Q4 2021 AG Mortgage Investment Trust Inc Earnings Call
Welcome to the AG mortgage investment Trust's fourth quarter 2021 earnings call. My name is John and I'll be your operator for today's call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. If you do have a question. Please 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 and S. One.
Thank you John Good morning, everyone and welcome to the fourth quarter 2021 earnings call for AG mortgage investment Trust.
With me on the call today are David Roberts, our chairman and CEO T. J darken, our president Nick Smith, our Chief investment Officer, and Anthony <unk>, 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 reports filed from time to time with the SEC.
As required by law, we are not obligated to and do not intend to update or to review or revise any forward looking statements, whether as a result of new information future events or otherwise.
During the call today, we will refer to certain non-GAAP financial measures. Please refer to our SEC filings for reconciliations from the 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 Dot AG.
<unk> dot com and click on the link for the fourth quarter 2021 earnings presentation on the homepage and the Investor presentation section.
Again, welcome to the call and thank you for joining us today.
That I would like to turn the call over to David.
Thank you Jamie.
2021 was a successful year for AG mortgage investment trust in many ways, but most importantly, we are proud to have achieved our transition to a pure play residential credit REIT.
We begin this year 2022 with the liquidity the infrastructure and the talent to continue to be a growing and focused leader in residential mortgage origination and securitization.
We have demonstrated our ability to execute this strategy through the rapid acceleration of our originations and subsequent securitization in the latter part of 2021 and into 2022.
Overtime, we believe this will lead to increased earnings and increased dividends for our shareholders.
That is how we evaluate ourselves and how we believe in time the market will evaluate us.
A notable event in 2021 was our equity capital raise of approximately $80 million. The most important effect of this capital is that it will fuel our growth for the foreseeable future.
Of course, we would have been far more pleased to have raised equity at a higher stock price and we did.
That said from a long term view of our earnings and dividend.
We consider the capital raise to have been necessary not only support our continued growth, but also to strengthen our position, making us well capitalized to seize on the opportunities that are unfolding in the face of the current volatility in the markets.
I would also point out that in 2021 through a combination of the common equity capital raise a significant increase in book value from earnings and some exchanges of common equity for preferred equity we were able to take the preferred equity percentage of total equity capitalization from <unk>.
58% at the start of the year down to 39% at year end.
We believe this year end capital structure positions the company much more solidly to achieve our goals.
As we are all well aware the start of 2022 has seen volatility in nearly all financial markets.
The bottom line is we have been and are well protected against interest rate rises.
The widening of credit spreads will cost our current book in the near term.
However, given our robust liquidity at both mix and our mortgage affiliate arc home.
That same volatility is providing us with increased opportunities, which we have already started to capitalize on.
In terms of our dividend policy, we will continue to be guided by our view of earnings on a go forward basis.
As we have highlighted in the last few calls given our current business model, we consider GAAP earnings to be a more meaningful go forward guide than core earnings and evaluating our business and our dividend policy.
Finally, we are well aware that the stock market has not yet given us credit for what we believe is a significant growth opportunity.
We will strive to make believers of both existing and new shareholders if.
If you have followed our ownership filings you will see that we members of the management team have backed up our own belief and confidence in midst future with sizable ownership stakes with that I will now cost the call over to T. J.
Thank you David and good morning, everybody.
Putting some specific numbers to David's opening remarks Mitch.
Generated $5 29, a GAAP earnings per share during 2021, along with $1 11 of core earnings while paying out 81 common dividends.
During the year, we grew adjusted book value by approximately 21% from $14 32 per share.
<unk>.
To $14 32 per share from $11 81 per share.
We grew the portfolio from $1 4 billion to $3 2 billion, increasing our economic leverage ratio from one five turns to two four turns from last year to enhance our earnings power.
Turning to page six and diving a bit deeper into the companys fourth quarter activity.
We were active in purchasing approximately $1 2 billion of non agency loans, while completing two non QM securitizations during the quarter.
We did take a one time hit to book value as a result of the capital raise in November but we ended the year with $137 million of liquidity, which puts us in a strong position to take advantage of the current market volatility.
And finally, our mortgage affiliate arc home continues to have strong results within its non agency channel with approximately $500 million of originations during the quarter.
I'll now pass the call over to Nick who will provide further detail on our execution in our homes performance.
T J turning to page seven here, we summarize our purchase activity throughout 2021, along with our 2022 year to date purchases current pipeline.
During 2021, we acquired approximately $2 5 billion of non agency loans.
Italy, increasing our purchase pace over the course of the year.
We also successfully deployed approximately $105 million of equity corresponding with the November offering pipeline and have purchased over $500 million of assets year to date in 2022.
