Q1 2022 AG Mortgage Investment Trust Inc Earnings Call

May 6, 2022

Okay.

Good morning, and welcome to the AG mortgage investment Trust first quarter 2022 earnings Conference call. My name is Brandon and I'll be your operator for today at this time all participants are in a listen only mode. Later, we will conduct a question and answer session during which you made Dallas zero. One if you have a question. Please no. It is.

So one that star one as a reminder, this conference is being recorded I will now turn the call over to Jenny Jenny you may begin.

Thank you Brandon good morning, everyone and welcome to the first quarter 2022 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, 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.

Courage 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, 2021, and our subsequent reports filed from time to time with the SEC.

Except as required by law, we are not obligated and do not intend to update or to review or revise any forward looking statements, whether as a result of new information future events or otherwise.

During the call today, we will refer to certain non-GAAP financial measures. Please refer to our SEC filings for a reconciliation to comparable GAAP measures. We will also reference the earnings presentation that was posted to our website. This morning reviewed.

To view the slide presentation turn to our website www Dot AG and <unk>.

Dot com and click on the link for the first quarter 2022 earnings presentation on the homepage and the Investor presentation section.

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 Jenny and good morning to everybody.

And my fourth quarter comments, I said that we were proud to have achieved a smooth transition and become a pure play residential credit REIT.

In this first quarter of 2022, we had to contend with a near doubling of interest rates and considerable widening of credit spreads.

We can indeed hedge against the move in rates.

But when spreads increased rapidly.

And we have a robust inventory of originated loans yet to be secure ties that will lead to mark to market losses.

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Largely the tale of the first quarter and the main reason, we lost 74 cents per share of GAAP earnings.

When spreads widened we moved quickly to adjust our pricing on newly originated loans.

Spike the rise in rates and spreads we were able to continue originating new loans at a rapid pace.

Much of that is due to the fact that we have continued to rollout new origination programs and channels.

As well we have seen some of our competitors retreat from the non agency origination arena.

Finally, our mortgage affiliate arc home has continued to build out its human capital taking advantage of an improved environment for attracting talent.

Despite our first quarter loss, we maintained the dividend of 21 per share.

Our dividend policy will continue to be guided by our view of earnings on a going forward on a go forward basis over a multi quarter period.

I should note that we do not believe that the first quarter movement in spreads will be repeated in.

In April <unk>.

<unk> is relevant to our business.

<unk> to widen and we've begun to see some tightening.

During the quarter, we executed three securitizations and we continued our momentum issuing another deal in April .

One of our primary objectives is to make the transition from origination to securitization as seamless as we can.

While the industry is experiencing an overall decline in origination volumes. This factor serves to benefit us, bringing up more capacity in the securitization markets to execute with increased efficiency.

This should improve the company's return on equity is going forward.

All was not negative we.

We ended this quarter with ample liquidity to continue to propel our growth strategy at higher asset yields we continue to be strong believers in our strategy as capable of delivering long term earnings growth and so we also believe we will be able to report better results as the year.

I will now turn the call over to TJ Durkin, our president.

Thanks, David Good morning, everyone.

We continue to be an active participant in the market during the first quarter acquiring and settling on over $900 million of non agency and agency eligible loans.

We also reduced our agency MBS exposure during the quarter through net sales of approximately $225 million.

We continue to be disciplined about our warehouse risk and are very proud of the fact, we executed three securitizations during a very challenging quarter.

These transactions not only derisk, our warehouse lines, but gave us additional liquidity to take advantage of the dislocation and opportunity set presented to us since the beginning of the year.

I have some historical players had to step away from their acquisition programs.

Nick will cover arc home in more detail later in the call, but I briefly point out <unk> continued success and taking market share this past quarter as many non QM originators were adversely affected by the interest rate move with many simply not hedging their pipelines at all.

Turning to page seven.

As our purchase activity accelerates the velocity of our securitization activity needs to increase.

This past quarter's record interest rate sell off brought with it much sought after operational capacity, which will provide us with the necessary resources to increase both our velocity and purchases.

Much of this capacity comes from other segments of the mortgage market that are more sensitive to interest rates.

