AG Mortgage Investment Trust Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 7, 2023

There are 5 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the AG Mortgage Investment Trust Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. I'd now like to turn the call over to Jenny Ness General Counsel for the company. Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and welcome to the Second Quarter 2023 Earnings Call for AG Mortgage Investment Trust. With me on the call today are TJ Durkin, our CEO and President Nick Smith, our Chief Investment Officer and Anthony Rosiello, 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.

Speaker 1

Management's Discussion and Analysis. The company's actual results may differ materially from these statements. We encourage you to read the disclosure and 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. Call.

Speaker 1

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 Q2 2023 earnings presentation on the homepage. Further, please note that we are not going to comment on or discuss the terms or status of our proposed transaction with Western Asset Mortgage Capital Corporation at this time.

Speaker 1

And as a result, we will not be taking Q and A after our prepared remarks. Again, welcome to the call and thank you for joining us today. With that, I'd like to turn the call over to TJ.

Speaker 2

Thank you, Jenny, and good morning, everyone. We entered the Q2 on the heels of the turbulence from the regional banking crisis in March. Unsure of where the market was headed, The policy actions taken to stem further broad based deposit runs led markets in the Q2 to determine the regional banking crisis was largely contained And then subsequently with the suspension of the debt ceiling in early June, we've seen the markets improve. That said, interest rates continue to rise throughout the quarter, Bringing the higher for longer inverted yield curve back to the forefront and leaving the mortgage origination market challenged. Despite these challenges, our hardware continues to serve to protect our book value.

Speaker 2

Book value grew by 0.3% quarter. We maintained ample liquidity of $80,000,000 and only 1 2nd.6 turns of economic leverage. During the quarter, Mid had $0.17 of earnings per share while generating $0.08 of EAD and paid its $0.18 dividend. As we've discussed in prior calls, our prudent and disciplined securitization strategy is beginning to evidence itself in our earnings power. The EAD improvement quarter over quarter reflects a combination of higher NIM off our investment portfolio and related hedging strategy as well as the improving fundamentals at our During the Q2, we saw strong demand from balance sheet players, namely insurance companies who were looking for residential whole loan exposure without the intent to securitize.

Speaker 2

We took advantage of this opportunity to sell both newly originated loans at a gain and to sell legacy RPLs loans out of the 2020 seconduritization, further reducing our legacy exposure there. The pending sale of RPLs is expected to settle this month, bringing in approximately $30,000,000 in additional liquidity available to deploy and generate and the higher ROEs that we're targeting today. As I stated last quarter, we continue to see an environment with higher ROEs based on both Some competition retreating and opportunities that we believe are in the early innings of presenting themselves given the lingering effects of the disruption amongst the regional bank balance sheets. Putting this all together, we are very pleased with Mid's performance year to date and importantly believe We are well positioned to drive higher results for both GAAP and EAD metrics per share looking forward. We remain focused on 2nd.

Speaker 2

We're continuing to build on this positive momentum and look forward to updating you on our progress in the coming quarters. I'll now turn it over to Nick to discuss our investment activities in Arc Home in more detail. Thanks, CJ.

Speaker 3

As volatility normalized across credit and interest rate markets, we took advantage of the increased liquidity created and sold credit sensitive loans, raising equity that can be deployed into higher ROEs in the coming quarters. We also built a strong pipeline of newly originated loans and expect to issue 2 securitizations before the end of the third quarter. Quarter. While spreads on loans tightened throughout the quarter, they lagged more liquid cohorts of structured credit and mortgage markets setting the stage for potential upside where we saw debt on the upcoming securitizations. We continue to see attractive ROEs across the non agency market and are beginning to see early signs of regional and midsized banks pulling back.

