Apollo Residential Mortgage, Inc. Reports Third Quarter 2014 Financial Results

Apollo Residential Mortgage, Inc. (the “Company”) (NYSE:AMTG) today reported financial results for the quarter ended September 30, 2014.

Third Quarter 2014 Financial Highlights

• Net income allocable to common stock and participating securities of $7.4 million, or $0.23 per basic and diluted share of common stock comprised of:
  • Operating earnings(1) of $0.51 per share of common stock;
  • Realized net losses of $(0.12) per share of common stock; and
  • Unrealized net losses of $(0.16) per share of common stock
• Declared a $0.44 dividend per share of common stock for the quarter, a 5% increase over the prior quarter dividend per share of common stock and a 10% increase over the first quarter of 2014 dividend per share of common stock

Third Quarter 2014 Other Highlights

• Book value per share of common stock of $19.27 at September 30, 2014, as compared to book value per share of common stock of $19.49 at June 30, 2014
• $3.6 billion residential mortgage backed securities (“RMBS”) portfolio consisted of Agency RMBS with an estimated fair value of $2.1 billion and non-Agency RMBS with an estimated fair value of $1.5 billion
• RMBS, securitized mortgage loans and other credit investment portfolio had a 2.7% effective net interest rate spread and a 15.0% effective levered asset yield at September 30, 2014(1)
• Leverage multiple of 3.9x
• $23 million outstanding on warehouse facility receivable associated with our Seller Financing Program(2) to fund the acquisition and rehabilitation of 381 homes and earnest money deposits for 45 homes

(1) Reflects a “non-GAAP” financial measure (i.e., a measure that is not calculated in accordance with U.S. Generally Accepted Accounting Principles). See “Reconciliations of Non-GAAP Financial Measures” in this press release.

(2) The “Seller Financing Program” refers to the initiative whereby the Company provides funding through a warehouse line to a third-party to finance the acquisition and improvement of single-family homes. Once the homes are improved, they are marketed for sale, with the seller providing financing to the buyer in the form of a mortgage loan or a bond-for-title contract (“BFT Contract”). The mortgage loans and BFT contracts may be purchased by the Company or by an unrelated third party from the counterparty, at which time the associated balance on the warehouse line is repaid.

“AMTG continued to produce solid operating and financial results in the third quarter, which resulted in a 5% increase in the Company’s dividend per common share,” said Michael Commaroto, the Chief Executive Officer and President of the Company. “We continue to focus AMTG’s capital allocation towards non-Agency RMBS and other credit investments, which performed well during the recent volatility in the fixed income markets, and have opportunistically added new investments to our credit portfolio throughout the quarter.”

Portfolio Summary (Table 1)

The following table sets forth additional detail regarding the Company’s investment securities and securitized mortgage loans as of September 30, 2014:

(1) A portion of the purchase discount on non-Agency RMBS is not expected to be recognized as interest income, and is instead viewed as a credit discount. At September 30, 2014, the Company’s non-Agency RMBS had gross discounts of $309,197, which included credit discounts of $97,958 and other-than-temporary impairments (“OTTI”) of $15,278.

(2) Amortized cost is reduced by allowances for loan losses on the Company’s securitized mortgage loans and unrealized losses that are classified as OTTI on the Company’s investment securities. The Company recognized OTTI of $3,817 on RMBS and recognized a reversal of provision for loan losses of $1,241 on securitized mortgage loans for the three months ended September 30, 2014.

(3) The estimated weighted average yield at the date presented incorporates estimates for future prepayment assumptions and forward interest rate assumptions on all RMBS and loss assumptions on non-Agency RMBS.

(4) The Company’s Agency Inverse Floater bonds are comprised of securities that have a floating interest rate with coupons that reset periodically based on an index and which coupon varies inversely with changes in the index, which index is typically one-month London Interbank Offer Rate (“LIBOR”).

(5) Agency IOs and Agency Inverse IOs are interest only (“IO”) securities that have no principal balance and bear interest based on a notional balance. The notional balance is used solely to determine interest distributions on interest-only classes of securities. At September 30, 2014, the Company’s Agency IOs had a notional balance of $293,345 and the Company’s Agency Inverse IOs had a notional balance of $149,983.

