Q3 2021 AG Mortgage Investment Trust Inc Earnings Call
Yes.
Welcome to the AG mortgage investment Trust third quarter 2021 earnings Conference call. My name is John and I'll be your operator for today's call. At this time all participants are in listen only mode. Later, we will conduct a question and answer.
During the question and answers that you have a question press Star then one on your Touchtone phone.
Please note the conference is being recorded and I will now turn the call over to Jenny in S. One.
Thank you John and good morning, everyone and welcome to the third quarter 2021 earnings call for AG mortgage investment Trust with me on the call today are David Roberts, our chairman and CEO TJ Durkin, our President Nick Smith, our Chief investment Officer, and Anthony Rusty yellow, our Chief Financial Officer.
Before we begin please note that the information discussed in today's call may contain forward looking statements.
Any forward looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in our SEC filings, including under the headings cautionary statement regarding forward looking statements risk factors and management's discussion and analysis.
The company's actual results may differ materially from these statements. We encourage you to read the disclosure regarding forward looking statements contained in our SEC filings, including our most recently filed Form 10-K for the year ended December 31, 2020, and our subsequent periodic reports filed with the SEC, except as required by law we are.
We're 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.
The slide presentation turn to our website www Dot AG M I T dot com and click on the link for the third quarter 2021 earnings presentation on the homepage in the Investor presentation section.
Again welcome to the call and thank you for joining us today with that I'd like to turn the call over to David.
Thanks, Jenny and good morning to everyone.
Pleased to report that we had a terrific third quarter as we continued to execute on our transition to a pure play residential credit mortgage REIT.
As part of our new focused mission, we substantially completed the exit of our legacy assets at prices and terms that were better than or in line with our expectations.
These transactions contributed to a material increase in our book value per share.
As of September 30, our book value per share was $16 92.
And our adjusted book value per share was $16 45.
Both figures represent a net increase of 12%.
On June 30.
These successful sales and resolutions of our legacy assets provide us with significant liquidity.
We have been using a portion of that liquidity to execute on and expand our go forward business plan of originating and securitizing non agency loans.
We continue to believe that we have a competitive advantage in executing that plan and advantage based on our proprietary origination engine of arc home.
Combined with the broad resource resources and expertise of Angelo Gordons structured credit group.
As TJ and Nick will discuss our origination and securitization activities year to date have been comfortably within our projected range of 14% to 18% return on equity.
We have also been pleased with the volume and quality of our originations as well as the continued rollout of new origination programs and new origination channels.
All of US all of which will help propel our growth over the long term.
As we shift our lower yielding investments and excess liquidity into these very attractive returns. We have continued to make progress towards realizing the full earnings potential of our go forward strategy.
For the third quarter, our earnings were heavily influenced by the exit of our legacy assets, our third quarter GAAP earnings per share was $1 87.
And our core earnings per share was <unk> 96.
As we did on our second quarter earnings call, we'd like to point out that core earnings does not capture certain important elements of our originate and securitize go forward business plan and Anthony will highlight that later in the call.
For the third quarter, we maintained our dividend of 21 per share.
Future dividend decisions, which of course are always subject to board approval will be influenced by our expectations and projections of the continued execution of our rotation into our go forward strategy and the resulting positive effect. We believe that will have I will now turn the call over to.
T J.
Thank you David and good morning, everyone.
As David mentioned, we grew adjusted book value by approximately 12% during the quarter.
The $16 45 per share from $14 72 per share last quarter.
We grew the portfolio from 2 billion to $2 2 billion, while decreasing our economic leverage ratio from 222 times to one eight times.
During the quarter, we doubled our liquidity to over $143 million of cash and unencumbered agency MBS.
We will walk you through our robust pipeline and how we see the company rapidly deploying this fresh capital.
To dig a bit deeper into the company's activity. We are active in purchasing approximately $610 million of non agency loans.
Mortgage affiliate Arc home also hit record production within its non agency channel during the third quarter, which Nick will walk through in more detail later in the call.