We have already benefited from this as large players in the mortgage market.

We're looking for opportunities away from conventional originations and we believe this is just the beginning.

We expect the investments we have made in our infrastructure over the past year to drive organic loan growth.

As our securitization portfolio grows.

Our exposure to mark to market warehouse financing will continue to shrink relative to the portion that has been termed out via securitization.

As you can see in the exhibit on this page this trend has already started.

Lastly, I want to highlight our NIM yield and cost of fund metrics on our securitized loan portfolio.

We normally don't spend much time on this quarter to quarter, but given the velocity of the interest rate movement. This quarter I think it's important to point out.

Our cost of funds is going up in large part because we are increasing the companys aggregate securitization notional.

Given the rate backdrop, our fixed rate cost of funds is higher today than it was six months ago and it's reflected in the two 6% cost of funds.

Now our current yield of four 2%, notably doesn't capture the earnings earnings profile going forward. Given these yields are based on a historical cost basis and don't reflect today's fair values.

So when we are acquiring new investments today at current fair values.

Assuming all other factors being equal the credit quality level of financing et cetera, we expect this to translate into higher asset yields and NIM is for our investments, which will help drive higher core earnings going forward.

I'll now turn the call over to Nick.

Thanks, T J and good morning, everyone turning to page eight.

As you can see here, we have ample liquidity to support loan growth, which we expect to be further supported by our financing strategy, including cash generated from securitization activity.

Our captive originator continues to add relationships through its broker and correspondent channels, which will support this organic growth year.

Year to date, we have executed four securitizations and expect this pace to continue throughout the year.

We are currently targeting post securitization returns of 14% to 25%, which does not include any ancillary income from our originator.

Although this is a wider range than our target ROE from prior quarters. It takes into consideration the current market volatility, which has resulted in near decade widespread in whole loans, along with the corresponding term financing.

Turning to page nine.

Looking at the chart on the bottom left the portfolio mix has tracked our pure play residential mortgage REIT strategy, which now has over 85% of our equity allocated to residential investments.

The top chart outlines the current portfolio yields along with corresponding cost of funds.

Over the quarter that yields have moved dramatically as risk free rates have increased over 125 basis points with credit spreads at the top of the capital stack widening approximately 60 to 70 basis points.

Today, we see asset yields in the low to mid 5% with term financing in the mid to high 4% area.

Over the past two quarters, we negotiated higher advance rates and lower spreads on our warehouse lines. The earliest maturity of these facilities is in November although we intend to shorten our dwell time substantially lower cost of funds on our warehouse lines and higher debt yield will improve our returns during the gestation period.

Subsequent to quarter end, we settle on approximately $250 million of loans with a pipeline of over $500 million.

We also successfully completed our second agency eligible non owner occupied securitization in April with a balance of approximately $425 million.

Turning to page 10.

Here, we outlined the loan portfolio's characteristics as of quarter end the portfolio continues to perform well and we anticipate being able to maintain our tight credit profile on future purchases, which will include the aforementioned pipeline.

The recent market volatility has created an opportunity for us to provide liquidity on asset profiles, we like while creating brand awareness at a time that other originators and capital providers have pulled back we've.

We've already seen a pickup in activity and interest in our product offerings as a result of archs commitment to its clients clients.

Turning to page 11.

As you can see in the bottom left chart lock volumes increased in Q1 with much of this being in the back half of the quarter as competitors pulled back significantly ARCUS forecasting approximately $3 $5 5 billion of non agency originations for the year driven by our increased brand awareness, which helped attract new brokers and correspondents to our platform.

MIT purchased approximately $4 million of loans this quarter from arc, representing over 40% of our acquisitions.

He will now go over financial results in more detail Anthony.

Okay.

Thank you Nick and good morning, everyone.

Turning to slide 12, we provide a reconciliation of our book value per common share.

During the first quarter book value declined by approximately six 6% as a result of recognizing a GAAP net loss available to common shareholders of approximately $18 million or <unk> 74 per fully diluted share.

Overall, the net loss was driven by realized and unrealized losses on our investment portfolio, resulting from the rising interest rate environment and credit spread widening across asset classes.

