AG Mortgage Investment Trust, Inc.

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Your program is about to begin. Good day and thank you for standing by. Welcome to the AG Mortgage Investment Trust Inc. Fourth quarter 2024 and full year 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 that today's conference 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 Neslin, General Counsel for the company. Please go ahead.

Thank you. Good morning, everyone and welcome to the full year and fourth quarter 2024 earnings call for AG Mortgage Investment Trust. With me on the call today are TJ Durkin, our CEO and President, Nick Smith, our Chief Investment Officer, and Anthony Rostiello, 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 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, 2023, and our subsequent reports filed from time to time with the SEC. Except it's 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, .agmit.com, and click on the link for the Q4 2024 earnings presentation on the homepage. 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. I'm pleased to report our fourth quarter and full-year financials, which shows our continued execution of our core business strategy and industry-leading results. We were able to deliver these strong outcomes amidst a challenging macroeconomic backdrop, proving the company has a more differentiated strategy than the average read. Highlighting mid-financial performance during the fourth quarter, we saw book value move higher by .6% from 10.58 to 10.64 while paying our 19-cent dividend and producing a healthy economic return on equity of .4% for the quarter. For the full year of 2024, we were able to increase our quarterly dividend by .6% earlier in the year and delivered an .7% economic return on equity for our shareholders. Although it is too early in our process to comment on February, book value was flat for the month of January. Now, taking a step back, I've been reflecting on where MIT was when I became CEO in October 2022 and where MIT is today. Nearly every quarter we presented earnings to you during this period, I've said the same thing, volatile, challenging, and turbulent market conditions. Yet in spite of this, we are protecting and growing MIT's book value. This consistent theme is due to our conviction that if we continue to execute on what we do best while also being unafraid to be dynamic and seize on compelling opportunities for growth, we can not only protect but also grow book value and in turn our earnings profile for our shareholders. We remain steadfast to our disciplined programmatic securitization strategy. In the quarter right before I became CEO, our economic leverage was 2.7 turns. Now it's 1.4 turns and that's been relatively steady as we have consistently executed securitizations on a quarterly basis, controlling our outstanding warehouse balances and generating additional capital for reinvestment. One of the other reasons for our strong financial performance in 2024 is a reflection on MIT's unique positioning. We are able to be nimble in asset allocation, seamlessly rotating in multiple flavors of non-agency credit, starting with non-QM, then being a first mover in securitizing agency eligible, non-owner occupied, to most recently being a leader in the emergence of home equity or secondly lending. Lastly, December marked the one-year anniversary of closing the WMC acquisition, which has been a resounding success to date in terms of gaining scale for our shareholders. Total stockholder returns from the close to the transaction has been more than 50 percent. This transaction showcases the power of our external manager, TPG, which we believe doesn't get, the market doesn't fully appreciate. Our manager gives us not just financial support as evidence during the WMC transaction, but also scale. Along with MIT, TPG's broader structured credit and specialty finance business manages 18 billion a day U.M. So while MIT may be 550 million of equity, our manager's strong market presence allows us to source and punch way above MIT's weight class and isolation. For all these reasons, I'm looking forward to another great year for MIT as we remain committed to our growth initiatives and creating value for our shareholders. Now I'll turn the call over to Nick.

