AG 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.

Certainly, at this time, if you would like to ask a question, please press star 1 on your touchtone phone. You may withdraw your question at any time by pressing star 2. Once again, to ask a question, that is star and 1. And we will take our first question from Doug Harder with Credit Suisse. Please go ahead.

Good morning. Just touching on that last point about, you know, kind of the earnings X ARC home being 11 cents. Can you help us, you know, kind of understand, you know, the path that that could get to the 18 cent dividend, you know, or how you're thinking about the dividend in light of that earnings hour?

Yeah. Hey, Doug. I think as we, you know, I think our 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, break even. And I think, you know, 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. You know, I think we would probably tell you in the very high teens and early if anything probably leaning towards maybe even higher um on the opportunity set so if we could balance you know if we could effectively swing the operating company of arc into into line with you know called the high teens to 20 roes i think that's how you can kind of walk through to get to an 18 cent dividend and i guess what is your and the board's you know kind of appetite to support the current dividend you know kind of until

you know, until that happens?

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

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

I think our pipes can effectively turn assets over fairly quickly. 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 turning it out. And so could we be getting to two to three 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? Yeah, because we'll be kind of returning it, right, back on a, you know, post-settlement basis. Got it. All right.

Thank you.

And we'll take our next question from Trevor Cranston with J&P Securities. Please go ahead.

Okay. Thanks. 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 how much book value accretion could there be if all the loans in the portfolio eventually were to pay off at PAR. Thanks.

Of course. So maybe stepping back a second, in the prepared remarks, we state 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 via 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 of part of your yield and having less option value, Really focusing more on our 2022 issuance, the discount on our 2022 issuance is almost $55 million. Now, you know, with different transactions have different probabilities of the monetization of that discount. But, you know, for the portfolio that I think is truly in play, the number's 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 on BS this quarter. 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, you know, have a little bit of capital deployed there sort of on a long-term basis?

Yeah, 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, you know, historic wide so we felt like it was 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 you know a cooler part of the portfolio got it okay appreciate the comment thank you and we will take our next question from matthew erdner with jones trading please go ahead Hey, guys. Thanks for taking the question 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 one large financial institution, and very little of that is likely to come out in the follow. So our view is that it's less likely to be a supply thing because, you know, even if these sort of positions are taken over by, you know, the FDIC, et cetera, that probably would take a long time to find their way to the market versus their more liquid counterparts. You know, we've seen that play out over different, you know, going back to the financial crisis, et cetera. I think the more important um relevant opportunity you know so i see that what you mentioned is more of a you know that could that's certainly a possibility but we think lower probability uh what i think is more likely is i alluded to the prepared remarks sort of the ending of this arms race um you know sort of the poster child of that is out of business and you know there are a lot of others chasing and to the extent that you know pricing normalizes we we just think that um spreads risk adjusted spreads will be a lot more attractive when guys aren't subsidizing uh client acquisitions with their portfolios so that that's what we think is a more likely scenario um but you know certainly there's you know tail situations in the market today which were you know we wouldn't want to exclude the opportunity of buying uh loans from failed institutions etc Right. And then you mentioned LLPAs. Can you expand a little more on that and what opportunities that could bring you guys? Yeah, it's interesting seeing people write in major publications about LLPAs. I thought only people like us knew about it. But, you know, credit spreads are at near, you know, historic wide than if even small portions of the agency eligible cohorts best decks into private label securitizations or just, you know, private markets. It doesn't take that much tightening of credit spreads to make even a higher percentage of, you know, agency-eligible paper best decks into PLS. So the fact that we're able to buy it today, we see the opportunity set is only growing over time, and we're excited about it.

Awesome.

Thank you, guys.

All right. We'll take our next question from Ghost George with KBW. Please go ahead.

Hey, guys. This is actually Mike Smith on for Bose. Kind of given where the stock trades on book, just wondering if there's any appetite for anything strategic, maybe whether it be a sale of ARK 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 you know, 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, you know, we're obviously in constant dialogue with them on what we see out there in terms of opportunity set. Great.

Thanks for taking the questions.

Once again, that's star one for your questions. We'll take our next question from Cy Jacobs with Jacob Asset Management. Please go ahead.

Hi, guys. Thanks for taking the question. I wonder if you could talk philosophically and then hopefully even mathematically on 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, reduce cash flow obligation, produce earnings, especially in light of the fact that you are, you know, relative to other rates, you're kind of, you're well top heavy in the preferred obligation versus common outstanding. And, you know, when in different or better times when the stock was trading closer to book value, you're doing you know, you're raising capital, and part of the logic back then given was to sort of right-side the relationship between equity and preferred outstanding. So I'm just wondering why, although I applaud it absolutely, you know, why buy that common but not preferred?

Yeah, hi, Sai. So I think if you were to go back historically, I think we've had good dialogue with preferred holders in terms of, you know, doing some exchanges for common a few years ago. So, I mean, I think we're obviously aware of the capital structure. We look at it, you know, from a logistics perspective, it's a bit more of a liquid transaction execute in the common market than the preferred. But, you know, 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 prices to retire preferred shares?

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

Gotcha. Understood. Thank you. You're welcome.

And again, that's SAR 1 for your questions. We'll pause another moment to allow any further questions to queue. We'll go next to Eric Hagan with BTIG. Please go ahead.

Eric Hagan Hey, thanks. Good morning. Hoping you can talk about a couple 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. Thanks.

Morning, Eric. It's Nick. So on the financial conditions, we largely and by largely, we primarily borrow from sort of GSIBs. We don't see a tremendous amount of pressure there. um maybe the cost goes up you know 5 10 15 basis points as we renew although most of our renewals are pretty far out in the future at this point so you know if anything we have excess capacity and you know we don't see a lot of pressure there obviously away from sort of the warehouse lines you know relying on securitization um you know given sort of the interest rate and credit spread volatility um you know it's good to be nimble we talk about you know being you know running aggregation risk um at the right level levels relative to the company's size so um and being ready to sort of issue when it makes sense um you know that that market is well, well, well off the wides. If anything, if you 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's 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 a portfolio, certainly I think we have a lot of room to add leverage. I think obviously, you know, similar to our comments on our being prudent around sort of the gestation, financing, warehousing, et cetera, you know, we sort of look at market conditions as we think about, you know, adding leverage to build capacity.

All right. That's helpful commentary. Thank you, guys. Thank you.

And it does appear that we have no further questions at this time. 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.