Aside from the price volatility on our investments we recorded net interest income of $17 million during the first quarter of 24% increase from the prior quarter, resulting from the continued growth in our residential loan portfolio.

In connection with this growth.

In the current market volatility, we also increased our interest rate swap portfolio, resulting in higher hedge expense.

Lastly, we recognized a higher level of transaction related expenses during Q1, given our increased pace of securitization as previously discussed.

On slide 13.

Disclosed a reconciliation of GAAP net income to core earnings as well as provide a summary of the components, making up core earnings.

During the quarter, we recognized a loss and core earnings of <unk> <unk> per share.

Overall net interest income exceeded our hedge and operating expenses by approximately $3 million.

However, our investment in our home contributed a $3 $6 million loss to core earnings despite having a profitable quarter.

This is because arc home's MSR mark to Mark gains.

As well as gains on the sale of loans sold to Mitt are excluded from core earnings.

As a reminder, although the gains on the sale of loans from arc home to mid are excluded from core earnings. They are recognized as unrealized gains in our income statement contributing to GAAP earnings.

On slide 14, we provide further details related to our investment in our call.

Currently our investment approximates $54 million.

Which we value using a multiple of approximately one times book.

During the quarter arc home generated after tax net income of $7 million driven by the mark to market gains on its MSR portfolio due to the rising rate environment offset by reduced volumes lower gain on sale margins and income tax expense as our investment is held within a taxable REIT subsidiary.

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Mitch portion of the earnings generated from arc home's operating business was approximately $3 million.

And another point to highlight is our homes MSR portfolio, which is $84 million in fair value as of March 31.

And it remains virtually unlevered.

Turning to slide 15, we provide an update on our financing profile as of March 31.

After completing three securitization during the quarter.

Securitized debt makes up 56% of our total financing up from 35% at December 31.

We expect this trend to continue increasing as we sponsored an additional deal in April .

And remain focus on our pace of securitization strategy.

Lastly, we currently have $1 3 billion of additional borrowing capacity on our warehouse lines and ended the quarter with total liquidity of approximately $138 million, which was inclusive of $50 million in cash as well as $88 million of Unlevered Agency MBS.

$38 million of which was sold and settled post quarter end.

This capacity and liquidity level will support the 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.

Thank you we will now begin the question and answer session. If you have a question. Please tell us zero one on your Touchtone phone, if you'd like to be removed from the queue. Please tell us zero too if you're on a speakerphone. Please pick up your handset first before daily.

Once again, if you have a question please dial zero one on your Touchtone phone.

And from credit Suisse, we have Doug Harter. Please go ahead.

Thanks, Nick you mentioned.

The 14% to 25% expected RV unsecured positions.

Could you just remind us what the prior range was and kind of where you see returns on.

The loan growth or on the warehouse lines.

Of course, so previously you had stated 14% to 18%, which probably tracks, but guys had been quoting for pretty long period of time.

On the warehouse lines, we still see call it very low double digit.

Ro.

Sure.

We have had a decent amount of benefit from negotiating better terms on those and as mentioned in the script.

Earliest maturity one is in.

As in November .

Got it.

Return.

For the Securitizations that unduly purchase loans I mean, I guess, how does how does the spread widening higher cost of funds impact for loans that as you transition them from the warehouse to securitization today.

Yeah of course, so that takes into consideration really so that that that is more forward looking so it's where we've been acquiring loans call. It for the vast part of.

The first quarter and entered into the new quarter now obviously looking backwards.

Mark to market losses.

On the loans from the spread widening that.

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Given those mark to market losses, the subsequent Ro Ro or still post securitization in that range.

Got it that makes that makes sense.

And then just to make sure I understand slide 13.

So our call made the $3 million.

For the quarter does that $3. One include the MSR gain so if you stripped out the MSR gain would that be kind of a small negative for the quarter.

That's correct, Doug if you look at that slide the $4 4 million, that's being backed out as essentially the MSR mark during the quarter permit.

Got it I.

I guess, how do you think about the profitability.

Both on kind of a.

A true operating basis, and then also.

