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Edited Transcript of ANH earnings conference call or presentation 5-Nov-18 6:00pm GMT

Q3 2018 Anworth Mortgage Asset Corp Earnings Call

Santa Monica Dec 13, 2018 (Thomson StreetEvents) -- Edited Transcript of Anworth Mortgage Asset Corp earnings conference call or presentation Monday, November 5, 2018 at 6:00:00pm GMT

TEXT version of Transcript


Corporate Participants


* Brett I. Roth

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

* Joseph E. McAdams

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


Conference Call Participants


* Douglas Michael Harter

Crédit Suisse AG, Research Division - Director




Operator [1]


Good day, and welcome to the Anworth Third Quarter Earnings Conference Call. (Operator Instructions) Please note that today's event is being recorded.

Before we begin the call, I'll 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 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, uncertainty and other unpredictable factors, which -- 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 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 are made. New risk and uncertainties arise over time, and it's not possible to predict those events or how they may affect us. Except as required by law, we don't 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 now like to introduce you to Mr. Joe McAdams, President and Chief Executive Officer of Anworth. Please go ahead, sir.


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


Thank you for joining our call today to discuss Anworth's third quarter results. Also with me here today are Brett Roth, Senior Vice President and Portfolio Manager; as well as Chuck Siegel, Anworth's CFO.

Turning straight to the quarter's financial results, Anworth's core earnings were $11.6 million or $0.12 per common share, a decline from $0.13 in the second quarter. This decline was driven predominantly by increasing financing cost of our repo borrowings that were not effectively offset by our interest rate swap hedges during the quarter.

GAAP net income to common shareholders was $15 million for the quarter or $0.15 per share. Comprehensive income, which also includes all realized and unrealized gains and losses in the market value of the entire portfolio and related liabilities, was a loss of $4.3 million or $0.04 per share.

With interest rates rising approximately 20 basis points during the quarter and some sectors of our agency MBS portfolio underperforming their hedges, the net value of our investment portfolio decreased and offset the income earned during the quarter, resulting in the comprehensive loss as reported.

Looking to the portfolio and the asset side of the balance sheet, Anworth's investment portfolio consists at quarter end of 77% agency mortgage-backed securities, including our TBA positions, 13% nonagency mortgage-backed securities, 10% residential mortgage loans and a contingent small allocation to residential real estate.

The mix between interest rate-sensitive agency MBS and credit-sensitive residential mortgage investments remained similar from the prior quarter.

Looking with a little more detail at our agency MBS portfolio, we have 37% of our agency allocation in adjustable-rate mortgage-backed securities with 21% of the total portfolio in ARMs that have less than 1 year to interest rate reset.

39% was invested in 15-year fixed-rate mortgage-backed securities. During the quarter, the majority of our new agency MBS investments were 30-year mortgage-backed securities, and you can see the allocation increase from 19% to 24% in the 20- and 30-year fixed-rate bucket.

The currently resetting ARMs continue to increase the average coupon of our ARM holdings. It went from 3.71% at June 30, up to 3.88% at the end of the third quarter.

Overall, the average agency MBS coupon rose to 3.39% from 3.26%. The average cost of our agency MBS declined to 102.44%, resulting in a $104 million of unamortized purchase premium on our agency MBS.

With regards to the agency prepayments, the overall prepayment rate was unchanged at a 16% CPR with higher mortgage rates in general combined with slower seasonal prepayments expected in the fall and winter months, we would expect to see reduced prepayment activity going forward over the next several quarters.

Our ARM portfolio has been prepaying at a significantly faster rate than the fixed-rate bonds due to the interest rates paid by the borrowers resetting higher. Our ARMs had a 23% CPR rate during the quarter.

Subsequent to quarter end, the October prepayment report showed a decline in ARM prepays to 20% CPR and an overall portfolio average CPR declining to 13%.

With that, I'd like to turn the call over to Brett to discuss our nonagency MBS and residential mortgage credit investments.


Brett I. Roth, Anworth Mortgage Asset Corporation - Senior VP & Portfolio Manager of Anworth Management, LLC [3]


Thanks, Joe. During the third quarter, there was some volatility in mortgage credit spread. The action on spreads was a bit of a roller coaster ride with spreads tightening a bit at the beginning of the quarter then widening out and then tightening back in again.

By the end of the quarter, spreads were basically back to where they were at the beginning of the quarter.

In general, investors' appetite for mortgage credit assets has remained strong. As we moved into September, the volume of new securitizations brought to the market began to increase. Assets were quickly snapped up by investors. And as we continued into October, the number of new deals being brought to market continued to increase. Ultimately, this did lead us to see a bit of a widening in the spread at which deals were clearing.

In terms of valuations, as mentioned previously, we saw volatility in credit spreads, which offset the volatility we saw on rates.

Ultimately, the credit spread movement moved to offset some of the negative impact of the increase in rates on the value of the nonagency portfolio.

During the quarter, we maintained our disciplined approach to valuing assets, and we were able to continue to selectively add assets at attractive yields to the portfolio. Our overall investment activity exceeded portfolio runoff.

Most of our acquisitions were in the agency risk transfer and nonperforming sectors of the portfolio, with a very limited amount of acquisition in the legacy CUSIP Alt-A sector of the portfolio.

And looking at the portfolio make-up from quarter-to-quarter, you'll notice that other than in the risk transfer sector, runoff and/or call actions outpaced reinvestment activity.

We will continue to opportunistically rotate our reinvestment into those sectors of the market that provide us with attractive returns.

