AG Mortgage Investment Trust Inc (MITT) 2023 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the AG Mortgage Investment Trust First Quarter 2023 Earnings Conference Call. (Operator Instructions) Please be advised, today's conference call is being recorded. (Operator Instructions)

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

Thank you, and good morning, everyone, and welcome to the First Quarter 2023 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, 2022, 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 on the link for the first quarter 2023 earnings presentation on the home page in the Investor Presentations 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. Good morning, everyone. The first quarter of 2023 got off to a constructive start, continuing the signs of recovery in the markets that we saw developing beginning in December. This momentum continued through January and February, until the sentiment disappeared in mid-March as the regional bank crisis took over. This reintroduced interest rate volatility back into the market, sending the front end materially lower.

Despite this volatile end to the quarter, we grew book value by 4% per share to $11.85 and $11.48 on an unadjusted and adjusted basis, respectively, while maintaining ample liquidity of $88 million and only 1.4 turns of economic leverage.

We continue to use our excess liquidity to repurchase our common stock. And during the quarter, we repurchased 923,000 shares at a weighted average price of $5.68, creating 2% of accretion for shareholders.

During the quarter, MITT had $0.37 of earnings per share while generating $0.03 of EAD and paid its $0.18 dividend. It is notable that while MITT did experience mark-to-market losses on assets it owns coming into the year, these losses run through our income statement and the vast majority of them are unrealized, and we continue to have confidence in the earnings power of the portfolio, which Nick will walk you through in more detail later in the call.

We were also able to complete the securitization in early February when the capital markets were very healthy and continue to see better sourcing opportunities as some historical competitors appear to be pulling back after a rough 2022. Based on our early preliminary read, book value was up approximately 1% to 2% for the month of April.

Before I pass it to Nick, I'd like to recap the recent performance of the balance sheet. Going back into last year, we remain focused on minimizing our warehouse risk and stayed disciplined in terms of issuing securitizations throughout the year, which protected book value in what turned into an extremely volatile year.

As we enter the second quarter, we have a loan book, which is very clean without low coupons which continue to be orphaned and do not effectively execute into securitizations today. This active portfolio management has produced strong first quarter results and well positioned ourselves to continue and build upon this momentum throughout the year as our initial April estimates [pour].

I think it is also important for us to express our view that MITT is at an inflection point in terms of earnings power. First, regarding Arc Home, we see this happening primarily based on recent organizational changes at Arc Home, setting the stage for a near-term return to profitability, which Nick will walk through in more detail. Secondly, we see an environment with higher ROEs on assets. Based on both some competition retreating and opportunities that we believe are in the early innings of presenting themselves given the disruption amongst the regional bank balance sheets. So putting this all together, we believe MITT's results will produce both higher GAAP and EAD metrics per share looking forward, and we believe the market should recognize the hard work and solid results being delivered by the MITT team.

I'll now pass the call to Nick.

Thanks, T.J. As T.J. mentioned, we came to market with our first securitization of 2023 in February. Over the past few quarters, we have emphasized that going forward, we would rightsize MITT's aggregation risks taken into account both current market volatility along with expected future volatility. This proved to be prudent, having successfully taken advantage of better tone in the early part of the quarter before it became apparent that there were significant challenges ahead in the broader financial sector caused by the historic Fed tightening. Our leverage remains close to low said at the end of last year, and we have significant liquidity, putting us in a position to take advantage of the ongoing stress in the banking community.

Over the past decade, depositories have increasingly used their portfolios to subsidize residential mortgages as a key component of their broader client acquisition strategies. Although, this is unlikely to cease entirely since not all banks have the same amount of balance sheet stress, we expect it to represent the relaxing of what have on the surface looks like an ever more competitive arms race. This should present an opportunity to source high-quality assets with credit spreads and nominal yields at the highs of over a decade. We also believe that there could be opportunities to buy portfolios of loans from field banks or ones that need liquidity.

In addition to these opportunities, we are finding attractive investments in home equity mortgages, conventional investment in second home residential mortgages and both qualified and nonqualified residential mortgages.

Although origination volumes remain low, we have seen significant increases in volumes at Arc Home, our captive originator. Some of this increase can be attributed to seasonality. However, the key drivers were more likely lower mortgage rates from the end of last year, less competition from the originator community, buyers becoming more comfortable with home prices and the recent implementation of higher LLPAs at Fannie and Freddie.

