AG Mortgage Investment Trust Inc (MITT) 2022 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the AG Mortgage Trust Third Quarter 2022 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I'd like to turn the call over to Jenny Neslin, General Counsel for the company. Please go ahead.

Thank you, Katie. Good morning, everyone, and welcome to the third quarter 2022 earnings call for AG Mortgage Investment Trust. With me on the call today are T.J. Durkin, our CEO and President; Nick Smith, our Chief Investment Officer; and Anthony Rossiello, our Chief Financial Officer.

Before we begin, please note that the information discussed in today's call may contain forward-looking statements. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in our SEC filings, including under the headings cautionary statement regarding forward-looking statements, risk factors and management's discussion and analysis. The company's actual results may differ materially from these statements. We encourage you to read the disclosure regarding forward-looking statements contained in our SEC filings, including our most recently filed Form 10-K for the year ended December 31, 2021, and our subsequent reports filed from time to time with the SEC. Except as required by law, we are not obligated and do not intend to update or to review or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

During the call today, we will refer to certain non-GAAP financial measures. Please refer to our SEC filings for reconciliations to the most comparable GAAP measures.

We will also reference the earnings presentation that was posted to our website this morning. To view the slide presentation, turn to our website, www.agmit.com and click the link for the third quarter 2022 earnings presentation on the home page in the Investor Presentation section.

Again, welcome to the call, and thank you for joining us today.

With that, I'd like to turn the call over to T.J.

Thank you, Jenny, and good morning, everyone. The markets in the third quarter continued to be centered around this year's themes of inflation, volatility and uncertainty about the future. Despite this, during the quarter, our adjusted book value per share declined 4.2% from $11.15 to $10.68, predominantly due to widening of credit spreads and securitization markets.

We recorded a GAAP loss of $0.33 per share and a loss of $0.03 of core earnings per share while maintaining our common dividend of $0.21 per share. Consistent with last quarter, we'd like to remind you that our GAAP loss was predominantly driven by unrealized mark-to-market losses. Based on our early preliminary read, book value is down approximately 5% to 6% for the month of October.

During the quarter, we continued executing the business strategy of acquiring high-quality, newly originated non-agency mortgage loans and securitizing them. We have been very disciplined and successful in terming out our warehouse financing into securitizations in very choppy markets, which we think is a testament to our strong relationships with debt buyers who look to our shelf versus others due to its strong performance history.

As a result, our economic leverage ratio decreased from 2.7 to 2.0x quarter-over-quarter with a continued decline in October to approximately 1.4x as a result of our October deal. In total, there has been $3.8 billion of unpaid principal balance securitized across the GCAT shelf in 2022, putting it as the fifth most active non-QM issuer based on the information made available to us.

This discipline puts MITT's liquidity on solid footing with approximately $80 million as of September 30, and approximately $104 million as of October 31. So unlike others in the space who may need to play defense, our strong liquidity position should allow us to play offense in volatile markets like this in a number of ways.

One, looking ahead with lower mortgage volumes expected, we do believe there is less competition in the non-agency space at both the aggregator level for MITT as well as at the origination level for Arc Home.

Two, we believe there will be opportunities to acquire high-quality performing loans at material discounts that were originated in 2021 or earlier this year and materially lower coupons as originators and aggregators could be forced to do something by the lenders.

And three, we will continue to use excess capital to buy back our common stock accretive to book value while being mindful of our share's trading liquidity. Since August, we have purchased 2.7 million and have $12.3 million of capacity left under the current program.

Before I pass it to Nick to go into further detail on the portfolio, I think it's important to be transparent that given the amount of changes that have occurred this year in terms of interest rates and credit spreads, we are seeing more compelling opportunities in the secondary markets from 4 sellers of recently issued non-agency securities.

We are committed to our origination to securitize strategy. However, as markets move and every day brings different opportunities, we believe we may be able to complement our strategy by acquiring the credit exposure we've been making through securitizations over the last few years in a more cost-effective manner by buying that risk in the secondary markets. We believe the credit underwriting and risk profile is very similar to what is in our current portfolio and believe we should be opportunistic to drive risk-adjusted returns into the portfolio, whether it be from our proprietary GCAT shelf or through other issuers.