The legacy portfolio continues to benefit from the credit performance of its underlying assets. In general, during the quarter, CDRs continued their downward trend. At the same time, the voluntary prepayments of this part of our portfolio did experience an increase in prepayments fees.

The agency risk transfer assets in our portfolio continued to experience negligible, if any, credit issues. However, they did realize a slight slowing of voluntary prepayment speeds.

Turning to our loans held in securitization trust. The credit performance on these assets continues to remain strong with defaults continuing to run at a 0 CDR. These assets have benefited from high -- I'm sorry, positive HPI and the overall positive economic environment we have experienced over the last few years. The result of this is that we continue to see that these mortgages have opportunities -- mortgagees have opportunities to refinance their current mortgage, and in spite of higher rates, are continuing to do so at elevated voluntary rates that are still in line with our original expectations.

Turning to funding, we continue to add new counterparties to our mix of lenders and to prudently manage our financing book and therefore our cost of funds. This activity has allowed us to help offset some of the cost of the rise in interest rates.

Looking forward, we continue to feel that we are in a good position to take advantage of 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 residential mortgage credit.

As we noted in our news release, subsequent to the close of the third quarter, we purchased a small pool of non-QM residential mortgage loans. We see this as an area of opportunity within the mortgage credit sector. We continue to actively bid on these types of loans for the portfolio and are building our network of sources for these assets as we continue to grow our footprint in this sector of the market.

Thanks, Joe.


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


Thanks, Brett. Turning to look at our overall portfolio financing, you'll see that total repo borrowing at September 30 stood at $4.0 billion. The average interest rate paid on our repos rose from 2.24% to 2.38% at quarter end.

However, you'll also notice that our average interest rate after adjusting for swap hedges also increased by a similar amount.

With our interest rate swaps, we pay a fixed interest rate and receive LIBOR floating each quarter. During the third quarter, 3-month LIBOR was virtually unchanged for most of the quarter, only rising by 6 basis points in the last few days of the quarter.

As a result, the swaps were not terribly effective in offsetting those increases in repo rates.

While we would expect some variability between our repo costs and LIBOR, the bases between those 2 rates has been particularly volatile during 2018. As a positive for the portfolio going forward, 3-month LIBOR has already risen by approximately 20 basis points during the third quarter to date and the spread between LIBOR and other benchmark short-term rates has been moving more favorably for our interest rate swap positions.

The overall leverage multiple was 6.09x. If you include the synthetic financing that is implied in the agency TBA transactions, our total effective leverage stood at 7.24x at quarter end.

Both of these measures were up between 0.1 and 0.2 of a turn of leverage on the quarter due to the reduction in the mark-to-market value of our portfolio.

Our swap position increased to $3.3 billion, a face value with an average fixed rate that we pay of 2.04% and 3.9 years on average until the maturity of the swaps. These swaps hedged 83% of our total repo borrowings, and when you combine that with our currently adjusting agency ARM positions, over 100% of our total short-term repo borrowings are either hedged with swaps or collateralized by adjustable-rate assets.

During the quarter, we declared a $0.14 dividend per common share. Based on the closing stock price at quarter end, this reflected an annualized dividend yield of 12.1%. Book value per common share declined $0.21 on the quarter or 3.9%, ending at $5.12. Taking into account the dividend paid of $0.15 and the book value decline, the total economic return to common shareholders was minus 1.3% for the quarter.

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


Questions and Answers


Operator [1]


(Operator Instructions) And looks like today's first question will be from Mr. Douglas Harter with Crédit Suisse.


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


Joe, given the spread weakness in agency, we've seen -- we saw in October, can you just talk about kind of how you see yourself positioned? And kind of how comfortable you are with current leverage?


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


Sure. So spreads have -- interest rates have moved up by about 15 basis points on the quarter and -- but spreads on agency MBS are wider. They've underperformed by roughly 0.375 point in price relative to underlying hedges. So on the positive side, that means that marginal new investments, we see a sort of a gross ROE in the 11% sort of area, given our current leverage targets and our -- the sorts of assets we're acquiring.

On the flip side, as you mentioned, we do see leverage creeping up a little bit. It is 0.1 to 0.15 higher than it was at quarter end as a result of declining mark-to-market. We are -- have been so far not been making significant reinvestments of the paydown so far this quarter. I think a 7x total economic leverage target is still what we're pointing at. So I don't expect to see a significant shift in our leverage target.

And likewise, even though there are attractive gross ROEs available from new investments, I do think, we'd maybe have a little less capital to deploy as we let the leverage sort of slide back down towards our target level.


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


Got it. And then on the non-QM loans you bought, can you talk about the financing that's kind of available, kind of given that you're still sort of below the size that would kind of be economic to do a securitization?


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


Sure. So we're actually engaged with several counterparties in terms of setting up some warehouse facilities. This -- we've been looking at this actually for some time in this environment. As we're seeing on the repo side, we're seeing spreads on this come in, and we're -- there's -- and the haircuts are also decreasing on these assets. So I think there's plenty of opportunity in the interim for us to effectively finance these on the balance sheet at attractive levels.


Operator [6]


(Operator Instructions) At this time, I'm not showing any more current questions. So I'd like to turn the conference back over to Mr. McAdams for any closing remarks.


Joseph E. McAdams, Anworth Mortgage Asset Corporation - CEO, President, CIO & Director of Anworth Management, LLC [7]


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


Operator [8]


The conference has now concluded. We want to thank you for attending today's presentation. And at this time, you may now disconnect.