As of quarter end, MITT's residential home loan pipeline is approximately $280 million.

Moving on to the portfolio. Our first GCAT securitization of 2023 included all of our out-of-the-money home loan positions, leaving our aggregation pipeline, including both closed and locked loans with a gross weighted average coupon of approximately 8%.

While in warehouse, we expect these positions to return low to mid-teens and expect ROEs in the low to mid-20s post securitization. As we've mentioned in previous quarters, much of the debt we've issued can be refinanced on or after the third anniversary of each transaction. Although we expect much of this to remain out of the money, providing us with valuable term funding, the recent rally and curve inversion makes it likely we will be able to economically refinance debt issued last year at the highs in both nominal yields and credit spreads.

These options, in effect, allow us to bring forward the monetization of deep discounts. Although the market currently does not give a lot of value to these options, we believe that as interest rate and spread volatility normalizes, this could lend itself to a substantial portfolio upside. MITT has a high-quality low mark-to-market loan-to-value portfolio of residential mortgage loans, providing significant and predictable cash flows with substantial mark-to-market upside, given historically-wide spreads and nominal yields along with deeply discounted subordinate positions. As we outlined in our presentation, the earnings power of our investment portfolio is strong, consisting of assets generating returns in the mid- to high teens.

Now for Arc Home. Although the results for this quarter were not materially better than the previous, we are heading into the next quarter with strong momentum, given a significant pickup in registrations and locks, realization of cost and productivity efficiencies along with new client acquisitions. Although we expect gain-on-sale margins to increase over the coming quarters as the impact of consolidation provides some relief, the management team is focused on factors in their control. Arc recently hired a new Chief Production Officer. Although early, his contributions so far have been impressive. We've also begun seeing significant improvements in productivity, along with reductions of fixed and variable costs as Arc Home's new Chief Operations Officer changes have been implemented. We expect this momentum to put us in a position to outperform some of our better known competitors in the coming quarters.

I will now turn the call over to Anthony.

Thank you, Nick. I'll provide a brief update on our financial highlights for the first quarter. The key themes of the quarter were continued book value recovery, accretive share repurchases and derisking our warehouse exposure, leaving MITT with the portfolio of current coupon loans. We ended Q1 with book value of $11.85 per share and adjusted book value of $11.48 per share.

Despite the volatility faced during the quarter, our book value per share increased 4%. And coupled with our dividend, we generated a quarterly economic return of 5.7%. Our increase in book value was primarily driven by net unrealized gains in our investment portfolio, coupled with accretive share repurchases.

During the quarter, we recognized GAAP net income available to common shareholders of approximately $8 million or $0.38 per fully diluted share. We experienced net gains on our securitized assets and loan portfolio driven by overall declines in benchmark rates and credit spreads. These gains outweighed unrealized losses recognized on our interest rate swap portfolio, dividends declared and transaction-related expenses recognized from our February securitization.

With regards to our share repurchase program, we remained active during the quarter, returning $5.2 million of capital to our shareholders. We repurchased 923,000 shares or 4% of our total outstanding shares at the start of the year, resulting in 2% of book value accretion as our purchase price was approximately 50% of our adjusted book value.

We continue to repurchase shares subsequent to quarter end, leaving us with approximately $1.7 million of repurchase capacity. In addition, our Board has authorized a new common stock repurchase program of $15 million available for use upon fully utilizing our remaining capacity under the existing program. We also grew our investment portfolio by 6% to $4.5 billion and continue to use our securitization platform to provide term non-mark-to-market financing. Currently, 85% of our financing is funded through securitization at a weighted average cost of 4.2%.

As a result, our economic leverage ratio at quarter end was 1.4 turns, of which 0.8 turns related to our credit portfolio and 0.6 turns to our Agency RMBS portfolio.

In addition, we ended the quarter with approximately $2 billion of borrowing capacities across 4 large banking institutions to support continued growth. We generated earnings available for distribution or EAD of $0.03 per share for the first quarter.

Net interest income, inclusive of interest earned on our hedge portfolio was $0.68 per share, which was consistent with prior quarter and exceeded our operating expenses and preferred dividends, generating earnings of $0.11 per share. This was offset by a loss of $0.08 contributed from Arc Home for the quarter driven by lower volumes. However, it is notable that Arc's contribution to EAD did improve by $0.05 quarter-over-quarter. Lastly, we ended the quarter with total liquidity of approximately $88 million of cash.