With additional pools of loans in the pipeline we.
We are well positioned to continue to build off this momentum given our liquidity.
Financing capacity and current portfolio available for securitization.
During 2020 to 21, we executed five securitizations.
And in 2022 have already completed two securitizations, including our first GSE non owner occupied collateral deal.
We expect to continue this pace of two to three securitizations at quarter throughout 2022.
Moving to page eight.
This slide outlines our current portfolio, along with the corresponding asset yields and cost of funds in the lower left we highlight the portfolio's repositioning over the course of 2021 as we rotated capital into non agency loans by year end, roughly 85% of our equity was allocated to residential investments.
As mentioned year to date in 2022, we have purchased an additional $519 million of non QM and GSE eligible non occupied loans, leading our first rated securitization of GSE eligible monarch buy loans.
<unk> $300 million secure.
Securitization with one of our origination partners and sold $133 million of agency RBS.
On page nine we provide a summary of our non agency new origination loans in 2021, we acquired approximately $2 billion of non QM loans as you can see on the table on the right. These acquisitions have significant equity along with other strong credit characteristics.
Approximately $800 million is financed with non mark to market nonrecourse debt. While the remainder is financed through aggregation warehouse lines that will be termed VR programmatic securitizations.
We also acquired approximately $500 million of GSE eligible nonregulated loans of which many were securitized in the beginning of January while the remainder will be securitized at the end of Q1 or the beginning of Q2 alongside additional acquisitions from 2022.
Yes.
Moving on to page 10.
During 2021 arc home generated $22 8 million of pre tax earnings 9 million of which contributed to mitts earnings during the year.
During the fourth quarter <unk> earnings were driven by Mark to market gains on its MSR portfolio, which also continued to perform well during the first quarter of 2022, given the rising rate environment.
Arc home's current MSR portfolio has a fair market value of approximately $68 million and can be used for additional liquidity given the current low utilization of <unk> existing MSR lending facilities.
On page 11, we continue our discussion on arc.
Arc home continues to differentiate itself through its growth in non agency originations over the past year arc has grown as non agency volumes to approximately 50% of its originations up from less than 5% 2020.
This is coupled with an increase in total originations from $3 8 billion in 2020 to $4 4 billion in 2021.
Art continues to expand its non agency footprint, we expected prospective will offset margin compression and conventional and government products.
Anthony We will now go over our financial results in more detail Anthony.
Thank you Nick and good morning, everyone.
Turning to slide 12, we provide an update on our financing profile as of December 31.
During the quarter, we remained focused on our securitization business completing two non QM securitizations of approximately $450 million of Phoebe.
Obtaining nonrecourse non mark to market financing.
As of year end, approximately 35% of our financing was through securitized debt.
We expect this allocation to continue to increase as we rotate our existing portfolio from warehouse financing to securitize financing and as Nick previously mentioned, we completed an additional two transactions through February .
The uncommitted borrowing capacity on our warehouse lines grew quarter over quarter as we increased the capacity on one existing facility and entered into new facility to finance non agency loans.
This capacity along with liquidity from previous sales of noncore assets.
Cash generated from securitization transactions and capital raised from our November common stock offering.
Fueled our growth plan, enabling us to acquire approximately $1 2 billion of non agency loans in the fourth quarter.
This fourth quarter acquisition activity alone represented approximately 50% of our total 2021 purchases.
On slide 13, we provide a reconciliation of our book value per common share for both the quarter to date and year to date periods.
During 2021.
Book value grew approximately 20% largely as a result of year to date GAAP net income.
Available to common shareholders of $86 million or $5 29 per fully diluted share.
GAAP earnings was driven by.
Asset appreciation on our credit investments and profitable sales or pay offs of our legacy noncore investments as we repositioned our portfolio to focus on non agency strategy.
Book value decrease in the fourth quarter by approximately 13%, which was primarily driven by our November common stock offering and the preferred and common dividends declared during the fourth quarter offset in part by net income.
Net income available to common stockholders during the fourth quarter approximated $6 3 million or <unk> 33.
Per fully diluted share.
These earnings included realized gains on the sale of certain non agency bonds.
Net mark to market gains on non QM loans inclusive of earnings from our related hedges.
Mark to market gains on certain <unk> NPL investments as a result of improved borrower performance.
And noncore earnings contributed from arc home.
Our 45% equity method investment, which is held in a taxable REIT subsidiary.
On slide 14, we disclosed a reconciliation of GAAP net income to core earnings where you can see core earnings was $1 11 per share for 2021 and negative <unk> <unk> per share during Q4.