Good morning, and thank you TJ. Today, I want to build upon TJ's remarks and unpack why we believe in the mid advantage, a topic that we have not emphasized enough in the past. We cannot talk about this topic without diving deep into TPG Angela Gordon's capabilities and more specifically the capabilities of its structured credit and specialty finance group, which provides unparalleled access, expertise, and resources to MIT. I'll take these one by one. Starting with access, TPG Angela Gordon has an edge in access to capital, ideas, and sourcing. On the capital side, we are an important counterparty to most, if not all, large investment banks along with many smaller entities that play an important role in shaping the residential finance sector. These relationships are important conduit to some of the best opportunities in the space. While these relationships are important, we take pride in our connectivity with the broader residential finance ecosystem. This is a critical part of our sourcing advantage. We have deep relationships across this sector ranging from the largest non-bank originators to niche venture capital types. Moving on to expertise. Our deep bench of structured credit and mortgage finance professionals includes over four dozen professionals across trading and origination, research and analytics, asset management, banking, finance and operations, along with dedicated legal and software engineering teams. All this allows us to attach the residential mortgage finance space in ways most cannot. Our core competency span multiple sectors of the broader residential mortgage finance segment, including non-QM, EPLs, agency eligible loans, specifically cohorts where Fannie and Freddie have punitive credit costs relative to private capital, home equity, including traditional products like closed end seconds, HELOCs, along with a new and growing niche digital HELOC sector and credit sensitive loans, including non-performing, re-performing, scratch and dent and bankruptcy. Tangential to the residential mortgages, we also have the ability to one own servicing rights as our vertically integrated portfolio company, Arc Home is fully licensed to own Fannie, Freddie and Ginny MSR with in-place subservicing contracts and all the necessary technologies. We also own and operate various types of specially financed companies, including residential mortgage re-digitators like Arc Home in which MIT owns 45%. Lastly, let's move on to resources that make all this possible. Reiterating what TJ said, MIT is part of a much bigger ecosystem through its manager TPG, Angela Gordet, which has substantial resources to support its more than 90 billion AUM across products including MIT. To name a few key resources, TPG, Angela Gordet provides MIT access to one, a custom built residential mortgage asset manager, Red Creek. Instead of buying one, TPG, Angela Gordet invested the time and capital into building this resource so it could be tailored to fit the needs of MIT and other TPG AG products. Two, a -the-art data science department that focuses on everything from digesting large data sets to help inform market views to cutting-edge technology applications. And three, a deep bench of residential mortgage bankers, contract finance experts, traders, financing specialists, and some of the best in-house legal professionals in the business. And all this is just the tip of the iceberg. The recent MIT track record shows how all these key ingredients come together to create and execute the company's strategy. A few notable highlights include, one, the successful acquisition of WMC which increased MIT's market cap by over 45% and propelled MIT into the Russell 3000 last June. Two, the fluid transition of equity deployment from non-QM to agency-owned investment loans. Two, most recently, home equity loans, which was instrumental in MIT's relative outperformance this quarter. Three, the disposition of mortgage servicing rights at ArcHome. Four, the rotation of legacy credit sensitive loan investments. And five, the launch of new channels and products at ArcHome that are favored, focused on empowering our clients with -in-class technology, liquidity, and service with a focus on operational leverage. Before moving on, a brief comment on ArcHome. For all the reasons that MIT benefits from TPG Angela Gordon's resources, ArcHome does as well. While it's had its challenges, ArcHome has reached a pivotal point in transitioning to profitability. Over the last year, we continued to invest in talent, including a new CEO, COO, and Chief Production Officer. We believe that these investments to fuel further growth and believe they were an important part of the company having a profitable December in January. So, in conclusion, with all these components, the access, the expertise, and the resources, we strive to provide our shareholders with the best risk- adjusted returns in the residential sector. And to make this happen, MIT can be agile in ways that most other residential mortgage rates can't. We do not want to be another conduit for investors to access liquid agency exposure on a hedged and levered basis. We also do not want to aggregate large operationally and capital-intensive origination businesses if we don't believe they are justified by our primary goal of providing the best risk-adjusted returns. Turning the call over to Anthony.