And lastly, I want to say we very much share the frustration of our shareholders with our stock price. Each of us on the management team and Angelo Gordon, the manager, all have meaningful ownership in MITT. While we know we can't change the stock price overnight, we have full confidence in our strategy and our ability, with the resources and full support of Angelo Gordon, to capitalize on compelling opportunities to generate attractive risk-adjusted returns for our shareholders over the long term.

I'll now pass it over to Nick.

Thanks, T.J. As T.J. mentioned earlier and outlined on Page 6, during the third quarter and into the beginning of the fourth quarter, we reduced risk and raised liquidity through the programmatic issuance of securities in our well-established GCAT shelf. We issued 3 transactions totaling just under $1.3 billion. The first 2 transactions we marketed and priced in August when market conditions were more favorable. The third transaction we marketed and priced in early October.

In the relatively short period of time between these transactions, AAA spreads widened out nearly 100 basis points, while risk-free nominal yields increased over 100 basis points. We expect this sort of volatility to persist as the Fed continues to combat inflation. These securitizations were critical in rightsizing our aggregation risk, taking into account both the current market volatility and expected future volatility. Ultimately, this increased our liquidity relative to previous quarters while deleveraging the balance sheet.

Although this capital is generally defensive, we believe that there is a high likelihood that the market will present compelling investment opportunities in residential credit in the coming quarters. Aside from these opportunities, the current business is expected to generate the same or higher returns with less risk, which is good since each dollar of capital will be more efficient in what will also be a meaningfully smaller market.

Turning to Page 7. As you can see, our securitization issuance through October exceeded the pace of acquisitions in the third quarter. This graph on the right shows the significant growth of our securitized loan portfolio along with the corresponding decrease in warehouse exposure, which is now the lowest it's been in over a year.

The left of this slide also summarizes our expectations of forward-looking business. Despite meaningfully lower expected forward origination volumes, we expect to source new credits around an 8% yield with equity returns in the middle to high teens while on warehouse. Once securitized, we expect equity returns in excess of 20% on retained tranches while deploying 1 to 2 turns of leverage depending upon the collateral composition.

Turning to Page 8. On this page, we provide high-level summary statistics of our aggregate loan portfolio. When thinking ahead with a slower economy and weaker housing market, it's important to note that current LTV is 60%, and the 60-day delinquent loan population across the over 4 billion of loans is less than 100 basis points. The last takeaway from this page is how out of the money this portfolio is relative to forward-looking originations with 8% yields, which sets us up for the next slide.

Turning to Page 9. Although the mark-to-market losses have been significant, we would like to reiterate what we said in previous quarters. Most of the losses are unrealized. And although we expect market conditions will remain volatile, we are constructive on residential mortgage credit fundamentals even as a recession, combined with negative home prices, becomes a more likely scenario.

It is worth noting that the underlying mortgages backing the interest-only and excess spread certificates we own are substantially out of the money, providing significant cash flow stability while the slices of subordinate certificates we own are priced at significant discounts on a relatively thick part of the capital stack. We believe that the combination of these 2 profiles provide stable cash flows along with mark-to-market upside and limited exposure to recourse leverage.

Turning to Page 10. The top-right bar chart outlines our leverage ratio over the past year. Here, you can see new loans transitioning from warehouse lines to securitized debt, bringing down the recourse leverage to where it is today. Although we have not reached our lowest recourse leverage ratio, we have made substantial progress on the peak.

As you can see, our recourse leverage as of quarter end was approximately 2x, which, subsequent to quarter end, has been reduced further to 1.4x. Table on the bottom outlines the composition of our aggregate debt, including securitized debt, repo and retained securities and home loan warehouse. As of quarter end, recourse debt accounted for approximately 24% of the aggregate.

Turning to Page 11. In previous quarters, we made it a point to emphasize that we believed that Arc Home was more insulated than conventional and government originators because of its non-agency origination focus. Although we still believe this is generally true, the most recent move to multi-decade high mortgage rates has made it less insulated than expected. Arc Home's management team has taken significant measures to rightsize costs while maintaining prudent operating capacity to take advantage of recent market dislocations. We will continue closely monitor capacity while matching it with the most attractive market opportunities.

Despite this challenging backdrop, it is important to note Arc Home's strong capital position as outlined on this page. As of quarter end, Arc Home had $32 million of cash, and MSR is valued at $92 million, which are largely unlevered. We believe that Arc Home is well positioned relative to many of its competitors and expect challenging period to show its resiliency while gaining market share and ultimately returning to profitability.