Core earnings for the year was primarily driven by accretion recognized on the sale of certain <unk> NPL loans held at discounts.
As well as deferred interest received on the resolution of a commercial loan in the third quarter of last year.
As a reminder, our core earnings is limited in that it does not include our portion of gains recorded by arc home in connection with the sale of residential mortgage loans to us.
These gains were 33 for the year and 10 for the fourth quarter and we're recognizing the unrealized gain line item on our income statement contributing to GAAP earnings during 2021.
Lastly, we.
We ended the quarter with total liquidity of approximately $137 million.
Which was inclusive of $68 million of cash and $69 million of Unlevered Agency MBS.
As of January 31, our liquidity was relatively consistent approximate $134 million.
Which will support our continued growth in our investment portfolio throughout 2022.
This concludes our prepared remarks, and we would now like to open the call for questions operator.
Thank you well now begin the question and answer session. If you do have a question press Star then one on your Touchtone phone.
If you wish to be removed from the queue. Please press the pound sign or the hash key.
Once again, if you do have a question press Star then one on your Touchtone phone.
Our first question is from Doug Harter from Credit Suisse.
Hi, This is John <unk> on for Doug. Thank you so much for having me.
First question, just sort of how do you.
Size, the risk or could you quantify the risk of when Youre aggregating. These loans and you are putting them into different buckets before you securitize kind of whats. The timeline. There until you are ready to securitize could you sort of size that risk for us.
Yes, certainly the.
The good news in that regard us as <unk> begins to roll off a lot of capacity has returned to the market from a resource standpoint, so to the extent that's the case what sort.
Sort of where the.
Covid turn times, if you will of more like 90 to 120 days, our expectation, we're going to get that down closer to 30 to 60 days from in loans hit our warehouses to when they find their way into the securitization.
So that's that's sort of the positive there.
Okay, great. Thank you and then second question.
New loan the kind of the way.
Lightning on.
Spreads on new loans, how has that impacted returns and where do you see it going.
Yes so.
That is if anything a bright spot obviously as David mentioned in the prepared remarks.
Theres a spread winding with on our current book, but we continue to be able to source assets at more attractive yields if anything earlier into the year.
We sort of haven't seen the spread widening in the loan space.
That we were seeing in the secondary.
But that's that's fully present today over the past couple of three weeks and into that if anything expectations, our volumes should actually be higher.
Okay, great. Thank you and then just last question.
How is the impact of the <unk>.
<unk> on high balance second home opportunities.
Yes, I think I think that's very interesting opportunity, maybe a little bit unexpected given sort of the roll back of some of the.
Amendments the PSP earlier in the year.
We welcome any LTA increases.
I think those will be very meaningful.
<unk> on originate cohorts of origination where it makes sense for our balance sheet to participate.
And given the fact that that.
It was implemented as of April one.
<unk> walks.
From from call it even a month ago.
We have already started flowing into private capitals hands.
I think I think that will continue to be an opportunity for yourselves and a lot of other participants in the markets.
In the loan space.
Great. Thank you for your time.
Sure.
Our next question is from Bose George from K B W.
Good morning. Thank.
Actually first just wanted to ask how do you see the core run rate earnings from the portfolio.
Quarter, the core number was slightly negative.
Just what do you see as a normalized <unk> and <unk>.
<unk> is going to think about how do we get there from here.
Yes.
I can take that so when you think about the current quarter, we did try and isolate the portion from arc that's not included.
Which was the <unk>.
I would say the best way to think about it and we've talked about this before where.
We've completed the transition on the balance sheet side and on the income statement side.
We do expect core and earnings too.
Continue to grow and we did include a slide in.
In the presentation on slide seven where you can really see purchases ramp up in Q3 Q4.
What youre not really seeing that earnings come through yet in the fourth quarter and Q1.
Q2 onward, we really see us see the earnings come through as the purchases settle in and begin to earn.
And just in terms of the normalized <unk> I mean should we think of kind of at a double digit number after sort of on a net basis.
Post post securitization, yes.
Okay, Great and then actually just looking at book value Slide last quarter.
If you sort of strip out the impact of the deal and what's the book value kind of roughly flat.
Yes flat to slight slightly up due to the GAAP earnings outweighing the dividends.
Okay.
And then just this quarter to date, just any update on changes to book value.
Yes, so quarter to date.
Through January 31.
Approximately down 1% for book value.
Okay, great. Thanks.
Our next question is from Herbert Crimson from JMP Securities.
Alright, thanks, good morning.
Just another question on <unk>.
I think in the prepared comments you guys mentioned that.
You expect an expanded footprint to offset.
The margin pressure that we've seen in the <unk>.
