AG Mortgage Investment Trust Inc. Q1 2023 Earnings Call
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Good day, and thank you for standing by and welcome to the AG mortgage investment trusts first quarter 2023 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.
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Now I'd like to turn the call over to Ginny Nepheline General Counsel for the company. Please go ahead.
Thank you and good morning, everyone and welcome to the first quarter 2023 earnings call for AG mortgage investment Trust with me on the call today are T. J Durkin, our CEO and President Nick Smith, our Chief investment Officer, and Anthony Rusty yellow, our Chief Financial Officer.
Before we begin please note that the information discussed in today's call may contain forward looking statements.
Any forward looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in our SEC filings, including under the headings cautionary statement regarding forward looking statements risk factors and management's discussion and analysis.
The company's actual results may differ materially from these statements. We encourage you to read the disclosure regarding forward looking statements contained in our SEC filings, including our most recently filed Form 10-K for the year ended December 31, 2022, 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 supposed to to our website. This morning.
To view the slide presentation turn to our website www dot a G M I T dot com and click on the link to the first quarter 2023 earnings presentation on the homepage in the Investor presentation section again welcome to the call and thank you for joining us today with that I'd like to turn the call.
All over to T J.
Thank you Jenny good morning, everyone.
The first quarter of 2023 got off to a constructive start.
The signs of recovery in the markets that we started developing beginning in December this.
This momentum continued through January and February until the sentiment disappeared in mid March as a regional bank crisis took over.
This reintroduced interest rate volatility back into the market standing in the front end materially lower.
Despite this volatile end of the quarter, we grew book value by 4% per share to $11 85, and $11.48 on an unadjusted and adjusted basis, respectively, while maintaining ample liquidity of $88 million and only 1.4 turns of economic leverage.
We continue to use our excess liquidity to repurchase our common stock during the quarter, we repurchased 923000 shares at a weighted average price of $5 and 68 sentence, creating two per cent of accretion for shareholders.
During the quarter Mitt had 37 cents of earnings per share, while generating three cents of E. A D and paint its 18th cent dividend.
It is notable that while it did experienced mark to market losses on assets at one coming into the year. These losses run through our income statement and the vast majority of them 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.
We were also able to complete a securitization in early February when the capital markets were very healthy.
And continue to see better sourcing opportunities as some historical competitors appear to be pulling back after a rough 2022.
Based on our early preliminary read book value was up approximately 1% to 2% for the month of April .
Before I pass it to Nick I'd like to recap the recent performance of the balance sheet.
Going back into last year, we remain focused on minimizing our warehouse RASK and stay disciplined in terms of issuing securitization throughout the year, which protected book value and what turned into an extremely volatile year.
As we enter the second quarter, we have a loan book, which is very clean without low coupons, which continue to be orphaned and do not effectively execute into securitizations today.
This active portfolio management has produced strong first quarter results and well positioned ourselves to continue and build upon this momentum throughout the year as our initial April estimate support.
I think it is also important for us to express our view that meant is that an inflection point in terms of earnings power.
First regarding arc home.
See this happening primarily based on recent organizational changes at arc home setting the stage for a near term return to profitability, which Nick will walk through in more detail.
Secondly, we see an environment with higher rois on assets.
Based on both some competition retreating and opportunities that we believe are in the early innings are presenting themselves given the disruption among my mongst the regional banks balance sheets.
So putting this all together we believe mixed results will produce both higher GAAP and AAD metrics per share looking forward and we believe the market should recognize the hard work and solid results being delivered by the <unk> team.
I'll now pass the call to Nick.
P J as T. J mentioned, we came to market with our first securitization of 2023 and February over the past few quarters, we've emphasized that going forward would rightsize mitts aggregation risk taken into account.
Both current market volatility along with expected future volatility.
This proved to be prudent having successfully taken advantage of the better tone in the early part of the quarter before it became apparent that there were significant challenges ahead in the broader financial sector caused by historic fed tightening.
