AG Mortgage Investment Trust Inc (MITT) 2022 Q1 法說會逐字稿

Good morning, and welcome to the AG Mortgage Investment Trust First Quarter 2021 Earnings Conference Call. My name is Brandon, and I'll be your operator for today. (Operator Instructions) As a reminder, this conference is being recorded.

I will now turn the call over to Jenny Neslin. And Jenny, you may begin.

Thank you, Brandon. Good morning, everyone, and welcome to the first quarter 2022 earnings call for AG Mortgage Investment Trust. With me on the call today are David Roberts, our Chairman and CEO; and T.J. Durkin, our 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 on the link for the first quarter 2022 earnings presentation on the homepage and 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 David.

Thank you, Jenny, and good morning to everybody. In my fourth quarter comments, I said that we were proud to have achieved a smooth transition and become a pure-play residential credit REIT. In this first quarter of 2022, we had to contend with a near doubling of interest rates and considerable widening of credit spreads. We can and did hedge against the move in rates. But when spreads increase rapidly and we have a robust inventory of originated loans yet to be securitized, that will lead to mark-to-market losses.

That was largely the tail of the first quarter and the main reason we lost $0.74 per share of GAAP earnings. When spreads widened, we moved quickly to adjust our pricing on newly originated loans. Despite the rise in rates and spreads, we were able to continue originating new loans at a rapid pace. Much of that is due to the fact that we have continued to roll out new origination programs and channels. As well, we have seen some of our competitors retreat from the non-agency origination arena.

Finally, our mortgage affiliate, Arc Home has continued to build out its human capital, taking advantage of an improved environment for attracting talent.

Despite our first quarter loss, we maintained a dividend of $0.21 per share. Our dividend policy will continue to be guided by our view of earnings on a go-forward basis over a multi-quarter period. I should note that we do not believe that the first quarter movement in spreads will be repeated. In April, spreads relevant to our business ceased to widen, and we've begun to see some tightening.

During the quarter, we executed 3 securitizations and we continued our momentum issuing another deal in April. One of our primary objectives is to make the transition from origination to securitization as seamless as we can. While the industry is experiencing an overall decline in origination volumes, this factor serves to benefit us, freeing up more capacity in the securitization markets to execute with increased efficiency. This should improve the company's return on equities going forward.

All was not negative. We ended this quarter with ample liquidity to continue to propel our growth strategy at higher asset yields. We continue to be strong believers in our strategy as capable of delivering long-term earnings growth. And so we also believe we will be able to report better results as the year goes on.

I'll now turn the call over to T.J. Durkin, our President.

Thanks, David. Good morning, everyone. We continue to be an active participant in the market during the first quarter, acquiring and settling on over $900 million of Non-Agency and Agency eligible loans. We also reduced our Agency MBS exposure during the quarter through net sales of approximately $225 million. We continue to be disciplined about our warehouse risk and are very proud of the fact we executed 3 securitizations during a very challenging quarter. These transactions not only derisk our warehouse lines, but gave us additional liquidity to take advantage of the dislocation and opportunity set presented to us since the beginning of the year as some historical players had to step away from their acquisition programs.

Nick will cover Arc Home in more detail later in the call, but I'd briefly point out Arc's continued success in taking market share this past quarter as many non-QM originators were adversely affected by the interest rate move with many simply not hedging their pipelines at all.

Turning to Page 7. As our purchase activity accelerates, the velocity of our securitization activity needs to increase. This past quarter's record interest rate sell-off brought with it much sought after operational capacity, which will provide us with the necessary resources to increase both our velocity and purchases.

Much of this capacity comes from other segments of the mortgage market that are more sensitive to interest rates. We have already benefited from this as large players in the mortgage market are looking for opportunities away from conventional originations, and we believe this is just the beginning. We expect the investments we have made in our infrastructure over the past year to drive organic loan growth. As our securitization portfolio grows, our exposure to mark-to-market warehouse financing will continue to shrink relative to the portion that has been termed out via securitization. As you can see in the exhibit on this page, this trend has already started.