During the month of October the company continued its robust acquisition pace by purchasing an additional $386 million of loans demonstrating the consistency in our pipeline of assets to support midst growth.
As previously disclosed both legacy commercial loans that were on our books heading into the third quarter were paid off at par.
Those proceeds combined with our previously disclosed sale of <unk> earlier in the quarter generated net proceeds of over $63 million for reinvestment.
As David mentioned, but it bears repeating it has no remaining commercial exposure and we are now fully focused on building our residential loan portfolio.
During the quarter, we further reduced our exposure to agency MBS as we thought the basis had reached a point where further tightening was unlikely and also sold our remaining excess MSR portfolio.
Further strengthening our liquidity position.
We also generated proceeds just shy of $30 million from a large accretive sale of our legacy <unk> and NPL whole loans, which we provide more details on later in the presentation.
Yes.
Moving on to our financing and capital activity during the quarter. We successfully completed another securitization during August which and we provide more details on this transaction later in the deck.
As I previously stated on past earnings call. We are committed to being very disciplined with regards to the pacing of our securitizations to derisk our warehouse lines.
Given our expanding investment pipeline and in an effort to provide flexibility during the quarter, we increased our borrowing capacity for non QM products to $1 1 billion and added $500 million of borrowing capacity to finance GSE non owner non owner occupied loans.
Notably this quarter, we were active in using the capacity under our existing share repurchase program.
In aggregate, we repurchased approximately 260000 shares at a weighted average price of $11 even.
<unk> well below our book value deploying approximately $2 $8 million of the company's excess liquidity.
The company has approximately $11 8 million of additional capacity left under the current buyback plan and we will continue to evaluate repurchases to the extent it is accretive to our balance sheet.
Turning to slide seven we felt it was important to take some additional time to walk investors through this visual of what was a particularly active and important quarter in midst repositioning to a pure play residential mortgage credit right.
We began the quarter was $71 million of liquidity.
Securitization proceeds in excess of warehouse lines create an additional $30 million.
The par payoff of our remaining CRE loans and sales of <unk>, creating an additional $63 million of net proceeds.
The sale of re performing and non performing loans generated $29 million.
And rounding it out with another $6 8 million from agency sales.
We effectively deploy this liquidity during the quarter to invest $58 million net of financing into non QM loans.
That's another $16 million net of financing into GSE non owner occupied loans.
We purchased $2 8 million of common shares again at a weighted average price of $11 and paid common and preferred dividends and aggregate of $8 9 million.
So in summary during the quarter, we were able to double our liquidity successfully exiting a noncore business lines at a profit providing the company with ample firepower to continue deployment within the residential whole loan space.
Subsequent to quarter end, we have deployed $48 million of liquidity into new whole loan investments, leaving us with $91 million of liquidity as of October 31.
On the next slide we wanted to show the remarkable progress made since our fourth quarter earnings call. When we began making the transition to a pure play residential credit.
And our portfolio composition has only continued to shift more towards non agency loans as a result of our October purchases.
During the first three quarters of 2021, we achieved substantial growth in mis investment portfolio and adjusted book value per share from $1 4 billion and $11 81 per share to $2 2 billion and $16 45 per share respectively.
This portfolio growth was led by strong loan acquisition channels, resulting in $1 3 billion of gross residential purchases during the year.
Further volume growth at our operating partner on arc home.
During the year, we were patient and exiting legacy noncore assets at the opportune time in order to maximize proceeds and profits for our investors.
While we are pleased with the progress that's been made year to date, what really drives our strong conviction in our business model is the growing pipeline of opportunities we see.
And future potential earnings power growth. This shift provides our investors, which brings us to the next slide.
We've spent a lot of time formulating our plan for <unk> future, particularly in light of all of the teams accomplishments year to date and simplifying the business and growing our whole loan portfolio.
Enabling the company to reposition to its new focused strategy.
