Apollo Residential Mortgage CEO Discusses Q2 2012 Results - Earnings Call Transcript

Apollo Residential Mortgage Inc (AMTG)

Q22012 Earnings Call

August 8, 2012 8:30 am ET

Executives

Michael Commaroto - Chief Executive Officer

Stuart Rothstein - Chief Financial Officer

Analysts

Douglas Harter - Credit Suisse

Rick Shane - JP Morgan

Trevor Cranston - JMP Securities

Presentation

Operator

I would like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Residential Mortgage Incorporated and any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release.

I would also like to call your attention to the cautionary safe harbor disclosure in our press release regarding forward looking statements. Today's conference call and webcast may include forward looking statements and projections and we ask that you refer to our most recent filing with the SEC for important factors that could cause actual results to differ materially from these statements and projections.

We do not undertake to update our forward looking statements or projections unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.apolloresidentialmortgage.com or call us at 212-822-0600.

At this time, I would like to turn the call over to Michael Commaroto, Chief Executive Officer of Apollo Residential Mortgage.

Michael Commaroto

Good morning and thank you for joining us on the Apollo Residential Mortgage Inc. second quarter 2012 earnings call. Joining me in New York this morning are Stuart Rothstein, our Chief Financial Officer, Keith Rosenbloom, our Agency Portfolio Manager and Teresa Covello, the Controller of our Management.

Before I turn the call over to Stuart to discuss the financial results, I would like to discuss our investment strategy in the second quarter as well as provide some color on opportunities we are seeing in the marketplace currently.

The company reported operating earnings of $14.1 million, or $0.66 per share for the second quarter ended June 30, 2012, driven by the performance of our well constructed $3 billion RMBS portfolio which generated a 2.7% blended net interest spread and 18.7% levered asset yield.

AMTG's asset selection and financing strategies were guided by macro trends witnessed in the markets throughout the second quarter. In April, when we completed an equity raise, the markets were relatively calm, we were able to redeploy the proceeds at net interest spreads substantially similar to our first quarter investment. Initially, we deployed equity with a heavier allocation towards Agency RMBS and opportunistically rotated our portfolio into Non-Agency RMBS as the quarter progressed.

Following our capital deployment, elevated volatility associated with the continuing soft index prices in Europe led to a flight to quality and strong demand for the U.S. treasury. Historically, Agency RMBS spreads have widened in this environment. However, a greater likelihood for another round of quantitative using and continued benign prepayments took valuations firm throughout the quarter. At the beginning of the quarter, the spread using a two-year and 10-year treasury notes was 180 basis points as compared to 134 basis points at the end of June.

Against this backdrop, we maintained a disciplined approach towards investing the Agency RMBS where we source potential agency investments, use a granular approach to identify loans with specific characteristics such as low loan balance or loans that have already been through the HARP program which we believe will serve to mitigate prepayments.

In general, we found that new production collateral with these features offers the best relative value within the sector with direct investment supporting. This is evidenced by the low fee payment rates we witnessed in our portfolio which exhibited one month CPRs of 3.7% on average over the quarter.

In addition, as market interest rates moved lower, we continued to execute our down investment strategy and sold approximately $612 million, primarily comprised of high coupon securities realizing net gains of $11.5 million or $0.55 per share. We then reinvested the proceeds into lower coupon Agency RMBS as well as Non-Agency RMBS.

Non-Agency prices rallied throughout the second quarter as well as investors seeking yields increased their capital allocations to the Non-Agency sector. We continued to utilize our proprietary investing models to identify attractive risk adjusted investments for our Non-Agency portfolio. During the three months ended June 30, 2012 the company purchased Non-Agency RMBS at a weighted average purchase price of 62.7% of par value.

While our focus primarily remains on sub-prime, we did ship the portion of our Non-Agency portfolio into Alt-A and pay-option adjustable mortgages where we found interesting opportunities. As a result, our advance rates from our repurchase facility providers improved slightly for our Non-Agency investments.

As of June 30, 2012, the equity allocation of our portfolio is comprised of 50% Agency, 23% Non-Agency and 19% cash. Based upon the current market climate, we expect to ship this allocation more towards on agencies to continue to see spread tightening in the Agency sector. Our hybrid restructure enables us to reallocate our equity in a manner that we believe will maximize returns to our stockholders and allow us to take advantage of opportunities across a broad spectrum of the residential mortgage market.

In addition to Agency and Non-Agency RMBS investment, we have begun to explore other residential mortgage investments in order to expand the scope of our portfolio. While we believe there are ample opportunities in our core investment, we believe it is important to explore ways to expand our platform utilizing investment experience of our management team and to broaden the asset class in which we are invested.

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