Lastly, I want to highlight our NIM yield and cost of fund metrics on our securitized loan portfolio. We normally don't spend much time on this quarter-to-quarter, but given the velocity of the interest rate movement this quarter, I think it's important to point out our cost of funds is going up in large part because we are increasing the company's aggregate securitization notional. Given the rate backdrop, our fixed rate cost of funds is higher today than it was 6 months ago, and it's reflected in the 2.6% cost of funds. Now our current yield of 4.2% notably doesn't capture the earnings profile going forward, given these yields are based on our historical cost basis and don't reflect today's fair values. So when we are acquiring new investments today at current fair values, assuming all other factors being equal, the credit quality level of financing, et cetera, we expect this to translate into higher asset yields and NIMs for our investments, which will help drive higher core earnings going forward.

I'll now turn the call over to Nick.

Thanks, T.J., and good morning, everyone. Turning to Page 8. As you can see here, we have ample liquidity to support loan growth, which we expect to be further supported by our financing strategy, including cash generated from securitization activity. Our captive originator continues to add relationships through its broker and correspondent channels, which will support this organic growth. Year-to-date, we have executed 4 securitizations and expect this pace to continue throughout the year. We are currently targeting post-securitization returns of 14% to 25%, which does not include any ancillary income from our originator. Although this is a wider range than our target ROEs from prior quarters, it takes into consideration the current market volatility, which has resulted in near decade-wide spreads in whole loans along with the corresponding term financing. .

Turning to Page 9. Looking at the chart on the bottom left, the portfolio mix has tracked our pure-play residential mortgage REIT strategy, which now has over 85% of our equity allocated to residential investments. The top chart outlines the current portfolio yields along with the corresponding cost of funds. Over the quarter, debt yields have moved dramatically as risk-free rates have increased over 125 basis points with credit spreads at the top of the capital stack widening approximately 60 to 70 basis points. Today, we see asset yields in the low to mid-5% with term financing in the mid- to high 4% area. Over the past few quarters, we negotiated higher advance rates and lower spreads in our warehouse lines. The earliest maturity in these facilities is in November. Although we intend to shorten our dwell time substantially, the lower cost of funds on our warehouse lines and higher debt yield will improve our returns during the gestation period.

Subsequent to quarter end, we settled on approximately $250 million of loans with a pipeline of over $500 million. We also successfully completed our second agency-eligible nonowner-occupied securitization in April with a balance of approximately $425 million.

Turning to Page 10. Here, we outlined the loan portfolio's characteristics as of quarter end. The portfolio continues to perform well, and we anticipate being able to maintain our tight credit profile on future purchases, which will include the aforementioned pipeline. The recent market volatility has created an opportunity for us to provide liquidity on asset profiles we like while creating brand awareness at a time that other originators and capital providers have pulled back. We've already seen a pickup in activity and interest in our product offerings as a result of Arc's commitment to its clients.

Turning to Page 11. As you can see in the bottom left chart, lock volumes increased in Q1 with much of this being on the back half of the quarter as competitors pulled back significantly. Arc is forecasting approximately $3.5 billion to $5 billion of non-agency originations for the year driven by our increased brand awareness, which helped attract new brokers and correspondence to our platform. MITT purchased approximately $400 million of loans this quarter from Arc, representing over 40% of our acquisitions.

Anthony will now go over financial results in more detail. Anthony?

Thank you, Nick, and good morning, everyone. Turning to Slide 12. We provide a reconciliation of our book value per common share. During the first quarter, book value declined by approximately 6.6% as a result of recognizing a GAAP net loss available to common shareholders of approximately $18 million or $0.74 per fully diluted share. Overall, the net loss was driven by realized and unrealized losses on our investment portfolio, resulting from the rising interest rate environment and credit spread widening across asset classes.

