AG Mortgage Investment Trust Inc. (MITT) Q1 2023 Earnings Call Transcript
Good day, and thank you for standing by. Welcome to the AG Mortgage Investment Trust 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. [Operator Instructions]. Please be advised today’s conference call is being recorded. [Operator Instructions].
I’d now like to turn the call over to Jenny Neslin, 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 Rossiello, 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 auto reviver any forward-looking statements, whether as a result of new information, future events, or otherwise.
During the call today, we will refer to certain non-GAAP financial measures. Please refer to our SEC filings for reconciliations to 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.agmit.com, and click on the link for the first quarter 2023 earnings presentation on the home page in the Investor Presentation section. Again, welcome to the call, and thank you for joining us today.
With that, I’d like to turn the call over to T.J.
Thank you, Jenny, and good morning, everyone. The first quarter of 2023 got off to a constructive start. Continuing to signs of recovery in the markets that we saw developing beginning in December. 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 ascending the front end materially lower.
Despite this volatile end to 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 in only 1.4 terms of economic leverage. We continue to use our excess liquidity to repurchase our common stock, and during the quarter we repurchase 923,000 shares at a weighted average price of $5.68, creating 2% of accretion for shareholders.
During the quarter man had $0.37 of earnings per share or generating $0.03 of EAD and payments of $0.18 dividend. Is notable that while men did experience mark-to-market losses on assets it owns 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 the 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, both values 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 risk and stay disciplined in terms of issuing securitizations throughout the year, which protected book value in 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. It’s 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 MITT has an inflection point in terms of earnings power. First, regarding our home, we see this happening primarily based on recent organizational changes at our home, setting the stage for near-term return to profitability, which Nick will walk through in more detail.
Secondly, we see an environment with higher ROEs on assets. Based on both some competition retreating, and opportunities that we believe are in the early innings of presenting themselves, given the disruption amongst the amongst the regional bank balance sheets.
To putting this all together, we believe mixed results will produce both higher gas and EAD metrics per share looking forward. And we believe the market should recognize the hard work and solid results being delivered by the mid-team.
I’ll will now pass the call to Nick.
Thanks, T.J. As T.J. mentioned we came to market with our first securitization of 2023 in February. For the past few quarters, we’ve emphasized that going forward, we will right-size mitigation risks take 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 the historic fed tightening.
Our leverage remains close to the lows 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, depositories have increasingly used their portfolios to subsidize residential mortgages is a key component of their broader client acquisition strategies.
Although this is unlikely to cease entirely, since not all banks have the same amount of balance sheet stress, we expect it to represent the relaxing of what had on the surface looks like an ever more competitive arms race. This should present an opportunity to source high-quality assets with credit spreads and nominal yields at the highs of over a decade. We also believe that there could be opportunities to buy portfolios of loans from field banks or ones that need liquidity.
In addition to these opportunities, we’re finding attractive investments in home equity mortgages, conventional investment in second home residential mortgages, and both qualified and nonqualified residential mortgages. Although origination volumes remain low, we have seen significant increases in volumes at our home or 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 LLPs at Fannie and Freddie. As of quarter end mixed residential home loan pipeline is approximately $280 million.
Moving on to the portfolio. Our first GCAT securitization of 2023 included all of our out of the money home loan positions, leaving our aggregation pipeline including both closed and locked loans with a gross weighted average coupon of approximately 8%. While I’m warehouse we expect these positions return to low to mid-teens and expect ROEs in the low to mid-20s 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 in both nominal yields and credit spreads.
These options in effect allow us to bring forward the monetization of the 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. It 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.
Given historically wide spreads, and nominal yields, along with deeply discounted subordinate positions. As we outlined in our presentation, the earnings power of our investment portfolio is strong consisting of acids 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 to gain on sale margins increase over the coming quarters as the impacts of consolidation provide some relief. The management team is focused on factors in their control.
Board recently hired a new Chief Production Officer. Although early his contribution so far had been impressive. We’ve also begun seeing significant improvements in productivity, along with reductions in fixed and variable costs is 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, and in the coming quarters.
I will 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 that with a portfolio of current coupon loans. We ended Q1 with book value of $11.85 per share, 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 5.7%.
Our increase in book value was primarily driven by net unrealized gains in our investment portfolio, coupled with accretive share repurchases. During the quarter, we recognize GAAP net income available to common shareholders at approximately $8 million or $0.38 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, we remain active during the quarter, returning $5.2 million of capital to our shareholders. We repurchase 923,000 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 with $15 million available for use upon fully utilizing our remaining capacity in the existing program. We also grow our investment portfolio by 6% to $4.5 billion and continue to use our securitization platform to provide term non-mark-to-market finance.