Our leverage remains close to the low set at the end of last year, and we have significant liquidity, putting us in a position to take advantage of the ongoing stress in the banking community.
Over the past decade, Depositaries are increasingly use their portfolios to subsidize residential mortgages as a key component of their broader client acquisition strategies.
Although this is unlikely to see it's entirely since not all banks had the same amount of balance sheet stress, we expect it to represent the relaxing of what had on the surface. It looks like an ever more competitive arms race. This should present, an opportunity to source high quality assets with credit spreads in nominal yields at the highs of over a decade.
We also believe that there could be opportunities to buy portfolios of loans from failed banks or ones that need liquidity.
Yeah.
In addition to these opportunities we are finding attractive investments in home equity mortgages conventional investment and second home residential mortgages and both qualified and nonqualified residential mortgages.
Although origination volumes remain low we have seen significant increases in volumes at arc home our captive originator.
Some of this increase can be attributed to seasonality. However, the key drivers were more likely lower mortgage rates from the end of last year less competition from the originator community buyers, becoming more comfortable with home prices and the recent implementation of higher L. L. P H at Fannie and Freddie.
As of quarter end myths residential whole loan pipeline is approximately $280 million.
Moving on to the portfolio.
Our first G kept securitization of 2023 included all of our out of the money whole loan positions, leaving our aggregation pipeline, including both closed and locked loans with a gross weighted average coupon of approximately 8%.
While on warehouse, we accept expect these positions returned to low to mid teens and expect ROE is in the low to mid twenties post securitization.
As we've mentioned in previous quarters much of the debt we've issued can be refinanced on or after the third anniversary of each transaction. Although we expect much of this to remain out of the money, providing us with valuable term funding. The recent rally in carbon version makes it likely we will be able to economically refinance debt issued last year at the highs and lows.
Nominal yields and credit spreads.
These options in effect allow us to bring forward the monetization of deep discounts. Although the market currently does not give a lot of value to these options, we believe that as interest rate and spread volatility normalizes. This could lend itself to substantial portfolio upside.
Mitt has a high quality low mark to market loan to value portfolio of residential mortgage loans, providing significant and predictable cash flows with substantial mark to market upside.
Historically widespread and nominal yields along with deeply discounted subordinate positions.
As we outlined in our presentation and the earnings power of our investment portfolio was strong consisting of assets generating returns in the mid to high teens.
Now for arc home.
Although the results for this quarter were not materially better than the previous we are heading into the next quarter with strong momentum given a significant pickup in registrations and locks.
Realization of cost and productivity efficiencies, along with new client acquisitions.
Although we expect gain on sale margins to increase over the coming quarters as the impacts of consolidation provides some relief. The management team is focused on factors in their control.
Our recently hired a new chief production officer, although early is contribution so hot so far had been impressive.
We've also begun seeing significant improvements in productivity along with reductions in fixed and variable costs as arc home's, New Chief operations officer changes have been implemented we expect this momentum to put us in a position to outperform some are better known competitors in the coming quarters.
I'll now turn the call over to Anthony.
Thank you Nick.
I'll provide a brief update on our financial highlights for the first quarter.
The key themes of the quarter were continued book value recovery accretive share repurchases and Derisking, our warehouse exposure, leaving mitt with a portfolio of current coupon loans.
We ended Q1 with book value of $11 85 per share and.
And adjusted book value of $11 48 per share.
Despite the volatility faced during the quarter, our book value per share increased 4%.
And coupled with our dividend we generated a quarterly economic return of five 7%.
Our increase in book value was primarily driven by net unrealized gains in our investment portfolio.
With accretive share repurchases.
During the quarter, we recognized GAAP net income available to common shareholders of approximately 8 million or <unk> 38 cents per fully diluted share.
We experienced net gains on our securitized assets and loan portfolio driven by overall declines in benchmark rates and credit spreads.
