Earnings Call Transcript - MITT Q1 2020

Operator, Operator

Good morning and welcome to the AG Mortgage Investment Trust First Quarter 2020 Earnings Call. My name is Brandon and I'll be your operator for today. At this time all participants are in a listen-only mode. Please note, this conference is being recorded. And I will now turn the call over to Raul Moreno. You may begin, sir.

Raul Moreno, Executive

Thank you, Brandon. Good morning everyone and welcome to the first quarter 2020 earnings call for AG Mortgage Investment Trust, Inc. Before we begin, please note that the information discussed on today's conference 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 the Risk Factors and MD&A section of our most recent SEC filings. Company's actual results may differ materially from these statements. We encourage you to read the disclosure regarding forward-looking statements contained in our earnings release, in our earnings presentation and in our SEC filings. 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 Q1 2020 Earnings Presentation link on the home page. Again, welcome and thank you for joining us today. With that, I would like to turn the call over to our CEO, David Roberts.

David Roberts, CEO

Thank you, Raul. Good morning. The initial stages of the COVID crisis in March disrupted the market in every aspect of AG MITT’s portfolio. Normal two-way markets evaporated, and securities and whole loans, both residential and commercial, and even in Agency RMBS. The small number of trades that did take place were from the most distressed sellers and represented prices that were at huge discounts from previous levels. The reaction of our repo lenders was swift. MITT began to receive a rising tide of margin calls. We met the calls for as long as we prudently could, using a portion of our cash reserves and selling those assets we believed were the least worst to sell, most notably our portfolio of Agency RMBS. At a certain point, however, the margin calls became overwhelming. Accordingly, we announced that we would not meet margin calls and instead would seek a forbearance agreement from our repo lenders. Most of our largest repo lenders agreed, a few elected to seize and sell our collateral. As detailed in our many 8-K filings, we negotiated three forbearance agreements. In order to induce our repo lenders to agree to the forbearances, our Manager, a direct wholly owned subsidiary Angelo Gordon, made two $10 million subordinated loans as a key element of the negotiations. In addition, MITT Manager also agreed to defer payments of both its management fees and expense reimbursement until September 30th of this year. We are pleased to announce that we exited forbearance two days ago and reinstated bilateral agreements with all our current lenders. Immediately prior to and during the two-month period of our forbearance, we sold the majority of our assets, paid off the related financing and consolidated our remaining repo arrangements down to six lenders. We did this so we could meet the previously unmet margin calls and exit forbearance. After these sales, MITT has a much smaller portfolio with lower leverage. We also made substantial progress in settling deficiency claims with those lenders who had seized and sold collateral. In downsizing our portfolio, mostly during a time of severe dislocation in our markets, MITT took substantial losses. The Company began the year with a common equity book value of $17.61 per share. As we reported in our May 7th 8-K, we estimated that our common book value per share as of April 30th was in the range from $1.80 per share to $1.90 per share. I note that the majority of our losses have been realized through sales. Based on our preliminary internal analysis, we estimate that our common book value per share as of May 31st was not substantially higher than it was on April 30th. Going forward, we anticipate continuing to raise liquidity and reducing debt through selected asset sales. Based on current conditions for our Company, we do not anticipate paying dividends on either our common or preferred stock for the foreseeable future. We are evaluating various go-forward plans for our business. Whatever strategy we choose, we will work hard to improve book value per share. That effort will take time, creativity, and the cooperation of the market. Thank you for listening and I'll now turn the call over to T.J. Durkin.

