AG Mortgage Investment Trust Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 6, 2025

There are 9 speakers on the call.

Operator

Good day, everyone, and thank you for standing by. Welcome to the AG Mortgage Investment Trust Inc. First Quarter twenty twenty five 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

Please be advised that today's conference is being recorded. I'd now like to turn the call over to Jenny Nestle, General Counsel for the company. Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and welcome to the first quarter twenty twenty five 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 Orocielo, 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 Statements 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 12/31/2024, 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 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 Q1 twenty twenty five 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 T. J.

Speaker 2

Thank you, Jenny. I'm pleased to report our first quarter earnings, which showcases the continued execution of our core business strategy and industry leading results, particularly around book value stability. I won't go into monologue about tariffs. The first quarter was clearly a tale of two distinct parts. The first two months saw a continuation of positive investor sentiment and very functional capital markets.

Speaker 2

Securitization discipline from the team and control around leverage led to MIT's strong financial performance during the first quarter. We saw book value largely unchanged, moving higher by $01 from $10.64 to $10.65 while supporting and paying our newly increased $0.20 dividend, therefore producing a healthy quarterly economic return on equity of 2% for our shareholders. Volatility that began in April that began in March continued through the majority of April. We have widened out spreads on our retained securities to reflect these market conditions and would estimate book value through April to be down approximately 3%. We are in a strong liquidity position to take advantage of any continued volatility.

Speaker 2

With that being said, we saw very little trading or forced capital markets activity during the peak volatility of early April, which we think bodes well for a potential quick rebound in spreads. Lastly, I wanted to share our views on the impacts and opportunities around potential GSE reforms. While we have no knowledge of massive reform coming imminently, we do see clear signs of reduced footprint from the entities they manage. We believe that MITT is uniquely positioned to take advantage of these potential opportunities given our vertical integration with Arc Home along with our well established securitization shelf GCAP. When you add all together, we believe MITT is extremely undervalued at today's price.

Speaker 2

I'll now turn the call over to Nick. Thanks, TJ, and good morning. The portfolio continues to perform well, delivering a 2% economic return while fully supporting the 5.3% increase in our dividend. We maintained a strong focus on protecting book value while growing the investment portfolio. Leverage increased modestly, yet remains well below peer averages, providing flexibility for rotation and growth into target asset classes.

Speaker 2

During the quarter, we increased our capital allocation to the home equity sector, a trend we expect to continue. This quarter, we partnered with a leading non bank mortgage originator to issue a $500,000,000 home equity securitization. We acquired approximately $130,000,000 of additional home equity loans from various non bank originators and we established a new partnership to aggregate home equity exposure while collaborating on programmatic securitizations. Our team remains focused on expanding partnerships in this space. Turning to the macro landscape, the current positioning and the portfolio.

Speaker 2

The global market is undergoing a significant transformation as The U. S. Redefines its role in an evolving global order. While the worst of the recent volatility appears to be behind us, we are well positioned to navigate and capitalize on future market shifts. We have exercised prudence in leverage and discipline in capital allocation.

Speaker 2

We avoided chasing levered agency basis trades despite their popularity and as a result, preserved book value. We've remained constructive on residential mortgage credit. As previously mentioned, we increased our capital allocation to home equity mortgages. We believe this sector is in the early stages of development and is set to outperform other residential mortgage credit sectors. We are lending exclusively to borrowers that have demonstrated ability to service their debts over a long period of time and who also are the beneficiaries of large increases in home prices along with historically low interest rates.

Speaker 2

We believe this aligns with the goal of providing the best risk adjusted returns in the residential sector. At a national level, housing continues to appear stable, which is supported by familiar narratives. Existing home sales have increased modestly from their lows a few years ago, but remain historically very low and the supply of newly constructed homes is slowly narrowing shortages in certain markets. Regionally, there are signs of pullback in markets that have seen some of the most significant increases in the recent past, but we believe these are contained. Similarly, we are seeing an uptick in delinquencies in certain cohorts of recent origination.

Speaker 2

In aggregate, underwriting standards remain historically tight. However, the past few years, we have seen expansion among certain participants, which is driving some of these recent increases. Despite the recent volatility and indications of modest weakness in certain housing markets and mortgage originations, it's important to note the strength of our portfolio. At the end of the quarter, our current loan to value was approximately 59% and serious delinquencies were only 1.3%. When you put all these ingredients together, our low economic leverage, our disciplined capital allocation and our strong portfolio performance, we are confident in our ability to continue to deliver results through broader macro driven volatility.