Origination business.
Okay.
Should we interpret that to mean.
You guys believe arc can remain profitable on an operating basis.
Throughout 2022, it seems like from some of the other originator codes.
There's been quite a bit of a continued margin compression.
Into the first quarter. So curious if you guys are seeing that as well and what the sort of outlook is for art in terms of operating profitability. This year.
Thanks, Robert This is Nick so on the the sort of transitioning to our non agency footprint. There's no hiding from the margin compression, which is obviously has been well telegraphed and will likely be more and more of it.
Across the industry I think if anything arc is counter cyclical given our repositioning.
And to the extent that.
Resources become available.
As.
<unk> comes off of really all time highs since 2007 that if anything it gives us the opportunity to both expand volumes and profitability.
So we're optimistic.
Okay got it I appreciate the color.
Okay.
Our next question is from Eric Hagen from <unk>.
Hi, Thanks, Good morning, maybe a couple for myself.
Thank you responded to the first question in the queue, saying that.
The federal is off its balance sheet and spreads widen there should be more capacity in the securitization market, maybe hoping you can explain that a little bit.
As an agency and Ginnie originator arc home has regulatory capital that it needs to exceed.
Above a certain threshold for the agencies can you can you say where arc homes regulatory capital sits with regard to that threshold.
Yes, Eric we don't have the exact numbers on the regulatory capital but were.
We're very comfortable lead through that.
That's not even an issue of top of mind and I think I think what the earlier comment was is that not so much the fed.
Rolling off their balance sheet more of the I think the change.
Changes out of the FHFA in terms of <unk> is what's creating I would say more volume or opportunity.
Four.
Not for Securitizers to effectively play in that space not so much directly the balance sheet runoff.
Okay.
So with regards to.
The securitization spreads that you might confront there can you talk about.
How you think about financing loans through your warehouse versus.
Versus turning them around and for incidents through securitization, if there's volatility in that market.
Of course, we expect to still prudently de risk our warehouse risks and securitize assets.
Although no one likes spread widening on the securitized space that sort of obviously prevalent across.
All sort of fixed income products and risk products.
The what I sort of alluded to before as we can.
Replace the risk at these wider levels.
And actually sort of dig in more on increased volume, so, albeit painful on current inventory.
There is you can replace risk at the current market and still create the ROE.
That we talked about.
Alright, Thanks, a lot.
Next question is from Jason Stewart from Jones trading.
Thanks, Good morning.
You've talked a little bit around this can you just describe the ROE opportunity in the pool market versus the origination market if youre seeing some dislocation.
Pools is that a better opportunity than buying from arc at the moment.
So we pay very close attention to where we can organically.
Great products at arc versus where assets trade in the secondary certainly there are.
Until recently, there hadn't been a tremendous amount of opportunity opportunity. If anything there is probably a lagged effect in fact, maybe just.
Trading shops, and guys being opportunistic.
Opportunistic or optimistic.
Earlier in January certainly in February has taken hold.
We do see more opportunity.
Then we had over the past year in the bulk markets for sure.
Is.
Is doing stuff organically still net net better today, yes.
Yes, but.
The basis has the basis there has certainly tightened considerably.
Okay fair enough on that.
And then back to arc on the MSR. If my math is right. It looks like <unk> was marked around something like four two times.
Can you talk about where you where you see the sensitivity on that asset and whether that was included or any mark up was included at your January 31st estimate of book value from it.
Yes, Jason I can comment on on the January impact. So there was a mark up on the MSR arc for from midst portion was approximately $2 million markup on that asset during January .
Okay.
Okay, and any comments around sensitivity to that asset on from a rate perspective, I mean, I guess, we can sort of back into it based on that January 31, Mark but.
Any generic comments there.
Yes, I mean, we do disclose.
The very high level.
Portfolio characteristics given.
Those characteristics, obviously those coupons are.
Well out of the money today and enter any sell off there should be additional expansion, albeit.
The next $25 50 basis points more.
Move won't have the same sort of impact.
To sort of the expansion of our value there.
As we've mentioned before obviously, we carry that unlevered. So.
A sort of additional source of capital if you will.
Got it okay. Thanks, a lot I appreciate it.
And we have no further questions at this time.
Hi, its David Roberts, Thanks to everyone for joining us on this busy morning, I would leave you with one thought which is that.
Conjunction with.
Our infrastructure.
And our talent it is a.
As a fortuitous time for us to have a lot of liquidity to deploy.
As we watch the volatility.
This market.
We are we are optimistic about the rest of the year.
Hope everyone has a good day. Thank you.