Currently, 85% of our financing is funded through securitization at a weighted average cost of 4.2%. As a result, our economic leverage ratio at quarter end was 1.4 turns, of which 0.8 turns relate to our credit portfolio, and 0.6 turns to our agency RMBs 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 EAD of $0.03 per share for the first quarter. Net interest income inclusive of interest earned on our hedge portfolio was $0.68 per share, which was consistent with prior quarter and exceeded our operating expenses and preferred dividends, generating earnings of $0.11 per share.
This was offset by a loss of $0.08 contributed from our home for the quarter driven by lower volumes. However, it is notable that our contribution EAD did improve by $0.05 quarter-over-quarter. Lastly, we ended the quarter with total liquidity of approximately $88 million of cash.
This concludes our prepared remarks and we now like to open the call for questions. Operator?
[Operator Instructions]. And we will take our first question from Doug Harter with Credit Suisse. Please go ahead.
Good morning. Just touching on that last point about kind of the earnings Arc Home being $0.11. Can you help us kind of understand, the path that that could get to the $0.18 dividend? Or how you’re thinking about the dividend and in light of that earnings power?
Yes. Hi, Doug. I think as we, I think Arc Home and obviously detracting from the earnings, I think we’re continuing to see momentum there and then they just walked you through. So, we’re kind of walking up back to I’d say, breakeven, and I think not too distant future, we would expect that to swing back to profitability. I think the ROE is on the asset side are probably a bit more straightforward. I think we would probably tell you, the very high teens, and if anything, probably leaning towards maybe even higher on the opportunity side.
So, if we can balance, if we can effectively swing the operating company of ARC into line with called the high-teens to 20 ROEs. I think that’s how you can kind of walk through to get to an $0.18 dividend.
And I guess, what is your end the board’s kind of appetite to support the current dividend, kind of until that happens?
Well, I think we’re cautiously optimistic that swing is coming over the next couple quarters. We’re not waiting years into the future.
Okay. And then, just, you talked about the pipeline that you have, I guess, how do you see your capacity to continue to add assets at these wider returns that you talked about?
Yes. So, I mean, I think our pipes can effectively turn assets over fairly quickly. I think what we’ve been able to do, and I think show, particularly during 2022, is we have access to the capital markets in good markets, and even in bad. We are not looking to take a lot of warehouse risk and so I think we’re able to turn over new asset opportunities fairly quickly, from kind of sourcing to settlement to effectively terming it out. And so, could we be, getting two to three securitizations a 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?
Yes, because we’d be we’re kind of returning it right back on post-settlement bases.
Got it. And thank you.
And we’ll take our next question from Trevor Cranston with JMP Securities. Please go ahead.
Thanks. On the securitize loan portfolio, I’m going to give an estimate as to how large the current mark-to-market discount is net and the debts are relative to par. In other words, basically, I’m trying to figure out like, how much book value accretion, could there be results with all the loans in the portfolio eventually work to pay off apart. Thanks.
Yeah, Trevor, of course. So maybe stepping back a second, in the prepared remarks, we state that a lot of the debt is highly valuable. So, what we mean by that we think a lot of that discount and is unlikely to be realized via sort of the acceleration of our optional termination rights. So, excluding sort of that discount, assuming that that just plays out over time given accretion and part of your yield, and less of having less option value. Really focusing more than 2022 issuance, the discount on our 2022 issuances, is almost $55 million.
Now, different transactions have different probabilities of the monetization of that discount. But for the portfolio that I think is truly in, play it the numbers close to the mid-50s.
Got it, and it is very helpful. And then, you guys did it looks like you did buy a little bit of agency MBS this quarter. Is that, should we think about that as sort of a liquidity management portfolio or do you think returns in the agency marketer are strong enough that you would like to have a little bit of capital deployed? They’re sort of on a long-term basis?
Yeah, it’s probably more the former, I mean, I think we were sitting on a decent amount of cash, we wanted to get it to work. And obviously, the basis is effectively at historic wide. So, we felt like it was a decent enough entry point where we weren’t taking a ton of spread risk there. But it’s not meant to be a core part of the portfolio.
Got it. Ok. Appreciate the color. Thank you.
And we will take our next question from Matthew Erdner 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 we’ve talked about the supply. I mean, over this past weekend, all that supply was absorbed by one large financial institution in that very little that is likely to come out on the follow. So, our view is that it’s less likely to be a supply thing, because, even if the sort of positions are taken over by the [ph] FDIC, etc. that probably would take a long time to find their way to the market versus their more liquid counterparts. We’ve seen that play out over different going back to the financial crisis, etc.