As of September 30, 2014, the average cost basis of the Company’s Agency RMBS pass-through portfolio was 107.0% of par value and the average cost basis of the Company’s non-Agency RMBS portfolio was 81.5% of par value.

The Agency RMBS pass-through portfolio experienced prepayments at an average one month constant prepayment rate (“CPR”) for the quarter ended September 30, 2014 of 7.9%. Including Agency IOs, Agency Inverse IOs and Agency Inverse Floaters, the Agency RMBS portfolio experienced prepayments at an average one month CPR of 8.0% for the quarter ended September 30, 2014.

Other Investments (Table 2)

The following table sets forth the Company’s other investments at September 30, 2014:

(1) Reflects BFT Contracts on real estate at September 30, 2014, which had an aggregate principal balance of $2,817 with a weighted average interest rate of 9.6%.

Portfolio Financing

At September 30, 2014, the Company had master repurchase agreements with 25 counterparties and had outstanding repurchase borrowings with 18 counterparties totaling approximately $3.1 billion.

(Table 3)

The following table sets forth the Company’s borrowings at September 30, 2014:

(1) Includes $29,177 of repurchase borrowings collateralized by $48,036 of non-Agency RMBS that were eliminated from the Company’s consolidated balance sheet in consolidation with the variable interest entity associated with the Company’s securitization transaction.

(2) Securitized debt, which represents non-recourse senior securities sold to third parties in connection with a securitization transaction, has a final contractual maturity of May 2047. Weighted average remaining maturity represents the estimated final maturity of the security based on the final projected repayment of principal. The actual maturity of the securitized debt may differ significantly from this estimate given that actual interest collection, mortgage prepayments and/or losses on liquidation of mortgages may differ significantly from those expected.

(Table 4)

The Company's derivative instruments consisted of the following at September 30, 2014:

(Table 5)

The following table summarizes the average fixed-pay rate and average maturity for the Company’s Swaps at September 30, 2014:

(Table 6)

At September 30, 2014, the Company’s Swaptions had an aggregate notional amount of $1.1 billion. The following table presents information about the Company’s Swaptions at September 30, 2014:

Estimated Taxable Income

The Company’s taxable income may vary significantly on a quarterly basis. Estimated taxable income for the quarter ended September 30, 2014 was $0.35 per share of common stock, or $0.16 lower than the Company’s operating earnings per share of common stock. This difference primarily reflects estimated tax to GAAP timing differences associated with discount accretion on certain non-Agency RMBS. These fluctuations primarily are attributable to changes in cash flows on the Company’s locked-out non-Agency RMBS, which impacts the timing of market discount the Company recognizes for tax purposes on such securities. Certain locked-out bonds may move from being locked-out to current pay, and vice-versa, depending on the performance of the underlying collateral and the associated triggers specified in the securitization structure.

Book Value

The Company’s book value per share of common stock at September 30, 2014 was $19.27 as compared to book value per share of common stock of $19.49 at June 30, 2014.

Teleconference and Website Presentation Details:

The Company will be hosting a conference call to discuss its financial results on Tuesday, November 4, 2014 at 10:00 a.m. Eastern Time. Members of the public who are interested in participating in the Company’s third quarter 2014 earnings teleconference call should dial from the U.S., (877) 445-0818, or from outside the U.S., (724) 498-0351, shortly before 10:00 a.m. and reference the Apollo Residential Mortgage, Inc. Teleconference Call (number 15206169). Please note the teleconference call will be available for replay beginning at 1:00 p.m. on Tuesday, November 4, 2014, and ending at midnight on Tuesday, November 11, 2014. To access the replay, callers from the U.S. should dial (855) 859-2056 and callers from outside the U.S. should dial (404) 537-3406, and enter conference identification number 15206169.

Webcast:

The conference call will also be available on the Company's website at www.apolloresidentialmortgage.com. To listen to a live broadcast, please go to the site at least 15 minutes prior to the scheduled start time in order to register, download and install any necessary audio software. A replay of the call will also be available for 30 days on the Company's website.

Supplemental Information

The Company provides a supplemental information package to offer more transparency into its financial results and make its reporting more informative and easier to follow. The supplemental package is available in the investor relations section of the Company's website at www.apolloresidentialmortgage.com.