Thank you, ladies and gentlemen that concludes today's call. Thank you for participating and you may now disconnect.
Okay.
Yeah.
[music].
[music].
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Welcome to the AG mortgage investment Trust's fourth quarter 2021 earnings call. My name is John and I'll be your operator for today's call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. If you do have a question. Please press Star then one on your Touchtone phone. Please note. The conference is being recorded and I'll now turn the call over to Jenny in S. One.
Thank you John Good morning, everyone and welcome to the fourth 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 Archie can.
A lot of it there.
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 managements discussion and analysis.
The company's actual results may differ materially from these statements.
I 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 reports filed from time to time with the SEC.
Except as required by law, we are not obligated to and do not intend to update or to review or revise any forward looking statements, whether as a result of new information future events or otherwise.
During the call today, we will refer to certain non-GAAP financial measures. Please refer to our SEC filings for reconciliations to 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 fourth quarter 2021 earnings presentation on the homepage and 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.
Thank you Jody.
2021 was a successful year for AG mortgage investment trust in many ways, but most importantly, we are proud to have achieved our transition to a pure play residential credit REIT.
To begin this year 2022, with the liquidity the infrastructure and the talent to continue to be a growing and focused leader in residential mortgage origination and securitization.
We have demonstrated our ability to execute this strategy through the rapid acceleration of our originations and subsequent securitization in the latter part of 2021 and into 2022.
Over time, we believe this will lead to increased earnings and increased dividends for our shareholders.
That is how we evaluate ourselves and how we believe in time the market will evaluate us.
A notable event in 2021 was our equity capital raise of approximately $80 million. The most important effect of this capital is that it will fuel our growth for the foreseeable future.
Of course, we would have been far more pleased to have raised equity at a higher stock price and we did that.
That said from the long term view of our earnings and dividend.
<unk>, we can further the capital raise to have been necessary not only to support our continued growth, but also to strengthen our position, making us well capitalized to seize on the opportunities that are unfolding in the face of the current volatility in the markets.
I would also point out that in 2021 through a combination of the common equity capital raise a significant increase in book value from earnings and some exchanges of common equity for preferred equity we were able to take the preferred equity percentage of total equity capitalization from <unk>.
88% at the start of the year down to 39% at year end.
We believe this year end capital structure positions the company much more solidly to achieve our goals.
As we are all well aware the start of 2022 has seen volatility in nearly all financial markets.
The bottom line is we have been and are well protected against interest rate rises.
The widening of credit spreads will cost our current book in the near term however, given our robust liquidity at both mix and our mortgage affiliate arc home.
The same volatility as providing us with increased opportunities, which we have already started to capitalize on.
In terms of our dividend policy, we will continue to be guided by our view of earnings on a go forward basis.
As we have highlighted in the last few calls given our current business model, we considered GAAP earnings to be a more meaningful go forward guide than core earnings and evaluating our business and our dividend policy.
Finally, we are well aware that the stock market has not yet given us credit for what we believe is a significant growth opportunity.
We will strive to make believers of both existing and new shareholders. If you have followed our ownership filings you will see that we members of the management team have backed up our own belief and confidence in midst future with sizable ownership stakes with that I will now pass the call.
T J.
Thank you David and good morning, everybody.
Putting some specific numbers to David's opening remarks, <unk> generated $5 29, a GAAP earnings per share during 2021, along with $1 11 of core earnings while paying out 81 common dividends.
During the year, we grew adjusted book value by approximately 21% from $14 32 per share from.
To $14 32 per share from $11 81 per share.
We grew the portfolio from $1 4 billion to $3 2 billion, increasing our economic leverage ratio from one five turns to two four turns from last year to enhance our earnings power.
Turning to page six and diving a bit deeper into the companys fourth quarter activity.
We're active in purchasing approximately $1 2 billion of non agency loans, while completing two non QM securitizations during the quarter.
We did take a one time hit to book value as a result of the capital raise in November but we ended the year with $137 million of liquidity, which puts us in a strong position to take advantage of the current market volatility.
And finally, our mortgage affiliate arc home continues to have strong results within its non agency channel with approximately $500 million of originations during the quarter.
I'll now pass the call over to Nick who will provide further detail on our execution in our homes performance.
Thanks T J turning to page seven here, we summarize our purchase activity throughout 2021, along with our 2022 year to date purchases and current pipeline.
During 2021, we acquired approximately $2 5 billion of non agency loans steadily increasing our purchase pace over the course of the year.
We also successfully deployed approximately $105 million of equity corresponding with the November offering pipeline and have purchased over $500 million of assets year to date in 2022.
With additional pools of loans in the pipeline.
We are well positioned to continue to build off this momentum given our liquidity.
