Earnings Call Transcript - MITT Q2 2020

Operator, Operator

Welcome to AG Mortgage Investment Trust Second Quarter 2020 Earnings Call. My name is Sylvia and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note, this conference is being recorded. I will now turn the call over to Raul Moreno. Mr. Moreno, you may begin.

Raul Moreno, Executive

Thank you, Sylvia. Good morning everyone and welcome to the second 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. 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 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 Q2 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 everyone. As we discussed last quarter, our immediate objectives have been to decrease leverage, enhance liquidity, and begin to restore book value. I am happy to share that our book value per common share rose to $2.75 as of June 30th, compared to the estimated range of $1.80 to $1.90 as of April 30th. In terms of leverage, we decreased our mark-to-market non-recourse financing to about $280 million this quarter from $1.2 billion last quarter. This $900 million reduction primarily resulted from asset sales and pay downs, although we also managed to shift about $200 million in financing from mark-to-market recourse to non-mark-to-market non-recourse. As of the end of the quarter, our total investment portfolio was $1 billion. Our economic leverage was 0.8 times and we had nearly $70 million in cash on hand. Our mortgage originator affiliates Arc Home had its best quarter ever. We continue to see significant long-term opportunities for MITT in residential origination, both through Arc and our other channels. Regarding dividends, as mentioned earlier, we did not pay common or preferred dividends this quarter. Given the current conditions for our company, we do not expect to pay dividends on our common or preferred stock for the foreseeable future.

T.J. Durkin, Chief Investment Officer

Thank you, Dave and good morning, everyone. Turning to our presentation on page five, we walk you through a high level activity for the quarter. Beginning on March 23rd through June 30th, we delevered the company by selling approximately $1 billion of various mortgage investments. We officially exited forbearance on June 10th and we are pleased to report as of August 10th, the company resolved and settled any outstanding deficiency claims with lenders. Our resulting financing profile is now primarily non-recourse on mark-to-market with only a small number of counterparties. Subsequent to quarter end, the company repaid $10 million at a scheduled maturity of the secured debt that the manager issued at the request of participating forbearance lenders. The remaining and final $10 million is due and payable on March 31st, 2021. As we indicated on last quarter's call, the company was active in securitizing and terming out debt on its residential mortgage home loan portfolio, completing an unrated refinancing of reperforming and non-performing loans in June, returning over $6 million of cash back to the company. Subsequently to quarter end, we also completed our second rated non-QM securitization of 2020, along with other Angelo Gordon affiliated bonds. Also, subsequent to quarter end, we took advantage of strong secondary markets within CMBS and sold positions, which resulted in approximately $24.4 million of proceeds. Turning to slide six, we want to highlight the strong performance of Arc Home, our fully licensed mortgage originator affiliate. The team at Arc has been able to fully take advantage of the talents in the mortgage banking sector with both record volume and margins within the agency channels. In July, the company was also one of the first originators to reenter the non-QM business and we expect to see volumes grow as we look ahead in 2020 and beyond. And just as a reminder, MITT owns approximately 45% of Arc Home and the remainder is owned by other Angelo Gordon managed funds. On slide seven, we lay our portfolio metrics; we had a fair value of approximately $959 million as of June 30th, representing 0.0 returns of economic leverage. The portfolio was approximately 78% residential securities and loans and 22% commercial securities and loans, not inclusive of Arc Home and the cash on hand within the company. And lastly, overall market conditions improved for all products during the second quarter with residential credit assets taking the lead earlier on in the quarter and commercial credit assets firming towards the end of the quarter and continuing that strength thus far into the third quarter. With that, I'll turn the call over to Brian to review the financial results.

Brian Sigman, Financial Officer

Thanks, T.J. Overall, for the second quarter, we reported net losses available to common stockholders of negative $2.6 million, or $0.08 per fully diluted share. Earnings for the quarter include higher than normal interest expenses due to elevated rates during our forbearance period. Earnings also include $7.8 million of restructuring-related expenses, which we have separated out on our income statement in order to add clarity to our outsized operating expenses for the quarter. As we mentioned, we did not declare dividends on preferred stock. However, the $2.6 million net loss does reflect a decrease of $5.7 million in preferred dividends in the quarter. During the quarter, our book value increased to $2.75 at June 30th from an estimated range of $1.80 to $1.90 at April 30th and $2.63 at March 31st. Per GAAP and unlike earnings, the balance sheet does not include an accrual of the undeclared preferred dividends, and therefore, book value does not include the accumulated unpaid preferred dividend. Consistent with last quarter, we are not currently disclosing core earnings, a non-GAAP financial measure, as we determined that this measure, as we have historically calculated it, would not appropriately capture the materially negative economic impact of the COVID-19 pandemic on our business, liquidity, results of operations, and ability to make distributions for our stockholders. 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. Our economic leverage decreased from 3.3 times at March 31st to 0.8 times at June 30th, as a result of asset sales and a restructuring of one of our larger financial agreements, which amended the terms of the arrangement to non-mark-to-market with respect to margin calls, as well as non-recourse to us. Additionally, we reduced the number of counterparties we had debt outstanding with from 18 as of March 31st to six as of June 30th. We issued approximately 1.4 million shares of common stock for net proceeds of approximately $5 million through our ATM program, with some of the shares settling in July. Subsequent to quarter end, we sold certain CMBS positions for proceeds of approximately $24.4 million. We also repaid $10 million of secured debt plus accrued interest to our manager as it became due. Additionally, we participated through our unconsolidated ownership interest in a rated non-QM loan securitization in which non-QM loans with a fair value of $221 million were securitized. This termed at our repo financing into lower costs, fixed-rate long-term financing within our subsidiary. That concludes our prepared remarks and we'd now like to open the call for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Eric Hagen from KBW.

