Q4 2022 AG Mortgage Investment Trust Inc Earnings Call
[noise] good day, and thank you for standing by.
Welcome City, a G mortgage investment trusts fourth quarter of 2022 earnings conference call.
At this time all participants are in a listen only mode.
After management's remarks, there will be a question and answer session.
In order to ask a question during the session. Please press star one on your telephone keypad.
Please be advised that today's conference is being recorded.
If you require any further assistance please press star zero.
I'd now like to turn the call over to Jenny Netherlands General Counsel for the company. Please go ahead.
[noise]. Thank you Chelsea good.
Good morning, everyone and welcome to the full year in fourth quarter of 2022 earnings call for a G mortgage investment Trust.
With me on the call today or T. J darken, our C E O and President next Smith, our Chief investment Officer, and Anthony Russell 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 our 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.
Companies 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 most recently filed Form 10-K for the year ended December 31st 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 reconciliation to the most comparable GAAP measures. We will also reference the earnings presentation that was posted to our website. This morning to view the slide presentation turn to our website Www Dot E. G M.
I T dot com and click on the link for the fourth quarter of 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 T. J.
Thank you do you any good morning, everyone.
2022 was extremely challenging year across markets, but particularly in the mortgage markets, where an abrupt of it by the fed created convexity movements, we haven't seen since the taper tantrum a 2013.
Well it did experience mark to market losses on assets it owns coming into the year. The vast majority of these losses are unrealized and we continue to have confidence in the earnings power of the portfolio, which.
Which Nick will walk you through in more detail later in the call.
During this volatile year remained disciplined by programmatically terming out its financing.
And avoided taking undue risk by holding loans on warehouse lines, hoping things, which simply get better.
As a result of this discipline, we believe is materially derisked with ample liquidity as we head into 2023 in a position to play offense when others may not be.
We used a portion of our excess liquidity to repurchase almost 2.7 million shares at a weighted average price of $6.82, creating 7% accretion for shareholders.
We ended the year in a strong financial position with approximately $87 million of liquidity at one point the returns of economic leverage and those numbers have both improved since quarter, and which Nick will walk through.
Finishing out 2022 year in review on slides six <unk>.
<unk> created $67.6 million of them during the year, while recording a loss of $3.12 and earnings per share.
Mid declared 81 cents of dividends per share and created eight cents of E. D per share E. D. As the performance metrics will be using going forward to replace core which.
Which Anthony will explain in further detail later in the call.
Now turning to slide seven.
The fourth quarter opened with continued weakness in the market.
December was the first month, almost all year to show signs of life.
With a significant reversal in the interest rates lower new issue volumes, creating a catalyst for spreads within the non agency space to tighten.
As such we saw adjusted book value improved 3% from $10.68 to $11.03 per share.
Mid had 33 cents of earnings per share, while generating five cents of the E D and declared its newly stated dividend of 18 says.
Based on our early preliminary read book value is up approximately another 3% to 4% for the month of January .
Now while the markets in January got off to a nice start we don't think the path forward is going to be a straight line towards tighter spreads in our market.
We believe the company was able to materially Delever and raise liquidity during a challenging 2022 in order to phase 2000, twenty-three with a clean balance sheet and lots of liquidity to deploy into this new tire interest rate environment.
And lastly, before I pass it to Nick I'll reiterate what I stated last quarter <unk>.
The management team is frustrated with our stock price, particularly given what we believe to be a year in which effectively navigated choppy markets created lots of excess liquidity and returned capital to shareholders via its share repurchase program.
As a reminder, each of us on the management team and Angelo Gordon the manager have a meaningful ownership.
We will continue to work hard and earning the confidence of the market by remaining focused executing our strategy and taking advantage of compelling opportunities.
Which we believe will translate into the earnings power to generate attractive risk adjusted returns for our shareholders over the long term.
Despite what they may be another year of challenging market conditions, we are.
Are excited about myths outlook for the year and look forward to sharing our progress in the coming quarters.
Thanks T J.
Sticking with slide seven as you might recall from our queue. Three prepared remarks, we stated that we estimated that our book value is down approximately 5% to 6% for the month of October .
Is T. J noted are.
Book value ultimately recovered three per cent in the fourth quarter and we estimate that it is up another approximately 3% to 4% in January .
We have stated previously that although mark to market losses have been significant.
That most of these losses are unrealized consider.
Consistent with this messaging this past quarter is modest recovery represents only a small fraction of these unrealized losses.
Our economic leverage ratio has significantly declined due to the two additional money and see securitization securitization executed in the fourth quarter and into the beginning of the year.
Combine these transactions decreased our warehouse exposure by approximately $600 million.
Significantly outpacing additional whole loan purchases of approximately $140 million.
Turning to page eight.
As you can see our securitization issuance in the fourth quarter and into the beginning of the first quarter continued to outpace our acquisition of new loans.
Table on the right shows the continued growth overseas far as for securitized loan portfolio, along with the corresponding reduction in warehouse exposure.
In previous quarters, we have emphasized that we believed it prudent to right size or education risks, considering both current market volatility and expected future volatility. Although we are still cautious and believe a critical to appropriately size or aggregation risk based upon current and expected market conditions.
Current position positioning likely represents a low on our education pipeline for this year and next.
While originate in volumes are down considerably given the current economic backdrop, we continue to see opportunity in acquiring high quality assets with attractive risk adjusted returns <unk>.