Financing capacity and current portfolio available for securitization.
During 2020 to 21, we executed five securitizations.
And in 2022 have already completed two securitizations, including our first GSE non owner occupied collateral deal.
We expect to continue this pace of two to three securitizations at quarter throughout 2022.
Moving to page eight.
This slide outlines our current portfolio, along with the corresponding asset yields and cost of funds in the lower left we highlight the portfolio's repositioning over the course of 2021 as we rotated capital into non agency loans by year end, roughly 85% of our equity was allocated to residential investments.
As mentioned year to date in 2022, we have purchased an additional $519 million of non QM and GSE eligible non occupied loans bleed at our first rated securitization of GSE eligible monarch buy loans.
Issued $300 million.
Securitization with one of our origination partners and sold $133 million of agency MBS.
On page nine we provide a summary of our non agency new origination loans in 2021, we acquired approximately $2 billion of non QM loans as you can see on the table on the right. These acquisitions have significant equity along with other strong credit characteristics.
Approximately $800 million is financed with non mark to market nonrecourse debt. While the remainder is financed through aggregation warehouse lines that will be termed via our programmatic securitizations.
We also acquired approximately $500 million of GSE eligible nonregulated loans of which many were securitized in the beginning of January while the remainder will be securitized at the end of Q1 or the beginning of Q2 alongside additional acquisitions.
From 2022.
Moving on to page 10.
During 2021 arc home generated $22 8 million of pre tax earnings 9 million of which contributed to Mitch earnings during the year.
During the fourth quarter <unk> earnings were driven by Mark to market gains on its MSR portfolio, which also continued to perform well during the first quarter of 2022, given the rising rate environment.
Arc home's current MSR portfolio has a fair market value of approximately $6 million to $8 million and can be used for additional liquidity given the current low utilization of ARX existing MSR lending facilities.
On page 11, we continue our discussion on arc.
Arc home continues to differentiate itself through its growth in non agency originations over the past year arc has grown as an agency volumes to approximately 50% of its originations up from less than 5% 2020.
This is coupled with an increase in total originations from $3 8 billion in 2020 to $4 4 billion. In 2021 is art continues to expand its non agency footprint. We expect it expect it will offset margin compression and conventional and government products.
Anthony We will now go over our financial results in more detail Anthony.
Thank you Nick and good morning, everyone.
Turning to slide 12, we provide an update on our financing profile as of December 31.
During the quarter, we remained focused on our securitization business completing two non QM securitizations of approximately $450 million of Phoebe.
Obtaining nonrecourse non mark to market financing.
As of year end, approximately 35% of our financing was through securitized debt.
We expect this allocation to continue to increase as we rotate our existing portfolio from warehouse financing to securitize financing and as Nick previously mentioned, we completed an additional two transactions through February .
The uncommitted borrowing capacity on our warehouse lines grew quarter over quarter as we increased the capacity on one existing facility and entered into new facility to finance non agency loans.
This capacity along with liquidity from previous sales of noncore assets cash generated from securitization transactions and capital raised from our November common stock offering.
Fueled our growth plan, enabling us to acquire approximately $1 2 billion of non agency loans in the fourth quarter.
This fourth quarter acquisition activity alone represented approximately 50% of our total 2021 purchases.
On slide 13, we provide a reconciliation of our book value per common share for both the quarter to date and year to date periods.
During 2021.
Book value grew approximately 20% largely as a result of year to date GAAP net income available.
<unk> available to common shareholders of $86 million or $5 29 per fully diluted share.
GAAP earnings was driven by.
Asset appreciation on our credit investments and profitable sales or pay offs of our legacy noncore investments as we repositioned our portfolio to focus on non agency strategy.
Book value decreased in the fourth quarter by approximately 13%, which was primarily driven by our November common stock offering and the preferred and common dividends declared during the fourth quarter offset in part by net income.
Net income available.
Available to common stockholders during the fourth quarter approximated $6 3 million or <unk> 33.
Our fully diluted share.
These earnings included realized gains on the sale of certain non agency bonds.
Net mark to market gains on non QM loans inclusive of earnings from our related hedges.
Mark to market gains on certain RPM NPL investments as a result of improved borrower performance.
And non core earnings contributed from arc home.
45% equity method investment, which is held in a taxable REIT subsidiary.
On slide 14, we disclosed a reconciliation of GAAP net income to core earnings where you can see core earnings was $1 11 per share for 2021 and negative <unk> <unk> per share during Q4.
Core earnings for the year was primarily driven by accretion recognized on the sale of certain <unk> NPL loans held at discounts.