Aside from the price volatility on our investments, we recorded net interest income of $17 million during the first quarter, a 24% increase from the prior quarter, resulting from the continued growth in our residential loan portfolio. In connection with this growth and the current market volatility, we also increased our interest rate swap portfolio, resulting in higher hedge expense. Lastly, we recognized a higher level of transaction-related expenses during Q1 given our increased pace of securitizations previously discussed.

On Slide 13, we disclosed a reconciliation of GAAP net income to core earnings as well as provide a summary of the components making up core earnings. During the quarter, we recognized a loss in core earnings of $0.02 per share. Overall, net interest income exceeded our hedge and operating expenses by approximately $3 million. However, our investment in Arc Home contributed a $3.6 million loss to core earnings despite having a profitable quarter. This is because Arc Home's MSR mark-to-market gains, as well as gains on the sale of loans sold to MITT, are excluded from core earnings. As a reminder, although the gains on the sale of loans from Arc Home to MITT are excluded from core earnings, they are recognized as unrealized gains in our income statement contributing to GAAP earnings.

On Slide 14, we provide further details related to our investment in Arc Home. Currently, our investment approximates $54 million, which we value using a multiple of approximately 1x book. During the quarter, Arc Home generated after-tax net income of $7 million, driven by mark-to-market gains on its MSR portfolio due to the rising rate environment, offset by reduced volumes, lower gain on sale margins and income tax expense as our investment is held within a taxable REIT subsidiary. Mix portion of the earnings generated from Arc Home's operating business was approximately $3 million. And another point to highlight is Arc Home's MSR portfolio, which is $84 million in fair value as of March 31 and it remains virtually unlevered.

Turning to Slide 15. We provide an update on our financing profile as of March 31. After completing 3 securitizations during the quarter, securitized debt makes up 56% of our total financing, up from 35% at December 31. We expect this trend to continue increasing as we sponsored an additional deal in April and remain focused on our pace of securitization strategy. Lastly, we currently have $1.3 billion of additional borrowing capacity on our warehouse lines and ended the quarter with total liquidity of approximately $138 million, which was inclusive of $50 million in cash as well as $88 million of unlevered Agency RMBS, $38 million of which was sold and settled post quarter end. This capacity and liquidity level will support the continued growth in our investment portfolio throughout 2022.

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

(Operator Instructions) And from Credit Suisse, we have Doug Harter.

Nick, you mentioned the 14% to 25% expected ROE on securitizations. Can you just remind us what the prior range was and kind of where you see returns on the loans that's are on the warehouse lines?

Of course. So previously, we'd stated 14% to 18%, which probably tracks what guys have been quoting for a pretty long period of time. On the warehouse lines, we still see, call it, very low double-digit ROEs. We have had a decent amount of benefit from negotiating better terms on those. And as mentioned in the script, earliest maturing one is in November.

Got it. And that return for the securitization. Is that on newly purchased loans? I mean, I guess, how does this spread widening higher cost of funds impact the loans that -- as you transition them from the warehouse to securitization today?

Yes, of course. So that takes into consideration really -- so that is more forward-looking. So it's where we've been acquiring loans, call it, for the vast part of the first quarter and into the new quarter. Now obviously, looking backwards, the mark-to-market losses on the loans from the spread widening, that -- given those mark-to-market losses, the subsequent ROEs are still post securitization in that range.

Got it. That makes sense. And then just to make sure I understand Slide 13. So Arc Home made the $3.1 million for the quarter. Does that $3.1 million include the MSR gains? Or so if you stripped out the MSR gain, would that be kind of a small negative for the quarter?

That's correct, Doug. If you look at that slide, the $4.4 million that's being backed out is essentially the MSR mark during the quarter permit.

Got it. I guess how do you think about the profitability, both on kind of a true operating basis and then also kind of on a core basis as we kind of go through '22 and, obviously, the world has kind of changed for originators.