This slide illustrates the compelling investment opportunity, we see in met by highlighting how we expect to unlock the embedded earnings power amidst equity by redeploying it into our new strategy.
At a high level, we believe we can create retain investments post securitization at loss adjusted ROE of 14% to 18%.
Further we have seen the returns play out through.
Through our most recent securitization.
And despite all the progress that's been made year to date, we still see approximately 40% of our equity base available to be rotated into our securitization strategy, which should further drive earnings power.
Away from the investment portfolio, we will still be proactive in addressing our balance sheet optimization.
Including through further repurchases of our common shares at discounts and continuing to work with our preferred shareholder shareholders on exchanges that makes sense for both parties.
With that I'll turn the call over to Nick to further discuss our portfolio in Arco. Thanks.
Thanks, TJ and good morning, everyone turning to page 10 here.
Here, we provided a breakdown of our residential portfolio, where you can further see the migration of assets into newly originated non agency loans driven by sales of legacy assets and continued reinvestment into residential mortgages, given our acquisition pace. We thought it would be helpful to highlight our post quarter activity, which included further growing the residential mortgage book by.
Approximately $386 million.
With loan sourced from both arc home and third party originators.
I'll discuss more on art later in later slides I think it's worth noting here that we have seen a meaningful pickup in registrations and locks through various arkoma origination channels, which we believe will further support our portfolio growth.
Also on this slide we highlighted the assets currently on warehouse totaling $760 million, which we will seek to securitize in the near term as part of our strategy.
On page 11, we provide a summary of loan characteristics for our non QM portfolio as well as the GSE non owner occupied loans, we began acquiring in the third quarter.
We believe we can continue to acquire similar credits through the expansion of existing existing acquisition channels and the rollout of new once year to date, we have acquired approximately $1 $3 billion of newly originated non agency product and continue to grow our footprint at arc home, which I will cover in more detail on the next slide.
During the quarter, we also purchased approximately $213 million of Investor loans, an additional $105 million in October.
As many expected the FHFA and treasury suspended certain amendments to the psf PSP implemented by the previous administration.
One amendment was 7% GSE acquisition cap on non owner occupied and second homes.
Although we've seen a slowdown in the pace of GSE eligible non occupied acquisition subsequent to the suspension.
We remain confident in our ability to deploy capital in this space at attractive returns.
We are happy with our progress this year and repositioning our portfolio and currently have adequate warehouse capacity and liquidity to support continued growth.
To reiterate what T. J said early earlier as we grow we are focused on increasing the pace of our securitizations.
To keep up with the pace of acquisitions and decrease our warehouse exposure.
Over the summer, we successfully completed multiple securitizations significantly improving our cost of financing, which we expect to benefit our net interest margin and earnings.
Going forward, we continue to work through various securitizations for the fourth quarter.
Moving on to page 12.
Arc home had a strong quarter, recognizing pretax income of $5 6 million $2 million of which contributed to mitts earnings during this quarter.
Also on this page we wanted to provide more transparency to investors regarding arc home's financial positions as well as characteristics on its outstanding MSR exposure.
Arc home continues to actively manage this exposure and sold approximately $2 billion of <unk> in the third quarter, resulting in approximately $16 million of proceeds.
The remaining MSR portfolios fair market value is approximately $62 million and can be used for additional liquidity given the current low utilization of our existing MSR lending facility.
Staying on arc home.
Turning to the next page.
Origination and lock volume remained relatively stable quarter over quarter art continued to shift towards non agency production.
This shift shift has helped support margins in environment, where compression is still occurring in the conventional and <unk> space non QM and GSE non occupied loan fundings increased to roughly 50% of arc homes total production and as mentioned previously we have more recently seen an uptick in registration.
<unk> and locks.
Given this growth arc has proven to be an important contributor to mid strategy with MIT currently acquiring approximately half of our combs non QM production with the balance flowing to other Angelo Gordon affiliates.
<unk> has also purchased primarily all of arch GSE owner occupied loan production.