T.J. Durkin, CFO

Thank you, David. I'll briefly walk you through the portfolio on March 31st and where it stood as of May 31st. Prior to March, January and February were somewhat ordinary months in terms of MITT managing the investment portfolio. In February, MITT, along with other Angelo Gordon managed net funds, priced its fourth non-QM securitization. However, as the fears of COVID made their way into the U.S. domestic market, even the most liquid asset classes, such as treasuries began to experience extreme price volatility, and more importantly, started losing their normal deep liquidity. This quickly crossed over into the Agency MBS market, as the basis widened to levels not seen since the GFC, but also began having liquidity evaporate in the market as well. It all happened very quickly. Unfortunately, we were forced to sell our entire agency book in late March in order to delever and raise liquidity as our credit assets were completely illiquid. Ultimately, the Fed has stepped into the fixed income and repo funding markets multiple times throughout the course of March, stabilizing the plumbing of the fixed income markets. By late April, the agency market had largely returned to normal. Turning to our presentation, on page seven. We had a fair value of approximately $1.6 billion as of 3/31, representing 3.3 turns of economic leverage. The portfolio was approximately 83% residential and 18% commercial. After the sale of our Agency whole pool, we removed all of our interest rate hedges, and that positioning remains true today. As David mentioned, post-quarter-end we continued to delever our portfolio in an orderly fashion and build liquidity. This quarter-end, the broader markets and structured credit market have started to recover and we are continuing to see asset prices improve in the secondary market and seeing the new issue market return as well. As of 5/31, we've seen an investment portfolio of approximately $1 billion comprised of 78% residential and 22% commercial. With this portfolio, we expect to run around a turn of recourse leverage. Our liquidity of cash and cash equivalents was approximately $45 million at that point. Looking ahead, we will continue to look for securitization to obtain term nonrecourse financing for our whole loan investment as the debt markets remain open. With regards to the underlying fundamentals, early data of post-COVID mortgage data indicates residential delinquency and forbearance numbers are performing in line or slightly better than industry estimates, but we note there's still a long way to go. We believe that the story in commercial real estate will take much longer to play out, as there is much more idiosyncratic risk among the different industries comprising commercial real estate securities. Lastly, our mortgage originator, Arc Home is taking advantage of the rally in mortgage rates and is currently on pace for record origination volume in the second quarter. I'll turn the call over to Brian. Thank you.

Brian Sigman, CFO

Thank you, T.J. Overall, for the fourth quarter, we reported a net loss to common stockholders of $490 million or $14.98 per fully diluted share. Our book value decreased from $17.61 at December 31st to $2.63 at March 31st. Total stockholders’ equity decreased by 58% in the first quarter. The losses were primarily a result of the global pandemic associated with COVID-19 that directly caused significant damage to financial and mortgage related asset markets. We do not disclose core earnings for the first quarter of 2020, as we determined that this measure, as we have historically calculated it, did not appropriately reflect the economic impact of COVID-19 pandemic on our results. As financial markets stabilize, we will evaluate whether core earnings or other non-GAAP financial measures would help both, management and investors evaluate our operating performance for future periods. The duress on market was the decrease in the prices of our assets as well as increased margin calls for our financing counterparties. In order to satisfy these margin calls, we sold a portion of our investment portfolio, resulting in a reduction of our economic leverage ratio from 4.1 times at December 31st to 3.3 times at March 31st. Additionally, we lowered the number of counterparties we had debt outstanding with from 30 as of December 31st to 18 as of March 31st. In the second quarter, we continued to delever our balance sheet, restructure our debt, and consolidate our counterparties. As part of the restructuring, we were able to reduce our recourse debt, then exited forbearance with only six lenders we will look to partner with in the future. As of May 31st, we had liquidity of approximately $45 million entirely in cash and cash equivalents. That concludes our prepared remarks. I would now like to open the call for questions.

Operator, Operator

Thank you. We'll now begin the question-and-answer session. And from Credit Suisse, we have Doug Harter.

Doug Harter, Analyst

I was just wondering if you could talk about the conditions that led to being able to get out from forbearance days ago, and if there were any other concessions that you had to make to get out of forbearance?

David Roberts, CEO

T.J.?

T.J. Durkin, CFO

Yes. Sure, Doug. I mean, it was a combination of multiple factors. We were deleveraging the portfolio throughout March up until this month. We were building liquidity that way. As David mentioned, or Brian mentioned, we condensed the lenders, which also made, operationally, exiting much easier; and lastly, to some extent, the market coming back obviously also helps as well. So there's a combination of all those things.

Doug Harter, Analyst

And then, you mentioned that you would sort of look to continue to reduce assets and deleverage, any sense of the magnitude that you would be looking at there or where the portfolio size might be able to stabilize?

T.J. Durkin, CFO

No, I don't think at this point we're ready to say where a stable long-term run rate ties or leverage ratio is.

Doug Harter, Analyst

And then lastly, for me, do you have the ability to issue all of the ATM given that you’re trading well above the book value?

T.J. Durkin, CFO

I'm sorry. Could you repeat that question?

Doug Harter, Analyst

Do you have the ability to use the at-the-market equity issuance program, given that you guys are trading well above book value?

T.J. Durkin, CFO

We have up till now really been focused on getting out of forbearance and then presenting this. Afterwards, we'll review all the different options that are available to us.

Operator, Operator

From KBW, we have Eric Hagen. Please go ahead.