I think the more relevant opportunity, so I see that what you mentioned is more of a, that could certainly a possibility, but we think lower probability. What I think is more likely, as I alluded to the prepared remarks sort of the ending of this arms race, sort of the poster child of that is out of business and the right to others chasing and to the extent that pricing normalizes we just think that spreads, risk-adjusted spreads will be a lot more attractive when guys aren’t subsidizing client acquisitions with their portfolios.
So that’s what we think is the more likely scenario but certainly, there’s a, tail situations in the market today, which were, we wouldn’t want to exclude the opportunity of buying loans from failed institutions et cetera.
And then you mentioned LPAs, can you expand a little more on that and what opportunities I could bring you guys?
Yes. It’s interesting seeing people write in major publications LPAs, I thought only people like us knew about it. But credit spreads are at near historic wide. And if even small portions of the agency eligible cohorts, best decks into private label securitizations, or just private markets. It doesn’t take that much tightening of credit spreads to make even a higher percentage of, agency eligible paper that stacks into PLAs. So, the fact that we’re able to buy it today, we see the opportunity set is only growing over time, and we’re excited about it.
We’ll take our next question from Bose George with KBW. Please go ahead.
It’s actually [indiscernible] on Bose. Just wondering, if there’s any appetite for anything strategic maybe whether it be a sale of ark or equity injection from the manager for some more scale. Just kind of wondering how you’re thinking about bridging the gap between the stock and book value?
We’re obviously frustrated with the stock price. We’re focused on investor outreach, and trying to 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 obviously in constant dialogue with them on what we see out there in terms of the opportunity set.
Thank you, for taking my question.
[Operator Instructions] We’ll take our next question from [indiscernible] with Jacob Asset Management. Please go ahead.
Hi, guys. Thanks, for taking my question. I wonder, if you could talk philosophically and then hopefully, even mathematically, the choice to buy back common shares at a discount and not also die or instead buy preferred shares at a discount, which will also create book value and reduce cash flow obligation produce earnings.
Especially in light of the fact that your relative to other REITs your wealth top heavy and that preferred obligation versus common outstanding and when different or better times when the stock was trading closer to book value you’re doing, you’re raising capital and part of the logic back then given was to sort of right-sided relationship between equity and preferred, outstanding. So just wondering why, although I applaud it, absolutely. Why that common, but not preferred?
I think if you were to go back historically, I think we’ve had good dialogue with preferred shareholders, in terms of, doing some exchanges for common a few years ago. So, I think we’re obviously aware of the capital structure, we look at it. From a logistics perspective, it’s a bit more of a liquid transaction executing the common market than the preferred but we’re certainly open to conversations with all shareholders of both common and preferred to the extent that there’s a conversation worth having.
So, you would turnaround and issue common shares at these prices to retire preferred shares?
I thought you were talking about more effective offers of preferred. It’s much easier to program on common than it is in the preferred space.
[Operator Instructions] We’ll go next to Eric Hagen with BTIG. Please go ahead.
Hi, thanks, good morning. Hoping you can talk about a couple of things. One, just financing conditions for warehouse lines of credit, leading up to securitization, and how much appetite you have to explore new financing arrangements there. And then the amount of liquidity that you have and kind of the space that you have to take your leverage higher at this point? Thanks.
Morning, Eric, it’s Nick. So, on the financing conditions, we largely and by largely, we primarily borrow from sort of G-SIBs. We don’t see a tremendous amount of pressure there. Maybe the cost goes up, you know, 5 basis points, 10 basis points, 15 basis points as we renew, although most of our renewals are pretty far out in the future at this point.
So, if anything, we have excess capacity. And we don’t see a lot of pressure there, obviously, away from sort of the warehouse lines, relying on securitization, given sort of the interest rate and credit spread volatility, it’s good to be nimble. We talked about, being running aggregation risk at the right level relative to the company size, and being ready to sort of issue when it makes sense.
That market is, well, well, well off a wide, if anything, if you look at the past 12 months, we’re much closer to the types than the wides. Obviously, it’s been very volatile. And I think a lot of that’s just the supply story today. There’s 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 the capacity to build a portfolio, certainly, I think we have a lot of room to add leverage. I think obviously, similar to our comments on our being prudent around sort of the gestation, financing, warehousing, etc. We sort of look at market conditions as we think about adding leverage to build capacity.
And it does appear that we have no further 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 I 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.