AG Mortgage Investment Trust, Inc.

Welcome to the AG Mortgage Investment Trust, Inc. Second Quarter 2025 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 this 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 Jenny Neslin, General Counsel for the company. Please go ahead.

Thank you. Good morning, everyone, and welcome to the second quarter 2025 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 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 ICC filings, including our most recently filed Form 10-K for the year ended December 31, 2024, and our subsequent reports 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 Q2 2025 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. Good morning, everyone. I'm pleased to report our second quarter earnings, which showcases the continued execution of our core business strategy and industry-leading results, particularly around book value stability. During the second quarter, we increased our common dividend by 5% or one penny per share. Focusing on the second quarter, Liberation Week in April created volatility in the broader markets we hadn't seen in some time. The merits of our core strategy and discipline around terming out warehouses with securitization showed in the continued strength of our capital structure. We entered the tightened period of vol with materially less financial leverage and smarter leverage like our non-market-to-market whole-loan warehouses. This setup means we are not as vulnerable to forced de-levering or panicked delta hedging. As a result, we saw a modest book value decline of 2.4%, moving from 1065 to 1039, while supporting and paying our increased 21-cent dividend. Therefore, producing a roughly break-even quarterly economic return on equity for our shareholders in a very difficult quarter for the MREIT space. We hope our shareholders can appreciate the results amidst differentiated business strategy and discipline around risk coming out of such a challenging quarter. For the second quarter, we experienced what we expect to be a one-time drop in EAD, mostly related to three of our remaining CRE loans to one borrower from the WMC acquisition hitting their maturity date. And therefore, we're taking off accrual as we work towards the ultimate resolution, which we believe should be by year-end. On a more positive and longer-term note, subsequent to quarter-end, MIT refinanced the expensive structured repo we inherited from the WMC acquisition into current market terms which will have a significant lift to go forward ead which nick will give more details on later in addition to our normal activity during the quarter we are excited to announce this just a strategic transaction for the company this morning mitt acquired an additional 21.4 percent of our comb from original seed investors in private funds managed by tpg ag A total of 2 million mid-shares were issued for consideration for their interests, creating minimal dilution of 2% to June 30th book value, while creating meaningful earnings accretion potential. The sellers are funds that are generally in the later or liquidating stage of their life cycle. We're obligated to register the shares pursuant to a registration rights agreement, which can take a bit of time, and there are various restrictions in that agreement governing timing of sales. Based on that, we don't expect the sellers to be able to sell meaningfully before year-end. When we embarked upon MIT 2.0 in 2021, we set out to be a best-in-class, vertically integrated residential mortgage origination and securitization platform. We believe this is a logical next step for our company's business strategy. The transaction will bring many benefits to MIT, with meaningful earnings accretion expected in 2026, driven by anticipated growth in the mortgage market and ARK's proven capability to be a leader in the non-QM space. There's also a positive step forward in scaling the company and enhancing our cap table. As we've said on prior calls, we will continue to seek and pursue opportunities that further this goal, only where we believe the results are to enhance value for shareholders. Both Nick and Anthony will go into more detail on the transaction later in the call. I'll now hand it over to Nick.

Thank you, and good morning. During the quarter, MIT completed two securitizations. Gains from these transactions partially offset bar-to-market losses driven by broad risk asset weakness following Liberation Day in early April. The first was MIT's second agency eligible investor securitization of the year, while the second was a joint venture with a leading HELOC originator. In addition to its securitization activity, MIT closed two residential mortgage warehouse facilities. These facilities are designed to reduce smart-to-market risk during the gestation period and enhance cash management, which is expected to modestly improve VAD. After the quarter end, the company refinanced high-cost, inefficient debt backed by retained interest in WMC-issued non-agency securitizations. The refinancing reduced the cost of capital by over 500 basis points and generated approximately $40 million in additional cash for redeployment. These proceeds have been redeployed through the Home Equity Securitization Partnership with a leading non-bank mortgage originator we first introduced in the first quarter. In addition, the company has a strong pipeline of residential mortgage loan acquisitions and anticipates issuing two more securitizations in the third quarter. As TJ mentioned, MIT increased its ownership of our home. In the first quarter's prepared remarks, we reiterated our commitment to this business and outlined how strategic investments in it were beginning to pay off. We saw a continuation of these trends throughout this quarter, which were offset by pipeline losses attributable to Liberation Day. A quick reversal in markets positioned ARK to recover most of these pipeline losses and provide insight into more normalized profitability. As ARK continues to execute on its plan to contribute to MIT's earnings available for distribution should increase, and with greater ownership share, this is expected to be an important driver of earnings. We are confident that ARK can continue to gain share in a growing and increasingly attractive corner of the mortgage market. I'll now turn the call over to Anthony.