Eric Hagen, Analyst

I'll start with one on the asset side. On the current portfolio, even to reflect any mark-to-market changes just during the first couple weeks in June, can you just give us a breakdown of what the portfolio looks like right now?

T.J. Durkin, CFO

Yes. I mean, listen, at a high level, June’s been a constructive month in the market. I think we laid out just at a high level the breakdown between residential and commercial. I don't think we have anything prepared in terms of the sub-asset classes to update you at this point for 5/31. We broke it out for quarter-end.

Eric Hagen, Analyst

It would be helpful to get a general understanding of the relationship between securities and loans in both the residential and commercial sectors. I know you might not be able to provide specifics as of the end of May, but do you have any indications or breakdowns that you could share with us?

T.J. Durkin, CFO

We don't have that prepared now.

Brian Sigman, CFO

I think you will find more detail in the 10-Q regarding 3/31 and subsequent events. There will likely be a clearer understanding, especially concerning the large residential loan sale we discussed, compared to what was presented in the earnings release. We will be filing that later today.

David Roberts, CEO

I would say as well Eric that we're trying to be transparent, but we're also trying not to set any sort of precedent in terms of the details that we're going to be disseminating between quarters.

Eric Hagen, Analyst

I can appreciate that. Did you say that your Q is going to be filed this afternoon?

David Roberts, CEO

Yes. That’s the expectation.

Eric Hagen, Analyst

Okay. One or two on the repo side and the reinstatement there. What are the assets that are currently being funded on repo? And are all of those subject to daily mark-to-market margin calls? And what's the funding cost that you expect on the reinstated repo?

T.J. Durkin, CFO

Sure. I mean, so we have a combination of loan warehouses as well as just regular way security repo. The majority of them are daily mark-to-market. There isn't one funding rate between the different asset types, or the return to somewhat regular way business on that side.

Eric Hagen, Analyst

Okay. But, is most of the repo applied to the resi credit portfolio or is the bulk of that really in the commercial portfolio, and what about the mark-to-market, the frequency of mark-to-market margin?

T.J. Durkin, CFO

Yes. So, it’s daily mark-to-market. And we do have residential and commercial securities as well as residential and commercial whole loans on facility.

Operator, Operator

From JMP Securities, we have Trevor Cranston. Please go ahead.

Trevor Cranston, Analyst

Follow-up on the question on the remaining repo facilities. We've seen some tier companies move towards establishing non-mark-to-market longer-term financing facilities for their assets. Can you guys say if that is something you're intending to explore, as you go forward, now that you're out of forbearance, or if you're comfortable with the remaining repo being something that you think could continue to remain in place for a fairly long period of time?

T.J. Durkin, CFO

No. I think that is something we definitely will continue to pursue on the whole loan side where it's probably a bit more practical than on the security side, at least based on what we're seeing year-end.

Trevor Cranston, Analyst

And I think in the prepared remarks, you mentioned that you had done a significant amount of work settling deficiency claims. Can you just clarify if there are any remaining outstanding deficiency claims from repo lenders that weren't in the forbearance agreement?

T.J. Durkin, CFO

Yes, we have addressed what we believe to be most of the issues. However, there are still two outstanding deficiency claims.

Brian Sigman, CFO

Yes. And they came up later after the quarter. So, when you see the Q, you'll see that the two that we settled were taken into kind of book value at March 31st. The two that remain are still open. And they were accrued for in our estimate that we put forward at April 30th, to our best guesses to what we think it will be. Obviously, we disclosed that it was part — there were estimates in there. But the April 30th book value is reflective of what we think would take to settle those.

Operator, Operator

From Jones Trading, we have Jason Stewart. Please go ahead.

Jason Stewart, Analyst

I appreciate there's a lot of complexity in this, but the $1.80 to $1.90 range is post 4/30. Does that include the pretty substantial loan sale that was executed?

Brian Sigman, CFO

Yes. At that time, the way those types of loans settle is that you enter into an agreement and we actually filed during that period. Then the buyer has time for due diligence, which takes some time. You agree on the price in advance, so we were aware of what the sales price would be, possibly subject to some minor changes. We were able to factor that into our considerations.

Jason Stewart, Analyst

So, that book value range includes your estimate for settlement on the forbearance includes loan sale, and any other portfolio items that you already executed or had planned on executing?