Speaker 2

Before handing the call over to Anthony, I'd like to reiterate some of the key messaging around MITT's originator, Arc Home. Strategic investments in a high caliber management team and talent have delivered meaningful results in a short period. Arc Home has demonstrated strong performance with lock volumes increasing 50% year over year. Gain on sale margins also improved during the quarter, supporting the company's achievement of breakeven. We expect Arc Home to remain committed to driving growth across origination channels, enhancing the customer experience and expanding market share.

Speaker 2

As Arc Home continues to innovate and diversify its product offering, we anticipate growing contribution to our earnings available for distribution. Our ability to generate assets through Arc Home is a key differentiator, providing flexibility and a compelling value proposition for our shareholders. With that, I'd like to turn the call over to Anthony.

Speaker 3

Thank you, Nick, and good morning, everyone. MITT maintained positive momentum during the first quarter. We increased our investment portfolio by continuing to acquire agency eligible and home equity loans. Additionally, we remain active in the securitization market, executing two deals during the quarter. Importantly, despite the market volatility that began in March, we protected our book value, grew our earnings available for distribution and increased our quarterly dividend by 5.3% to $0.20 per share.

Speaker 3

During the quarter, our book value remained stable with a slight increase of 0.1% to $10.65 per share. Including our common dividend of $0.20 per share, we generated a 2% economic return for our shareholders. GAAP net income available to common shareholders was $6,200,000 or $0.21 per share. Net interest income earned on our investment in swap portfolios increased by $1,000,000 or 5% from prior quarter, primarily driven by continued capital deployment into target assets. Our investment portfolio recognized modest net realized and unrealized gains on a hedge adjusted basis, reflecting continued strength in home equity assets and our securitized loan portfolio.

Speaker 3

In addition, our earnings from equity method investments was $1,200,000 during the quarter, which includes gains in our investment in Arc Home valued at one times book. These gains were partially offset by $1,100,000 of transaction expenses primarily related to securitization activity. We recorded EAD of $0.20 per share, which increased from $0.18 in the prior quarter and covered our first quarter common dividend. Net interest income, including interest earned on our swap portfolio totaled $0.68 per share. After accounting for operating expenses and preferred dividends of $0.48 this resulted in net earnings of $0.20 per share.

Speaker 3

Arc Home's contribution to EAD improved by $02 compared to last quarter and was breakeven in Q1 bolstered by continued strength in volumes and improving gain on sale margins. During the quarter, we grew our investment portfolio by 6.2% to $7,100,000,000 and maintained focus on expanding our presence in the home equity space. Specifically, we purchased $367,000,000 of agency eligible loans and subsequently securitized $423,000,000 of UPB. We also purchased $128,000,000 of home equity loans, increasing our portfolio to $228,000,000 as of quarter end, while continuing to build in April, acquiring an additional $52,000,000 Further, expanding on home equity, we co sponsored a securitization of $492,000,000 UPB at close end seconds, retaining $26,000,000 of non Agency RMBS securities. From a financing perspective, we continue to operate with a low economic leverage ratio, which is 1.6 turns at quarter end.

Speaker 3

We have prudently managed our leverage exposure through our programmatic securitizations, ending the quarter with only $223,000,000 of warehouse financing, primarily related to home equity loans. And lastly, we ended the quarter with total liquidity of approximately $133,000,000 consisting of $116,000,000 of cash and $17,000,000 of unencumbered Agency RMBS. This concludes our prepared remarks, and we now like to open the call for questions. Operator?

Operator

We'll take our first question over the phone from Doug Harter with UBS. Please go ahead. Your line is open.

Speaker 4

Thanks and good morning. You have one of the legacy commercial mortgage loans that's set to mature this month. Just hoping you could give us an update on that and how much capital that would free up for investing?

Speaker 2

Yes. So we have one of two loans legacy from the W and C acquisition maturing this month. We expect that to go into of pre negotiated forbearance. So we've been actively in dialogue with the borrower and the rest of the lender group. And we feel reasonably confident that we'll get to a positive outcome there in the short term.

Speaker 2

And then ultimately, within a realistic timeframe, kind of culminate in a full payoff probably within 2025. And it's about $16,000,000 of equity capital.