Kind of on a core basis as we kind of go through 'twenty, two and obviously the world has kind of changed for originators.

Yeah, Doug I mean, I think what we're trying to highlight on the earlier slide as we continue to.

Transition the share of origination towards our agency products. So obviously agency margins are challenging they probably arent going to get materially better anytime soon and so as we invest in.

The pipeline, if you will and getting more credit product and we hope that will be good for.

The operational efficiency I think core earnings were trying to I would say walk through what's a bit convoluted from an accounting perspective, and Anthony is trying to give you the.

The reversals, if you will of it but we're trying to look at it as a holistic versus maybe the traditional core definition of arc home's profitability vertically up intimate so.

That's why we're trying to give a little bit more detail on.

What we have to back out versus what's really happening on the ground.

Okay makes sense. Thank you.

From Jones trading we have Jason Stewart. Please go ahead.

Hey, good morning. Thanks.

Just following on the Ark MSR, if I'm doing the math right does that mean it was marked up at arc about $10 million quarter to quarter.

Yes, Jason that arc was about 12 quarter to 12, Okay and can you give us the multiple on that.

Multiples four nine as of March 31.

Okay, great. Thank you.

And then I think someone else if you didn't give it and I missed it I apologize do you have a book value quarter to date in <unk>.

Yes, Jason just since we're early in our process for April .

We don't have.

The exact number but given the volatility of what's going on and we think were marginally down quarter to date.

Okay, and then just pulling back up for a minute.

I get the concept of trying to preserve liquidity.

I guess two parts to that one is when you think about that in the volatility of spreads where their opportunities are there opportunities for you to be an opportunistic slash I.

I don't want to call it distressed buyer.

Assets in <unk> and <unk> based on that volatility and then the second part is have you adjusted sort of the way you think about liquidity and leverage going forward.

Given that volatility.

Yes, so we did have opportunities to acquire assets.

That were attractive.

Still believe that given sort of.

The sell off that.

We've gravitated towards positioning ourselves set current coupon.

Our view is that in the debt markets has potentiality that orphaned coupons will just be less liquid. So we continue to look forward rather than backwards.

So thats.

Our general view, there and the nice thing is as I think we've probably said three times or more in our presentation.

That debt as others pullback that we've actually been able to drive volumes there.

Really what I consider near historic widen spreads for call it the past decade.

Thanks, Nick.

I wanted to pivot from the origination side to the acquisition side is there an opportunity to acquire pools securities at discounts that are sorted from distressed or non liquid sellers.

I think there's more rumors of distress out there than there is actual distress now obviously that that can change we have had.

Success acquiring stuff through our bulk channel.

Yes.

Very recently and in the past so the expectation that that should continue but quite honestly probably at a slow pace I think I think sort of the the the event.

Widening is sort of already occurred and the people who are going to pull back or any pullback.

Got it fair enough I'll jump off thanks.

On the <unk>, we have Bose George Please go ahead.

Yes.

Hey, guys. This is actually Mike Smith on for Bose.

Just wondering the securitization market can you just provide some color on the volatility and how that's trended in April just wondering if most of the older inventory is cleared and then if you've seen any changes to loan pricing to reflect that volatility.

Yes, so the low prices I think.

Earlier in the year I think they were somewhat stubborn and then.

Call. It the back half of January February things sort of gaps why they are and thats. When we really started to see an opportunity.

So for a while it didn't really necessarily track what was going on in the debt markets.

Now if anything it's on sort of flip to the other side you can buy assets at attractive levels, where you can sell.

Self that that being said.

Given the backdrop of volatility that can change quickly we did see some relief.

Very recently on call it the past two to three weeks in where we're selling the <unk> part of the stack.

Off pretty tough.

Substantially tighter than sort of what we saw the wide being call it anywhere from 30% to 50 basis points depending upon.

What part of the capital stack.

So if anything it feels like it was a little bit overdone.

And if anything that was tightening where we're issuing debt while sort of the markets broader markets around us actually.

We're a little bit weaker so I think that plays into things being a little maybe a little overdone.

Okay, Great. That's helpful color and then just one more can you just is there anything strategic that you are considering just given the valuation of the shares I'm. Just wondering if you can maybe talk through how youre thinking about bridging the gap between the share price and book value.

Hi, its David Roberts, we do have a share repurchase program.

That is that is outstanding and we're always looking at.

Opportunities too.

Drive earnings growth and therefore dividend growth.

Definitely.

Yes.

An arrow in our quiver in terms of.

Improving shareholder value.

Great. Thanks for taking the questions.

And we have no further questions at this time.

Thank you everyone for joining us and for your questions. We appreciate it and look forward to speaking with you again next quarter. Thank you have great weekend.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.

Okay.

Yes.

[music].

Good morning, and welcome to the AG mortgage investment Trust first quarter 2022 earnings conference call. My name is Brandon and I'll be your operator for today at this time all participants are in a listen only mode. Later, we will conduct a question.

The answer session during which he made Dallas zero. One if you have a question. Please note. It is zero one got star one as a reminder, this conference is being recorded I will now turn the call over to Jenny Jenny you may begin.

Thank you Brandon good morning, everyone and welcome to the first quarter 2022 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, 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.

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, 2021, and our subsequent reports filed from time to time with the SEC.

Except as required by law, we are not obligated and do not intend to update or to review or revise any forward looking statements, whether as a result of new information future events or otherwise.

We view the slide presentation turn to our website www Dot AEG.

Dot com and click on the link for the first quarter 2022 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 Jenny and good morning to everybody.

And my fourth quarter comments, I said that we were proud to have achieved a smooth transition and become a pure play residential credit REIT.

In this first quarter of 2020 to react to contend with a near doubling of interest rates and considerable widening of credit spreads.

We cannot hedge against the move in rates.

When spreads increased rapidly.

And we have a robust inventory of originated loans yet to be securitized.

That will lead to a mark to market losses.

That.

With largely the tale of the first quarter and the main reason, we lost 74 cents per share of GAAP earnings.

When spreads widened we moved quickly to adjust our pricing on newly originated loans.

Fight the rise in rates and spreads we were able to continue originating new loans at a rapid pace.

Much of that is due to the fact that we have continued to rollout new origination programs and channels.

As well we have seen some of our competitors retreat from the non agency origination arena.

Finally, our mortgage affiliate arc home has continued to build out its human capital taking advantage of an improved environment for attracting talent.

Despite our first quarter loss, we maintained a dividend of <unk> 21 per share.

Our dividend policy will continue to be guided by our view of earnings on a going forward on a go forward basis over a multi quarter period.

I should note that we do not believe that the first quarter movement in spreads will be repeated in.

In April <unk>.

<unk> relevant to our business.

<unk> two widened and we've begun to see some tightening.

During the quarter, we executed three securitizations and we continued our momentum issuing another deal in April .

One of our primary objectives is to make the transition from origination to securitization as seamless as we can.

This should improve the company's return on equity is going forward.

All was not negative.

I'll now turn the call over to TJ Durkin, our president.

Yes.

Thanks, David Good morning, everyone.

We continue to be an active participant in the market during the first quarter acquiring and settling on over $900 million of non agency and agency eligible loans.

We also reduced our agency MBS exposure during the quarter through net sales of approximately $225 million.

We continue to be disciplined about our warehouse risk and are very proud of the fact, we executed three securitizations during a very challenging quarter.

These transactions not only derisk, our warehouse lines, but gave us additional liquidity to take advantage of the dislocation and opportunity set presented to us since the beginning of the year.

As some historical players had to step away from their acquisition programs.

Nick will cover our call them in more detail later in the call, but I briefly point out arcs continued success and taking market share this past quarter as many non QM originators were adversely affected by the interest rate move with many simply not hedging their pipelines at all.

Turning to page seven.

As our purchase activity accelerates the velocity of our securitization activity needs to increase.

This past quarter's record interest rate selloff brought with it much sought after operational capacity, which will provide us with the necessary resources to increase both our velocity and purchases.

Much of this capacity comes from other segments of the mortgage market that are more sensitive to interest rates.

We have already benefited from this as large players in the mortgage market.

Looking for opportunities away from conventional originations and we believe this is just the beginning.