Speaker 3

Although still in the early stages, we expect this now widely accepted narrative to lead to opportunities to deploy equity capital in our targeted asset classes. Throughout the quarter, Arc Home built on the momentum from previous quarters Even as nominal yields retraced close to the highs of the past year. While there remains significant progress to be made in a difficult origination market, the changes we outlined in previous quarters are beginning to show through improved volumes and benefits from operational efficiencies. In this quarter's earnings presentation, we We provided additional information on page 8, outlining the retained non Agency securities. As outlined in previous quarters, the

Speaker 4

debt we issue off our non QM

Speaker 3

Make this option very valuable by providing the potential path to pull forward these deep discounts in the coming years. Pie chart shows that over a third of the fair market value of these retained positions are mezzanine and subordinate securities from 2,002 held at deep discounts to bar. As the Fed approaches the end of this tightening cycle, home prices have been much more resilient quarter. And mortgage credit continues to perform well. In line with this trend, credit spreads flattened throughout the quarter supported by these strong fundamentals Ashley.

Speaker 3

While financing costs have increased considerably since the beginning of this tightening cycle, we are constructive on being able to deploy current excess liquidity and rotate equity into attractive ROEs in the mid to high teens with modest mark to market leverage. I will now turn the call over to Anthony.

Speaker 4

Thank you, Nick, and good morning. During the second quarter. The company recorded book value of $11.89 per share and adjusted book value of 11.52 2nd per share, representing an increase of 0.3% from prior quarter. This increase, coupled with our dividend, generated a quarterly economic return of 1.9% for our shareholders. Our book value performance this quarter quarter.

Speaker 4

J. Rice:] Is attributable to improvement in earnings available for distribution, net gains on our investment portfolio and accretive share repurchases which exceeded our accrued common dividend. During the quarter, we recognized GAAP net income available to common shareholders of approximately $3,500,000 or $0.17 per fully diluted share. Net interest income, inclusive of our hedge interest, increase quarter over quarter by approximately $500,000 while expenses declined to $1,300,000 less of transaction related expenses. Quarter.

Speaker 4

Although benchmark rates increased during the quarter, gains on our interest rate swap portfolio more than offset mark to market losses on our investment portfolio, resulting in $1,700,000 of realized and unrealized earnings. We continue to utilize our share repurchase program returning $1,100,000 of capital to our shareholders. We repurchased 187,000 shares

Speaker 2

quarter or 1% of our

Speaker 4

total outstanding shares at the start of the quarter, resulting in 0.4% of book value accretion As our purchase price was approximately 50% of our adjusted book value. Year to date, we've deployed 6 $400,000 of capital in repurchasing our common stock as of quarter end, and our remaining repurchase authorization was approximately 16,500,000. Quarter. Our investment portfolio was flat quarter over quarter at $4,500,000,000 as loan purchases With 82% of our financing funded through securitization at a weighted average cost of 4.2%. As a result, Our economic leverage ratio at quarter end was 1.6 turns, of which one turn related to our credit portfolio and 0.6 turns to our agency RMBS portfolio.

Speaker 4

In addition, we ended the quarter with approximately $2,000,000,000 of borrowing capacity for continued growth in our portfolio. We generated earnings available for distribution or EAD of quarter. Net interest income inclusive of interest earned on our hedge portfolio was $0.73 per share, which was $0.05 higher than prior quarter. Net interest income exceeded operating expenses and preferred dividends, generating earnings EAB improved by $0.03 quarter over quarter when excluding the impact of gains recorded by ARC on loans sold to MIT. Lastly, we ended the quarter with total liquidity of approximately $80,000,000 of cash and expect to generate additional capital from the loan sales and securitizations mentioned earlier.

Speaker 2

I'll now turn the call back to TJ. Thanks, Anthony. We want to thank everyone again for joining us this morning. And as Jenny mentioned at the top of the call, we won't be taking Q and A this quarter. We appreciate your understanding, We look forward to speaking again next quarter.

Operator

That concludes today's teleconference. Thank you for your participation.

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AG Mortgage Investment Trust Q2 2023
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