Speaker 4

Got it. And then I guess away from that, how do you think about your current capacity to continue to fund new loan acquisitions like the $50,000,000 of home equity that you did in April?

Speaker 2

Doug, this is Nick. We alluded to in the prepared remarks sort of our ability to increase leverage. We've also commented in the past on some inefficient financings that are rolling off from the WMC acquisition along with sort of the combination of the commercial. So we actually think we have a good amount of runway over the next, call it, two, three quarters to, one, rotate capital and then two, take some of that additional leverage into the home equity space.

Speaker 4

Great. Appreciate your answers. Thank you.

Operator

We'll take our next question over the phone from Kristin Love with Piper Sandler. Please go ahead. Your line is open.

Speaker 5

Thank you and good morning, everyone. Can you talk about the health of the securitization markets

Speaker 2

over the

Speaker 5

last several months, especially amid the recent volatility and then how they might be performing today?

Speaker 2

Yes. So I think we saw the markets perform fairly well through March despite maybe broader sort of equity turbulence. When you got to Liberation Day, call it the first two weeks of April, we saw them effectively close. And I think that was in a glass half full way, it was no one was forced to issue. People sat out by volatility.

Speaker 2

By the end of the month, you saw deals coming back to market and quite a decent amount of them by the last two weeks of April and into the May. And I would say their capital markets are fully open. I think spreads are wider, right? So I think if you look at where we're retaining securities, I think there may be 50 to 75 wider based on where we're seeing pricing today. And so I think that's how we're thinking about book value in April.

Speaker 2

I would say the markets are back open.

Speaker 5

Perfect. Thank you. Makes sense and appreciate the color there. And then can you expand and share your views on the home equity market? It was a good chunk of your prepared remarks and just the attractiveness opportunities that you doubled your exposure the quarter of a relatively small base, remained active in April.

Speaker 5

But curious on your longer term views there, especially if the rate outlook changes meaningfully from current levels? Yes.

Speaker 2

We get the question a lot about the rate outlook. So let's take it that part first. Like we do believe that this is a durable place for us to commit capital in the future because rates can rally a tremendous amount, whether it be the front end, belly, no matter wherever it is. The lock in effect from the stimulus eras during COVID And for there to be any sort of degradation of the addressable market, you need a very, very significant rate rally. So we remain confident in our ability to of this being the relatively early stages of emerging asset class.

Speaker 2

To that end, we're seeing more and more originators ramp up this production and folks that were originating a decent amount of production, call it, a year back, we're seeing a near doubling sort of sequentially year over year, and we expect sort of that momentum to continue.

Speaker 5

Great. Thank you. Appreciate you taking my questions.

Operator

We'll take our next question over the phone from Jose George with KBW. Please go ahead. Your line is open.

Speaker 6

Hey, Good morning. Just wanted to continue on ARC. Can you just talk about volume trends in the second quarter, the spread widening you noted in the securitization markets? Is that been able can you pass that on to consumers? Is that impacting the demand there?

Speaker 6

Just, you know, color on that.

Speaker 2

Yes. So I think it's been widely publicized in the NBA, and we'll see if the trend continues. But the consumer has pulled back slightly on home purchases. Obviously, it's early in sort of the purchasing cycle. We would expect the overall market to be down, but we do think ARK is somewhat insulated given where it attaches itself to the market.

Speaker 2

As far as gain on sale margins, we do expect them to normalizemaybe gain a little bit into this volatility. Certain segments have been better bid versus others, if anything, maybe creating a little bit of opportunity. But we're still optimistic coming into this part of the buying season.

Speaker 6

Okay, great. And then in terms of earnings at mid, so you've reached breakeven. Can you just talk about the expectations there for EAD, assuming volumes remain kind of subdued this year?

Speaker 2

Bose. I think as we've said in the past, we bifurcate sort of how our equity is allocated, right? You've got a large chunk of it in what we call the investment portfolio. I think that's largely been doing its job, both from a book value perspective as well as an earnings perspective. And we had the headwind of kind of negative EAD coming out of ARC.

Speaker 2

We've now hit breakeven. And we think sort of zero one dollars zero two dollars zero three dollars from ARC is just effectively adding to what that stable kind of earnings power has been on the investment side. So I think that's how we build forward earnings growth. Effectively keep doing what we're doing on the investment side, and now we're seeing some contribution from ARC and that should directly kind of increase what has been our kind of steady state EAD range.