These gains outweighed unrealized losses recognized on our interest rate swap portfolio dividends declared.
And transaction related expenses recognized from our February securitization.
With regards to our share repurchase program remained active during the quarter, returning $5 2 million of capital to our shareholders.
We repurchased 923000 shares or 4% of our total outstanding shares at the start of the year, resulting in 2% of book value accretion as our purchase price was approximately 50% of our adjusted book value.
We continue to repurchase shares subsequent to quarter end, leaving us with approximately $1 7 million of repurchase capacity.
In addition, our board has authorized a new common stock repurchase program of 15 million available for use upon fully utilizing our remaining capacity under the existing program.
We also grew our investment portfolio by 6% to $4 5 billion and continue to use our securitization platform to provide term non mark to market financing.
Currently 85% of our financing is funded through securitization at a weighted average cost of four 2%.
As a result, our economic leverage ratio at quarter end was one four turns.
Of which 0.8 turns related to our credit portfolio and 0.6 turns to our agency MBS portfolio.
In addition, we ended the quarter with approximately 2 billion of borrowing capacities across four large banking institutions to support continued growth.
We generated earnings available for distribution or E D. A <unk> <unk> per share for the first quarter.
Net interest income inclusive of interest earned on our hedge portfolio was 68 cents per share.
Which was consistent with prior quarter and exceeded our operating expenses and preferred dividends generating earnings of <unk> 11 per share.
This was offset by a loss of eight cents contributed from arc home for the quarter driven by lower volumes. However, it is notable that arc contribution he did improve by <unk> <unk> quarter over quarter.
Lastly, we ended the quarter with total liquidity of approximately $88 million of cash.
This concludes our prepared remarks, and we'd now like to open the call for questions.
Later.
At this time, if you would like to ask a question. Please press star one on your Touchtone phone you may withdraw your question at any time by pressing star to once again to ask a question that is star one and we will take our first question from Doug Harter with Credit Suisse. Please go ahead.
Good morning.
Touching on that last point about.
You know kind of the earnings X arc home being 11 cents.
Can you help us kind of understand the past that that could get you to the 18th dividend or how youre thinking about the dividend in light of that earnings power.
Yeah, Hey, Doug I think I think as we.
Yeah, you know I think arc homes that obviously detracting from the earnings I think we were continuing.
To see momentum there is Anthony just walked you through so we're kind of walking it up back to I'd say break even and I think you know in the not too distant future. We would expect that to swing back to profitability. I think there are always on the asset side are probably a bit more straightforward.
I think we would probably tell you in the very high teens, and if anything probably leaning towards maybe even higher.
Opportunity set so we can balance if we could effectively swing the operating company of arc into into line with you know call. It the high teens to 20 ROE is I think that's how you can kind of walk through to get to an 18th cent dividend.
And I guess, what is your and the board's kind of appetite to support the current dividend you know kind of until you know until that happens.
Well I think I think we're.
So optimistic that that that swing is coming over the next.
Couple of quarters, we're not we're not waiting three years into the future.
Okay.
And then just you know you talked about the pipeline that you have you know I guess, how do you see your capacity to to continue to add assets at these wider returns that you talked about.
Yeah. So I mean, I think I think we've I think our pipes can effectively turn assets over.
Fairly quickly right I think what we've been able to do and I think show you know, particularly during 'twenty 'twenty. Two is we have access to the capital markets and good markets and even in bad we.
We are not looking to take a lot of warehouse risk.
And so I think we were able to turn it over you know do asset opportunities fairly quickly.
I'm kind of sourcing to settlement to effectively terming it out and so could we be.
Getting to two to three securitization in the quarter, if that pipeline picks up I think the team here can effectively handle that type of volume.
And you feel like you have the capital to do that as well yeah, because what we believe are kind of returning it right back on.
Post settlement basis.
Got it.
Alright, thank you.
And we will take our next question from Trevor Cranston with JMP Securities. Please go ahead.
Okay. Thanks.
On the securitized loan portfolio.
Do you guys have an estimate as to.
How large the current mark to market just count is net of the debt.
Relative to par.
In other words, basically I'm trying to figure out like how much book value accretion could there be to call him. You know we've talked with all of the loans in the portfolio actually worked to pay off at par.
Yeah of course, so maybe stepping back a second.
In the prepared remarks, you know we state that a lot of the debt is highly valuable. So what we mean by that we take a lot of a lot of that discount and that is unlikely to be realized via sort of the acceleration.
Our optional termination rights, so excluding sort of that discount assuming that that just plays out over time, given the accretion and part of your yield and less of having less option value.
Really focusing more on our 2022 issuance.
Discount on our 2022 issuances is almost $55 million now with different different different transactions have different probabilities of the monetization of that discount.
But yeah.
For the portfolio that I think is truly in play at the numbers close to the mid fifties.
Got it okay. That's helpful.
And then you guys did it looks like you did buy a little bit of agency MBS. This quarter or is that should we be thinking about that as sort of our liquidity management portfolio or.
Or do you think returns in the agency market are strong enough that you would like to.
Have a little bit of capital deployed there sort of a long term basis.
Yes, it's probably more the former I mean, I think when we were sitting on a.
A decent amount of cash we wanted to get it to work in and obviously the basis is.
Actively at.
Historic wide. So we felt like it was it was a decent entry point, where we werent, taking a ton of spread risk there, but it's not meant to be.
Core part of the portfolio.
Got it okay I appreciate the color. Thank you.
Okay.
And we will take our next question from Matthew <unk> with Jones trading. Please go ahead.
Hey, guys. Thanks for taking the question on for Jason. This morning, where do you guys see spreads going from this point given the amount of supply that could come online with these banks.
Well I think there's a big unknown there I think when you talk about the supply I mean over this past weekend all of that supply was absorbed by one large financial my actual institution and that very little of that is likely to come out in the follow so our view is that it's less likely to be a supply thing cuz.
You know, even if the sort of positions are taken over by the FDIC, etc. They probably would take a long time to find their way to the market versus the more liquid counterparts, and we've seen that play out over different you know you know going back to the financial crisis et cetera.
I think the more relevant.
Relevant opportunity yeah. So I see that what you mentioned is more about you know that that's certainly a possibility, but we think lower probability.
Uh huh.
What I think is more likely as I alluded to in the prepared remarks sort of the ending of this arms race.
You know sort of the poster child of that is out of business and you know there are a lot of others chasing and to the extent that you know pricing normalizes, we just think that.
Spreads risk adjusted spreads will be a lot more attractive when guys are subsidizing.
Our client acquisitions with their portfolios. So that that's what we think is the more likely scenario.
But you know certainly there is a tail situations in the market today, which were you know we wouldn't want to exclude the opportunity of buying.
Loans from failed institutions et cetera.
Right and then you mentioned <unk> can you.
To expand a little more on that and what opportunities that could bring you guys.
Yes, it's it's interesting seen people write in major publications about L. L. P. As I thought only people like us knew about it but you know credit spreads are at near historic Wides and if even small portions of the agency eligible cohorts best ex into private label Securitizations or just you know private.
<unk> it doesn't take.
That much tightening.
Of credit spreads to make even a higher percentage of you know.
Does he eligible paper best accident Pls. So the fact that we're able to buy it today, we see the opportunity said is only growing over time and we're excited about it.
Awesome. Thank you guys.
Okay.
All right, we'll take our next question from Bose George with <unk>. Please go ahead.
Hey, guys, it's actually Mike Smith on for Bose.
Kind of give it once its doctors on book just wondering if there's any appetite for anything strategic maybe whether it be a sale of our core equity injection from the manager for some more scale just kind of wondering how you're thinking about bridging the gap between you know the stock in book value.
Yeah, we're we're obviously frustrated with the stock price, what we're focused on investor outreach and.
I'm trying to I would say get the story out there we think the results are strong.
But I think the manager is supportive of growth in a variety of ways.
So we're we're obviously in constant dialogue with with them on what we see out there in terms of opportunity set.
Yeah.
Great Okay.
Okay.
Thanks for taking my question.
Once again Thats star one for your questions. We will take our next question from Jay Jacobs with Jacob asset management. Please go ahead.
Hi, guys. Thanks for taking the question.
I Wonder if you could talk philosophically and then hopefully even mathematically.
The choice to buy back.
Our common shares at a discount and not also by or instead bone preferred shares at a discount.
Which would also create.
Book value.
Cash flow obligations.
These earnings.
Especially in light of the fact that your.
Relative to kind of reach your kind of your well talk again.
Third the obligation versus common outstanding in and when different or better times when the stock was trading closer to book value you're doing.
You were raising capital and part of the logic back then given was to sort of rightsize the relationship between equity preferred outstanding. So just wondering why.
Quad.
Absolutely.
Why.
Buy back common.
But Marc Pritchard.
Yeah, Hi, sorry, I'm sorry. This one I think if you go back historically I think we've had good.
Dialogue with preferred holders in terms of doing some exchanges for common a few years ago. So I think I think what we're obviously aware of the capital structure, we look at it.
From a logistics perspective, it's a bit.
A bit more or a liquid transaction executing a common market than the preferred but you know we're certainly open to conversations with all shareholders of both common and preferred.
To the extent that there is a conversation we're having.
So you would turn around an issue common shares at these prices to retire preferred shares.
Hello.
I thought you were talking about more.
Yep.
Effective effectively offers.
Of preferreds.
Like I said.
It's much easier to execute a swap.
Uncommon than it is in the preferred space.
Gotcha understood. Thank you Youre welcome.
And again that SAR one for your question. So we'll pause another moment to allow any further questions. Thank you.
We'll go next to Eric Hagen with BTG. Please go ahead.
Hey, Thanks, Good morning, hoping you could talk about a couple of things one just financing conditions.
For warehouse lines of credit.
Leading up to securitization and how.
How much appetite you have to explore new financing.
Arrangements, there and then the amount of liquidity that you have in kind of the space that you have to take your leverage higher.
At this point thanks.
Good morning, Eric It's Nick.
So on the financing conditions.
We largely by largely we primarily.
Borrow from sort of G sibs.
We don't see a tremendous amount of pressure there.
<unk>.
Maybe the cost goes up 510, 15 basis points as we renew although most of our renewals are pretty far out in the future at this point. So yeah. If anything we have excess capacity and we don't see a lot of pressure there obviously away from sort of the warehouse lines you know relying.
On securitization.
Given sort of the interest rate and credit spread volatility.
It's good to be nimble, we talked about.
Been running aggregation risk at the right level levels relative to the company size. So.
And being ready to sort of issue when it makes sense.
That market.
As well well well off of wise, if anything if you look at the past 12 months, where we're much closer to the types than the wides.
Obviously, it's been very volatile.
And I think a lot of that is just the supply story today.
We're just going to be far far less supply.
In this space and given that backdrop, I think scarcity starts becoming a bigger question and most of this is on the front end of the curve and there's a lot of demand there.
As far as capacity.
To build the portfolio certainly I think we have a lot of room to add leverage I think obviously similar to our comments on.
We are being prudent around sort of the the gestation financing warehousing et cetera.
We sort of look at market conditions, as we think about.
Adding leverage to build capacity.
Alright, that's helpful commentary, Thank you guys.
Thank you.
And it does appear that we have no further.
Other questions at this time I'll turn the call back to the speakers for closing remarks.
Thank you very much to everyone for joining us and for your questions. We appreciate it and look forward to speaking with you again next quarter have a good weekend.
Thank you and this does conclude today's program. Thank you for your participation you may disconnect at any time.
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