?

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Brett I. Roth, Anworth Mortgage Asset Corporation - Senior VP & Portfolio Manager of Anworth Management, LLC [13]

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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 make sense, I think that number is somewhere around $250 million just in -- as we kind of think about the economics of what it costs to do the securitization. I think $250 million -- I should say $250 million to $300 million. I think if we get too much larger than that, that creates some other issues for us. So that seems to be the sweet spot of what we are shooting for here.

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Mikhail Goberman, JMP Securities LLC, Research Division - VP & Research Analyst [14]

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Got you. What is 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.

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Brett I. Roth, Anworth Mortgage Asset Corporation - Senior VP & Portfolio Manager of Anworth Management, LLC [15]

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The net coupon on that portfolio now is 5.56%.

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Mikhail Goberman, JMP Securities LLC, Research Division - VP & Research Analyst [16]

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5.56%. All right.

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Operator [17]

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(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.

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Joseph E. McAdams, Anworth Mortgage Asset Corporation - Chairman & CEO, President, CIO and Director of Anworth Management, LLC [18]

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Just -- 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.

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Operator [19]

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