Brian Sigman, CFO

Well, I mean, obviously, it seemed a lot. There was — a lot of assumptions are baked into it. It was off cycle. It was end of the month as opposed to end of the quarter. But we, to the best of our knowledge at the time, what we knew definitely went into there. So, to the extent we knew we were selling something a couple days later at a certain price, we certainly would have marketed into that number at that price.

Operator, Operator

Christofferson Robb, we have Brad Golding.

Brad Golding, Analyst

I'm just looking at the slide on the income statement. And there's still about $4.5 million of operational expenses. The net asset value of the common clearly can’t support that kind of expense base. And the ratio of preferreds to common is obviously clearly out of whack here. I know you didn't want to answer the question about capital raise going forward. But is this a viable entity? Is it time to just shut this down or return the capital to shareholders?

David Roberts, CEO

David Roberts, I'll take that.

Brad Golding, Analyst

Hi David. Nice. Haven’t talked for a while. Nice. Thank you.

David Roberts, CEO

As we said, I'd repeat two comments, I guess in response to that good question. One is, our focus first has been to exit forbearance and to do that — as we detailed, we had to take a number of steps with the portfolio in terms of reducing it and reducing our repo leverage. So, that really has been the focus over the past few months. We are, as I said in my prepared remarks, evaluating various go-forward plans for the business. We really could not do that until we were out of forbearance. Now that we’re out of forbearance, we will be looking at all the various options. We will certainly communicate to the market, once we've determined the best strategy for our shareholders. So, it's a good question, but a preliminary one at this point.

Brad Golding, Analyst

Okay. Just, I'm somewhat concerned by the lack of structural support for the preferreds. And now that the market appears to be somewhat stable, I would think you would have to make these decisions fairly quickly, to either raise capital or pull the plug, because obviously there is — I don’t want to sound preachy or anything, but clearly there's an existential crisis for the entity and it has to grow or protect the remaining value for first shared and preferred holders. So, thank you.

David Roberts, CEO

Thank you.

Operator, Operator

From KBW, we have a follow-up from Eric Hagen. Please go ahead.

Eric Hagen, Analyst

Thanks for taking the follow-up. Can you just remind us what the percentage of the affiliates that you guys own? I think for Arc Home, if I remember correctly, it’s slightly less than half, is your ownership stake. But, I think it's Red Creek in the remainder of the affiliates. Can you remind us what your ownership stake is there?

Brian Sigman, CFO

Sure. It's Brian. So, Arc Home, as we talked about, they are mortgage originator. Obviously, they’ve been quite busy. We at MITT own slightly under 50% of that entity. The rest of the entity is owned by other funds that are managed by Angelo Gordon. To your second question on Red Creek, Red Creek is actually a subsidiary of our manager, Angelo Gordon. And they just service residential mortgage loans for an asset management fee. So, to the extent that we have a resident mortgage loan at MITT, we would use them to service those fees. And MITT does not own any percentage of Red Creek.

Eric Hagen, Analyst

Can you confirm that the amount of ownership attributed to Arc Home reflects your share of its net asset value?

Brian Sigman, CFO

Yes, that's correct, Eric. The value was approximately $20 million as of March 31. Similar to any other assets we co-own, we will only account for our share of that value.

Eric Hagen, Analyst

Yes. Thank you for clarifying that.

Brian Sigman, CFO

Yes. No problem.

David Roberts, CEO

I believe we are nearing the end of the hour, but if there's a quick follow-up from Jason Stewart, please go ahead with the last question.

Operator, Operator

Jason?

Jason Stewart, Analyst

Thank you. Brian, just to get back to book value, I completely appreciate the intra-quarter and the nature of the estimates you're putting into these, but not substantially higher than that range, including all the things that have happened including exiting forbearance, the loan sale, leaves a lot of room for people to guess what it is lower. Is there any more detail you could provide us in terms of walking us maybe one or two big points to center around a new estimate for book value?

David Roberts, CEO

I'm going to answer that question. It’s David. We purposely did not give a range. To come up with a range that we feel comfortable with takes a lot of estimating. And we simply did not have the time to do that with all the moving pieces on the portfolio. So, what we wanted to signal, and we chose our words carefully, was exactly what we did: that the range was not substantially higher. And that’s what we felt comfortable saying, based on the estimating that we were able to do.

Jason Stewart, Analyst

Okay. Thank you.

David Roberts, CEO

You’re welcome. Okay. Well, thank you everyone. If your questions weren't answered, you can reach out and ask your questions in terms of calling our Investor Relations number. So, thank you.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.