This concludes our prepared remarks, and we'd now like to open the call for questions. Operator?

(Operator Instructions) We will take our first question from Doug Harter with Credit Suisse.

Just touching on that last point about kind of the earnings ex Arc Home being $0.11. Can you help us kind of understand the path that, that could get to the $0.18 dividend or how you're thinking about the dividend in light of that earnings power?

Yes. Doug, I think as we -- I think Arc Home has been obviously detracting from the earnings. I think we're continuing to see momentum there, as Anthony just walked you through. So we're kind of walking it up back to, I'd say, breakeven. And I think in the not-too-distant future, we would expect that to swing back to profitability. I think the ROEs on the asset side are probably a bit more straightforward. I think we would probably tell you the very high teens and if anything, probably leaning towards maybe even higher on the opportunity side. So if we could balance -- if we could effectively swing the operating company of Arc into line, with, call it, the high teens to [20] ROEs, I think that's how you can kind of walk through to get to an $0.18 dividend.

And I guess, what is your and the Board's kind of appetite to support the current dividend kind of until that happens?

Well, I think we're cautiously optimistic that, that swing is coming over the next couple of quarters. We're not waiting years into the future.

Okay. And then just you talked about the pipeline that you have, I guess, how do you see your capacity to continue to add assets at these wider returns that you talked about?

Yes. So I mean I think we've -- I think our pipes can effectively turn assets over fairly quickly, right? I think what we've been able to do and I think show particularly during 2022 is we have access to the capital markets in good markets and even in bad. We are not looking to take a lot of warehouse risk. And so I think we're able to turn over new asset opportunities fairly quickly from kind of sourcing to settlement to effectively terming it out. And so could we be getting to 2 to 3 securitizations a quarter if that pipeline picks up? I think the team here can effectively handle that type of volume.

And you feel like you have the capital to do that as well?

Yes, because we be kind of returning it right back on a post settlement basis.

And we'll take our next question from Trevor Cranston with JMP Securities.

On the securitized loan portfolio, do you guys have an estimate as to how large the current mark-to-market discount is net of the debt relative to par? In other words, basically, I'm trying to figure out like how much book value accretion could there be if all the loans in the portfolio eventually were to pay off at par?

Yes, of course. So maybe stepping back a second. In the prepared remarks, we stated that a lot of the debt is highly valuable. So what we mean by that, we think a lot of that discount is unlikely to be realized to be a sort of the acceleration of our optional termination rights. So excluding sort of that discount, assuming that, that just plays out over time, given accretion and part of your yield and less -- having less option value, really focusing more on our 2022 issuance. The discount on our 2022 issuance is almost $55 million now with -- different transactions have different probabilities of the monetization of that discount. But for the portfolio that I think is truly in play, the number is close to the mid-50s.

Got it. Okay. That's helpful. And then you guys did -- it looks like you did buy a little bit of Agency MBS this quarter. Is that -- should we think about that as sort of a liquidity management portfolio? Or do you think returns in the Agency market are strong enough that you would like to have a little bit of capital deployed there sort of on a long-term basis?

Yes, it's probably more the former. I mean I think we were sitting on a decent amount of cash. We wanted to get it to work. And obviously, the basis is effectively at [histo work] wide. So we felt like it was a decent enough entry point where we weren't taking a ton of spread risk there, but it's not meant to be a core part of the portfolio.

And we will take our next question from Matthew Erdner with JonesTrading.

On for Jason this morning. Where do you guys see spreads going from this point given the amount of supply that could come online with these banks?

Well, I think there's a big unknown there. I think when you talk about the supply, I mean, over this past weekend, all that supply was absorbed by 1 large financial institution and that -- very little of that is likely to come out on the follow. So our view is that it's less likely to be a supply thing because even if these sort of positions are taken over by the FDIC, et cetera, they probably would take a long time to find their way to the market versus there are more liquid counterparts. We've seen that play out over a different -- going back to the financial crisis, et cetera. I think the more relevant opportunity. So I see that -- what you mentioned is more of a -- that's certainly a possibility, but we think lower probability.