Very recently, we've seen increased competition is a likely consequence of lower volumes, coupled with improvements in broader market conditions.
Despite the recent tightening we still believe we can source new credit surround an 8% yield with equity returns in excess of 20 per cent on the retrained charges, while deploying one to two turns of leverage.
It is also worth noting that while many other market participants have recently white and their credit box some significantly to combat lower origination volumes, we have not followed this trend.
While we remain constructive on residential mortgage credit fundamentals, we do not think this is a prudent time to be relaxing credit standards as home prices are likely to continue to decline in a recession because the more probable scenario.
Turning to pay John .
On this page, we provide high level summary, statistics of our aggregate loan portfolio as.
As we have emphasized previously the weighted average mark to market LTV of the underlying residential home loans as a proxy approximately 66%.
And the 60 plus day delinquent population population across over 4 billion portfolio is less than 100 bits.
Though the forward looking economic backdrop is likely to remain uncertain, we have not seen any early signs of deterioration in the portfolio's performance.
On page 10, we summarize the earning power of our portfolio and doing so we strip out the securitized debt components of our consolidated loans to clearly show only are retained interest in our securitization.
Along with the corresponding repo financing held on the retained bonds.
The retained interests are a true economic exposure in the securitization.
Notwithstanding the securitize loans that are consolidated on our balance sheet due to cap gap the county.
In this table, we also breakout disported positions from the interest only excess servicing net interest margin physicians we've.
We have stated previously that the combination of these two profiles provide stable cashless along with mark to market upside.
The underlying mortgages backing the interest only in excess spread certificates are substantially out of the money.
This provides significant and predictable cashless, while the subordinate certificates represent the relatively thick parts of the capital stack at deep discounts.
It's worth reiterating the fee subordinate certificates are backed by high quality residential mortgages with low mark to market Ltv's.
While we retain the option to refinance much of the that we've issue on or after the third anniversary of each transaction.
We expect this option to remain out of the money for the transition transactions issued prior to the second or third quarter of last year.
For the transactions issued and the third and fourth quarter. We believe these options are likely to prove valuable given the historically inverted yield curve and widespread time of issue.
As mentioned earlier, we expect the markets to remain volatile. Consequently don't expect the recovery in book value to be a straight line. However.
However, we are confident in the underlying credits in the capital structure of the depth, we issue to provide long term value.
This table demonstrates the portfolios carnett, earning power along with it significant total return it upside.
As you can see the fair value of the subordinate certificates is at over 30 point discount to face representing historically elevated spread and interest rate levels.
It is also worth noting the <unk> on the far right of the table is achieved by deploying only a modest amount of recourse leverage.
On page 11, we outline our investment portfolio, along with the corresponding size and cost of the securitized debt and repo financing.
As a reminder, given our continued involvement in Securitizations issued we.
We consolidate the loans and securitized debt on our balance sheet.
As noted on this slide our investment portfolio currently contains acid yields a 5.1% with a weighted average cost of financing a 4.3%.
Turning to page 12.
The top right March out outlines our leverage ratio over the past year.
Here you can see the loans transitioning from warehouse lines, it's securitize that bringing down the recourse leverage to where it is today.
And the last quarters prepared remarks, we stated that although we have made substantial progress in bringing down a recourse leverage ratio from its peak that it was likely to go lower.
Today, we are comfortable stating that we do not expect three fourths leverage to decrease materially from these levels and believe we can prudently increase this over time, because we just for market conditions and opportunities.
As you can see a recourse leverage as a quarter and is approximately one three X, which subsequent quarter and has been reduced further 2.7 X.
As a quarter and <unk> accounted for approximately 60% of the aggregate down from 24% at the end of last quarter.
Turning to page 13.
As you can see in the table to the right origination volumes continue to fall in the fourth quarter contributing to an after tax loss of $6.1 million for our <unk>.
Although there is still room to become more efficient most of the cost cutting measures are behind us and we have likely seen the lows and origination volumes.
The combination of historic Selloff seasonality the lock in effect and cautious homebuyers. Among other factors are here to stay but we believe we will experience modest volume increases as the impact of these components were off and expect the company to return to profitability in 2023.
Despite the challenging backdrop is important to note are calm strong capital position as outlined on this page.
As a quarter and arc home has $27 million of cash and MSR is valued at approximately $92 million with modest leverage of just under $20 million. We continue to believe arkoma as well positioned relative to many of its competitors expect this challenging period to show its resiliency gaining market share.
Strong capital position combined with the current origination environment enabled Ark home to return capital to the ageing Investor group in the fourth quarter.
Of which approximately $4.5 million was distributed to <unk>.
I will now turn the call over to Anthony.
Thank you Nick.
Turning to slide 14, we provide year to date and quarter to date reconciliations of book value per common share.
As we mentioned earlier the financial markets were extremely volatile throughout the year and our 2022 earnings is reflective of unprecedented increases and benchmark interest rates.
Coupled with historic credit spread widening.
This resulted in mark to market losses on our investment portfolio, partially offset by realized games on our derivative portfolio.
In addition, a portion of our book value declined during the year related to upfront securitization expenses as we were disciplined throughout the year and securitizing, our warehouse population executing eight deals during 2022.
During the fourth quarter, we did experience some book book value recovery, which have increased by approximately 3% as a result of recording GAAP net income available to common shareholders of approximately $7 million or 33 per fully diluted share.
Income during the fourth quarter was driven by Unrealised Mark to market gains recorded on securitize assets due to credit spread tightening.
In the latter half of the quarter, coupled with realized games on our interest rate swap portfolio.
This is all set by $1.5 million a transaction related expenses, which were associated with the securitization that close in October .
We also remain active and share buybacks during the year, which contributed to book value accretion of approximately 2% for the quarter and 7% for the year.
During the fourth quarter, we repurchased approximately 850000 shares at a weighted average price of $5.68 per share.
For the full year, we deployed approximately 18 million of capital to repurchase 2.7 billion shares at a weighted average price of $6.82 per share.
Overall, we repurchased about 11% of our outstanding shares during the year at in approximately 40% discount to our December 31 adjusted book value.
As a reminder, we authorize a $15 million repurchase program in August of 2022.
And our remaining capacity under this program is $7.3 million as of today.
As TJ noted earlier.
Beginning with the fourth quarter, we've decided to change the name of core earnings to earnings available for distribution.
With no changes to the definition.
We continue to believe that provides useful supplemental information for our shareholders.
Although as we've discussed in prior quarters. It continues to have important limitations as it does not include certain earnings are losses, our management team considers and evaluating our financial performance.
On slides 15, and 16, we provide the components of earnings available for distribution.
As well as disclose a reconciliation of GAAP net income T E. A D for the full year in the fourth quarter.
On Slide 15, you can see that for the full year was eight cents per share.
Overall, our net interest income on our investment portfolio exceeded our hedge cost expense load and preferred dividends by 83.
Which was offset by losses contributed to a D from our home of approximately 75 cents.
It is important to note that from our home does not include Mark to market gains on its MSR portfolio, which was a significant portion of its GAAP earnings during 2022.
Myths portion of the MSR gain was approximately 8.6 million for the year.
Our homes gain on sale of loans sold to MIT approximated $6 million or 26 cents per share for the year, which you can see is also excluded from a D.
However, as a reminder, these are recorded as unrealized gains contributing to GAAP earnings.
Turning to slide 16, we present, the fourth quarter E D, which was five per share.
Net interest income inclusive of interest earned on our hedge portfolio exceeded operating expenses and preferred dividends generating earnings of 18 cents per share.
We recorded net interest income inclusive of hedge interests of approximately $15 million during the quarter.
And our net interest margin at quarter end was 83 basis points.
Our expenses impacting a D decreased during the quarter, primarily driven by lower noninvestment related expenses and less purchase activity.
This was offset by loss of 13 contributed from our home.
For the quarter, driven by lower volumes and gain on sale margin.
Lastly, we ended the quarter with total liquidity of approximately $87 million.
And as of today.
Liquidity was approximately $120 million with the increased primarily due to cash generated from our February securitization.
This concludes our prepared remarks, and we know like to open the call for questions.
Operator.
Thank you Sir.
At this time, if you would like to ask a question. Please press the Star F. One key on your touch tone solid.
Is it any time you find that your question has been addressed you may remove yourself from the queue by pressing Stark Hill.
Once again that is star one to ask a question.
And our first question will come from Calcutta with credit.
Your line is open.
Thanks.
Touching on the liquidity point that you made there at the end.
<unk> 120, how much of that do you think is kind of available for for investments.
You said you might be able to play some more offense in 2023.
Yeah, I think we probably think about <unk>.
Running the company with.
$40 million to $50 million of cash.
If you look at kind of our historic leverage ratios over the last 12 18 months. So I think we've got significant liquidity right now.
You mentioned that the calls on older securitization are kind of unlikely to be exercise.
How would you describe the health of kind of financing subordinates in today's market as those delever, where do you consider kind.
Kind of adding leverage to some of the subordinates to kind of.
Build equity since you can kind of pull it out by by re securitizing.
Yes, certainly obviously as.
Yo DVD securities the underlying Securitizations delever the availability.
Additional financing typically increases our.
Patients over time that we'd be able to take out.
More liquidity from those those securities although realistically that's.
Although maybe some of them are underlevered today, I think broadly speaking I think you have to see sort of that deleveraging occurred occurred before we could take out a ton more cash.
And what is the timeframe for that would that be another year or two years, just helpless framework.
On certain transactions it could be as soon as six to 12 months other transactions that might be two year or so and these are these tend to be incremental it's not it's not you just take out another at 20%, it's sort of 5% of the time so.
Okay.
Great. Thank you.
Thank you all.
Our next question will come from.
W. You're lightning telcom.
Hey, guys. This is actually my <unk>.
Can you just help us get a sense for the current run right earnings power of the portfolio <unk> low single digits or are we just kind of wondering how you are thinking about the timeline for getting to that 16% on.
On slide 10, and then as a follow up how you kind of thinking about that kind of balancing capital deployment versus buying back stock.
Yeah. So so I think on the earnings power. The reality is our quarter to quarter earnings I think you're going to be choppy because of things like the transaction expenses for securitization et cetera. So we're focusing more on like the longterm earnings power, which we're trying to display on on page 10, there that's obviously.
I think showing a.
A portfolio or company that has significant liquidity to to invest that those yields if not higher in 2023 terms. So I think that's how we're thinking about things. We obviously just recently restricted dividend and so that is how we are thinking about things in terms of the medium long term, but I do think like a quarter to <unk>.
Quarter numbers.
Could still be be choppy I.
I think we would obviously hoped to take advantage of opportunities to employ to deploy this capital.
In a timely manner as we think the opportunity said is probably going to present itself in the near term.
In terms of buybacks I think.
Depending where we are on on the stock price. We obviously have good liquidity to continue.
Buying back stock Accretively I think we are conscious of just looking at our volumes and the liquidity in the stock and don't want to.
Perversely do something damaging over the long term.
By reducing investor liquidity.
So it's a balance.
Yeah, and maybe just kind of on that one on the discount to book.
<unk> appetite for some type of strategic transaction, whether it be rolling mid back into the parent company or merging with a smaller company for some scaling operating leverage would just be curious to hear your thoughts on how you're thinking about that given given the discount to book.
Well I mean, I think I think holistically, we think the companies and a very good position.
Financially from a balance she's perspective from the levers perspective.
I think we're always looking for opportunities to grow responsibly and to the extent the right opportunity came to MIT I think the manager will be supportive in helping gromit.
It's kind of financial support to the extent of the opportunity.
Was compelling.
Great. Thanks, a lot for taking the questions.
Thank you and as a reminder, that is star one to ask a question.
Our next question will come from.
With.
Your line is open.
Hey, Thanks, Good morning, I hope it goes well.
Couple of questions for me can you talk a little bit about the warehouse funding for loans right now just how the environment is how readily available source of funding is maybe even what the cost of funds looks like on a new warehouse line today, even how many counterparties you currently have providing your warehouse funding on the back books. Thanks a lot.
Great.
So maybe the address on the loan loan side first the availability of financing for loans is still far.
Stripped sort of what we need.
I think if you take.
No one no warehouse lenders lost money and obviously very volatile year last last year and given the short duration or of the asset. It's very desirable land I think also given sort of the broader pullback in the residential mortgage market.
Guys agency volumes.
A decade multi decade, low low on sort of the balances they have out so.
They're very axed to put on what what they can so we've not seen our cost of financing go up if anything I think.
It will stay the same or get lower we've also not seen.
Advanced rates.
Decrease.
Given the amount of folks sort of looking to steal entered this space or grow their warehouse positions for non agencies.
We expect that to be the same.
Similar dynamic on the securities, although there's always a little bit less liquidity for down the stack and securities, but as you go off the stack it's fairly comparable.
Comparable to loan liquidity.
From the counterparty standpoint, we currently have five realistically.
That's more than we need, but we're not looking to actually trim and we're always opportunistically opportunistically can add.
Yup that's helpful detail.
Maybe just one more I mean can you can you say how big of a margin call you sort of model for on the retained bonds, some securitization, which are funded with repo.
And just how do you guys think about the approach cushman with liquidity.
Yeah.
I think.
Generally speaking, we work with with our risks Department.
Independently.
Simple answer is I think we're looking at sort of Ah Ah March 2020, Covid shock in terms of credit spreads.
And.
It's a recent enough event that I think.
That's the right shop to look at and having enough cash.
To meet that kind of a margin call.
So it's helpful. What's it for me thanks.
Thank you.
Our next question will come from Matthew with Jones trading your line of cell phones.
Hey, what do you think the best allocation of capital is and where do you guys see opportunities going forward 20 period.
Yes, certainly.
Obviously given the.
The sort of multi decade loan origination valued as in <unk>.
And sort of this being a transitional period I think you don't necessarily have to be creative but you have to be open to sort of changing.
Investment D C as in being open to new products.
We did sort of conveniently see the implementation or maybe it hasn't been implemented yet, but it has been announced it will be implemented and met for may deliveries for Fannie and Freddie.
New LLP as.
Although.
Although net net these changes are beneficial to to private label execution and competitiveness. There are some places where they actually become more competitive or sort of tried to take away from being cherry picked.
So we certainly see that as an interesting place to deploy capital as the government sort of further makes explicit what was.
Implicit the subsidization of better credits subsidizing lower credit so we see opportunity there and given widespread as spreads come in in the private label market and private label market will become increasingly competitive versus vapid. So we think that that's that's a longer term view.
We're also interested in looking at sort of prime second liens and he locks.
<unk>, obviously, given sort of the lockean effective first liens, we think there's an opportunity given the cash up market more or less being shot shot out for.
For he locks and secondly take that space.
So those are those are sort of the larger food groups, but always looking at more things.
That's helpful. And then do you think the better opportunities on a securitized CUSIP product or loan origination.
Yeah. So I think we announced last quarter, we saw opportunities in securities.
We we were able to play a little bit of capital there I think spreads tightened in December and kind of into January where.
That's probably a shifted back to loans, but I think.
I think we announced the market we're open to taking advantage of those opportunities within call. It GNU Reggie mortgage credit.
We're certainly not going to buy the loans and and make the credit if we can buy a cheaper in the secondary but.
But I don't think it is.
As obvious as an opportunity as it was say 90 days ago.
Awesome, Thanks for taking the questions.
Thank you.
A reminder, that.
One to ask a question.
Alright at this time, we have no further questions in the queue. So I would like to turn it back to management for any additional that closing remarks.
Thank you and thank you to everyone for joining us this morning and for your question.
We appreciate it and look forward to speaking with you again next quarter.
Hi, the rest of the day.
Ladies and gentlemen, does conclude today's call and we appreciate your participation you may disconnect.
John .
Mmm.
Mmm.
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Good day, and thank you for standing by and welcome to the AG mortgage investment Trust's fourth quarter 2022 earnings Conference call.
At this time all participants are in a listen only mode.
After management's remarks, there will be a question and answer session.
In order to ask a question during this session. Please press star one on your telephone keypad.
Please be advised that today's conference is being recorded.
If you require any further assistance please press star zero.
I'd now like to turn the call over to Jenny Meslin General Counsel for the company. Please go ahead.
Thank you Chelsea good morning, everyone and welcome to the full year and fourth quarter 2022 earnings call for AG mortgage investment Trust with me on the call today are T. J darken, our CEO and President Nick Smith, our Chief investment Officer, and Anthony Rough CLO, 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, 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 the most comparable GAAP measures. We will also reference the earnings presentation that was posted to our website. This morning to view the slide presentation turn to our website Www Dot AG.
I T dot com and click on the link for the fourth 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 T. J.
Thank you Jeremy and good morning, everyone.
2022 was an extremely challenging year across markets, but particularly in mortgage markets, where an abrupt pivot by the fed created convexity movements, we haven't seen since the taper tantrum of 2013.
While Mitt did experienced mark to market losses on assets it owns coming into the year. The vast majority of these losses are unrealized and we continue to have confidence in the earnings power of the portfolio.
Which Nick will walk you through in more detail later in the call.
During this volatile year remained disciplined buy programmatically terming out its financing and avoided taking undue risks by holding loans on warehouse lines, hoping things would simply get better.
As a result of this discipline, we believe mitt is materially de risked with ample liquidity as we head into 2023 in a position to play offense when others may not be.
We used a portion of our excess liquidity to repurchase almost two 7 million shares at a weighted average price of $6 82, creating 7% accretion for shareholders.
We ended the year in a strong financial position with approximately $87 million of liquidity at one point the returns of economic leverage and those numbers have both improved since quarter end, which Nick will walk through.
Finishing out 2022 year in review on slide six mid created $67 $6 million of NIM during the year, while recording a loss of $3 12 and earnings per share.
Mid declared 81 sense of dividends per share and created <unk> <unk> of <unk> per share.
<unk> is the performance metric, we'll be using going forward to replace core <unk>.
Which Anthony will explain in further detail later in the call.
Now turning to slide seven.
The fourth quarter opened with continued weakness in the market.
But December was the first month, almost all year to show signs of life.
With a significant reversal in the interest rates lower new issue volumes, creating a catalyst for spreads within the non agency space to Titan.
As such we saw our adjusted book value improved 3% from $10 68 to $11 <unk> per share.
<unk> had 33 of earnings per share, while generating <unk> of EDI and declared its newly stated dividend of <unk> 18.
Based on our early preliminary read book value was up approximately another 3% to 4% for the month of January .
Now while the market in January got off to a nice start we don't think the path forward is going to be a straight line towards tighter spreads in our market.
We believe the company was able to materially Delever and raise liquidity during a challenging 2022 in order to face 2023, with a clean balance sheet and lots of liquidity to deploy into this new higher interest rate environment.
And lastly, before I pass it to Nick I'll reiterate what I stated last quarter the <unk>.
Management team is frustrated with our stock price, particularly given what we believe to be a year in which effectively navigated choppy markets created lots of excess liquidity and returns capital to shareholders via a share repurchase program.
As a reminder, each of us on the management team and Angelo Gordon the manager has a meaningful ownership.
We will continue to work hard and earning the confidence of the market by remaining focused executing our strategy and taking advantage of compelling opportunities.
Which we believe will translate into the earnings power to generate attractive risk adjusted returns for our shareholders over the long term.
Despite of what they may be another year of challenging market conditions. We are excited about <unk> outlook for the year and look forward to sharing our progress in the coming quarters.
Yes.
Thanks T J.
Sticking with slide seven as you might recall from our Q3 prepared remarks, we stated that we estimated that our book value was down approximately 5% to 6% for the month of October .
As TJ noted.
Our book value ultimately recover 3% in the fourth quarter and we estimate that it is up another approximately 3% to 4% in January .
We have stated previously that although mark to market losses have been significant.
That most of these losses are unrealized.
Consistent with this messaging this past quarter as modest recovery represents only a small fraction of these unrealized losses.
Our economic leverage ratio has significantly declined due to the two additional non agency securitization securitizations executed in the fourth quarter and into the beginning of the year.
Combined these transactions decreased our warehouse exposure by approximately $600 million.
Significantly outpacing additional whole loan purchases.
$140 million.
Turning to page eight.
As you can see our securitization issuance in the fourth quarter and into the beginning of the first quarter continued to outpace our acquisition of new loans.
The table on the right shows the continued growth of our securitized loan portfolio, along with a corresponding reduction in warehouse exposure.
In previous quarters, we have emphasized that we believe it prudent to rightsize, our aggregation risk considering both current market volatility and expected future volatility. Although we are still cautious and believe a critical to appropriately size our aggregation risk based upon current and expected market conditions, the current position positioning likely.
<unk> represents a low in our aggregation pipeline for this year and next.
While origination.
Nation volumes are down considerably given the current economic backdrop, we continue to see opportunity in acquiring high quality assets with attractive risk adjusted returns.
Very recently, we've seen increased competition as a likely consequence of lower volumes, coupled with improvements in broader market conditions.
Despite the recent tightening we still believe we can source new credits around an 8% yield with equity returns in excess of 20% on the retraining charges, while deploying one to two turns of leverage.
It is also worth noting that while many other market participants have recently widened their credit box some significantly to combat lower origination volumes, we have not followed this trend.
While we remain constructive on residential mortgage credit fundamentals, we do not think this is a prudent time to be relaxing credit standards as home prices are likely to continue to decline in a recession as the more probable scenario.
Turning to page nine.
On this page, we provide high level summary, statistics of our aggregate loan portfolio.
As we've emphasized previously the weighted average mark to market LTV of the underlying residential whole loans as a proxy approximately 66%.
And the 60 plus day delinquent population population across over $4 billion portfolio is less than 100 bps.
The forward looking economic backdrop is likely to remain uncertain, we have not seen any early signs of deterioration in the portfolios performance.
On page 10, we summarize the earning power of our portfolio in doing so we strip out the securitized debt components of our consolidated loans to clearly show only our retained interest in our securitizations.
Along with the corresponding repo financing held on the retained bonds.
The retained interests are a true economic exposure in these securitizations.
Notwithstanding the securitized loans that are consolidated on our balance sheet due to GAAP accounting.
In this table, we also breakout the supported positions from the interest only excess servicing a net interest margin positions. We have stated previously that the combination of these two profiles provides stable cash flows along with mark to market upside.
Underlying mortgages backing the interest only in excess spread certificates are substantially out of the money.
This provides significant and predictable cash flows while the subordinate certificates represent relatively thick parts of the capital stack at deep discounts.
It is worth reiterating that these subordinate certificates are backed by high quality residential mortgages with low mark to market Ltvs.
While we retain the option to refinance much of the debt we've issued on or after the third anniversary of each transaction.
We expect this option to remain out of the money for the transaction transactions issued prior to the second or third quarter of last year.
For the transactions issued in the third and fourth quarter. We believe these options are likely to prove valuable given the historically inverted yield curve and widespread at time of issue.
As mentioned earlier, we expect the markets to remain volatile and consequently don't expect the recovery in book value to be a straight line.
However, we are confident in the underlying credits in the capital structure of the debt we issued to provide long term value.
This table demonstrates the portfolio's current earning power along with its significant total return upside.
As you can see the fair value of the subordinate certificates is at over a 30 point discount to face representing historically elevated spread and interest rate levels.
It is also worth noting the ROE on the far right of the table is achieved by deploying only a modest amount of recourse leverage.
On page 11, we outline our investment portfolio, along with the corresponding size and cost of the securitized debt and repo financing.
As a reminder, given our continued involvement in Securitizations issued.
We consolidate the loans and securitized debt on our balance sheet.
As noted on this slide our investment portfolio currently contains asset yields of five 1% with a weighted average cost of financing of four 3%.
Turning to page 12.
The top right Bar chart outlines our leverage ratio over the past year.
Here, you can see the loans transitioning from warehouse lines to securitize debt, bringing down the recourse leverage to where it is today.
And the last quarter's prepared remarks, we stated that although we have made substantial progress in bringing down our recourse leverage ratio from its peak that it was likely to go lower.
Today, we are comfortable stating that we do not expect recourse leverage to decrease materially from these levels and believe we can prudently increase this overtime as we adjust for market conditions and opportunities.
As you can see our recourse leverage as of quarter end was approximately $1 three X, which subsequent to quarter end has been reduced further to <unk> X.
As of quarter end recourse debt accounted for approximately 16% of the aggregate down from 24% at the end of last quarter.
Turning to page 13.
As you can see in the table to the right origination volumes continue to fall in the fourth quarter contributing to an after tax loss of $6 1 million for our cone.
Although there is still room to become more efficient most of the cost cutting measures are behind us and we have likely seen the lows in origination volumes.
The combination of historic Selloff seasonality the lock in effect and cautious homebuyers. Among other factors are here to stay but we believe we will experience modest volume increases is the impact of these components were off and expect the company to return to profitability in 2023.
Despite the challenging backdrop. It is important to note <unk> strong capital position as outlined on this page.
As of quarter end arc home has $27 million of cash and MSR is valued at approximately $92 million with modest leverage of just under $20 million. We continue to believe arkoma is well positioned relative to many of its competitors expect this challenging period to show its resiliency, while gaining market share.
This strong capital position combined with the current origination environment enabled our calm to return capital to the AG Investor group in the fourth quarter.
Of which approximately $4 5 million was distributed to make.
I will now turn the call over to Anthony.
Thank you Nick.
Turning to slide 14, we provide year to date and quarter to date reconciliations of book value per common share.
As we mentioned earlier the financial markets were extremely volatile throughout the year and our 2022 earnings is reflective unprecedented increases in benchmark interest rates coupled.
Coupled with historic credit spread widening.
This resulted in mark to market losses on our investment portfolio.
Really offset by realized gains on our derivative portfolio.
In addition, a portion of our book value declined during the year related to upfront securitization expenses as we were disciplined throughout the year and securitizing, our warehouse population executing eight deals during 2022.
During the fourth quarter, we did experience some book book value recovery, which have increased by approximately 3% as a result of recording GAAP net income available to common shareholders of approximately $7 million or <unk> 33 per fully diluted share.
Income during the fourth quarter was driven by unrealized mark to market gains recorded on securitized assets due to credit spread tightening and.
In the latter half of the quarter, coupled with realized gains on our interest rate swap portfolio.
This was offset by $1 5 million of transaction related expenses, which were associated with the securitization that closed in October .
We also remain active in share buybacks during the year, which contributed to book value accretion of approximately 2% for the quarter and 7% for the year.
During the fourth quarter, we repurchased approximately 850000 shares at a weighted average price of $5 68 per share.
For the full year, we deployed approximately $18 million of capital to repurchase two 7 million shares at a weighted average price of $6 82 per share.
Overall, we repurchased about 11% of our outstanding shares during the year at an approximate 40% discount to our December 31 adjusted book value.
As a reminder, we authorized a $15 million repurchase program in August of 2022.
And our remaining capacity under this program to $7 3 million as of today.
As T J noted earlier.
Beginning with the fourth quarter, we've decided to change the name of core earnings to earnings available for distribution or AAD with no changes to the definition.
We continue to believe that <unk> provides useful supplemental information for our shareholders.
Although as we've discussed in prior quarters. It continues to have important limitations as it does not include certain earnings or losses, our management team considers in evaluating our financial performance.
On slides 15, and 16, we provide the components of earnings available for distribution as well as disclose a reconciliation of GAAP net income to EBITDA for the full year and the fourth quarter.
On Slide 15, you can see that for the full year was <unk> <unk> per share.
Overall, our net interest income on our investment portfolio exceeded our hedge cost expense load and preferred dividends by 83.
Which was offset by losses contributed to AAD from arc home of approximately 75.
It is important to note that from arc home does not include Mark to market gains on its MSR portfolio, which was a significant portion of its GAAP earnings during 2022.
<unk> portion of the MSR gain was approximately $8 6 million for the year.
Arc home's gain on sale of loans sold to MIT.
Approximated 6 million or <unk> 26 per share for the year.
Which you can see is also excluded from EBITDA.
However, as a reminder, these are recorded as unrealized gains contributing to GAAP earnings.
Turning to slide 16, we present, the fourth quarter, AAD, which was <unk> <unk> per share.
Net interest income inclusive of interest earned on our hedge portfolio exceeded operating expenses and preferred dividends generating earnings of <unk> 18 per share.
We recorded net interest income inclusive of hedge interest of approximately $15 million during the quarter.
And our net interest margin at quarter end was 83 basis points.
Our expenses impacting AAD decreased during the quarter, primarily driven by lower non investment related expenses and less purchase activity.
This was offset by a loss of 13 contributed from our home.
For the quarter, driven by lower volumes and gain on sale margin.
Lastly, we ended the quarter with total liquidity of approximately $87 million.
And as of today.
Liquidity was approximately $120 million with the increase primarily due to cash generated from our February securitization.
This concludes our prepared remarks, and we'd now like to open the call for questions.
Operator.
Yes.
Thank you Sir.
At this time, if you would like to ask a question. Please press the star one Keith on your Touchtone phone.
Is it any time you find that your question has been addressed you may remove yourself from the queue by pressing star kill.
Once again that is star one to ask a question.
And our first question will come from Doug Harter with Credit Suisse. Your line is open.
Thanks.
Touching on the liquidity point that you made there at the end.
Of that 120, how much of that do you think is kind of available for four investments.
As you said you might be able to play more offense in 2023.
Yeah, Doug I think we probably think about.
Running the company with.
$40 million to $50 million of cash.
If you look at kind of our historic leverage ratios over the last 12 18 months. So I think we've got kind of significant liquidity right now.
And then.
You mentioned that the calls on older Securitizations are kind of unlikely to be exercised.
How would you describe the health of kind of financing subordinates in today's market and as those Delever would you consider.
Adding leverage to some of the subordinates to kind of fill.
Build equity since you can kind of pull it out by by re securitizing.
Yes, certainly obviously as.
<unk> security as the underlying Securitizations delever the availability.
Additional financing typically increases.
Our expectation is over time that we'd be able to take out.
More liquidity from those those securities although realistically that's.
Although maybe some of them are under Levered today.
Broadly speaking I think you have to see sort of that deleveraging occurred occurred before we could take out a ton more cash.
And what is the timeframe for that would that be another year or two years, just help us frame that.
Hi.
On certain transactions it could be as soon as six months to 12 months other transactions that might be two years or so and these are these tend to be incremental.
You just take out another 20%, it's sort of 5% at a time so.
Okay.
Great. Thank you.
Yes.
Yes.
Thank you.
Our next question will come from Bose, George with <unk>. Your line is open.
Hey, guys. This is actually Mike Smith on for Bose.
Can you just help us get a sense for the current run rate earnings power of the portfolio. The <unk> low single digits ROE just kind of wondering how youre thinking about the timeline for getting to that 16% ROE on slide 10, and then as a follow up how are you kind of thinking about that and kind of balancing capital deployment versus buying back stock.
Yes, so I think on the earnings power. The reality is our quarter to quarter earnings I think are going to be choppy because of things like transaction expenses for securitizations et cetera. So we're focusing more on like the long term earnings power, which we're trying to display on page 10, there that's obviously.
I think showing a.
Our portfolio of company that has significant liquidity to invest that those yields if not higher in <unk>.
'twenty three terms so I think that's how we're thinking about things. We obviously just recently restructured the dividend and so that is how we're thinking about things in terms of the medium long term, but I do think like the quarter to quarter numbers.
It could still be choppy I.
I think we would obviously hope to take advantage of opportunities to employ to deploy this capital.
In a timely manner as we think the opportunity set is probably going to present itself in the near term.
In terms of buybacks I think depending.
Depending where we are on the stock price, we obviously have good liquidity to continue.
Buying back stock Accretively I think we are conscious of just looking at our volumes in the liquidity in the stock and don't want to.
Perversely do something damaging over the long term.
By reducing investor liquidity.
So it's a balance.
Yeah, and maybe just kind of on that one on the discount to book.
The appetite for some type of strategic transaction, whether it be rolling back into the parent company or merging with a smaller company for some scale and operating leverage would just be curious to hear your thoughts on how you are thinking about that given given the discount to book.
Well I mean listen I think I think Holistically, we think the company is in a very good position.
Financially from a balance sheet perspective from a leverage perspective.
I think we're always looking for opportunities to grow responsibly and to the extent the right opportunity came to MIT I think the manager will be supportive in helping grow met.
With its kind of financial support to the extent of the opportunity.
Was compelling.
Great. Thanks, a lot for taking my questions.
Thank you and as a reminder, that is star one to ask a question.
Our next question will come from Eric Hagen with <unk>. Your line is open.
Hey, Thanks, Good morning, I Hope you guys are well.
Couple of questions from me can you talk a little bit about the warehouse funding for loans right now just how the environment is how readily available that source of funding is maybe even what the cost of funds. It looks like on a new warehouse line today, even how many counterparties do you currently have providing you warehouse funding on the back book Thanks, a lot.
Great.
Good morning.
So maybe you addressed it on the loan side first.
Availability of financing for loans is still far out strips sort of what we need.
I think if you take.
No one no warehouse lenders lost money and obviously very volatile year last last year and given the short duration.
The asset it's very desirable land I think also given sort of the broader pullback in the residential mortgage market.
Guys agency volumes.
At <unk>.
Decade, multi decade lows lows on sort of the balances they have out so.
Theyre very AXT to put on what what they can so we have not seen our cost of financing go up if anything I think.
It will stay the same or lower we've also not seen.
Advance rates.
Decrease or given the amount of folks sort of looking to still entered the space to grow their warehouse positions for non agencies.
We expect that to be the same.
Similar dynamic on the securities.
Although there is always a little bit less liquidity for down the stack in securities, but as you go up the stack it's.
It's fairly comparable.
Comparable to loan liquidity.
From a counterparty standpoint, we currently have five.
Realistically, that's that's more than we need, but we're not looking to necessarily trimming.
Louis is opportunistically opportunistically can add.
Yes, that's helpful detail Thanks, Matt.
Maybe just one more I mean can you can you say how big of a margin call you sort of model for on the retained bonds from securitization, which are funded with repo.
And just how you guys think about the approach to cushioning with liquidity.
Yes.
Okay.
Generally speaking, we work with with our risk Department.
Independently.
Simple answer is I think we're looking at sort of a.
On March 2020, Covid shock in terms of credit spreads.
And.
It's a recent enough event that I think.
That's the right shop to look at and having enough cash.
To meet that kind of a margin goal.
That's helpful. That's it for me thanks.
Thank you.
Our next question will come from Matthew <unk> with Jones trading your line is open.
What do you think the best allocation of capital is and where do you guys see opportunities going forward in 'twenty three.
Yes, certainly.
Obviously given.
The sort of multi decade loan origination values and rosy.
And sort of this being a transitional period I think you don't necessarily have to be creative but you have to be open to sort of changing.
Investment theses and being open to new products.
We did sort of conveniently see the implementation or maybe it hasn't been implemented yet, but it's been announced and will be implemented in met for may deliveries for Fannie and Freddie.
New LLP as.
Although.
Although net net these changes are beneficial to private label execution and competitiveness. There are some places where they actually become more competitive or sort of try to take away from being cherry picked.
So we certainly see that as an interesting place to deploy capital as the government.
Further.
Makes explicit what was implicit the subsidization of better credits subsidizing lower credit so we see opportunity there and given widespread as spreads come in in the private label market. The private label market will become increasingly competitive versus that bid. So we think.
That.
It's a longer term view.
We're also interested in looking at sort of prime second liens and Helocs.
Obviously, given sort of the lock in effect of first liens, we think theres an opportunity given the cash out market more or less been shut shut out.
Four key locks in second liens to take that space.
So those are those are sort of the larger food groups, but always looking at more things.
Okay. That's helpful. And then do you think the better opportunity is on a securitized CUSIP product our loan origination.
Yes, I mean, so I think we announced last quarter, we saw opportunities in securities.
We we were able to play a little bit of capital there I think spreads tightened in December and kind of into January where.
That's probably a shifted back to loans, but I think.
We are I think we announced the market we're open to taking advantage of those opportunities within call it new rising mortgage credit.
We're certainly not going to buy the loans.
And make the credit if we can buy it cheaper than the secondary.
But I don't think it has.
Obviously as an opportunity as it was say 90 days ago.
Awesome, Thanks for taking the questions.
Okay.
Yes.
Thank you.
As a reminder, that is star one to ask a question.
Okay.
At this time, we have no further questions in the queue. So I would like to turn it back to management for any additional or closing remarks.
Thank you and thank you to everyone for joining us this morning and for your questions.
We appreciate it and look forward to speaking with you again next quarter.
The rest of the day.
Thank you ladies and gentlemen, this does conclude today's call and we appreciate your participation you may disconnect at any time.