Overall, we remain constructive on being able to prudently grow midst non agency pipeline organically through our call.
Moving on to page 14.
This page provides a summary of our credit sensitive loan position over the previous 12 months as mentioned by T. J. We continue to actively manage this portfolio during the quarter, we sold additional loans, resulting in approximately $6 million of gains.
This sale combined with continued asset management has resulted in a significant reduction in the size of this portfolio since the middle of last year.
Beyond these liquidations the portfolio continues to benefit from strong housing tailwind and historically low mortgage rates.
Currently 79% of the portfolio is performing well nearly a third of the 21% of contractually delinquent loans are making payments.
Voluntary prepayments continued to trend upward with a 12 month average voluntary prepayment rate in the low teens.
The 26% of borrowers that received Covid related assistance nearly two thirds are contractually current today.
Flipping to the next page.
Here, you will find a summary of our agency portfolio.
As of the end of the quarter, approximately 10% to 22% of our equity was allocated in agency MBS.
As we previously mentioned we have continued to reduce our agency exposure selling off a $109 $90 million during the third.
Third quarter.
And expect that trend to continue as we tradition, our equity into residential credit assets. Anthony We will now go over our financial results in more detail Anthony.
Thank you Nick and good morning.
Turning to slide 16, we provide a summary of our current financing profile profile.
In executing our non agency strategy, we continue to focus our efforts on increasing the pace of Securitizations. So we can obtain nonrecourse non mark to market financing on our loan portfolio, which provides meaningfully lower financing costs as compared to when loans are financed on warehouse.
On this slide we highlight that approximately 37% of our financing is through securitized debt, which increased this quarter due to our all of the securitization.
We expect this allocation to continue increasing.
Given our existing loan population available for securitization, which again speaks to the earnings potential in our current portfolio.
<unk>, our current liquidity position discussed by T. J earlier, coupled with our available capacity of $944 million puts the company in a good position for further growth.
Please note that we included a slide in our appendix, which provides details on how we structure. Our most recent deal which is consolidated on the companys balance sheet.
Overall, we securitize approximately $268 million of non QM or non QM UBB, which.
This appendix will provide more details on our retained interest.
On slide 17, we provided a reconciliation of our book value per common share, which increased by $1 74 quarter over quarter.
During Q3, we reported net income available to common shareholders of approximately $30 million or $1 87 per fully diluted share.
Earnings during the quarter were driven by various factors, including mark to market gains across our new origination and RPM NPL portfolios.
Gains from the resolution of our two remaining commercial loans and the sale of our remaining <unk> portfolio.
Gains from the sale of <unk> Npls.
And earnings contributed from our 45% equity method investment in arc home, which is held in a taxable REIT subsidiary.
This increase in book value is reflective of our current quarter earnings offset by the preferred and common dividends declared during the quarter and our common share repurchases approximating $2 8 million.
As discussed on our previous earnings call. We also disclose adjusted book value per common share of $16 45.
Which is computed based on total equity less the entire liquidation preference of our preferred stock.
Turning to slide 18, we disclosed a reconciliation of GAAP net income to core earnings for the third quarter, where you will see core earnings was <unk> 96.
Core earnings was primarily driven by two items.
First included receiving 12 months of deferred interest upon the resolution of commercial loan L, which was modified during 2020.
The second related to previously mentioned <unk> NPL sale.
Specifically the proceeds from the sale went to pay down the bonds secured by the underlying loans and the company held certain of those bonds at discounts.
As the company received par value on the bonds. This resulted in accelerated accretion on these assets during the quarter.
It should be noted that core earnings does not include $1 6 million of gains arc home recognized during the quarter on loans sold to MIT. However, these earnings are recognized as unrealized gains contributing to our overall book value increase.
Lastly, I'll reiterate that we ended the quarter with total liquidity of approximately $144 million.
Which was inclusive of $102 million of cash and $42 million of Unlevered Agency RMB S.
And as we continue to purchase non agency residential loan subsequent to quarter end.