Anthony Becker- Thank you, Nick. Good morning, everyone. Despite April's volatility, we ended the quarter with book value of $10.39 per share, representing a modest 2.4% decline from prior quarter. We also increased our quarterly dividend by 5% to 21 cents per share. Including this dividend, our economic return was essentially flat at negative 0.5%, highlighting our ability to maintain shareholder value in a challenging quarter. We reported a gap net loss available to common shareholders of $1.4 million or $0.05 per share. We continued to see steady growth in net interest income from our residential investments as we deployed additional capital into core strategies. However, net interest income was down $1.1 million or 6% from prior quarter due to certain commercial loans that matured in May and were placed on non-accrual. Our portfolio also recognized net unrealized losses on securitized loans from April's spread widening, although these were partly offset by unrealized gains recognized on our portfolio in May and June. Additionally, it's important to note that about 1% of book value decline was due to upfront transaction expenses related to a home equity loan securitization completed in early July. During the quarter, we recognized EAD of 18 cents per share. Net interest income, inclusive of our hedge portfolio, was 64 cents, exceeding operating expenses and preferred dividends of 46 cents. The slight decline in EAD from prior quarter was largely due to placing commercial loans on non-accrual. However, we expect this to be temporary as we work towards recovering and redeploying this capital into target assets during the second half of the year. EAD also benefited from a slight decline in operating expenses, and ARCOM's contribution to EAD remained break-even, consistent with prior quarter. Our investment portfolio grew 2.3% in the quarter to $7.3 billion, with additional activity continuing into July. We maintained a low economic leverage ratio, ending the quarter at 1.3 turns. During the quarter, we purchased and securitized 341 million of agency-eligible loans and purchased 104 million of home equity loans, securitizing substantially all of our home equity loans in early July. These deals not only reduced our warehouse risk, but also positioned us well for future growth. In July, we also replaced high-cost debt, financing securitized loans acquired from WMC, significantly reducing our cost, and freeing up $39 million of capital that was immediately reinvested to strengthen our earnings profile. With these proceeds, we sponsored a securitization backed by $647 million of closed-end second loans and continue to expand our home equity portfolio. As previously mentioned, today we acquired an additional 21.4% interest in our home, taking our ownership to 66%. This represents an incremental investment of $16 million purchased through the issuance of approximately 2 million common shares. The dilution impact on book value from this acquisition is minimal, and we expect the transaction to be accretive for our shareholders in 2026 as ARCOM continues to execute on its strategic growth initiatives. Our increased ownership interest will continue to be reported as an equity method investment at fair value on our balance sheet, which was valued at one times book as of June 30th. This concludes our prepared remarks, and we now like to open the call for questions. Operator?

Yes, thank you. As a reminder, again, if you would like to ask a question, it is the star and one on your touchtone telephone. If at any point, We find your question has been answered. You may remove yourself from the queue by pressing star two. We'll take our first question from the line of Crispin Love with Piper Sandler. Please go ahead.

Crispin Love Thank you. Good morning. Congrats on the additional ARC Home ownership. Just on ARC Home, can you talk a little bit about long-term plans there? Is it over time owning the whole company? Who owns the remaining portion today? And then can you just dig into a little bit of the accretion potential and earnings as you look over the near and long term.

