AG Mortgage Investment Trust Q2 2024 Earnings Call Transcript

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August 2, 2024

Key Takeaways

  • Dividend Increase: The board approved a 5.6% dividend raise to $0.19 per share, with earnings available for distribution of $0.21 per share covering the new dividend by $0.02.
  • Debt Restructuring: The company replaced $86 M of convertible notes maturing in September with $65 M of new senior unsecured notes (plus $34.5 M issued in Q1), improving its corporate debt structure.
  • Liquidity & Leverage: Q2 ended with $180 M in liquidity and a moderate 2.5x leverage ratio, which is expected to normalize post-repayment of the convertible notes.
  • Strategic Merger Benefits: Following the WMC acquisition, $57 M of assets have been monetized returning $41 M of equity for redeployment, and the company was added to the Russell 2000 index on June 28.
  • GAAP Net Loss: Q2 GAAP net loss was $0.02 per share, with adjusted book value modestly declining from $10.58 to $10.37 due to unrealized mark-to-market losses.
AI Generated. May Contain Errors.
Earnings Conference Call
AG Mortgage Investment Trust Q2 2024
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the AG Mortgage Investment Trust Inc. 2nd Quarter 2024 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 Please be advised that today's conference is being recorded.

Operator

I'd now like to turn the call over to Jenny Neslin, General Counsel for the company. Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and welcome to the Q2 2024 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 Rossello, 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

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 ks for the year ended December 31, 2023, and our subsequent events 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 reconciliations to the most comparable GAAP measures.

Speaker 1

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 2024 earnings presentation on the homepage. 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. I'm excited to report our Q2 financials, which show our continued execution of our core business strategy and the compelling benefits of our recent merger. Walking through mid financial position as of June 30th, we saw adjusted book value move modestly lower from 10.58 to 10.37 producing a roughly breakeven economic return on equity for the quarter. With it being too early to give an estimate of July's book value. More notably on June 13, the board voted unanimously to increase our dividend 5.6 percent to $0.19 per share.

Speaker 2

During the quarter, we earned $17,400,000 of net interest income, negative 0.02 dollars of earnings per share and $0.21 of EAD per share covering our newly set dividend previously declared by $0.02 One of the key areas of focus for us coming out of the WMC acquisition was efficiently addressing the impending maturity of their $86,000,000 convertible notes due on September 15, 2024. We were happy to report during the quarter, we successfully issued another $65,000,000 of investment grade senior unsecured notes to more than cover the upcoming maturity when considering our $34,500,000 issuance from Q1 of this year. Effectively replacing the convertible debt with these senior unsecured notes positions Mitt with a materially more advantageous corporate debt structure going forward. As a result of these bond issuances and to avoid holding excess cash, we have invested a portion of these proceeds into Agency MBS using only modest leverage in order to generate strong short term risk adjusted returns. As a result, the company ended the quarter with $180,000,000 of liquidity and modest moderately higher than normal leverage of 2.5 turns.

Speaker 2

We would anticipate post repayment of the convertible notes at maturity in September, we will return to more historical levels of leverage at the company level. In closing the WMC acquisition on December 6th last year through quarter end, approximately 57,000,000 of assets have already been monetized, returning 41,000,000 of equity to be rotated into our core strategy of newly originated residential mortgage loans. One significant result of the merger is our inclusion into the Russell 2000 as of June 28th. We believe this is a critical step in both broadening our investor base and improving investor liquidity. Like I stated last quarter, the team and I are very excited to show the market the benefits we see in the power of the combined company.

Speaker 2

I'll now turn the call over to Nick.

Speaker 3

Thanks, TJ. This quarter, we saw the continuation of various themes we've pointed out over recent quarters: elevated levels of interest rate volatility, continued outperformance of housing, a resilient residential mortgage borrower, and modestly tighter residential credit spreads with outperformance in lower rated parts of the capital stack. The delinquency rate of our loan portfolio remains low at approximately 1% with a modest improvement quarter over quarter and an increase of only 10 basis points since the end of last year. The team executed 2 securitizations during the quarter. The second transaction of the quarter was an inaugural private label securitization backed by Fannie and Freddie eligible investor loans from 1 of the nation's largest mortgage originators where we acted as the cosponsor.

Speaker 3

Through the next quarter and throughout the rest of the year, we expect to remain active and issue at a similar pace to the past 2 quarters. Moving on to Arc Home. We are excited to announce that Arc Home opportunistically agreed to sell its MSR portfolio at the end of April. Close to this year's peak in interest rates, which settled subsequent to quarter end, this sale generates ample liquidity for continued growth in Arcom's core business, along with capital that we expect to be deployed in compelling new opportunities developing in the residential mortgage origination market. As you can see on Page 9, volumes grew considerably quarter over quarter adding to the scale needed to be profitable.