Speaker 6

Okay, great. Thank you.

Operator

We'll take our next question from Jason Weaver with Jones Trading. Please go ahead. Your line is open.

Speaker 7

Hey, good morning. Thanks for taking my question. First, on the home equity securitization, can you talk a little bit more about that, what advance rates and sort of execution levels you were able to achieve there?

Speaker 2

Yes. So the advance, I want to maybe just starting with the collateral. We're talking mid-700s FICO, high-sixty, low-seventy type LTV. The advances to the non IG part of the stack, which what we retain generally is, call it, 95 ish percent of market value From of where you're funding that, that's changed a little bit. As CJ alluded to earlier, slightly wider, but you're funding that, call it, 200 ish context plus or minus 10 basis 15 basis points

Speaker 5

today.

Speaker 7

Got it. Thank you for that. And maybe just to hone in a little bit more on Bose's question. Is there a level of originations that you need to see within ARC to maintain that sort of like $01 to $3 of profitability for the rest of the year?

Speaker 2

So one, I think one, I think we're focused more on growing the top line there to exceed that. So obviously, there's a breakeven and volumes will volumes in outright levels of margins will impact it. As we've shown in the past quarter, obviously, we broke even. There's been some volatility, but we think that we're sort of at that at those origination volumes today. But to make it more profitable, obviously, we have to continue to grow the top line.

Speaker 7

All right. That's helpful. Thank you, guys.

Operator

We'll take our next question from Eric Hagen with BTIG. Please go ahead. Your line is open.

Speaker 8

Hey, thanks. Good morning, guys. I want to dive in a little bit more on how we're like responding to volatility and such. And when mortgage spreads are wider, I mean, you see that as an opportunity to maybe add risk and like add leverage? And do you see some of the typical non QM originators retrench from the market when mortgage spreads are widening or just like what's the behavior in the market right now?

Speaker 8

Thank you.

Speaker 2

Yes. I mean, I think, Eric, the volatility in early April was, I would say, more in like the macro spaces. So you saw it in rates, saw it in equities, and the closest derivative would be the basis on the agency side. And I think we think our shareholders are expecting us to kind of operate in the non agency space and not try and time tactical trades there. So we've been disciplined in not taking the bait there.

Speaker 2

At the end of the day, there wasn't that much for selling of whether it be home equity loans or non QM loans or even securities backed by those products. So it was from our opinion, it's probably in the rearview mirror at this point. And so it's kind of back to business as usual.

Speaker 8

Got you. Okay. On the securitized non QM loans on that you guys show on Slide 11, it looks like the yield to your cost basis is 5.7%. But how should we think about like a market yield for that portfolio at this point? Because it looks like the cost of funds that you're showing is probably a market cost of funds.

Speaker 8

So how should we think about like the economic spread that you're earning in that portfolio right now?

Speaker 2

I mean, I think we would probably clean the ROE on the right side.

Speaker 8

Okay. Okay. So that ROE is more like a market ROE and not an ROE using your cost basis?

Speaker 2

That's right.

Speaker 8

Okay. Thank you guys. Appreciate it.

Operator

And there are no further questions on the line at this time. I will turn the program to our speakers for any additional or closing remarks.

Speaker 1

Thank you to everyone for joining us and for your questions. We very much appreciate it and look forward to speaking again next quarter. Have a great day.

Operator

This does conclude today's program. Thank you for your participation and you may now disconnect.

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Key Takeaways

  • The company achieved book value stability in Q1 with NAV per share rising to $10.65, generating a 2% economic return and supporting a 5.3% dividend increase to $0.20.
  • Volatility in late Q1 and April widened spreads by roughly 50–75 bps on retained securities and drove an estimated 3% NAV decline through April, but strong liquidity and limited forced trading position the trust for a rebound.
  • Home equity exposure was expanded via a $500 million securitization, $128 million in loan acquisitions (bringing the portfolio to $228 million), and new origination partnerships, reflecting confidence in this emerging sector.
  • Arc Home originations grew 50% YoY with improved gain-on-sale margins, achieving breakeven in Q1 and expected to contribute positively to future earnings.
  • Economic leverage remained conservative at 1.6× (well below peers) with portfolio metrics of ~59% current LTV and 1.3% serious delinquencies, underscoring disciplined capital allocation and risk management.
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Earnings Conference Call
AG Mortgage Investment Trust Q1 2025
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