Thank you, Nick, and good morning. 2024 was a successful year for the company. Our performance captured strong asset appreciation on our investment portfolio and substantial synergies realized from the WMC acquisition. We were also very active, growing our investment portfolio by 13% to 6.7 billion, executing six securitizations, incorporating home equity loans into our product mix, which has been impactful to our profitability. And lastly, we successfully raised senior unsecured notes to pay off the legacy WMC convertible notes. Overall, book value increased year over year by 4.3%, generating an annual economic return of .7% for our shareholders, while earnings available for distribution or EAD of 76 cents per share covered the 2024 dividends declared of 75 cents. During the fourth quarter, book value increased by approximately .6% to $10.64 per share, producing a .4% economic return when considering the 19-cent quarterly dividend. The increase in book value is primarily driven by gains on our investment activity and home equity loans, coupled with gains on portfolio hedges due to rising benchmark rates, offsetting unrealized -to-market losses on our investment portfolio. As a result, we recorded gap net income available to common shareholders of approximately $8.8 million, or 30 cents per share. We generated EAD of 18 cents per share for the fourth quarter. Net interest income, inclusive of interest earned on our hedge portfolio, was 66 cents, which exceeded our operating expenses and preferred dividends of 46 cents, generating earnings of 20 cents per share. Although Archome contributed a loss of 2 cents to EAD, there has been continued strength in volumes and improvement in margins, driving Archome to profitability in December. We remain active during the fourth quarter, acquiring 359 million of agency-eligible loans and 153 million of home equity loans. These purchases were offset by the sale of 185 million of home equity loans, where we reinvested the capital returned from the sale into non-agency RMBS collateralized by home equity. Our economic leverage ratio at quarter end was 1.4 turns, which slightly declined from 1.5 turns in September and is relatively low on a historical basis. We've continued to prudently manage our leverage exposure on residential mortgage loans through our programmatic securitizations, ending the quarter with only 190 million of warehouse financing outstanding. Lastly, we ended the quarter with total liquidity of approximately $137 million, which is $117 million, consisting of 119 million of cash and 18 million of unencumbered agency RMBS. This concludes our prepared remarks, and we'd now like to open the call for questions. Operator?

Thank you. And at this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star and one to ask a question. And we will take our first question from Boz George with KBW. Please go ahead.

Hey guys, good morning. How would you characterize your excess capital? You know, you noted the cash and liquidity. Yeah, just when you think about deployable capital, how would you characterize that?

So when we think about our deployable capital, we have CRE positions that will mature later this year, call it summerish time into fall. That represents probably 20-25 million of equity capital returns. In addition, away from rotation, really newfound equity, when we acquired WMC, there were some inefficient financing that will roll off this summer, which will release another sort of 25-30 million dollars of equity. Away from that, there's another 30-50 million of equity that can be rotated. So, you know, that sort of comes out to a range of call it 75-100 million that could be rotated or newly deployed into the coming year.

Okay, great. And then just in terms of the corporate leverage, the level of preferred, et cetera, you know, how are you thinking about that now? Is that, you know, is this a level you're comfortable with? Any changes you need to make?

Yeah, I mean, I think we obviously saw the first kind of new preferred deal come out last week, I believe, and it's been a while there. So we're actively monitoring the market. I mean, we've been running the company, you know, sort of with these ratios for quite some time now. So I think we're comfortable. But we're obviously comfortable there. And I think we've sort of shown kind of good performance in managing that overall leverage ratio to the common.

Okay, great. Thank you. Thanks.

Thank you. And we will take our next question from Doug Harder with UBS. Please go ahead.

Hi, thanks. It's Marissa Lobo on for Doug. I was hoping you could speak to us a little more about the relative attractiveness of non-QM versus home equity today and how the securitization and financing markets compare.

Yeah, look, I think you have to stepping back. Home equity is relatively new and we see a very large, you know, addressable market. So we think we're in the early innings there. And, you know, I think when you think about being in the early innings, oftentimes, there's sort of a first mover advantage. So, you know, we continue to think that that's the case, albeit maybe not as much as a little, you know, some time ago. You know, on the non-QM side, it's a market that continues to grow. I think maybe has grown more than others or maybe most have fought. You know, we still find, you know, relative value there. But, you know, as you can see from our prepared remarks are sort of leaning in more on the home equity side.

Okay, thank you. And also on the preferred, any thoughts on the preferred given the increased costs from rolling to floating?