Speaker 3

Additionally, Arcom has seen modest increases in margins and is optimistic that these gains are not only durable, but likely have room to improve as additional liquidity for non agency residential mortgage loans enters the market has recently become a well publicized pocket of capital. Now I'd like to turn the call over to Anthony.

Speaker 4

Thank you, Nick, and good morning. It continued its positive momentum in the 2nd quarter, growing its investment portfolio, increasing its securitization activity and positioning ourselves to address the upcoming convertible note maturity, while generating strong earnings available for distribution and increasing the common dividend. During the quarter, our book value of $10.63 per share and our adjusted book value of 10 point by approximately 2% from March. When considering the $0.19 common dividend, our economic return was roughly breakeven. We recorded a GAAP net loss available to common shareholders of approximately $700,000 or $0.02 per share.

Speaker 4

The modest book value decline was driven by unrealized mark to market losses on our investment portfolio, partially offset by EAD exceeding our quarterly dividend and gains on our investment in ARPU. We generated EAD of $0.21 per share for the 2nd quarter. Net interest income, inclusive of interest earned on our hedge portfolio, was 0 point 67 dollars per share, which exceeded our operating expenses and preferred dividends of $0.43 generating earnings of $0.24 per share. This was offset by a loss of $0.03 contributed from Arc Home, which continued to improve quarter over quarter. Our investment portfolio increased by approximately 11% to $6,900,000,000 through acquiring $423,000,000 of residential mortgage loans and $428,000,000 of agency RMBS.

Speaker 4

As mentioned earlier, we were active in the securitization markets, managing our exposure to mark to market finance. We ended the quarter with $300,000,000 of loans financed on warehouse lines, of which $87,000,000 were sold in July, further reducing our risk profile and returning capital for reinvestment. Our economic leverage ratio at quarter end was 2.5 turns, with approximately one turn relating to the Agency RMBS portfolio, which we anticipate will be removed in connection with the funding of the convertible note maturity in September. Lastly, we ended the quarter with total liquidity of approximately 180,000,000 of cash and $59,000,000 of unencumbered agency RMBS. This concludes our prepared remarks, and we'd now like to open the call for questions.

Speaker 4

Operator? Thank you, And we'd now like to open the call for questions.

Operator

Operator? The floor is now open for questions. Our first question will come from Doug Harter with UBS. Please go ahead.

Speaker 5

Thanks. Can you talk about the timeframe you think it'll take to kind of rotate out of Agency MBS into your core assets and what you think of kind of the return differential as you make that rotation?

Speaker 2

Yes. Look, I think about it kind of in some sequencing. So I think we want to address the convertible note in September with obviously the liquidity that we have on balance sheet today. And then I think rotating that kind of excess liquidity will probably take no more than probably 2 to 3 quarters kind of post that. We're not using if you look at sort of the agency rates, we're using probably about half the leverage there.

Speaker 2

So it's an interim kind of stop gap to earn some carry. So I think the ROEs are not applicable. I think we're targeting on the new origination side, I would call it mid high teens gross ROEs as part of the plan going forward. And that's where we see the market.

Speaker 5

And I guess just with I mean you are taking lower leverage. Just how should we think about the book value risk that you're taking kind of on the agencies given kind of the large moves in interest rates, especially on days like today?

Speaker 2

Yes. I mean, I think like I said, we probably got I mean, we're running from a duration perspective, I think a consistent strategy just less leverage in terms of our hedge ratios etcetera. So it should be muted versus a fully levered agency REIT.

Speaker 5

Makes sense. And then just on the ARC MSR sale, that extra capital that kind of gets freed up, does that stay within ARC? Or does some of that get distributed up to mid?

Speaker 3

Good morning, Doug. It's Nick. So our management team, along with our Combs management team, has evaluated recapitalization of the company. And at the moment, we expect there to be a likely return of capital.

Speaker 5

Great. I appreciate that. Thank you, guys.

Operator

Thank you. Our next question will come from Bose George with KBW. Please go ahead.

Speaker 6

Yes, good morning. Actually, I wanted to ask first just about the trend in EAD. With the liquidity you'll be holding in the Q3, could we see a little downward pressure there? Or should it continue to trend up as you're deploying capital?

Speaker 2

Yes. I mean, I guess, I think you're thinking about it right this is an interim quarter, if you will, to kind of get through that September maturity. But I mean, we're certainly working towards avoiding cash drag and creating some ROE in the interim. But I would think of kind of on a prospective basis, it will look like a more normalized portfolio. I understand the logic of your question.

Speaker 6

Okay. No, that makes sense.

Speaker 5

Thanks a lot. And then actually, can

Speaker 6

you just give us an update on book value, core GEDI, I guess, before the noise of today, but yes, earlier this week?

Speaker 2

We haven't produced a total high book value yet. It's too early.

Speaker 5

Okay, great. Thank you.

Operator

Thank you. Our next question will come from Trevor Cranston with Citizens JMP. Please go ahead.