What I think is more likely, as I alluded to in the prepared remarks, sort of the ending of this arms race, sort of the poster child of that is out of business, and there are a lot of others chasing. And to the extent that pricing normalizes, we just think that spreads -- risk-adjusted spreads will be a lot more attractive when guys aren't subsidizing client acquisitions with their portfolios. So that's what we think is a more likely scenario. But certainly, there's fail situations in the market today, which we're -- we wouldn't want to exclude the opportunity of buying loans from failed institutions, et cetera.

Right. And then you mentioned LLPAs. Can you expand a little more on that and what opportunities that could bring you guys?

Yes. It's interesting seeing people write in major publications about LLPAs. I thought only people like us knew about it. But credit spreads are at near historic wide and if even small portions of the agency eligible cohorts [BestX] into private label securitizations or just private markets. It doesn't take that much tightening of credit spreads to make even a higher percentage of agency eligible paper, BestX in the [PLS]. So the fact that we're able to buy it today, we see the opportunity, as said, is only growing over time, and we're excited about it.

We'll take our next question from Bose George with KBW.

This is actually Mike Smyth on for Bose. Just kind of give (inaudible) stock trade and book. Just wondering if there's any appetite for anything strategic, maybe whether it be a sale of Arc or equity injection from the manager for some more scale. Just kind of wondering how you're thinking about bridging the gap between the stock and book value?

We're obviously frustrated with the stock price. We're focused on investor outreach and trying to get the story out there. We think the results are strong. But I think the manager is supportive of growth in a variety of ways. So we're obviously in constant dialogue with them on what we see out there in terms of opportunity set.

(Operator Instructions) We'll take our next question from Sey Jacobs with Jacobs Asset Management.

I wonder if you could talk philosophically and then hopefully even mathematically, the choice to buy back common shares at a discount and not also buy or instead buy preferred shares at a discount, which would also create book value and reduced cash flow obligation produce earnings. I suppose to in light of the fact that you are relative to other REITs, you're kind of well top-heavy in the preferred obligation versus common outstanding? And when in different or better times when the stock was trading closer to book value during -- you're raising capital and part of the logic back then given was to sort of rightsize the relationship between equity and preferred outstanding. So just wondering why -- although I applaud it absolutely, why [that common] but not preferred.

Sey, so I think if you go back historically, I think we've had good dialogue with preferred holders in terms of doing some exchanges for common a few years ago. So I think we're obviously aware of the capital structure, we look at it. From a logistics perspective, it's a bit more of a liquid transaction executing the common market than the preferred, but we're certainly open to conversations with all shareholders of both common and preferred to the extent that there's a conversation worth having.

So you would turn around and issue common shares at these price if you retire preferred shares into the (inaudible)

No, I thought you were talking about more effectively offers of preferred. Like I said it's much easier to execute a (inaudible) program on common than it is in the preferred space.

(Operator Instructions) We will go next to Eric Hagen with BTIG.

Hoping you can talk about a couple of things. One, just financing conditions for warehouse lines of credit leading up to securitization, and how much appetite you have to explore new financing arrangements there? And then the amount of liquidity that you have and kind of the space that you have to take your leverage higher at this point?

Eric, it's Nick. So on the financing conditions, we largely -- and by largely, we primarily borrow from sort of G-SIBs. We don't see a tremendous amount of pressure there. Maybe the cost goes up 5, 10, 15 basis points as we renew, although most of our renewals are pretty far out in the future at this point. So if anything, we have excess capacity, and we don't see a lot of pressure there. Obviously, away from sort of the warehouse lines relying on securitization, given sort of the interest rate and credit spread volatility. It's good to be nimble. We talked about being -- running aggregation risk at the right levels relative to the company's size. So -- and being ready to sort of issue when it makes sense. That market is well, well, well off of wide, if anything, if you like look at the past 12 months, we're much closer to the tights than the wides. obviously, it's been very volatile. And I think a lot of that is just the supply story today. There's just going to be far, far less supply in this space. And given that backdrop, I think scarcity starts becoming a bigger question, and most of this is on the front end of the curve, and there's a lot of demand there.

As far as capacity to build the portfolio, certainly, I think we have a lot of room to add leverage. I think, obviously, similar to our comments on are being prudent around sort of the gestation financing warehousing, et cetera. We sort of look at market conditions as we think about adding leverage to build capacity.

And it does appear that we have no further questions at this time. And I'll turn the call back to the speakers for closing remarks.

Thank you very much to everyone for joining us and for your questions. We appreciate it and look forward to speaking with you again next quarter. Have a good weekend.

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.