As well as deferred interest received on the resolution of a commercial loan in the third quarter of last year.
As a reminder, our core earnings is limited in that it does not include our portion of gains recorded by arc home in connection with the sale of residential mortgage loans to us.
These gains were <unk> 33 for the year and 10 for the fourth quarter and we're recognizing the unrealized gain line item on our income statement contributing to GAAP earnings during 2021.
Lastly, we ended the quarter with total liquidity of approximately $137 million.
Which was inclusive of $68 million of cash and $69 million of Unlevered Agency RMB.
As of January 31, our liquidity was relatively consistent approximate and $134 million.
Which will support our continued growth in our investment portfolio throughout 2022.
This concludes our prepared remarks, and we would now like to open the call for questions operator.
Yes.
Thank you well now begin the question and answer session. If you do have a question press Star then one on your Touchtone phone.
If you wish to be removed from the queue. Please press the pound sign or the hash key.
Once again, if you drove a question press Star then one on your Touchtone phone.
Our first question is from Doug Harter from Credit Suisse.
Hi, This is John <unk> on for Doug. Thank you saw loss Youre, having me.
First question, just sort of how do you.
Size, the risk or could you quantify the risk of.
When youre aggregating. These loans you are putting them into different buckets before you securitize kind of whats the timeline there until you are ready to securitize and that could you sort of size that risk for us.
Yes, certainly.
The good news in that regard us as <unk> begins to roll off a lot of capacity has returned to the market from a resource standpoint, so to the extent that's the case what sort.
Sort of where the.
Covid turn times, if you will of more like 90 to 120 days, our expectation, we're going to get that down closer to 30 to 60 days from in loans hit our warehouses to when they find their way into securitization.
So that's that's sort of the positive there.
Okay, great. Thank you and then second question.
New loan the kind of the widely known.
Spreads on new loans, how has that impacted returns and where do you see it going.
Yes so.
Thats, if anything a bright spot obviously as David mentioned in the prepared remarks, there is a spread winding with on our current book, but we continue to be able to source assets at more attractive yields if anything earlier into the year.
We sort of haven't seen the spread widening in the loan space.
That we were seeing in the secondary but.
But that's that's fully present today over the past couple of three weeks and into that if anything youre expectations are volumes should actually be higher.
Okay, great. Thank you and then just last question.
How is the impact then of the.
<unk> on high balance sheet second home opportunities.
Yes, I think I think that's a very interesting opportunity.
Maybe a little bit unexpected given sort of the roll back of some of the.
Amendments the PSP earlier in the year.
We welcome any LTA increases.
I think those will be very meaningful.
We're focused on originate cohorts of origination where it makes sense for our balance sheet to participate.
And given the fact that that has it was implemented as of April <unk> that basically it walks.
From from call it even a month ago have already started flowing into private capitals hands.
I think I think that will continue to be an opportunity for ourselves and a lot of other participants in the markets.
The loan space.
Great. Thank you for your time.
Course.
Our next question is from Bose George from K B W.
Hey, everyone. Good morning.
Actually first just wanted to ask how do you see the core run rate earnings from the portfolio.
Quarter, the core number was slightly negative.
Just what do you see as a normalized Roe.
<unk> is going to think about how we get there from here.
Yes.
I can take that so when you think about the current quarter, we did try and isolate the portion from arc that's not included.
Which was the <unk>.
I would say the best way to think about it and we've talked about this before where.
We've completed the transition on the balance sheet side and on the income statement side we.
We do expect core and earnings too.
We continue to grow and we did include a slide.
In the presentation on slide seven where you can really see purchases ramp up in Q3, Q4 of which youre not really seeing that earnings come through yet in the fourth quarter and Q1, and really Q2 onward, we really see us see the earnings come through as the purchases settle in and begin to earn.
And just in terms of the normalized ROE I mean should we think of kind of at a double digit number after.
On a net basis.
Post close securitization, yes.
Okay, Great and then actually just looking at book value Slide last quarter.
If you sort of strip out the impact of the deal and what's the book value kind of roughly flat.
Yes flat to slight slightly up due to the GAAP earnings outweighing the dividends.
Okay.
And then just this quarter quarter to date, just any update on changes to book value.
Yes, so quarter to date.
Okay.
Through January 31.
Approximately down 1% for book value.
Okay, great. Thanks.
Our next question is from Herbert Crimson from JMP Securities.
Alright, thanks, good morning.
Just another question on <unk>.
I think in the prepared comments you guys mentioned that.
You expect an expanded footprint to offset.
The margin pressure that we've seen in the <unk>.
Origination business.
Yes.
Should we interpret that to mean that.