Speaker 7

Hey, thanks. I guess, first question, obviously, the securitization activity this quarter was focused on the agency eligible market. Can you give a little bit of color in general on what you guys are seeing in the loan markets and kind of where you're seeing the best opportunities for securitization today? Thanks.

Speaker 3

Yes, certainly. So obviously as a non agency focused REIT, we focus on sort of the wide array rather than just one sort of non agency asset. In the non QM space, we continues to see the lowest cost of capital being no longer levered credit buyers. Obviously, that could change. But at the moment, we believe it's prudent to best ex Art Home's origination to those sort of buyers and deploy mixed capital and higher returning opportunities.

Speaker 3

Some of those opportunities actually are, I think, somewhat counterintuitively, the agency eligible positions we've added. We'll actually price another one of those transactions later this morning, along with other sort of co issue opportunities I mentioned in the script in that space. We're also paying close attention to home equity space and expect to be active there.

Speaker 7

Okay. Got it. That's helpful. I appreciate that you don't have a book value update for July. But I guess when you look at the portfolio as of June 30, can you talk about kind of what you think the overall net duration positioning of the book was?

Speaker 7

Thanks.

Speaker 2

I don't think we have anything sort of published ever.

Speaker 7

Okay. That's fair enough. Thank you.

Operator

Thank you. Our next question will come from Brad Cappuzzi with Piper Sandler. Please go ahead.

Speaker 7

Thanks for taking my question.

Speaker 8

I appreciate all the commentary. Can you just talk about the bid for securitizations you're seeing? I know you mentioned on the last call there still tends to be less supply than demand. If you can just shed any color on what you're seeing, that would be helpful. Yes.

Speaker 3

Helpful. Yes. It's sort of sector by sector. I think I spoke a little bit earlier answering Trevor's question in sort of non QM space. If anything, So that So that debt has done better relative to maybe some of the other sectors.

Speaker 3

The prime jumbo market as of late has been under pressure. There is no release valve, if you will, to non securitization outlets today, which has widened out that space as there's just been increase of issuance. But in general, the market has been healthy across residential credit up and down the stack. So any widening in the previously mentioned assets have been truly marginal from a historical standpoint. And if anything, in the non QM space, we're sitting at local

Speaker 8

types. Thanks. I appreciate the color And then, do you view on where you see volumes trending for Arcom as we exit 2024 and into 2025 after posting a strong quarter in 2Q? And what type of rate scenario would you need to see play out before we see a more normalized origination environment there? Thanks.

Speaker 3

Yes. We've said previously that and obviously, if you look at the NBA forecast, I don't think we're going to deviate a ton from sort of NBA forecast. A lot of our gains have just been from being more competitive and more efficient rather than sort of market conditions. So I also think there's going to be a lot of seasonality to these businesses as you would expect given as much of how much purchase money Arc Home is reliant upon. But I think the trends you've seen should be similar.

Speaker 3

And if you were to seasonally adjust sort of where we are today, I think that's what you would expect. So look, we're still in growth mode. We're still trying to be bigger, better, more efficient. So trajectory is still up, but conditioning that it will be highly seasonal.

Speaker 8

Thanks. I appreciate you taking my questions.

Operator

Thank you. Our next question will come from Eric Hagen with BTIG. Please go ahead.

Speaker 9

Good morning. This is Jake Kasikis on for Eric Hagen. Thanks for taking my questions. First one, just going back to leverage in the Agency MBS portfolio. I know you talked about it a little, but just hearing some things that would maybe lead you guys to raise leverage in the portfolio and if you guys kind of have a target range for it, just some color there would be helpful.

Speaker 9

Thank you.

Speaker 2

Yes. I think if you fast forward through next quarter, we would kind of expect to be materially smaller in agencies and kind of returning to the one handle of economic leverage that we've been running the company at over the past 4 or 6 quarters. So this is just an interim stop gap to earn some carry the cash proceeds we raised from the bond offering.

Speaker 9

Okay. Got you. Thank you. And then my other one, turning to the non QM portfolio, do you guys have a sense or estimate for how much prepayment speeds could accelerate? And if they were to increase, how that would translate to earnings or spreads in the portfolio?

Speaker 9

Thank you.

Speaker 3

Yes. So the vast majority of the loan book, and you can see this in the present in our presentations, is far out of the money. Our securitized coupon, if you look at it, is 5%, 4%, which if you think about even where conforming rates are, it's way out of the money. So obviously, we're very focused on prepayment speeds and inverted curve and sort of efficiencies entering the market. But the book of this book of business is fairly well protected from any convexity event or expected convexity event.

Operator

Thank you. At this time, I'm showing no further questions in queue. I'll turn the call back to management for any additional or closing remarks.

Speaker 1

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

Operator

Thank you. This does conclude the AG Mortgage Investment Trust Inc. 2nd quarter 2024 earnings conference call. You may disconnect your line at this time and have a wonderful day.

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