We ended October with $91 million of liquidity.
This concludes our prepared remarks, and we would now like to open the call for questions operator.
Thank you, we'll now begin the question and answer session.
If you do ask a question press Star then one on you touched on phone.
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And our first question from Doug Harter from Credit Suisse.
Thanks.
Thank you just said you ended.
Ended October with $91 million of liquidity.
How are you thinking about what is the liquidity cushion that you want to count that you guys want to maintain so how.
How should we think about kind of the quote unquote excess liquidity position.
Physicians today.
Yes, I mean, Doug C J.
We obviously have our internal risk models to maintain liquidity for margin calls and the like so I think we're well through that.
Given the amount of cash we <unk>.
Generated during the quarter. So we think we can further expand that down by a decent amount as we look into kind of year end.
Roughly speaking I would probably say like 40%, 40% to $50 million based on.
The pipeline and sort of where we are.
Seeing the size of our gestation financing or warehouse risk.
Got it and then I guess.
How do you think about the timing of future sales.
In the CLO market, which.
That market is quite strong today, how do you think about taking advantage of that but maybe.
Maybe it's a little bit a ways away until you actually need the liquidity, how do you kind of balance those two those two factors, yes. It's a couple of factors one it's we.
We financed a lot of that.
A lot of that asset class through various securitization. So some of it is getting too.
Getting through periods of.
Where we can sell the assets and where we can either collapsed refinance or sell out of traditional sort of NPL securitization. So some of it is structurally timed and then we just find that.
Aggregating to some sort of critical mass gets better execution than selling in.
Smaller a smaller pool, so those two things.
I would say drive us towards.
Less frequent but larger probably hopefully more accretive.
Disposition, so we'll continue to do it.
Into 2022.
Got it and then just from a REIT standpoint is there any or liquidity standpoint, any amount of agency that you would kind of want to hold long term as you can kind of continue to build.
Towards towards the future.
Yes, the way, we think about it is the.
Assets that were currently.
Acquiring with the new originations are.
Qualified assets for retest, so the idea would be to wind down the agency portfolio and we wouldn't need to be relying upon a four.
<unk>.
Great. Thank you.
Our next question from Bose George from <unk>.
Hey, guys good morning.
I just wanted to go back to slide 18, I guess, it was where you have that.
GAAP reconciliation can you just go over that $15 million again sort of the different drivers of that.
Yes, so that $15 million is the <unk>.
Refer to the <unk> NPL sale, so upon selling or liquidating those assets. We held bonds that were recorded at a discount to par and we received par on those bonds. So that's the accelerated accretion.
Okay that makes sense. Thanks, and then the investment in affiliates line item on your balance sheet.
You remind me what's in there I assume are part of it but what's what's.
Yes, what's it and it's kind of come down over time, just wanted to figure that out as well.
That's correct arc is approximately $52 million of that balance.
The remainder is what we refer to as land related financing and we also have a.
A small joint venture that has non QM loans that we investment.
Okay and the decline there is are those those investments just going down over time or because it's kind of gone down over a few quarters.
That's correct and that decline also related to the <unk> NPL sale because the loans, we sold were in that line item.
Okay, great. Thanks, and then just one more for me the 14% to 18% ROE on the purchase loans.
Can you just go through a little bit.
The leverage structural and then.
Wood repo on top of that you're assuming.
Yes, so when.
When we talked when we quote the 14% to 18% that sort of post securitization. So obviously daring to gestation period, we're highly incentivized to turn that to shorten up that ramp period on the leverage we're taking out on the securitization is call. It mid 90% it could be slightly higher could be slightly lower.
So our acquisition price.
And that's how you arrive at the 2014% to 18% certainly as certain assets deleveraging.
Over time.
Structurally we can add additional financial leverage throughout.
Our holding period for those assets.
But generic generally that that is very modest.
Okay, yes, so the 14th.
Sorry go ahead sorry.
I'm going to ask.
We've also been able to take that sort of traditional repo financing and term that out with non mark to market as well.
Okay. So just excluding the repo do you get to the 2014, just struck with the securitization leverage.
Yes, I was just wondering what that would be excluding like if there was no repo at all on it.
Yes, we're probably slightly lower than slightly lower.
Okay.
Okay, great. Thanks, a lot.
Our next question is from Eric Hagen from <unk>.
Hey, Thanks, Good morning, a couple of questions can you highlight.
Some more detail around how you think about the tradeoff between and potentially raising the dividend and buying back stock.
And then can you also describe the profile of the non QM loans that you are buying at this point and how the credit has maybe evolved.
Over the last call.
At year.
From what you've been buying.
On the dividend point its David Roberts.
As we've said in the past we look at our.
Dividend policy based on the current quarter end.
And in our go our go forward look and.
We will continue to do that.
In terms of.
We purchase versus versus dividends.
I would say that we are.
One is the repurchases and opportunistic.
Episodic.
Type of investment and.
The dividend is.
I think at the heart of.
Why people are <unk>.
<unk> invested in the mortgage REIT space for that dividend income.
And so we're really focused on growing our earnings which.
Would enable us to grow our dividend over time, if we're successful.
Hey, Eric This is this is Nick.
On the credit quality.
And sort of positioning of the assets.
The nice thing is is we do have and have emphasized in the presentation a bunch the arc home channel.
Through that channel, we've had minimal or almost no expansion of our guidelines, we still don't feel a tremendous amount of pressure. It's generally very up in credit we're talking high <unk> low 70 type LTV in aggregate at mid 700 Spike goes.
We actually see decent opportunity.
Going up in credit. So we we continue to be constructive on the availability.
To source attractive assets without really having to go further and further out in credit.
Got it thanks for the color.
Our next question is from Jason Stewart from Jones holding.
Hey, good morning, Thank you and nice quarter I wanted to get your updated thoughts on art and given the strength in that platform. If theres any new thoughts about continuing to to be a JV or if it makes sense to be a separate entity at some point.
We have no.
No current thoughts of.
Changing that.
<unk> that structure.
Okay got it.
I think that answers your question.
Not sure does okay fair enough and then just.
Wishing to FHFA and thoughts around product structure that potential.
Potentially it could be evolving with Sandra Thompson and.
And any sort of.
Thoughts around the credit box, changing and what that market opportunity looks like for arc would be helpful. Thanks.
So the current administration.
Think is going to be.
Sort of changes out of there.
Will impact sort of our ability to source assets.
Obviously, the suspension of the 7% cap.
That's already happened and as mentioned in the presentation, we've already seen a slowdown there, albeit we were still sourcing those assets, we still like the returns.
Certainly it's still on the table that you could see.
That could get reversed its currently sort of pending review by the FHFA.
We have.
<unk> seen other changes.
But I think that has more to do with sort of the capital base of Fannie and Freddie.
CRT coming back as they revisit sort of capital rules. There. So I don't see that is impacting our current book of business. If anything that's just another asset class that down the road, we could we could potentially look at obviously today we are not.
So I think it's still the same the same sort of policy changes that happened earlier in the year are in place.
And Thats, where we really see growth and expansion.
Our business so.
That's sort of what we see for now.
Got it okay. Thank you and congratulations on some nice results.
Thanks, Jason.
And we have no further questions at this time.
Okay.
Its David Roberts.
Conclude.
Hope what came through through all the information and we had certainly had a lot to talk about this quarter.
Is our.
Enthusiasm for not only where we're positioned but for the strength of our team and our resources.
And the successful execution, so far of our transition.
I can tell you that as a management team we're very excited.
For the future and.
Really believe that we have all the tools necessary to.
Finished this transition and continue to grow so thank you very much for your time.
And we look forward to reporting to you next.
Next quarter.
Thank you, ladies and gentlemen that concludes today's call. Thank you for participating and you may now disconnect.
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