Q4 2020 AG Mortgage Investment Trust Inc Earnings Call

Welcome to AG mortgage investment Trust fourth quarter of 2020 earnings call. My name is Sylvia and I'll be operator for today's call at.

At this time, all participants on a listen.

Later, we will conduct a question and answer session.

During the question and answer session. If you have the question. Please press Star then one on your Touchtone phone.

Please note that this conference is being recorded.

I will now turn the call over to Christopher Moore, Mr. Martin you may begin.

Yeah.

Thank you Sylvia.

Morning, everyone.

Only most of them till the fourth quarter and full year of 2020 earnings call for AG mortgage investment Trust.

Before we begin please note that the information discussed on today's call may contain forward looking statements.

Any forward looking statement made during today's call are subject to certain risks and uncertainties.

Sort of outlined in our SEC filings.

The one when including under the headings cautionary statement regarding forward looking statements risk factors.

And managements 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 on our SEC filings.

Except as required by law, we were not.

David and do not intend to update of to review or revise any forward looking statement, 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.

G M I T dot com and click on the link for the fourth quarter 2020 earnings presentation on the homepage.

Again, welcome to the call and thank you for joining.

Joining us today.

With that I'd like to turn the call over to our CEO David Roberts.

Thank you very much Chris good morning to everybody.

Our goal of the permit continue to be increasing the company's long term earnings power.

While maintaining adequate liquidity.

As well as increasing book value.

We continue to emphasize residential whole loans is a key part of our strategic direction given the significance of our investment in arc home and our experience and expertise in the non QM space.

I am pleased to report that our adjusted GAAP book value per common share increased to $3.94 as of year end compared to $3.08 as of September 30th.

Our adjusted book value excludes as an asset.

Set the capitalized issuance cost of our preferred stock and therefore is about 20 cents lower per share than GAAP book value.

As well January was a positive month for our book value on our company and we have estimated that our adjusted book value.

As of January 31.

Is in the range of $4.15 to $4 25.

Per share.

The increase in our book value quarter over quarter and in January was driven primarily by a rise in the value.

<unk> of our residential whole loans.

And our see MBS.

As well as continued strong performance from our mortgage affiliate arc home.

As we announced in November the board approved the payment of accrued and unpaid dividends on our preferred.

<unk> stock in December and.

And we have returned to normal course dividend payments on our preferred stock with the first quarter dividend payable on March 17th.

In the fourth quarter, we also reinstated the dividend on the company's common stock.

I will turn the call over to our Chief investment Officer TJ Durkin.

Thank you David and good morning, everyone.

During the quarter, we executed on accretive opportunities to strengthen our capital base by redeeming, one 3 million shares of preferred stock and exchange.

<unk> for $4 6 million shares of common stock and $8 million of cash.

In two separate transactions. We also utilized our ATM program to raise net proceeds of $2 4 million through the issuance of 700000 shares of common stock.

Subsequent to year end, we sold two of our for remaining commercial.

With the whole loans at prices slightly above our year end marks.

We reinvest that capital into both agency whole pools and entered into agreements to purchase approximately $73 million of non QM whole loans.

Turning to our presentation on page five we present, the fourth quarter portfolio update and.

Snapshot of the portfolio for January month end.

During the fourth quarter, we increased the size of the portfolio from $1 1 billion to $1 4 billion, mainly through agency purchases of approximately $273 million, while increasing the portfolio of leverage from <unk> to one five turns of the economic leverage.

Real estate, we continue to deploy capital on the first quarter of 2021 into agency mortgages and non QM whole loans.

The effects of these transactions have grown our portfolio further to one 6 billion with the corresponding economic leverage ratio of two two turns as of January 31.

And again, putting this altogether as David.

Previously mentioned the effect of all of this activity has improved book value in 2021 year to date and we have estimated our adjusted book value as of Jan 31 in the $4 15 to $4 25 per share range.

Turning to slide six.

Again, we want to highlight the strong performance of our home our licensed mortgage origination.

<unk> affiliate during 2020.

Arc home achieved overall growth in origination volume of 136% year over year and generated $49 million of net income for the year during.

During the fourth quarter the team of our continued to take advantage of the <unk> in the mortgage banking sector with another strong quarter.

In both volume and margin margin within the agency channels.

As we stated on our second quarter earnings call Arc home was one of the first originators to reenter the non QM business post Covid and you can see clearly how this product represented an increasing percentage of our fundings in the fourth quarter.

We.

We believe this early reentry into non QM will build strong brand awareness and recognition for arc home and the non agency correspondent and wholesale markets as the agency refi way of begins to recede over the near to medium term.

Here, we have provided additional detail on arc arc home's funding volumes by channel product.

An overall gain on sale of margin for reference.

And just as a reminder owns approximately 45 per cent of arc home and the remainder is owned by other Angelo Gordon managed funds.

So in conclusion, we are we're pleased with the progress we made during the fourth quarter and January of this year with.

<unk> to both the balance sheet in the portfolio.

We are simplifying the company to be focused on growing our residential whole loans in concert with the growth from arc home, while maintaining a prudent balance of agency mortgages for both earnings power and liquidity.

With that I'll turn the call over to Anthony to view of the financial results.

Regarding thank you T J and good morning, everybody.

During the fourth quarter, we reported net income available to common stockholders of approximately $47 million of $1 16 per fully diluted share.

Earnings were driven by asset appreciation in our credit investments as well as $10 million of earnings from our equity method investment in our.

Hmm, which is held on the taxable REIT subsidiary.

As Youll see on slide 12, we provided a reconciliation of our GAAP book value per common share, which increased 79 cents during the quarter.

This increase reflects the combined impact of our current quarter earnings and the preferred stock exchanges transaction in October.

We're all set by the preferred and common dividends reinstated during the fourth quarter.

In addition, we utilized our ATM program to issue common stock for net proceeds approximating $2 $4 million.

As David noted earlier, we also disclosed adjusted book value per common share of $3 94.

<unk>, which is computed based on total equity less the entire liquidation preference of our preferred stock.

We're introducing this metric the supplement GAAP book value per share, which is computed using the carrying value of our preferred stock on balance sheet.

Although we previously disclosed the liquidation preference of our preferred stock. We believe also disclosing adjusted.

The value, we will provide transparency into the impact of liquidation preference on common equity.

Turning to slide 13, as the company has now stabilized and we have reinstated both the common and preferred dividends we the.

Disclosed the reconciliation of GAAP net income to core earnings for the fourth quarter recognizing.

The book earnings of 22 per common share.

During the first three quarters of the year, we did not disclose core earnings as we determined this measure did not appropriately capture our business liquidity results of operations financial condition or our ability to make distributions to our stockholders.

Quarterly we ended the quarter with total liquidity of $54 million.

Consisting of $48 million of cash and $6 million of unencumbered Agency Securities.

Our liquidity position continued to strength and subsequent to quarter end as a result of the commercial real estate loan sales, which generated an additional $36 million available for reinvestment.

Last with that this concludes our prepared remarks, and we'd now like to open the call for questions.

Operator.

Thank you we will now begin the question and answer session. If you have a question. Please press Star then one on your touch telephone maybe the new Speakerphone, you may need to pick up the handset first before pressing the numbers once again on behalf.

Please press Star then one.

And the first question comes from Doug Harter from Credit Suisse.

Hoping you could talk a little bit.

More about kind of of the expected pace of our.

Capital deployment into.

The non QM loans.

Kind of how you think that market continues to develop and.

Just talk about how.

Net get this allocation rather relative to other.

Angelo Gordon funds.

Just as you as.

As we think about the sizing potential.

Yes sure Doug.

I think we are where we're seeing the market come back in terms of volume, there's obviously competition out there, but we're pretty active in both I think the competitive bulk oct.

Auctions that are going on and the team here is actively working more on.

Of the bilateral basis with some some originators that we won already has more.

Slow bilateral agreements with and we're looking to expand that acquisition channel over time with other counterparties.

In terms of of the allocation I mean, we have a sort of.

Total Gordon the manager has the compliance approved allocation process for for all of our trades not just non QM that's.

We have I think details on the K on but happy to walk you through it in more detail.

So theres nothing indifferent about non QM versus any other investments we are doing.

Sure.

And I guess, just if you could talk about how you're how you're financing those.

And kind of.

Kind of what's the percentage would be.

Consider the kind of securitization financing.

Yeah. So.

Using I would say traditional warehouses current.

Okay.

And I think we're aiming to term those out once we get to.

What we deem to be critical mass in terms of being able to amortize the fixed costs of any securitization, which.

Generally speaking, we target of around $250 million of loans as that.

Threshold.

Great. Thank you T J.

The next question comes from Bose, George from K B W.

Hey, good morning.

First question is just on room for further recovery on book value of how should we think about that.

Currently our share of boats I think sitting here mid first quarter.

I think residential assets have largely recovered here on there theres, probably some room the.

The vast majority of I would say the unrealized.

Book value is going to be on the commercial side those within the whole loans space and as well as the <unk>.

The securities.

Okay, great. Thanks, and then actually.

Switching over to just the earnings power of the existing portfolio of can you just talk about the the earnings power and then also just in terms of whether there's room to increase leverage. It was just how do we think about the current run rate earnings of this.

The MBS.

Yeah sure I mean, I think I think we're sort of.

Displaying that were prudently growing the portfolio.

With with increased modest leverage quarter over quarter on quarter to date versus year end.

I think I think we.

If you'll look to grow the portfolio. We do think that you know looking at the assets that were that were owning the there's certainly room to run in terms of of increasing the leverage.

<unk>.

Which obviously would flow down into the increased earnings power.

I mean, I think we would expect to continue to do that.

We'll continue on that.

It's David.

Just to add the part of part of the Prudence is the obviously the nature of that that leverage so as TJ mentioned.

Creating the opportunity to do Securitizations.

We obviously view.

Securitize, the leverage as a kind of as.

As part of that overall prudent.

The leverage strategy.

Sorry to cut you off of that.

The.

Just to follow up on the return so is that should we think about it sort of a day.

Of a low double digit ROE on your book value or the.

Because.

So the core earnings this quarter.

You know were much higher than that so I'm, just kind of trying to.

Pizza together in terms of having sort of the model it.

Yes, I think I think it's on.

Obviously hard to model, obviously, the mortgage banking sector experienced.

Uh huh.

Generally.

<unk> on ROE in 2020, we all expect those to come down into 'twenty, one we don't know how.

How far how much and how fast, but but we would expect that.

Not be of repeat within 2021, and then at the same time on the other side of the portfolio, we are increasing that.

The capital invested in the portfolio is growing via the the leverage increase we just talked about so.

It's probably from February today of hard to exactly model, but I mean, I think that's generally how you would think the the earnings power is going to shift in 2021.

Versus 2020.

Okay, great. Thanks.

Yes.

The next question comes from perfect Crampton from JMP Securities.

Alright, thanks, good morning.

The question on the agency investments.

It sounds like the the.

Real core focus right now is more so on.

QM space.

Should we think about the agency investments more so as a place to deploy the liquidity pending loans that you can acquire in the non QM space or are you guys approaching the agency.

For more so as a as a core part of the portfolio.

On the New award.

The second part of that question can you talk about where Youre, where youre seeing returns on the agency of Christmas.

Yeah, So maybe working backwards I think if we were to look at the agency market and the way, we're we're hedging it with sort of a standard.

Going from one type leverage ratio, we're probably at around 10.

I think as of portfolio. Yes, we are we are focusing the the kind of operating business plan into.

The focus on on the whole loans side, we do want to manage our liquidity and our earnings.

900, the agencies, we also want to be conscious of our 40 Act test.

And so it's it's accomplishing I would say probably those three things.

Okay got it I appreciate the comments thank you.

Yeah.

And the next question is from Eric Hagen from <unk>.

Power with Hey, good morning, we've seen several mortgage rates call pieces of their preferred capital structure, we'd love to get your thoughts on.

Whether youre looking at potentially the similar moving whether you feel comfortable with the liquidity and the room on your balance sheet to make that happen and the second question can you just provide some detail on how the re performing and nonperforming loans.

Are being financed.

On the advance rate in cost of funds and such on the.

The piece of the portfolio can you repeat the first part of your question you said certain rights are.

Didn't hear the verb.

Yeah, sorry about that.

I'm asking about mortgage rates, calling pieces of the cap the preferred.

The new capital structure.

And whether you guys feel like the other the liquidity in the room on your balance sheet too.

The similar move.

You know, we're always going to be we're always going to be looking at the best use of our of our capital and.

You know and also looking at what is the right.

Preferred scale of of the company. So we'll take those two.

Taking the taking those two into account.

I can say that there no.

Current plans to call.

Our preferred issue.

And then okay.

The the NPL book I mean, that's the majority of that is financed through securitization.

Currently.

Okay, and what's the breakdown of re performing versus nonperforming in the portfolio.

I don't have that in front of me, Eric we can definitely get back to you on that.

Okay, and then on the GAAP book value versus adjusted book I'm curious how are you guys thinking about capital raising and the level of accretion do you know are you guys using.

The GAAP number or the adjusted number.

As.

The level to potentially execute more capital issuance.

Yeah, I think we've put that in in the response to some investor calls we've had over the past couple of quarters just to show.

I think more in line with sort of the way some other Reits are reporting how their preferred show up on their book value. So if somebody is trying to you.

Flattened.

Flattened flattened the planes the the numbers between some of the other Reits and how we've been reporting it.

I felt like investors were telling us we were doing it.

The majority of of reach we're doing it a different way and we're trying to show both.

Yeah, and we thought it was more realistic is I mean more accurate I should say as well.

Well so.

Yes.

I would agree thanks, so much guys for the kind of.

We have no further questions.

Terrific.

Perfect well, thank you very much for for for joining the call and we look forward to.

Giving you a report after the after the first quarter and wish everyone. A good day in and of Great weekend. Thank you very much.

Thank you ladies and gentlemen, this concludes today's conference. Thank you for participating.

I'll disconnect.

Yeah.