Yes. Doug, I mean, I think what we're trying to highlight on the earlier slide is we continue to transition the share of origination towards Non-Agency products. So obviously, Agency margins are challenging. They probably aren't going to get materially better anytime soon. And so as we invest in the pipeline, if you will, in getting more credit product and we hope that will be good for the operational efficiency. I think core earnings, we're trying to, I would say, walk through what's a bit convoluted from an accounting perspective and Anthony is trying to give you the reversals, if you will, of it. But we're trying to look at it as the holistic versus maybe the traditional like core definition of Arc Home's profitability vertically up into MITT. So that's why we're trying to give a little bit more detail on what we have to back out versus what's really happening on the ground.

From JonesTrading, we have Jason Stewart.

Just following on the Arc MSR. If I'm doing the math right, does that mean it was marked up at Arc about $10 million quarter-to-quarter?

Yes, Jason, at Arc was about $12 million quarter-to-quarter.

$12 million, okay. And can you give us the multiple on that?

Multiple's 4.9 as of March 31.

Okay. Great. And then I think someone else -- if you didn't give it and I missed it, I apologize. Do you have a book value quarter-to-date in 2Q?

Yes. Jason, just since we're early in our process for April, we don't have an exact number, but given the volatility and what's going on, we think we're marginally down quarter-to-date.

Okay. And then just pulling back up for a minute. I get the concept of trying to preserve liquidity. I guess 2 parts to that. One is when you think about that in the volatility of spreads, were there opportunities? Are there opportunities for you to be an opportunistic, I don't want to call it distressed, but buyer of assets in 1Q and 2Q based on that volatility? And then the second part is, have you adjusted sort of the way you think about liquidity and leverage going forward given that volatility?

Yes. So we did have opportunities to acquire assets that were attractive. I still believe that given sort of the sell-off that we've gravitated towards positioning ourselves to current coupon, our view is that in the debt markets, there's potentiality that orphaned coupons will just be less liquid. So we continue to look forward rather than backwards. So that's our general view there. And the nice thing is I think we probably said 3 times or more in our presentation, that as others pull back, that we've actually been able to drive volumes there at really what I consider near historic wides and spreads for, call it, the past decade.

I wanted to pivot from the origination side to the acquisition side. Is there an opportunity to acquire pools, securities at discounts that are sort of from distressed or nonliquid sellers?

I think there's more rumors of distress out there than there is actual distress. Now obviously, that can change. We have had success acquiring stuff through our bulk channel very recently and in the past. So the expectation that, that should continue, but quite honestly, probably at a slowed pace. I think sort of the event and widening has sort of already occurred and the people who were going to pull back already pulled back.

From KBW, we have Bose George.

This is actually Mike Smyth on for Bose. Just one on the securitization markets. Can you just provide some color on the volatility and how that's trended in April? I'm just wondering if most of the older inventory has cleared and then if you see any changes to loan prices to reflect that volatility.

Yes. So the loan prices, I think we -- earlier in the year, I think they were somewhat stubborn and then, call it the back half of January or February, things sort of gapped wider and that's when we really started seeing opportunity. So for a while, it didn't really necessarily track what was going on in the debt markets. Now if anything, it's sort of flipped to the other side. You can buy assets at attractive levels where you can sell debt. That being said, given the backdrop of volatility, that can change quickly.

We did see some relief very recently, call it the past 2, 3 weeks, in where we're selling the IG part of the stack off pretty substantially tighter than sort of what we saw the wides being, call it, anywhere from 30 to 50 basis points depending upon what part of the capital stack. So if anything, it feels like it was a little bit overdone. And if anything, that was tightening where we're issuing debt while sort of the markets -- broader markets around us actually were a little bit weaker. So I think that plays into things being a little -- maybe a little over done.

Great. Great. That's helpful color. And then just one more. Can you just -- is there anything strategic that you're considering just given the valuation of the shares? Just wondering if you can maybe talk through how you're thinking about bridging the gap between the share price and book value.

It's David Roberts. We do have a share repurchase program that is outstanding, and we're always looking at opportunities to drive earnings growth, and therefore, dividend growth. So it's definitely an arrow in our quiver in terms of improving shareholder value.

And we have no further questions at this time.

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. Have a great weekend.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.