Thank you. Good morning, Kristen. So I think to answer your first question, other funds managed by TBG AG own the balance. At this point, there's no other transactions kind of pending or in the pipeline. And so they'll, you know, remain co-owners with MIT. I think, you know, as Nick mentioned, you know, we're seeing, you know, we've been investing in ARK both in people and process, and, you know, we're seeing the results. You see it in the volume kind of growth. And so, you know, assuming that trajectory holds, you know, we're going from call it break-even at ARK, you know, to, you know, a more profitable company, and we're largely hitting those goals. So, you know, that's what we see as the, you know, positive earnings contribution, you know, go forward in late 25 and really in earnest in 26. So, you know, strategic long-term hold and, you know, we think just executing the business plan, not having to do anything additional will be positive to EAD in 26.

Great. That makes sense. And then just a second question from me on securitization demand from investors. Definitely volatile second quarter of April, specifically around Liberation Day. But curious on recent demand, appetite for securitizations, and then just recent spread trends.

Look, this is Nick. As the sector has grown, we've seen more and more stability in the issuance of the debt. Had you rewind the clock not too far back, it would have been more volatile. Post-liberation day, the markets returned very, very quickly. Folks, including ourselves, issued, and it was well-received, and spreads have behaved very well and in line with a lot of other asset classes or better.

Great. Thank you. I appreciate you taking my questions.

Thank you. And we'll go next to the line of Doug Harder with UBS. Please go ahead.

Thanks. Can you just talk about you know, kind of the one-times book that you were able to acquire, your additional stake. It seems like there were some other transactions that went for significant premiums in the market. You know, just, you know, kind of how you got to that price, how you're kind of arriving at the current carrying value.

Matt Lowrie Yeah. So I think, you know, in terms of the transaction, the MIT Board engaged, you know, KBW actually for fairness opinion and the board, including all the independent directors sort of approved that. So, you know, we went to a, you know, true third party. I think, you know, all these originators are a different scale and profitability, which I think also factors into maybe what you've seen in some of the other recent transactions.

Great. And I guess now as you have a larger ownership stake, do you envision that changing kind of any of the hold strategy for any of the originations or, you know, like as you ramp up non-QM, would you plan on holding any of that or you still, you know, kind of want to sell it? You know, so any change in that strategy?

Yeah. I think from an operating perspective, you know, the management team at ARC is sort of, business as usual and continuing. There's no change in the strategy at that level.

Great. Lastly, just, you know, can you give us some more detail on those commercial loans? You know, kind of, I guess, what change that led them to be put on non-accrual? Can you kind of help talk through your comfort in being able to kind of recognize the capital that is in those loans and kind of a timeframe for when you would expect to receive that?

Yeah, of course. So I think, you know, as I'm sure you're following lots of the commercial REITs, like the maturity dates are flexible, to say the least. And so this borrower on those three properties, one borrower for the hospitality loans is working through an asset disposition plan. And so we're in constant contact and, you know, working towards a productive solution there.

Got it. And I guess, you know, since they're working on that plan, I guess you feel comfortable, you know, that that plan should cover your current carrying basis for those loans? Yeah. Based on the information we have today, yes. Okay. Appreciate it. Thank you.

Thank you. And we'll go next to the line of Jason Weaver with Jones Trading. Please go ahead.

Hi, guys. Good morning. First of all, can you comment on your comfort level at the $89 million in liquidity here and what sort of approach you're likely to take to adjust that? I know you have some things coming up in Q3, but with the deferral on the WMC and not having that capital come back in right away before year end.

Yeah, we're comfortable with the current cash positioning. We've enhanced some of the ways that we finance the balance sheet, as alluded to in the prepared remarks, and think that this is a level that is likely to be, you know, a range it will be in and maybe even slightly lower in the future.

Got it. Got it. And Nick had mentioned something about refinancing the repo in the legacy WMC. Can you comment on the economics there?

Yeah, look, as mentioned in prepared remarks, we had $40 million of cash come back as additional proceeds through that refinancing, and we lowered the costs considerably and have already redeployed that capital in the third quarter.

Got it. Thanks for the call, Eric.