About Apollo Residential Mortgage, Inc.

Apollo Residential Mortgage, Inc. is a real estate investment trust that invests in and manages residential mortgage-backed securities and other residential mortgage assets throughout the United States. The Company is externally managed and advised by ARM Manager, LLC, a Delaware limited liability company and an indirect subsidiary of Apollo Global Management, LLC (NYSE:APO), a leading global alternative investment manager with approximately $164 billion of assets under management at September 30, 2014.

Additional information can be found on the Company's website at www.apolloresidentialmortgage.com.

Forward-Looking Statements

Certain statements contained in this press release constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the Company's control. These forward-looking statements include information about possible or assumed future results of the Company's business, financial condition, liquidity, results of operations, plans and objectives, including information about the ability of the Company to generate attractive returns while attempting to mitigate risk. When used in this release, the words believe, expect, anticipate, estimate, plan, continue, intend, should, may or similar expressions are intended to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: the return on equity; the yield on investments; the ability to borrow to finance assets; and risks associated with investing in real estate assets, including changes in business conditions and the general economy. For a further list and description of such risks and uncertainties, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 and other reports filed by the Company with the Securities and Exchange Commission. The forward-looking statements, and other risks, uncertainties and factors are based on the Company's beliefs, assumptions and expectations of its future performance, taking into account all information currently available to the Company. Forward-looking statements are not predictions of future events. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Reconciliations of Non-GAAP Financial Measures

Included in this press release are disclosures about the Company’s “operating earnings,” “operating earnings per share of common stock,” “effective levered asset yield” and “effective net interest rate spread” which measures constitute non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. The Company believes that the non-GAAP financial measures presented, when considered together with GAAP financial measures, provide information that is useful to investors in understanding the Company’s operating results. An analysis of any non-GAAP financial measures should be made in conjunction with results presented in accordance with GAAP.

Operating earnings and operating earnings per share of common stock presented exclude, as applicable: (i) certain realized and unrealized gains and losses recognized through earnings; (ii) non-cash equity compensation; (iii) one-time events pursuant to changes in GAAP; and (iv) certain other non-cash charges. Operating earnings is a non-GAAP financial measure that is used by the Manager to assess the Company’s business results.

While the Company has not elected hedge accounting under GAAP for its Swaps, such derivative instruments are viewed by the Company as an economic hedge against increases in future market interest rates. To present for investors how the Company views its Swaps, the Company provides the “effective cost of funds” which is comprised of GAAP interest expense plus the interest expense component for Swaps. The interest expense component of the Company’s Swaps reflects the net interest payments made or accrued on its Swaps. The Company believes that the presentation of effective cost of funds is useful for investors as it presents the Company’s borrowing costs as viewed by management.

The Company believes that the non-GAAP measures presented provide investors and other readers of this press release with meaningful information to assess the performance of the Company’s ongoing business and believes it is useful supplemental information for both management and investors in evaluating the Company’s financial results. The primary limitation associated with operating earnings as a measure of the Company’s financial performance over any period is that such measure excludes, except for the net interest component of Swaps, the effects of net realized and unrealized gains and losses from investments and realized and unrealized gains and losses from derivative instruments. In addition, the Company’s presentation of operating earnings may not be comparable to similarly-titled measures of other companies, who may use different definitions or calculations for such term. As a result, operating earnings should not be considered as a substitute for GAAP net income as a measure of the Company’s financial performance or the Company’s liquidity under GAAP.

A reconciliation of the GAAP items discussed above to their non-GAAP measures for the three and nine month periods ended September 30, 2014 and the three and nine month periods ended September 30, 2013, are presented in the tables below.

(Table 7)

The following table reconciles net income allocable to common stockholders with operating earnings for the three months ended September 30, 2014 and September 30, 2013, respectively:

(1) Reflects basic per share impact of each component presented.

(Table 8)

The following table reconciles net income allocable to common stockholders with operating earnings for the nine months ended September 30, 2014 and September 30, 2013, respectively:

(1) Reflects basic per share impact of each component presented.

(Table 9)

The following table details Effective Net Interest Spread and Effective Levered Asset Yield at September 30, 2014: