Q2 2021 AG Mortgage Investment Trust Inc Earnings Call
[music].
Welcome to AG mortgage investment Trust second quarter 2000.
And earnings call. My name is Sylvia and I'll be your operator for today's call at.
At this time all participants are in a listen only mode. Later, we will conduct a question answer session. During the question and answer session and if you have a question. Please press Star then 1 on your Touchtone phone. Please note that this conference is being recorded.
And 'twenty I will now turn the call over to Johnny and Aspen Teddy you may begin.
Thank you Sylvia and good morning, everyone and welcome to the second quarter 2021 earnings call for AG mortgage investment Trust with me on the call today are David Roberts, our chairman and CEO T J Durkin, our president Nick Smith.
These investment officer, and Anthony and Rusty L O, 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.
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.
Our child form 10-K for the year ended December 31, and 2020, and our first quarter 10-Q.
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.
View, the slide presentation turn to our website www dot.
Dot AG M I T dot com and click on the link for the second quarter 2021 earnings presentation on the homepage and the Investor presentation section.
And welcome to the call and thank you for joining us today with that I'd like to turn the call over to David.
Thank you.
Very much Jenny and good morning to everybody.
Since our last call TG mortgage investment Trust has made great progress and our transition to a company focused on residential mortgage origination and securitization.
On the buy side of our business and the second quarter, we purchased.
$446 million of non QM loans from our affiliate arc home as well as third parties in June we completed a non QM securitization of $224 million raising non mark to market non recourse financing on these asset.
Purchase Additionally, arc home doubled its production of non QM loans during this quarter to $376 million.
Going forward, we intend for our business model to be fueled primarily by non QM and other residential origination.
And followed by securitization on a quarterly or more frequent basis.
On the sell side of our business, we have sold all of our C. M. B S and certain RMB S positions throughout the quarter and subsequent to quarter and supporting our continued transition.
We also had good reason to believe we are progressing towards being paid off on our 2 remaining commercial real estate loans.
C M. B S sales have resulted in favorable gains during and subsequent to quarter and and potential payoffs of the commercial loans are.
And expect it to be favorable to our core to our second quarter marks.
These completed and anticipated sales provide ample liquidity to fund continue expansion of our go forward business model.
In terms of our financial results for.
Our water our book value increased by 3% driven by earnings of 70 cents per share. This is after accounting for the declared second quarter dividend of 21 per share.
And with our per share numbers are on a post split basis.
Core.
For the <unk> for the quarter were approximately breakeven.
However, the definition, we use for core earnings does not capture important elements of our go forward business strategy.
Specifically core earnings does not include Mitch share of the gain that arc.
For her recognizes when it sells loans to us nor does it include earnings that met recognizes when we securitize the loans purchased from both arc home and third parties.
As I mentioned before the sales of commercial assets have and are expected to continue.
Home to increase our liquidity.
This comes at the short term cost of reduced net interest margin, but more importantly, and the longer term. This liquidity will enable us to continue growing.
Origination and securitization strategy.
Strategy, we believe offers.
He superior risk reward to AG mortgage investment trust and its shareholders.
For our dividend policy going forward, we will be looking most closely and those earnings metrics that most accurately reflect the evolution of our business strategy.
And as we always.
Due and our dividend policy, we will consider not only the current quarter, but our outlook for earnings over the intermediate term.
Thanks, very much and with that I will turn.
It over to TJ durkin.
Thank you David and good morning, everyone.
To dig a bit deeper into.
And as activity during the quarter, we were active and purchasing $446 million and non QM loans during the quarter from 5 originators, including our mortgage affiliate arc home.
Which originated $360.376 million during the quarter with MIT purchasing approximately 50% of that production.
And they contribute.
<unk> loans into 2 securitizations during the quarter and.
And we intend to be very disciplined with regards to the pacing of our securitizations to Derisk our warehouse lines.
And other asset classes, we continue to prudently dispose of non core assets and repositioning to mitts forward looking strategy by selling <unk> and.
And other RMB as securities, where we don't have any control or access to the underlying whole loans.
During the quarter and we also reduced our exposure to agency MBS as we thought the basis had reached a point where further tightening was unlikely.
Subsequent to quarter and we sold the remaining see MBS positions.
<unk> and a slight gain from Q2 marks generating gross proceeds of $34 million for approximately $15 million of equity proceeds.
And moving onto our capital activity during the quarter, we successfully utilized our ATM program to raise $3.1 million of fresh capital by issuing 226006.
74 shares and an average.
Price of $14 and 21 per share adjusting for that split.
We also completed our fifth exchange with the preferred holder exchanging 240861 shares of preferred for 429802 shares.
<unk> hundred common.
This brings our cumulative preferred to common exchange notional at approximately $51 million of par value.
And lastly, we completed a 1 for 3 reverse stock split which went effective July 22nd with the ultimate goal of reducing volatility and the stock price into the future.
Shares of <unk>, turning to slide 6 our investment portfolio grew slightly over the quarter based on the rotation I previously mentioned out of agency MBS and CMS into non QM whole loans.
Turning to slide 7 we made progress increasing our allocation to non QM by nearly doubling the fair value as a percentage.
And for our investment portfolio from 19% to 37% this quarter.
Also given the strength and the housing market, we are seeing solid performance with regard to our land related financing and we expect lot takedowns to run this asset class off organically over the coming 12 months to 18 months, while we earn a healthy yield.
Percentage on slide 8 we present, our <unk> and commercial real estate exposure as previously mentioned subsequent to quarter and we exited the single asset single borrower <unk> securities for gross proceeds of $33.7 million.
Currently Mitt only has to remain and commercial real estate loans left under our commercial designation and we wanted to provide.
For detailed today.
Commercial okay as a first lien construction loan to our recently completed and fully open destination Hotel and times square.
The loan continued making interest payments during COVID-19, but its original maturity date was due in may of this year.
Mitch loan exposure as part of a.
Some more consortium and is actively engaged with the lender group on working towards a productive resolution and the near term.
However, we can't guarantee such resolution will occur.
We are very comfortable with our basis and the finished product.
Commercial loan L as a fully draw and loan to a hotel.
Larger located off the magnificent mile and downtown Chicago.
Immediately following the initial COVID-19 shutdown and we completed a modification with the sponsor and September of 2020, turning off the cash coupon and letting the deferred interest accumulate.
However, we did not accrue interest income during this quarter.
During this period and exchange for the interest deferral, we received an additional $2.1 million of equity.
We remain in close contact with the sponsor and have seen operating metrics continue to improve into the larger reopening.
On slide 9 you can see we continue to be able to create and agency MBS book with better prepayment.
Payment performance due to our size and selected and this when purchasing specified pools.
A reduction and agencies was solely based on relative value not based on performance.
We will continue to use agency MBS to absorb excess liquidity, when a prudent and valuations and to meet our 40 Act tests.
And lastly in June we entered into.
And agreements to sell all our remaining excess msr's, which was settled during the third quarter.
With that I'll turn the call over to Nick Thank.
Thank you Jay and good morning, everyone turning to slide 10 year to date, we've acquired over $650 million of non QM loans with over $250 million acquired from affiliate our affiliate arc home.
And July.
And we increased.
Our uncommitted warehouse capacity to $1.1 billion to accommodate future acquisitions, while simultaneously terming out approximately $224 million of non mark to market and non recourse debt.
We also securitized approximately $171 million of non QM loans alongside other Angelo Gordon.
Ones within and unconsolidated joint venture.
And the Romanian assets held in this joint venture are primarily retained interest from other prior from prior Securitizations the.
Tables on this page show the continued delinquency carrying over the past year for our non QM portfolio, along with collateral cares characteristics of our current.
Our borrower base.
Subsequent to quarter and we also entered into agreements to acquire GSE eligible non owner occupied pools and connection with these acquisitions, we added $500 million of uncommitted warehouse capacity capacity, specifically for GSE eligible loans we.
We expect these credits to continue.
And offer attractive risk adjusted returns and look forward to adding additional sellers and capacity.
Moving on to slide 11.
This page provides a high level summary of the performance of our credit sensitive loan positions over the past 12 months.
As you can see this portfolio has benefited from strong housing.
2 islands, and historically low mortgage rates prepayment speeds have increased significantly and approximately 75% of the borrowers that received COVID-19 related assistance are either contractually current for making payments on a loss mitigation plan.
Over the past year, approximately 30% of the portfolio has been liquidated through a combination of opportunity.
Opportunistic loan sales voluntary and involuntary prepayments.
Turning to slide 12.
As mentioned in previous quarters arc home are licensed mortgage abridging origination affiliate continues to benefit from being 1 of the first originators to reenter the non QM business.
<unk> tables below clearly shows the benefit of these early investments as arc home's non QM volumes offset declines and agency volumes and was able to mitigate margin compression during the quarter.
Mark to market losses, and arc home's MSR portfolio portfolio, driven by lower nominal yields and a bull flattening.
And of the curve generated pre tax net losses of $3.7 million, resulting and $2.7 million of losses for MIT, which does not include $1.4 million of gains recognized by arc home and connection with its mortgage loan sales to net.
With that I'll turn it over to Anthony.
Thank you Nick and good.
<unk>.
Before providing an update on the second quarter I wanted to reiterate that we completed a 1 for 3 reverse stock split post quarter, and which became effective on July 20 <unk>.
This reduced our common shares outstanding from approximately $48.5 million to $16.2 million.
As.
As a result, you will see that we adjusted all common share and per share metrics within our press release earnings presentation, and 10-Q on a retroactive basis to reflect the reverse split for all periods presented.
With that being said during the first quarter, we reported net income available to common stockholders.
<unk> of approximately $10.9 million for 70 cents per fully diluted share.
Earnings during the quarter were driven by Mark to market gains on residential and commercial assets within our portfolio along with realized gains from the sales of certain RMB SMC MBS.
These gains were offset.
<unk> by Mark to market losses within our interest rate swap portfolio driven by the day decline in interest rates during the quarter as well as the previously mentioned loss from our 45% equity method investment and arc home, resulting from mark to market losses on its MSR portfolio.
Operating expenses increased slightly from the first.
However, this was attributable to transaction expenses related to the non QM securitization that occurred in June.
On slide 14, we provide a reconciliation of our book value per common share, which increased by 41 during the quarter.
This increase reflects our current.
Quarter earnings offset by the preferred and common dividends declared during the second quarter.
And you'll also see the increases related to a preferred stock exchange transaction entered into during the quarter.
As well as net proceeds raised from issuing common stock through our ATM program approximating $3 million.
Yeah.
As discussed on our previous earnings call. We also disclose adjusted book value per common share of $14.72.
Which is computed based on total equity less the entire liquidation preference of our preferred stock.
Turning to slide 15, we disclosed a reconciliation of GAAP net income to.
Core earnings for the second quarter, where you will see core earnings was breakeven for the quarter.
1 item to note is that core earnings does not include $1.4 million of gains and arc home recognized during the quarter on loans sold to us.
Lastly, we ended the quarter with total liquidity of 71.
And.
Which is inclusive of $64 million of cash and $7 million of Unlevered Agency MBS.
This improvement and liquidity from the first quarter was a result of the previously mentioned and to non QM Securitizations transacted, along with the sale proceeds on our MBS portfolio offset by.
The purchase activity to grow our non QM portfolio.
This concludes our prepared remarks, and we would 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 1 on your Touchtone phone.
If you wish to be removed from the queue. Please.
Thompson and or the hash key.
And we really speak about human need to pick up the handset first before pressing the numbers.
Once again, if you have a question. Please press Star then 1 on your Touchtone phone.
And our first question comes from Doug Harter from Credit Suisse.
Uh huh.
Thanks.
Can you just talk about the <unk>.
Evel of competition.
We kind of in the QM market today and how that.
How returns still look today versus kind of the early days for our of course, 1 of the first movers.
But of course.
There certainly is more competition that being said.
Capacity has returned to the market.
And sort of agency stuff has run off.
For Refis and brought off and we still see plenty of opportunity to buy buy these assets and others.
And attractive levels.
And we don't see that changing and the near future.
Got it and then could you just compare the railroad too.
And our attractiveness of returns.
What kind of non QM versus non owner occupied.
<unk> loans.
And kind of which is a more attractive opportunity.
We see them fairly comparable if anything and the non QM side a lot of those positions are investment properties already.
And they are fairly similarly priced.
On the agency side, we just it's 1 of those things where we.
We expect that to be opportunistic and to be sort of a.
The interesting opportunity for for the coming years, and we expect pricing to come in and out and.
And we'll obviously keep the relative value between between the 2 products in mind.
And then just 1 kind of accounting question you mentioned that there was the net.
MSR Mark.
At arc homes.
It was the size of that and you know I guess how would the.
Profitability of arc have worked if you excluded the <unk>.
Net MSR Mark.
The net MSR Mark was down about $4 million for the quarter. So if you.
Think about pulling that out from earnings.
It would be around plus $2 million.
And $2 million to $3 million during the quarter without the MSR markdown.
Great.
And then so even if you stripped out the 1 point for millions of gains and I guess the contribution to <unk>.
And I guess closer and or.
And it was slightly positive.
Positive to closer to breakeven versus the 2 point or versus the lawsuit you mentioned.
And that's correct 1 clarification of the Mark to market loss that I mentioned was pre our 45% share so that $4 million day would only got 45 per cent of that.
Okay that makes sense. Thank you very.
Very much.
Our next question comes from Bob <unk> from K B W.
Hey, guys good morning.
And actually just first just a clarification you mentioned.
You mentioned that the the mid core earnings. It doesn't include the sales of the <unk>.
Our accounts to MIT can you just remind me what some.
Arc is included in core earnings.
Their operating business, which is their gain on sale.
On the agencies and the non QM that are not sold to US are included in core and.
Is there and like in terms of what you bought from them is that percentage and it remains stable because it seems like if it increases your almost.
Almost kind of hurt your core income relative because it all.
It won't count.
Yes, that's correct.
Has remained stable we have bought approximately 50 per cent of the production from non QM from them, but you're thinking is correct.
Okay, great. Thanks, and then and you just sort of and looking forward.
And I guess what are.
Kind of and things that need to happen to get to a more you know whatever normalized core number I mean for obviously from an economic return and get returns were good but if you liked a lot of people focus on core so just.
And what's the best way to kind of think about that.
This is David Roberts and answering that I think the.
And to think about this is that.
You know this quarter and.
And.
All likelihood a the next few quarters, we're in a transition to.
To the new business model or to you know to the go forward I should say.
Best way to model, so it's a mix of the 2.
We've got a legacy assets that were rotating.
Into first cash and then and.
2 our origination securitization business and that's just going to take a that's just going to take some time.
Mhm.
Okay that makes sense great.
Great. Thanks.
Our next question comes from Kevin Cranston JMP Securities.
Alright, thanks, good morning.
I wanted to clarify something on the commercial loans and.
Business and.
Thanks for all the additional detail on those.
And the prepared comments I think you made the comment that you were hopeful.
Hopeful that there could be a pay off on those and the near term.
I just wanted to clarify was that comment related to both of the loans or was that maybe more directed towards the construction loan.
Sure.
Yeah, I mean, I would say it's more it's obviously, we're working with the borrower on maturity issue on that line in particular, I think I would say on the other alone.
We fully anticipate that coming out of the day.
And the modification period.
And will remain contractually current.
And it could pursue other financing options at that point.
Okay, and can you remind us when the when that when that period and.
And.
Yeah. It was a it was a 1 year modification from last September so it Oh and this September.
Yes.
And they got it.
And then on the GSE and non owner GSE eligible non owner occupied loans.
Could you maybe talk about that opportunity a little bit more and help us think of kind of what the potential market size is there.
Relative to the sort of more traditional.
<unk> non QM opportunity yes.
Yes, certainly so historically.
The the supply of for origination of Investor properties via the Gse's or Fannie and Freddie.
Has ranged from approximately 75% to $95 million a year.
And it's.
Okay, not had near it doesn't have nearly sort of the same sort of cyclical impacts.
So if anything if this refi boom.
Comes off.
Essentially you are lowering your denominator of.
Other non owner occupied asset so.
Is that denominator.
And it shows lower debt, 7% cap, that's been institution Institute and the latest PSP, a or amendment with Fannie and Freddie.
The assumption is that that will sort of normalize and that excess will be higher.
And so.
Obviously, if the number goes.
And here to 12%.
You have to solve for that excess of 7% that being said.
And even prior to this a good portion of GSE loans actually best AXT.
And and offered attractive returns for for investors like ourselves.
And our expectation is as.
And 2 originators get more familiar with with selling too to the private markets away from Fannie and Freddie debt debt.
That this space could could grow now exactly exactly how much of sort of the overall market will ultimately see theres a lot of factors that go into it but at least at least it's a decent sized.
You have a notional.
Got it okay, that's very helpful.
And then last thing.
I think and you noted that you guys had a short TBA position.
And the second quarter.
Can you just can you say, how large that position is and if you're still carrying the.
And into the third quarter.
The position size to $130 million notional on the TBA that went on at quarter end.
Okay. Thank you.
Yeah.
Our next question comes from Jason Stewart from Jones trading.
Hey, good morning, a couple of follow ups.
On commercial loan Oh, It's day, Mark at 630, a 86% and part reflective of the coupon or your confidence and a payoff.
Well.
And we use third party vendors to help us determine.
And the Mark so it's 86%.
Par, which is a $51 million notional.
So as you're thinking updated that youre going to get a full part pay off at September 30th when the modification periods over.
Well no at September 30, there their coupon will turn back on and I think.
We'll see what pricing vendors, how they view the sort of modifications that are all starting to.
Expire if you will right, we're kind of cut and getting to that point and the calendar from a year ago.
So I don't have and.
And a certainty and to how they will look at that but we would expect that.
<unk>.
<unk>.
Conversations that the loan will start cash paying.
Come Q4.
Okay, so not necessarily a path but.
And it'll be turned back on Okay got it and then if you can update us on book value.
And quarter to date, if you don't mind.
Yes book value quarter to date was up.
Based on every percent approximately and that was primarily driven by some of the mark to market gains.
And that we've been talking about and the <unk> and commercial portfolio as well as some of the realized gains through the sales that we mentioned during the quarter.
I'm sorry, what was your question about this third.
Up to her and now or was it looking back and David border.
For the latest point available.
Yeah, we're not we're just going to stick with what we've reported.
Okay, and then on the MSR.
And when we look at that portfolio can you give us any detail.
And then in terms of what potato looks like or maybe like what a plus 50 or 100 move and the and the rates market looks like for the valuation of that MSR.
Well just to be clear so we sold.
The third party purchased MSR, so so the volatility going forward.
Telling me lower and.
I would say we're not we're not.
The point really reporting like St or shifts and the goal is really to reduce debt.
That volatility and that and that business and really have them focused.
On the origination side.
Okay, Okay and.
And last 1 for me then.
I guess I understand and sort of the rationale for the TBA short given valuations and the space, but how does that fit into the overall hedging strategy and what's your propensity to carry that position going forward.
So this is Nick so there's a part of the TBA short is the contemplation that.
And we'll be we'll be selling debt off of the.
The recently acquired GSC positions.
And when you think about.
And when you think about when you sell that debt its benchmark versus TBA. So and you actually go sell that debt to third parties and the market. Your benchmark is CBA because.
Youre selling loans back backed by agency collateral.
So it's really just a hedge similar to other hedges, we put on against non QM.
Loans, so Jason Yeah, I mean, the basically the price and convention for traditional non QM debt is off of swaps and then.
For AAA seniors on the agent.
And see eligible it'll be benchmarked off TBS.
Okay.
Okay. Thanks for taking the questions I appreciate it.
Our next question comes from Eric Hagen from <unk>.
Hey, Thanks. Good morning, Hope you guys are well within the debt and equity affiliates can you give a snapshot for what the balance sheet looks like there.
And including the amount of capital that is sitting at arc home.
Sure.
Excuse me and that line item arc home is approximately $51 million of equity and that balance and then we also have approximately $30 million and.
Investment in joint venture, where we've historically acquired.
Third non QM and if you recall, we're now acquiring the non term directly into.
And the REIT and then the other.
Asset and there is approximately $80 million of the land and related financing that that T. J mentioned earlier.
Got it Okay. That's helpful and then on the non QM Securitizations how.
Coverage are you guys applying to the retained tranches and get to the return profile that you outlined in the deck.
Somewhere between 1 and a half day, 2 and a half.
And.
Turns.
Okay and are those mark to market.
Repo.
Right Okay.
Alright, thank you.
Our next question comes from Jim Delisle from 7 Canyon.
Good morning folks.
The the MSI and presuming that arc continues to carry some MSR and itself.
<unk> generated portfolio.
Yes, that's correct.
And that would be and the 50 million or so long. It line item you just referenced Eric Hagen.
It's embedded within the way that we account for it as we bring we show the net equity that we own of arc we.
Pull through into our homes balance sheet within our financials, but.
The asset would be flowing up into that net equity.
Alright, and can you give us some understanding as to what percentage of that $50 million carrying value of your holding of arc.
Is represented by the MSR of their self generated portfolio.
So we don't have that number in front of us, but we can we can look into that.
That'd be great. Thank you very much that's my only question.
We have no further questions at this time and I'll turn the call over to our host for closing remarks.
We don't.
Excuse me. Thank you Sylvia and thank you for to everyone for joining the call today.
Enjoy the rest of your weekend.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Okay.
[music].
Yeah.
[music].
[music].
[music].
Welcome to AG mortgage investment Trust second quarter 2021 earnings call. My name is Sylvia and I'll be your operator for today's call.
At this time all.
All participants are in a listen only mode. Later, we will conduct a question answer session during.
During the question and answer session. If you have a question. Please press Star then 1 on your Touchtone phone.
Note that this conference is being recorded.
I will now turn the call over to Jonathan Atkin Jetty you may begin.
Thank you Sylvia.
Good morning, everyone and welcome to the second quarter 2021 earnings call for AG mortgage investment Trust with me on the call today are David Roberts, our chairman and CEO T. J Durkin, our President Nick Smith, our Chief Investment Officer Officer, and Anthony and Rusty yellow, our Chief Financial Officer before.
And 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.
Smith's discussion and analysis.
The company's actual results may differ materially from these statements we and.
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, and 2020 and our first quarter 10-Q.
And men and 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 a reconciliation to the most comparable GAAP measures. We will also reference the earnings presentation that was posted to our website. This morning.
The slide presentation turn to our website www Dot AG M I T dot com and click on the link for the second quarter 2021 earnings presentation.
Question on the homepage and the Investor presentation section.
And welcome to the call and thank you for joining us today with that I'd like to turn the call over to David.
Thank you very much Jenny and good morning to everybody.
Since our last call TG mortgage investment Trust.
Presently they progress and our transition to a company focused on residential mortgage origination and securitization.
On the buy side of our business and the second quarter, we purchased $446 million of non QM loans from our affiliate arc home.
As well as third parties and <unk>.
June we completed a non QM securitization of $224 million, raising non mark to market and nonrecourse financing on these assets.
Additionally, arc home doubled its production of non QM loans.
Cause meeting this quarter to $376 million.
Going forward, we intend for our business model to be fueled primarily by non QM and other residential origination followed by securitization on a quarterly or more frequent basis.
During the sales side of our business, we have sold all of our C. M. B S and certain of our MBS positions throughout the quarter and subsequent to quarter and supporting our continued transition.
We also had good reason to believe we are progressing towards being paid off on our 2 remaining.
Main and commercial real estate loans.
C N B S sales have resulted in favorable gains during and subsequent to quarter and and potential payoffs of the commercial loans.
Are expected to be favorable to our core to our second quarter marks.
These.
Completed and anticipated sales provide ample liquidity to fund continue expansion of our go forward business model.
In terms of our financial results for the quarter, our book value increased by 3% driven by earnings of 70 cents per.
This is after accounting for the declared second quarter dividend of 21 cents per share both our per share numbers are on a post split basis.
Core earnings for the quarter were approximately breakeven.
However, the definition we use for.
For sure earnings does not capture important elements of our go forward business strategy.
Specifically core earnings does not include MIT share of the gain that arc home recognizes when it sells loans to us nor does it include earnings that met recognizing.
Of course, when we securitize the loans purchased from both arc home and third parties.
As I mentioned before the sales of commercial assets have and are expected to continue to increase our liquidity.
This comes at the short term cost of reduced net interest.
And is margin, but more importantly, and the longer term this liquidity will enable us to continue growing our origination and securitization strategy.
Our strategy, we believe offers a superior risk reward to AG mortgage investment trust and its shareholders.
Interest for our dividend policy going forward, we will be looking most closely and those earnings metrics that most accurately reflect the evolution of our business strategy and as we always do and our dividend policy, we will consider not only the current quarter, but our outlook for earnings.
Over the intermediate term.
Thanks, very much and with that I will turn.
It over to TJ durkin.
Thank you David and good morning, everyone.
To date, a bit deeper into the company's activity during the quarter, we were active and purchasing 446 million and non QM loans during the quarter.
And from 5 originators, including our mortgage affiliate arc home.
Which originated $360.376 million during the quarter with mid purchasing approximately 50% of that production.
And they contributed loans into 2 securitizations during the quarter.
And we intend to be very disciplined with regards to the pacing of our secured.
Iridization to Derisk, our warehouse lines.
And other asset classes, we continue to prudently dispose of non core assets and repositioning to myths forward looking strategy by selling see MBS and other RMB as securities, where we don't have any control or access to the underlying whole loans.
During.
During the quarter and we also reduced our exposure to agency MBS as we thought the basis had reached a point where further tightening was unlikely.
Subsequent to quarter and we sold the remaining see MBS positions and a slight gain from Q2 marks generating gross proceeds of $34 million or approximately 15.
And of equity proceeds.
Now moving onto our capital activity during the quarter, we successfully Utah utilized our ATM program to raise $3.1 million of fresh capital by issuing 226000 and 630 for shares and.
And average.
And price of $14 and 21 per share.
Millions and adjusting for that split.
We also completed our fifth exchange with the preferred holder exchanging 240008 hundred 61 shares of preferred for 429802 shares of common.
This brings our cumulative preferred to common exchange notional at approximately 51.
Share of par value.
And lastly, we completed a 1 for 3 reverse stock split which went effective July 22nd with the ultimate goal of reducing volatility in the stock price into the future.
And turning to slide 6 our investment portfolio grew slightly over the quarter based on a rotation I previously mentioned.
And 1 million out of agency, MBS and see MBS into non QM whole loans.
Turning to slide 7 we made progress increasing our allocation to non QM by nearly doubling the fair value as a percentage of our investment portfolio from 19% to 37% this quarter.
Also given the strength and the housing market, we're seeing solid performance with regard to our land related financing and we expect lot takedowns to run this asset class organically over the coming 12 months to 18 months, while we earn a healthy yield.
Okay.
On slide 8 we present, our <unk> and commercial real estate exposure as previously.
So you mentioned subsequent to quarter and we exited the single asset single borrower <unk> securities for gross proceeds of $33.7 million.
Currently Mitt only has to remain and commercial real estate loans left under our commercial designation and we wanted to provide some more detail today.
Commercial okay as a firstly.
Firstly and construction loan to our recently completed and fully open destination Hotel and times square.
The loan continued making interest payments during COVID-19, but its original maturity date was due in may of this year.
Mitch loan exposure as part of a larger consortium and is actively engaged with the lender group and working towards a productive.
<unk> resolution and the near term.
However, we can't guarantee such resolution will occur.
We are very comfortable with our basis and the finished product.
Okay.
Commercial loan L. As a fully draw and loan to a hotel located off the magnificent mile and downtown Chicago.
Immediately following the initial COVID-19 shutdown and we completed a modification with the sponsor and September of 2020, turning off the cash coupon and letting the deferred interest accumulate.
However, we did not accrue interest income during this quarter.
During this period and exchange for the interest deferral, we received an additional.
And $1 million of equity we remain in close contact with the sponsor and have seen operating metrics continue to improve into the larger reopening.
On slide 9 you can see we continue to be able to create and agency MBS book with better prepayment performance due to our size and selected and this when purchasing specified pools.
2 a reduction and agencies was solely based on relative value not based on performance.
We will continue to use agency MBS to absorb excess liquidity when that prudent valuations and to meet our 40 Act tests.
And lastly in June we entered into an agreement to sell all our remaining excess msr's, which will settle during the third quarter.
With that I'll turn the call over to Nick Thank.
Thank you Jay and good morning, everyone turning to slide 10 year to date, we've acquired over $650 million of non QM loans with over $250 million acquired from affiliate our affiliate arc home.
And July we increased.
Our uncommitted warehouse capacity to $1.1 billion.
To accommodate future acquisitions, while simultaneously terming out approximately $224 million of non mark to market and non recourse debt. We also securitized approximately $171 million of non QM loans alongside other Angelo Gordon funds within and unconsolidated joint venture.
And the remaining assets.
Its joint venture are primarily retained interest from other prior from prior Securitizations.
The tables on this page show the continued delinquency carrying over the past year for our non QM portfolio, along with collateral characteristics of our current.
Borrower base.
Subsequent to quarter and we also.
Held them into agreements to acquire GSE eligible non owner occupied pools and connection with these acquisitions, we added $500 million of uncommitted warehouse capacity capacity, specifically for GSE eligible loans.
We expect these credits continue to offer attractive risk adjusted returns and look forward to adding additional sellers.
And capacity.
Moving on to slide 11.
This page provides a high level summary of the performance of our credit sensitive loan positions over the past 12 months.
As you can see this portfolio has benefited from strong housing tailwind and historically low mortgage rates prepayment speeds have increased significantly and.
And approximately 75% of the borrowers that received Covid related assistance are either contractually current for making payments on a loss mitigation plan.
Over the past year, approximately 30% of the portfolio has been liquidated through a combination of opportunistic loan sales voluntary and involuntary prepayments.
Turning to slide 12.
As mentioned in previous quarters, our calm our licensed mortgage abridging origination affiliate continues to benefit from being 1 of the first originators to reenter the non QM business.
The tables below clearly shows the benefit of these early investments.
As arc home's non QM volumes offset declines and agency volumes and was able to mitigate margin compression during the quarter.
Mark to market losses, and arc home's MSR portfolio portfolio, driven by lower nominal yields and a bull flattening of the curve generated pre tax net losses of $3.7.
Million, resulting and $2.7 million of losses for Mitt.
Which does not include $1.4 million of gains recognized by Arkoma and connection with its mortgage loan sales to net.
With that I'll turn it over to Anthony.
Thank you Nick and good morning.
Before providing an update on the second quarter I wanted to reiterate.
<unk> that we completed a 1 for 3 reverse stock split post quarter, and which became effective on July 20 <unk>.
This reduced our common shares outstanding from approximately $48.5 million to $16.2 million.
As a result, you will see that we adjusted all common share and per share metrics.
Within our press release earnings presentation, and 10-Q on a retroactive basis to reflect the reverse split for all periods presented.
With that being said during the first quarter, we reported net income available to common stockholders of approximately $10.9 million or <unk> 70 per.
Fully diluted share.
Earnings during the quarter was driven by mark to market gains on residential and commercial assets within our portfolio along with realized gains from the sales of certain RMB SMC MBS.
These gains were offset by mark to market losses within our interest rate swap portfolio driven by the default.
The decline in interest rates during the quarter as well as the previously mentioned loss from our 45% equity method investment and arc home, resulting from mark to market losses on its MSR portfolio.
Operating expenses increased slightly from the first quarter. However, this was attributable to transaction expenses related.
To the non QM securitization that occurred in June.
On slide 14, we provide a reconciliation of our book value per common share, which increased by 41 during the quarter.
This increase reflects our current quarter earnings offset by the preferred and common dividends declared during the second.
Quarter and.
And you'll also see the increases related to a preferred stock exchange transaction entered into during the quarter.
As well as net proceeds raised from issuing common stock through our ATM program approximating $3 million.
As discussed on our previous earnings call. We also disclose adjusted book value.
And share of $14.72, which is computed based on total equity less the entire liquidation preference of our preferred stock.
Turning to slide 15, we disclosed a reconciliation of GAAP net income to core earnings for the second quarter, where you will see core earnings was breakeven for the.
Quarter, 1 item to note is that core earnings does not include $1.4 million of gains arc home recognized during the quarter on loans sold to us.
Lastly, we ended the quarter with total liquidity of $71 million.
Which is inclusive of $64 million of cash and 7 million.
And of Unlevered Agency MBS.
This improvement and liquidity from the first quarter was a result of the previously mentioned and 2 non QM securitizations.
<unk> along with the sale proceeds on our MBS portfolio offset by the purchase activity to grow our non QM portfolio.
This concludes our prepared remarks.
And we would 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 1 on your Touchtone phone.
If you wish to be removed from the queue. Please press the pump line or the hash key.
Can you speak about and you may need to pick up the answer first be for personnel.
And then M breeze.
Once again I'd be happy question. Please press Star then 1 on your Touchtone phone.
And our first question comes from Doug Harter from Credit Suisse.
Thanks.
Can you just talk about the level of competition.
<unk>.
We kind of in the QM market today, and how the returns still look today versus kind of the early days for our of course, 1 of the first movers.
Of course.
And there is certainly is more competition and that being said.
Yeah.
Capacity has returned to the market.
And sort of agency stuff is run off.
Or refis have run off and we still see plenty of opportunity to buy buy these assets and others at attractive levels.
And we don't see that changing.
And the near future.
Got it and then could you just compare the relative.
Current goodness of recurrence.
What's kind of non QM versus non owner occupied loans.
Loans, and and it's kind of which is a more attractive opportunity.
We see them fairly.
Early comparable if anything and the non QM side, a lot of those positions are investor properties already and.
And they are fairly similarly priced.
On the agency side, we just it's 1 of those things, where we expect that to be opportunistic and to be sort of a a interesting opportunity.
For the coming years, and we expect pricing to come in and out and.
We will obviously keep the relative value between between the 2 products in mind.
And then just 1 kind of accounting question, you mentioned that there was a negative MSR mark.
Hum at arc homes.
What was the.
The size of that and you know I guess, how would the profitability of arc have worked if you excluded the net M.
M S for Mark.
So the net MSR Mark was down about $4 million for the quarter.
So if you think about pulling that out from earnings.
Probably be around plus $2 million.
<unk> from $2 million to $3 million during the quarter without the MSR markdown.
Great.
And then so even if you stripped out the 1 for millions of gains and I guess.
The contribution to <unk>.
And I guess closer and her.
And it was slightly positive to closer to breakeven versus the 2 point for.
Versus the lawsuit you mentioned.
That's correct 1 clarification of the Mark to market losses that I mentioned was pre our 45% share so that $4 million day would only get 45% of that.
Okay that makes sense. Thank you very much.
No.
Our next question comes from Buffy charged.
Uh-huh BW.
Okay.
Hey, guys good morning.
And I should just first just a clarification you mentioned.
You mentioned debt and.
The net core earnings it doesn't include the sales of the <unk>.
<unk> submit can you just remind me what some arc is included in core earnings.
And operating business, which is their gain on sale.
On the agencies and the non QM that are not sold to US are included in core and.
And is there and like in terms of what you bought from them is that percentage and it remains stable because it seems like if it increases your almost kind of hurt your core income relative because it'll it won't count.
Yeah.
Yes, that's correct.
It has remained stable we have bought approximately 50 per cent of the production from non QM from them, but you're thinking is correct.
Okay, great. Thanks, and then and you.
So looking forward.
What are kind of things that need to happen to get to a more you know whatever normalized.
Core number I mean for obviously from an economic returns over time for good but if you like a lot of people focus on core so just what's the best way to kind of think about that.
This is David Roberts and answering that I think the best way to think about this as debt.
This quarter and.
Uh huh.
In all likelihood.
The next few quarters, we're in a transition.
And to to the new business.
Model or to you know to the go forward I should say business model. So it's a mix of the 2.
We've got.
Our legacy assets that were rotating into first cash and then into our origination securitization business and.
And that's just going to take is just going to take some time.
Okay that makes sense.
Great. Thanks.
Your next question comes from Truvada and Cranston from JMP Securities.
Alright, thanks, good morning.
I wanted to clarify something on the commercial loans and.
And thanks for all the additional detail on those.
And the prepared comments I think you made the comment that you were.
I'm hopeful that there could be a pay off on those and the near term.
I just wanted to clarify was that was that comment related to both of the loans or was that maybe more directed towards the construction loan in particular.
Yeah, I mean, I would say it's more it's obviously, we're working with the borrower on and maturity.
Yeah on that line in particular, I think you know what I would say.
On the other alone.
We fully anticipate that coming out of the demand.
The modification period.
And it'll remain contractually current and they could pursue other financing options at that point.
Okay and.
Can you remind.
And when the when.
And when that went up period.
And.
And yes. It was it was a 1 year modification for them from last September so at all and this September.
Yes.
Okay got it.
And.
And then on the GSE and non owner GSE eligible non owner occupied.
Loans.
Can you maybe talk about that opportunity a little bit more and help us think of kind of what the potential market size is there.
Relative to the sort of more traditional non QM opportunity.
Yes, certainly so historically.
D day.
The supply of for origination of Investor properties via the Gse's or Fannie and Freddie.
Has ranged from approximately 75% to $95 million a year.
It's not had near it doesn't have nearly sort of the same sort of cyclical impacts.
And so.
Anything if this refi boom.
It comes off.
Essentially you are lowering your denominator of.
Other non owner and <unk> assets so.
Is that denominator goes lower at 7% cap that's been institution instituted in the latest PSP or.
Amendment with Fannie and Freddie.
The assumption is debt that will sort of normalize and that excess will be higher.
So.
Obviously, if the number goes to 12%.
And you have to solve for that excess of 7% that being said.
Even prior to this a good portion of GSE loans actually best AXT.
And offered attractive returns for for investors like ourselves.
And our expectation is as originators get more familiar with with selling too to the private markets away from Fannie and Freddie debt.
That this space could could grow now.
<unk> exactly how much of sort of the overall market will ultimately see theres a lot of factors that go into it but at least at least it's a decent sized.
Notional.
Got it okay, that's very helpful.
And then last thing.
<unk>.
I think you noted that you had set a short TBA position.
And the second quarter.
Can you just can you say how large that position is and if you are still carrying into the third quarter.
The position size for $130 million notional on the TBA.
At quarter end.
Okay. Thank you.
Okay.
Our next question comes from Jason Stewart from Jones trading.
Hey, good morning, a couple of follow ups.
On a commercial loan al is the mark.
At 630 at 86% and part reflective of the coupon or your confidence and a payoff.
Well.
Well Mark you know, we use third party vendors to help us determine the mark. So it's 86 per cent of par, which is a $51 million notional.
So as you're thinking updated that youre going to get a full part pay off at September 30th when the modification periods over.
Well no at September 30, there their coupon will turn back on and I think we'll see what pricing vendors.
And they view these sort of.
Modifications that are all starting to.
You know expire if you will right, we're kind of cut and getting to that point and the calendar from a year ago.
So I don't have any.
And any certainty and to how they'll look at that but we would expect that.
Based on our conversation that the loan will start cash paying.
So come Q4.
Okay, so not necessarily pay off but.
And it'll be turned back on Okay got it and then if you can update us on book value.
Quarter to date for Ya man.
Yeah book value quarter to date was up 3% approximately and that was primarily driven by some of the mark to market gains.
And that we've been talking about.
Too rosy and commercial portfolio as well as some of the realized gains through the sales that we mentioned during the quarter.
I'm sorry, what was your question about this.
Third quarter that were and now or was it looking back yes, David border.
To the to the latest point available.
Yeah, we're not.
We're just going to stick with what we've reported.
Okay, and then on the arc MSR.
And when we look at that portfolio can you give us any detail in terms of what saito looks like or maybe like what a plus 50 or 100 move and the and the rates market looks like for the valuation of that.
And the right.
Well just to be clear so we sold.
<unk>.
The third party purchased MSR so so.
Volatility going forward will be lower and I.
I would say we're not we're not.
And point really reporting like St or shifts and the goal is really.
And MSR juice.
That volatility and that and that business and really have them focus on the origination side.
Okay. Okay last.
And last 1 for me then.
I guess I understand sort of the rationale for the TBA short given valuations and the space, but how does that fit into the overall hedging strategy.
What's your propensity to carry that position going forward.
So this is Nick so there's a part of the TBA short is the contemplation that.
And we'll be selling debt.
Net off of.
And the recently acquired GSC positions.
And.
And think about.
And when you think about when you sell that debt its benchmark versus TBA. So and you actually go sell that debt to third parties and the market. Your benchmark is CBA, because youre selling loans back backed by agency collateral.
And so it's really just a hedge and similar to other hedges we put on against non.
And when you see them.
Loans, so Jason Yeah, I mean, the basically the price and convention for traditional non QM debt is off with swaps and then.
And for AAA seniors on the agency eligible it'll be benchmark off TBA.
Okay. Okay.
Okay. Thanks for taking the questions I appreciate it.
Our next question comes from Eric Hagen from <unk>.
Hey, Thanks. Good morning, Hope you guys are well within the debt and equity affiliates can you give us a snapshot for what the balance sheet looks like there and including the amount of capital that is sitting at arc home.
Sure.
Yes.
Excuse me and that line item arc home is.
<unk> $51 million of equity and that balance and then we also have approximately $30 million investment in joint venture, where we historically acquired non QM and <unk>.
Recall, we're now acquiring the non cash directly into.
And the REIT and then the other.
Asset and there is approximately $18 million of the land related financing that that T. J mentioned earlier.
Got it Okay. That's helpful and then on the non QM Securitizations, how much leverage are you guys applying to the retained tranches to get to the return profile that you outlined in the deck.
Somewhere between 1 and a half day, 2 and a half.
Yeah.
Turns.
Okay and are those mark to market.
Repo.
Okay.
Alright, thank you.
Our next question comes from Jim <unk>.
Kenyans.
Good morning folks.
The MSR and presuming that arc continues to carry some MSR and itself generated portfolio.
Yes, that's correct.
And that would be and the 50 million or.
7.1 line item you just referenced Eric Hagen.
It's embedded within the way that we account for it as we bring we show the net equity that we own of arc, we don't look through into our homes balance sheet within our financials, but.
The asset would be flowing up into that net equity.
Alright.
And so it gives us some understanding as to what percentage of that $50 million carrying value of your holding a box Inc.
Is represented by the MSR of their self generated portfolio.
Jim and we don't have that number in front of us up for we can we can look into that.
And do you need to be great. Thank you very much.
And my only question.
We have no further questions at this time and I'll now turn the call over to our host for closing remarks.
Thank you excuse me. Thank you Sylvia and thank you for to everyone for joining the call today.
And I'm trying to rest of your weekend.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.