I will now turn the call over to Anthony.

Thank you, Nick. Turning to Slide 12. We provide a reconciliation of our book value per common share. During the third quarter, book value declined by approximately 4% as a result of recording a GAAP net loss available to common shareholders of approximately $7.5 million or $0.33 per fully diluted share. The loss was driven by unrealized mark-to-market losses recorded across asset classes due to credit spread widening, partially offset by gains on our securitized debt and interest rate swap portfolio.

In addition, we also recorded $5.3 million of transaction-related expenses, which primarily relate to upfront costs associated with the 2 securitizations that closed during August and a partial accrual for expenses related to the October securitization. The decline in book value associated with our preferred and common dividends was slightly offset by accretion from our share repurchases. As you may recall, we fully utilized the remaining capacity on our previous repurchase program and authorized a new program in August with a capacity of 15 million.

During the quarter, we repurchased approximately 400,000 shares or 2% of our total outstanding at a weighted average price of $6.08 per share, representing a 43% discount to our September 30 adjusted book value. As previously noted, our remaining capacity under this program is 12.3 million.

On Slide 13, we disclosed a reconciliation of GAAP net income to core earnings as well as provide the components of core earnings. During the quarter, net interest income exceeded our hedge and operating expenses, generating earnings of $4.9 million or $0.22 per share.

We recorded net interest income of approximately $17 million, and our net interest margin at quarter end was 1%. This was offset by a $0.25 loss contributed to core earnings from our investment in Arc Home, bringing core to a $0.03 loss overall for the quarter.

Arc Home generated an after-tax loss to MITT of $1.3 million or $0.06 per share driven by reduced volumes and lower gain-on-sale margins. Losses from Arc's origination business were partially offset by mark-to-market gains on its MSR portfolio. However, these are excluded from core earnings.

Arc Home's gain on the sale of loans sold to MITT approximated $1.8 million or $0.08 per share this quarter, which you can also see are excluded from core earnings. As a reminder, these gains are recorded as unrealized gains contributing to GAAP earnings. As of September 30, the fair value of our investment in Arc Home approximated $46 million, which we valued using a multiple of 0.94 of book.

Lastly, we ended the quarter with total liquidity of approximately $80 million. And as of October 31, liquidity was approximately $104 million, which was inclusive of $102 million of cash and $2 million of unlevered agency RMBS.

This concludes our prepared remarks, and we would now like to open the call for questions.

(Operator Instructions) Our first question will come from Doug Harter with Credit Suisse.

I was hoping you could talk about kind of how you're viewing the dividend. Are you viewing that concept of sort of spread income less expenses as kind of a level to think about? Or how should we think about the sustainability of the dividend given where kind of earnings have been lately?

Yes, I think that's right, Doug. I think, Anthony just walked through a couple of noncore measures, which we factor into setting the dividend. And so I think that's a fair way to look at the available cash flow.

Okay. And then you talked about the attractiveness of opportunities today. I guess how much of kind of the available cash that you had as of the end of October that you gave would you be comfortable kind of leveraging and therefore, kind of how much more growth do you think you could have in the portfolio?

Yes. I mean, I don't know if we've given an exact number. I mean, I think we've really derisked the portfolio year-to-date in 2022. I do think it's going to continue to be choppy at least headed into year-end. And so I think we just wanted to be able to play from a position of strength kind of into year-end here across the opportunity set. I think we've been running the company with much lower economic rate than in previous cycles. And so I think we have kind of room to expand that being close to kind of an upper ceiling from where we are today.

Got it. I guess just to clarify, I mean, I guess do you view kind of available liquidity or recourse leverage as more of the gating factor for growth?

I would say we're probably more focused on liquidity. I think leverage is readily available to us.

(Operator Instructions) Our next question will come from Trevor Cranston with JMP Securities.

You mentioned that you're seeing more opportunities in the secondary market as a place to potentially add to the portfolio. Can you comment on kind of where you're seeing yields on bonds in the secondary market and sort of what's your approach to financing and your purchases there would be?

Yes. So I mean, I think just to be very clear, I mean, we're looking at effectively recently issued within the last, call it, 18 months, non-QM or other non-agency securities that I think are being sold in the market, basically the same underlying credit that we've been making through GCAT. I mean, we saw, I think, this week, just to give you context, probably an 8%, 8.5% yield on like single A securities at a material discount to par for a recently issued non-QM deal off of a different shelf that was just being sold in the secondary market.