Eric Hagen, Analyst

Thanks. Good morning. I hope you guys are doing well. Which assets including the assets of your affiliates are now being funded with repo? And what was the level of unencumbered assets that you carried at the end of June?

Brian Sigman, Financial Officer

On the vast majority, the repo consists of just securities, and we have transferred more of that into non-mark to market type facilities. I don't have the exact numbers in front of me.

Eric Hagen, Analyst

Okay. And what was the rough level of unencumbered assets like how much could you draw against those securities from here?

Brian Sigman, Financial Officer

I can provide more details on that as well.

Eric Hagen, Analyst

Okay. Did you say where your book value is currently inclusive of the ATM issuance that settled in July? And can you say where in the portfolio you had some unrealized losses and the outlook to recover a portion of those from here?

David Roberts, CEO

On the book value, we have not done anything beyond June 30. So we'll just stick with June 30th, obviously there's more changes than just the ATM. But I'll let my colleagues handle the other question.

Brian Sigman, Financial Officer

On the unrecovered, I would say that's more geared towards securities. So the things like CMBS and CRT probably are further away from, call it, pre-COVID levels versus I think the residential home loans have recovered more of that so far throughout August 10.

Eric Hagen, Analyst

Got it. Okay. And can you give any color on how Arc Home capitalized, including just kind of a rough, rough idea of the fair value of MSR and its balance sheet and how that's funded?

Brian Sigman, Financial Officer

Yeah. So we funded that Arc Home funds that through they have lending relationships with various banks as well as utilize excess MSR stripping transactions which, you know, MITT and other Angelo Gordon funds help fund. So to minimize the fair value there, I don't have the aggregate fair value of the MSR in front of us right now, but we can get back to you on that.

Eric Hagen, Analyst

Sure. But just to get a sense of how much capital is in the business. Just how much net asset value is in the business right now?

David Roberts, CEO

Yeah. We disclose, it's about $20 million that we have in the presentation, that fair share of the company value and we're about 46% of Arc Home.

Eric Hagen, Analyst

Great. Okay, so we're $40 million odd to $45 million odd worth of book value in the business. Got it. Okay. Thank you, guys.

Operator, Operator

Our next question comes from Trevor Cranston from JMP Securities.

Trevor Cranston, Analyst

Hey, thanks. Can you talk about how much roughly speaking you expect interest expense to benefit from having ended the forbearance agreements? And then secondarily from some of those securitization refinancing you're able to do in June?

David Roberts, CEO

Unfortunately, it's difficult for us to provide specific guidance on that. There were many factors at play during the quarter regarding our various financial positions, making it challenging to offer precise estimates without being overly general. We don't have that information, but I mentioned earlier that there was an increase in the second quarter. The non-mark-to-market financing did cost us slightly more, and secured financing is more expensive than repos. Before the forbearance agreement, we were already dealing with elevated interest rates, which have now decreased. With a return to standard repo practices on our securities and loans, you can expect a more normalized run rate starting in the third quarter.

Trevor Cranston, Analyst

Okay. Fair enough. Thanks. And then I appreciate that you stripped out the restructuring expenses. Are there any other sort of elevated or one-time items that are within the other operating expense line item out $4.5 million?

David Roberts, CEO

Not really. We tried to isolate that in the restructuring. So not really. I mean, obviously with the decrease in size, we do expect some of our operating expenses to come down as well. So that's not something that should be stripped out, but it is something that shouldn't actually decline given the shrinkage of the portfolio.

Trevor Cranston, Analyst

Okay. Thanks. And then one more question on Arc Home, can you provide any color on in terms of what you're seeing with margins, as they sort of as the second quarter progressed and into the third quarter. It seems like they may have peaked for some originators early in the second quarter and have been trending a little tighter, just sort of trying to get a sense of what you guys are seeing and if we should think about second quarter being as maybe sort of being a peak in the earnings for that business over the near term? Thanks.

David Roberts, CEO

Yes, I mean, I think into the third quarter volumes and margins are still fairly robust. We obviously do expect that to dissipate over time, whether it's next month or Q4, it's hard for us to predict.

Operator, Operator

The following question comes from Ryan James from Indiscernible Capital. Regarding the trends in the second quarter and whether we should consider it as a potential peak for earnings in that business over the short term, David Roberts, our CEO, responded that volumes and margins are still quite strong as we approach the third quarter. However, we do anticipate that they will decline eventually, but it's difficult to determine if that will happen next month or in the fourth quarter.

Unidentified Analyst, Analyst

Hi, guys. Is there anything stopping you from considering selling more shares based on the stock price? Are there any limitations, or is it just a judgment call on how much to sell?

David Roberts, CEO

The limitations that we set for ourselves are two. Typically, we don't like to move the market. So it's really based on volume and the length of the window that's open to us, but Raul I don't know or Brian if you want to comment further.

Brian Sigman, Financial Officer

Yes, that's correct. There are some restrictions related to daily trading activity as well. As David mentioned, we attempt to navigate this through the market. We also have specific trading windows that we coordinate with our legal team regarding the timing of when our information is released, which can limit not the daily volume but the specific days when we can issue.

Unidentified Analyst, Analyst

Okay. Thanks. Would you guys consider an equity offering below market, a formal equity offering not at the money, just to kind of get scale and rebalance the capital structure?

David Roberts, CEO

Look, we have a wide range of options that we're always considering. And we have to be certainly mindful of book value. And as I said, one of our goals has been to restore book value per share. And that's an important criterion for anything that we might do in the future.

Unidentified Analyst, Analyst

Okay. Thanks.

Operator, Operator

We have no further questions. Thank you for joining us.

David Roberts, CEO

Okay. Thanks everyone for joining. We'll speak next quarter.

Operator, Operator

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