TPG Mortgage Investment Trust, Inc.

Good day and thank you for standing by. Welcome to the AG Mortgage Investment Trust's first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After management's remarks, there will be a question and answer session. In order to ask a question during the session, please press the star key followed by the number one on your telephone. Please be advised today's conference call is being recorded. If you require any further assistance, please press star, then zero. I'd now like to turn the call over to Ginny Nesslin, 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 reconciliation 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 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 tj 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, MID had $0.37 of earnings per share, while generating $0.03 of EAD and paid its $0.18 dividend. is notable that while MIT did experience market 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, bulk 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 remained 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 support. I think it is also important for us to express our view that MIT is at an inflection point in terms of earnings power. First, regarding ARCOME, we see this happening primarily based on recent organizational changes at ARCOME, 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 MIT'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 MIT 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 right-size amidst aviation risks, taking into account both current market volatility along with expected future volatility. This proved to be prudent, having successfully taken advantage of the 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 the lows set 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 had on the surface looked 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 or loans from failed banks or ones that need liquidity. In addition to these opportunities, we are finding attractive investments in home equity mortgages, conventional investment and second home residential mortgages, and both qualified and non-qualified 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, MIT's residential whole 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 whole loan positions, leaving our aggregation pipeline, including both closed and locked loans, with a gross weighted average coupon of approximately 8%. While on 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 substantial portfolio upside. MIT 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 widespread 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 our column. 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 costs and productivity efficiencies, along with new client acquisitions. Although we expect gain-on-sale margins to increase over the coming quarters as the impacts of consolidation provide 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 in fixed and variable costs as ARC Holmes' 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 de-risking our warehouse exposure, leaving MIT with a 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 purchases. During the quarter, we recognized gap 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 purchase program, we remain 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 weight 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 four 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.