Thank you. And we'll go next to the line of Mikhail Zilberman with Citizens JMP. Please go ahead.

Mikhail Zilberman. Hey, good morning, gentlemen. Thank you for taking the questions. If I may just ask about a sort of a big picture view on the housing market. What is your view on home prices right now? And given some of the news that's coming out from some states, Texas, Florida, that prices are starting to sort of flatline, if not go down. um any geographies that you're avoiding um and if you're typing any underwriting standards at all thank you yeah good question so you know i think our

view is in line with consensus. Obviously, there's been some weakness in some of the markets that supply has returned to sort of pre-COVID levels. The weakness is still relatively modest. And then there are certain regions that are still hanging in tight, still getting good gains. So from a guideline standpoint, like nothing changes because we've always had adjustments for weaker markets. We think that's, you know, relatively consistent across the whole business. But, you know, we pay very close attention to the trajectory of that and still believe that, you know, it's more or less steady as she goes or some mean reversion.

Great. Thank you. And if I may, send you again a question, any update on current book value through the quarter?

Hey, Michael. No, just as of, just given where we stand in the calendar, still working through our process, so no update at this time. Got you. Thank you.

Thank you. And we'll go next to the line of Bozy George with KBW. Please go ahead.

Hey, guys. Good morning. Actually, a couple on the mortgage banking. At ARQOM, the pipeline hedging in volatility in April, does that impact the EAD or, yeah, does it impact the EAD?

That's the question. Yeah, that flows through EAD. You can see the impact to EAD from ARQOM this quarter was a loss of $130,000. So April was largely offset by positive earnings in May and June at ARQOM.

So, okay, so the setup given the stability this quarter suggests that it should be a positive number. Yes. Okay. Okay, that's great. And then can you just talk about the gain on sale margin differential between the first liens and the second liens and just talk about the outlook for, you know, further growth in the second lead market, which has already obviously been pretty strong.

So the gain on sale quarter over quarter for sort of the non-QM market has been somewhat consistent. You know, we expect that to remain the same going forward, given sort of the demand profile that I think has been fairly well telegraphed out there. On the second liens, you know, a lot of the you know, when we think about that versus the origination business, a lot of that's being acquired by, you know, non-affiliate third parties. And, you know, so we don't think about that business as much, but again, on sale, look at more of those investors, although there has been decent gain on sales driven by some of the spread tightening and capital efficiencies we've been able to achieve.

Okay. So that's more of an investment product, essentially, so you look at it more on the capital that you deploy?

That's right. That could evolve over the coming quarters to a year, but at the moment, that's a fair statement.

Okay. Great. Thank you.

And once again, if you'd like to ask a question, it is the star and one on your touchtone telephone. We'll go next to the line of Eric Kagan with BTIG. Please go ahead.

Eric Kagan, BTIG. Okay. Thanks. Good morning, guys. Can you say what the return on capital was that you expect the close-end seconds that you picked up from redeploying that $40 million, and were those loans originated by our company or by a third party?

Those loans were originated by third parties. We expect returns there to be blended across the different parts we provided in the mid-to-high teens.

Got it. Okay. Going to Arcom here, I mean, can you give a quick snapshot for what the leverage and the capital structure looks like at Arcom? Like how much total equity is in the business, how much sort of long-term debt?

There's no long-term debt. They use, obviously, warehouses for their own sort of origination gestation, but there's no long-term debt in the company.

Are there any securities?

Eric, if you look at the – if you think about the balance sheet of ARCOM, it's essentially cash and loans on warehouse with approximately $70 million of equity at that level.

Okay, got it. So there's no securities that are capitalized on the balance sheet? No. No. Okay. Thank you guys so much. Thank you.

And once again, it is C star and one for questions. We'll pause briefly for any further questions to queue. At this time, it does not appear we have any further questions. Speakers, do you have any closing remarks you'd like to give?

Just thank you to everyone for joining us and for your questions. We appreciate it and look forward to speaking with you again next quarter. Thanks and have a good day.

Thank you. We'd like to thank everybody for joining. Please feel free to disconnect your line at any time.