No, I mean, we obviously knew that that was coming. I think, you know, as Nick mentioned, we've got some other financings that we see coming down the pike this year that I think will also help offset that increased floating rate. So we're looking at it, you know, at a corporate level. But, you know, we sort of had that floating rate, you know, switching in the model. So we're prepared for it.

Appreciate the answer.

Thank you. And once again, if you would like to ask a question, please press the star and one on your telephone keypad now. And we will take our next question from Eric Hagen with BTIG. Please go ahead.

Hey, good morning. This is Jake Katsikos on for Eric. Thanks for taking my questions. On slide 14, you show that the yield on the securitized non-agency loans was 5.7 percent. I'm curious if you could kind of talk about what would have to happen in order for that yield to increase. Thank you.

Yes. So those are really are kind of on balance sheet, you know, gap accounting. So that's really the securitization. So you're going to see that's really a function of, you know, 20, 21, 20, 22 type of origination that is, you know, effectively term financed out. So that number is not going to move a lot until we either rotate out of the, you know, call the deals and sell the loans, et cetera. But the ROE out to the right is probably what I would point to. That's, you know, effectively neutralizing a lower coupon on the mortgages with the, obviously, the cheaper financing that was issued at the time.

Got you. Thank you. And then you expect the cost of funds for the warehouse lines to drop further. And if that were to happen, would that potentially encourage you to get more active in building your pipeline?

I mean, we've definitely seen the larger investment banks get more aggressive on financing terms, you know, close to the term of the new year. So we're actively, you know, taking advantage of that. I think it's really just about, you know, the overall kind of A to Z ROEs. We're not, you know, the warehouse is only part of the life cycle of a loan coming onto the balance sheet of MIT. So it's really also about where the securitization markets are pricing, probably more so than just the, you know, gestation warehouse terms.

Great. Thank you so much.

Thank you. And we will take our next question from Broad Capuzzi with Piper Sandler. Please go ahead.

Thank you for taking my questions. Just kind of want to get high level thoughts on origination volume in ARCOM into 2025, obviously, industry origination volumes that have come down in recent months, given the backup in rates. Just kind of want to get your thoughts there as we look into 2025. Thanks.

Yeah, look, we continue to think that ARCOM's business model is, you know, somewhat immune or more immune than the broader mortgage market, you know, specifically sort of, you know, more liquid products like agencies and jumbos and guvv origination. I think it's been well publicized that the non QM and non-AMC markets are actually, you know, going at a good amount relative to the other spaces. And we continue to expect that to be the case. And, you know, beyond that, as we mentioned in the prepared remarks, you know, the investment we've made in the growth of that company and we expect, you know, sort of the combination of those two to really pay dividends in the future. So our expectation and what we've mapped out for this year is continued growth, no matter what the market is. And, you know, obviously interest rates matter, but, you know, we think that the company will be resilient.

Gotcha. I appreciate the commentary. And then just last question for me. Can you speak on your current thoughts around the dividend and, you know, just what you would need to see in your rate outlook to continue covering the need to covering the dividend in EAD?

Yeah, so, I mean, I think we talked about this in the past. When we think about the dividend, we've really been bifurcating the company's portfolio and sort of the, what we call the investment portfolio and then obviously the equity interest in ARK Home. And, you know, to Nick's point earlier, you know, we definitely faced a headwind in terms of, you know, a sort of negative EAD contribution coming from ARK over the past, you know, call it, you know, 48 quarters. You know, we're seeing that effectively kind of come to neutral now over December, January. So we flip from a negative to a positive. It's not a huge positive, right? And so I think we're sort of in this transitional phase where, let's just call it round numbers break even. And then I think as we fast forward into 25, we expect that to be more of a positive contributor. So, you know, if you look back at, you know, the last year's, as an example performance, I think that is the sort of tailwind that we would need to think about, you know, having a composite EAD north of sort of where the dividend is. I hope that answers the question.

Yeah, that's perfect. I appreciate it.

Thank you. And it appears that we have no further questions at this time. I will now turn the program back 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. Have a great day.

Thank you. This does conclude today's presentation. Thank you for your participation. You may disconnect at any time.