You guys believe arc can remain profitable on an operating basis.
Throughout 2022, it seems like from some of the other originator Kohl's.
There's been quite a bit of continued margin compression.
Into the first quarter. So curious if you guys are seeing that as well and look the sort of outlook is for art in terms of operating profitability. This year.
Thanks, Robert This is Nick so on the the sort of transitioning to our non agency footprint. There's no hiding from the margin compression, which is obviously has been well telegraphed and will likely be more and more of it.
Across the industry I think if anything arc is counter cyclical given our repositioning.
And to the extent that.
Resources become available.
As.
<unk> comes off of really all time highs since 2007 that if anything it gives us the opportunity to both expand volumes and profitability.
So we're optimistic.
Okay got it I appreciate the color.
Okay.
Our next question is from Eric Hagen from <unk>.
Hi, Thanks, Good morning, maybe a couple for myself.
Thank you responded to the first question in the queue, saying that.
As the fed rolls off its balance sheet and spreads widen there should be more capacity in the securitization market, maybe hoping you can explain that a little bit and then as as an agency and Ginnie originator arc home has regulatory capital that it needs to exceed.
Above a certain threshold for the agencies can you can you say where arc homes regulatory capital sits with regard to that threshold.
Sure.
Yes, Eric we don't have the exact numbers on the regulatory capital.
We're very comfortable lead through that.
That's not even an issue of top of mind and I think I think what the earlier comment was is that not so much the fed.
Rolling off their balance sheet more of the I think the <unk>.
Changes out of the FHFA in terms of <unk> is what's creating I would say more volume or opportunity.
Four.
Not for Securitizers to effectively play in that space not so much directly the balance sheet runoff.
Okay.
So with regards to.
The securitization in spreads that you might confront there can you talk about.
How you think about financing loans through your warehouse versus.
Versus turning them around and finance and then through securitization, if there's volatility in that market.
Of course, we expect to still prudently de risk our warehouse risk and securitize assets.
Although no one likes spread widening on the securitized space that sort of obviously prevalent across.
All sort of fixed income products and risk products.
The what I sort of alluded to before is we can replace the risk at these wider levels.
And actually sort of dig in more on increased volumes, so, albeit painful on current inventory.
There is you can replace risk at the current market and still create the ROE.
That we talked about.
Alright, Thanks, a lot.
Next question is from Jason Stewart from Jones trading.
Thanks, Good morning I.
I think you'd talked a little bit around the some can you just describe the ROE opportunity in the pool market versus the origination market if youre seeing some dislocation.
In pools is that a better opportunity than buying from arc at the moment.
So we pay very close attention to where we can organically.
Create product at arc versus where assets trade in the secondary certainly there are.
Until recently, there hadn't been a tremendous amount of opportunity opportunity. If anything there is probably a lagged effect in fact, maybe just.
Trading shops, and guys being offered opportunistic or optimistic.
Earlier in January certainly in February has taken hold.
We do see more opportunity than we had over the past year in the bulk markets for sure.
Yes.
Is doing stuff organically still net net better today, yes.
Yes, but.
The basis has the basis there has certainly tightened considerably.
Okay fair enough on that.
And then back to arc on the MSR. If my math is right. It looks like <unk> was marked around something like four two times.
Can you talk about where are you where you see the sensitivity on that asset and whether that was included or any mark up was included at your January 31st estimate of book value from it.
Yeah, Jason I can comment on on the January impact. So there was a mark up on the MSR arc for from midst portion is approximately $2 million mark up on that asset during January .
Okay.
Okay, and any comments around sensitivity to that asset from a rate perspective, I mean, I guess, we can sort of back into it based on that January 31st Mark but.
Any generic comments there.
Yes, I mean, we do disclose.
The very high level.
Portfolio characteristics given.
Those characteristics, obviously those coupons are.
Well out of the money today and enter any sell off there should be additional expansion, albeit.
The next $25 50 basis points more.
Move won't have the same sort of impact.
Two to sort of the expansion of our value there.
As we've mentioned before obviously, we carry that unlevered. So.
A sort of additional source of capital if you will.
Got it okay. Thanks, a lot I appreciate it.
And we have no further questions at this time.
Hi, its David Roberts, Thanks to everyone for joining us on this on this busy morning, I would leave you with one thought which is that.
In conjunction with.
Our infrastructure.
And our talent it is a it is a.
Fortuitous time for us to have a lot of liquidity to deploy.
As we watch the volatility.
This market.
We are we are optimistic about the rest of the year.
Hope everyone has a.
Good day, thank you.
Thank you, ladies and gentlemen that concludes today's call. Thank you for participating and you may now disconnect.