So with a simple turn or 2 of leverage, I mean, you can definitely get into the mid- to high-teens ROEs. And it's a much simpler execution of putting that risk on versus buying loans, warehousing them, hedging them and then having to securitize them. Normally, we don't see this much opportunity in the secondary markets from newly created securities. But I think there's a lot of outflows from the money managers, and we are seeing opportunities that just seems like a better risk/reward when you kind of put all that together.

Okay. Got it. And then on Arc Home, you mentioned that there's been some focus on sort of managing expenses there. I guess with where rates are today and where gain on sale is at, do you guys foresee that Arc will be in a position where it can be profitable in this environment? Or how are you sort of thinking about where they shake out after the company's sort of scaled for the market as it is today?

Yes. Obviously, there's a lot of factors that go into that. We do expect gain-on-sale margins to increase. We'd like to think we're closer to the bottom than not. And then from sort of a consolidation standpoint, which T.J. had alluded to in the prepared remarks, we're already starting to see that maybe not as quickly as we had thought. So I think that sort of plays into the gain on sale ultimately as you see that consolidation. What inning we are, I'd like to think we're in later innings just because of how violent the sell-off has been versus previous ones. As you can see, other companies have rightsized staffing very aggressively. And so hopefully, that gets us closer to a return on healthy gain on sales. So our view is that it should normalize soon and return to profitability but obviously, something, like everyone else in this space, is monitoring very, very closely.

Our next question will come from Jason Stewart with JonesTrading.

Just wanted to hear your view on what you think of delinquency transition rates in non-QM right now maybe relative to GCAT versus the rest of the market.

Yes. So look, we're in -- we've yet to really see a meaningful impact or really any meaningful increase in delinquencies in our shelf. If anything, we can comp it versus other sectors. In general, the non-QM space, non-agency space increase in delinquencies has been benign universally. There may be other segments of the mortgage market that we don't think comp to the credits we've generated where you're starting to see upticks in delinquencies. So although we think our credits will outperform relative to peers in the non-QM, non-agency space, we haven't seen cracks really in anyone else's credit creation either. So for now, it's still very healthy.

Our next question will come from Eric Hagen with BTIG.

I have a couple of questions. In the investor property collateral, which was popular in sourcing last year, how are you feeling about the leverage of the borrowers and the stability of the LTV in that portfolio, maybe just the sensitivity to interest rates, in general? And because they're agency-eligible, does that mean the financing should be better for those loans if they need to be brought back on the balance sheet because of the delinquency?

Yes. So first, I think we got to distinguish between sort of the full stock underwrite agency-eligible cohorts that we've originated versus the non-agency component or non-QM component. Versus other peers, we've done a lot less. Probably, if the rest of the market, for the past year, call it, 45% to 55% DSCR, we're like 15. We haven't seen cracks there. And quite honestly, we're still constructive like many others on rent growth. As long as there's rent growth, we expect delinquencies to be all right, particularly in the full back stop where we have a strong belief that those properties are all rented and are not speculative credits.

Got it. How about the funding for those loans, if they need to be brought back on balance sheet, how do you guys feel about that?

I mean, the funding if they need to be brought back on balance sheet, the vast majority of the debt we have has been termed out. So there isn't a scenario where they have to be brought back on balance sheet.

Okay. Yes. And then the follow-up there is, how are you guys hedging your pipeline risk for non-QM? Forgive me if you guys discussed this. I had to hop on a little late. And how are you thinking about managing that with, I guess, the visibility for sourcing new products being somewhat challenging itself?

On the hedging side, we have internal models that are run like everyone else is that we monitor our hedge ratios. And we stayed close to home on what we think the duration impact. Now on the credit hedge standpoint, we don't actively hedge the credit spread component. That being said, versus where credit spreads are today, I would hope that we're closer to the wides there. And if anything, we see the credit spreads very, very attractive on a historical basis.

(Operator Instructions) It appears we have no further questions at this time. I'd like to now turn the program back over to our presenters for any additional or closing remarks.

Thank you, everyone, for joining us and for your questions. We appreciate it, and look forward to speaking with you again next quarter. Thank you.

Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.