Good day and thank you for standing by. Welcome to the AG Mortgage Investment Trust Inc. Second 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 session. I'd now like to turn the call over to Jenny Neslin, General Counsel for the company. Please go ahead.

Thank you. Good morning, everyone, and welcome to the second quarter 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 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 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, 2023, 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. 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 home page. Again, welcome to the call, and thank you for joining us today. With that, I'd like to turn the call over to TJ.

Thank you, Jenny. I'm excited to report our second quarter financials, which show our continued execution of our core business strategy and the compelling benefits of our recent merger. Walking through the financial position as of June 30, we saw adjusted book value move modestly lower from 10.58 to 10.37, producing a roughly break-even 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% to $0.19 per share. During the quarter, we earned $17.4 million of net interest income, negative $0.02 of earnings per share, and $0.21 of earnings available for distribution 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 million convertible notes due on September 15, 2024. We were happy to report during the quarter, we successfully issued another $65 million of investment-grade senior unsecured notes to more than cover the upcoming maturity, when considering our $34.5 million issuance from Q1 of this year. Effectively replacing the convertible debt with these senior unsecured notes positions us 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 mortgage-backed securities, using only modest leverage in order to generate strong short-term risk-adjusted returns. As a result, the company ended the quarter with $180 million of liquidity and moderately higher than normal leverage of 2.5 times. We would anticipate post-retirement of the convertible notes at maturity in September, we will return to more historical levels of leverage at the company level. Since closing the WMC acquisition on December 6 of last year through quarter end, approximately $57 million of assets have already been monetized, returning $41 million 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 28. 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 and the power of the combined company. I will now turn the call over to Nick.

Thanks, TJ. This quarter, we saw the continuation of various themes we have 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 the 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 two 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 one of the nation's largest mortgage originators, where we acted as the co-sponsor. Over the next quarter and throughout the rest of the year, we expect to remain active and issue at a similar pace to the past two quarters. Moving on to Arc Home. We are excited to announce that Arc Home opportunistically agreed to sell its mortgage servicing rights portfolio at the end of April. Close to this year's peak in interest rates, we settled subsequent to quarter end. This sale generates ample liquidity for continued growth in Arc Home'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. Additionally, Arc Home 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-AMC residential mortgage loans enters the market from what has recently become a well-publicized pocket of capital.

Thank you, Nick, and good morning. We continued our positive momentum in the second quarter, growing our investment portfolio, increasing our 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 $10.37 per share decreased by approximately 2% from March. When considering the $0.19 common dividend, our economic return was roughly break-even. We recorded a GAAP net loss available to common shareholders of approximately $700,000 or $0.02 per share. The modest book value decline was driven by unrealized mark-to-market losses on our investment portfolio, partially offset by earnings available for distribution exceeding our quarterly dividend and gains on our investment in Arc Home. We generated earnings available for distribution of $0.21 per share for the second quarter. Net interest income, inclusive of interest earned on our hedge portfolio, was $0.67 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 $6.9 billion through acquiring $423 million of residential mortgage loans and $428 million of agency RMBS. As mentioned earlier, we were active in the securitization markets, managing our exposure to mark-to-market financing. We ended the quarter with $300 million of loans financed on warehouse lines, of which $87 million 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 million, consisting of $120 million of cash and $59 million of unencumbered agency RMBS. This concludes our prepared remarks, and we'd now like to open the call for questions.

Our first question will come from Doug Harter with UBS. Please go ahead.

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?

I think about it in terms of sequencing, so I think we want to address the convertible note in September with the liquidity that we have on balance sheet today, and then I think rotating that excess liquidity will probably take no more than two to three quarters post that. We're not using, if you look at the agency rates, we're using probably about half the leverage there, so it's an interim stopgap to earn some carry, so I think the ROEs are not a place to look at.

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 on the agencies given the large moves in interest rates, especially on days like today?

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

Makes sense. And then just on the Arc MSR sale, that extra capital, does that stay within Arc or does some of that get distributed up to MITT?

Morning, Doug. It's Nick. So our management team, along with Arc Home's management team, has evaluated the appropriate capitalization of the company, and at the moment, we expect there to be a likely return of capital.

Next question will come from Bose George with KBW. Please go ahead.

Actually wanted to ask first just about the trend in earnings available for distribution. With the liquidity you'll be holding in the third quarter, I mean, could we see a little downward pressure there, or should it continue to trend up as you're deploying capital?

Yes. I mean, I guess I think you're thinking about it right. I think 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 on a prospective basis, it'll look like a more normalized portfolio. I understand the logic of your question.

Yes. Okay. No, that makes sense. Thanks a lot. Can you give us an update on book value? I guess before the noise of today, earlier this week.

We haven't produced a traditional high book value yet. Too early.

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

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.

Yes. Certainly. So, obviously as a non-ANC focus, we focus on sort of a wider array rather than just one sort of non-ANC asset. In the non-QM space, we continue 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 allocate our home's origination to those sort of buyers and deploy capital in higher returning opportunities. 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 co-issue opportunities I mentioned in the script in that space. We're also paying close attention to the home equity space and expect to be active there.

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 curation positioning of the book was? Thanks.

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

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

Can you talk about the bid for securitization you're seeing? I know you mentioned on the last dollar 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. It's sort of sector by sector. I think I spoke a little bit earlier answering Trevor's question in the non-QM space. If anything, as more loans get sold to real money, there's been less supply in that space. So that gap has done better relative to maybe some of the other sectors. 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 an 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 has been truly marginal from a historical standpoint. And if anything, in the non-QM space, we're sitting at local tights.

Thanks. I appreciate the color there. And then do you have a view on where you see volume shredding 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.

We've said previously that, and obviously you can look at the MBA forecast. I don't think we're going to deviate a ton from the MBA forecast. A lot of our gains have just been from being more competitive and more efficient, rather than market conditions. So I also think there's going to be a lot of seasonality in these businesses, as you would expect, given how much purchase money Arcom is relying upon. But I think the trends you've seen should be similar. And if you were to seasonally adjust the current situation, I think that's what you would expect. So we're still in growth mode, still trying to be bigger, better, and more efficient. The trajectory is still up, but conditioning it, it will be highly seasonal.

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

Good morning. This is Jake Katsikas for Eric Hagen. Thanks for taking my questions. First one, just going back to leverage in the agency RMBS 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. Thank you.

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

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? Thank you.

Yes. So the vast majority of the loan block, and you can see this 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, is way out of the money. So obviously we're very focused on prepayment speeds and inverted curve and sort of the efficiencies entering the market, but this book of business is fairly well protected from any convexity event or expected convexity event.

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.

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.

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