Earnings Call Transcript - MITT Q1 2025

Operator, Operator

Good day, everyone. Thank you for being here. Welcome to the AG Mortgage Investment Trust, Inc. First Quarter 2025 Earnings Conference Call. I would now like to pass the call to Jenny Neslin, General Counsel for the company. Please proceed.

Jenny Neslin, General Counsel

Thank you. Good morning, everyone, and welcome to the First Quarter 2025 Earnings Call for AG Mortgage Investment Trust. With me on the call today are T.J. 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 Statements regarding Forward-Looking Statements, Risk Factors and Management's 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, 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. 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 2025 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 T.J.

T.J. Durkin, CEO

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 a 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. Securitization discipline from the team and control around leverage led to MITT's strong financial performance during the first quarter. We saw book value largely unchanged, moving higher by $0.01 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. The volatility 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. 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 GCAT. When you add all this together, we believe MITT is extremely undervalued at today's price. I'll now turn the call over to Nick.

Nick Smith, CIO

Thanks, T.J., 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. During the quarter, we increased our capital allocation to the home equity sector, a trend that we expect to continue. This quarter, we partnered with a leading nonbank mortgage originator to issue a $500 million home equity securitization. We acquired approximately $130 million of additional home equity loans from various nonbank 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. 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. We avoided chasing levered agency basis trades despite their popularity and as a result, preserved book value. We remain 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 who have demonstrated the 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. 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. In aggregate, underwriting standards remain historically tight. However, over 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. 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. 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.

Anthony Rossiello, CFO

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. 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 $6.2 million or $0.21 per share. Net interest income earned on our investment and swap portfolios increased by $1 million or 5% from the 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. In addition, our earnings from equity method investments was $1.2 million during the quarter, which includes gains on our investment in Arc Home valued at 1x book. These gains were partially offset by $1.1 million of transaction expenses primarily related to securitization activity. We recorded earnings available for distribution 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. Arc Home's contribution to earnings available for distribution improved by $0.02 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 $7.1 billion and maintained focus on expanding our presence in the Home Equity space. Specifically, we purchased $367 million of Agency Eligible loans and subsequently securitized $423 million of UPB. We also purchased $128 million of home equity loans, increasing our portfolio to $228 million as of quarter end, while continuing to build in April, acquiring an additional $52 million. Further, expanding on home equity, we co-sponsored a securitization of $492 million UPB of closed-end seconds, retaining $26 million of non-Agency RMBS securities. From a financing perspective, we continue to operate with a low economic leverage ratio, which is 1.6x at quarter end. We have prudently managed our leverage exposure through our programmatic securitizations, ending the quarter with only $223 million of warehouse financing, primarily related to Home Equity loans. And lastly, we ended the quarter with total liquidity of approximately $133 million, consisting of $116 million of cash and $17 million of unencumbered Agency RMBS. This concludes our prepared remarks, and we'd now like to open the call for questions.

Operator, Operator

We'll take our first question over the phone from Doug Harter with UBS.

Doug Harter, Analyst

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?

T.J. Durkin, CEO

Yes. So we have one of those two loans legacy from the WMC acquisition maturing this month. We expect that to go into a kind 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 and then ultimately, within a realistic time frame kind of culminate in a full payoff probably within 2025. And it's about $16 million of equity capital.

Doug Harter, Analyst

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 million of Home Equity that you did in April?

Nick Smith, CIO

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, 2 or 3 quarters to, one, rotate capital and then two, take some of that additional leverage into the Home Equity space.

Operator, Operator

We'll take our next question over the phone from Crispin Love with Piper Sandler.

Crispin Love, Analyst

Can you talk about the health of the securitization markets over the last several months, especially amid the recent volatility and then how they might be performing today?

T.J. Durkin, CEO

Yes. I believe the markets performed quite well through March, despite some broader equity turbulence. During the first two weeks of April, around Liberation Day, we saw them effectively close. However, in a positive light, no one was compelled to issue, and many chose to avoid the volatility. By the end of April, we noticed a return of deals to the market, and a significant number of them appeared in the last two weeks of April and into early May. I can say that the Capital Markets are fully open now. While spreads are wider, we are seeing that the securities we're retaining are 50 to 75 basis points wider based on current pricing. This is our perspective on book value for April, but overall, the markets are back to being open.

Crispin Love, Analyst

Perfect. Makes sense. I 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 in the quarter off of a relatively small base, remained active in April. But curious on your longer-term views there, especially if the rate outlook changes meaningfully from current levels?

Nick Smith, CIO

We often get questions about the outlook for rates. To address that first, we believe this is a strong position for us to invest in the future because rates could increase significantly, regardless of where they come from. The effects from the stimulus periods during COVID still influence the market. For there to be any real decline in the addressable market, a substantial rise in rates would be required. Therefore, we are confident that this is still the early stage of a developing asset class. We are observing more originators increasing their production levels, with those who were already producing a decent amount seeing almost a doubling of production year-over-year, and we expect this momentum to keep going.

Operator, Operator

We'll take our next question over the phone from Bose George with KBW.

Bose George, Analyst

Can you provide insights on volume trends in the second quarter, particularly regarding the widening spreads you mentioned in the securitization markets? Have you been able to pass that on to consumers, and is that affecting demand? Please share your thoughts on this.

Nick Smith, CIO

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. So we would expect the overall market to be down, but we do think Arc is somewhat insulated given where it attaches itself to the market. As far as gain on sale margins, we do expect them to normalize or maybe 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.

Bose George, Analyst

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

T.J. Durkin, CEO

Yes. 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 then we had the headwind of kind of negative earnings available for distribution coming out of Arc. We've now hit breakeven. And we think sort of $0.01, $0.02, $0.03 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. It's effectively keep doing what we're doing on the investment side. And now we're seeing some positive contribution from Arc, and that should directly increase what has been our kind of steady-state earnings available for distribution range.

Operator, Operator

We'll take our next question from Jason Weaver with Jones Trading.

Jason Weaver, Analyst

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?

Nick Smith, CIO

Yes. I want to start with the collateral. We're discussing FICO scores in the mid-700s, with loan-to-value ratios in the high 60% to low 70% range. The advances to the non-investment grade part of the stack, which we retain, are generally around 95% of market value. The funding context has changed slightly. As T.J. mentioned earlier, it's widened a bit, but you're looking at a funding context of around 200, plus or minus 10 to 15 basis points today.

Jason Weaver, Analyst

Got it. 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 $0.01 to $0.03 of profitability for the rest of the year?

Nick Smith, CIO

We are primarily focused on increasing our revenue to surpass previous levels. There is a breakeven point where volume and margin levels will have an effect. As we demonstrated in the last quarter, we achieved breakeven despite some fluctuations, and we believe we are currently at those origination volumes. To enhance profitability, we need to keep growing our revenue.

Operator, Operator

We'll take our next question from Eric Hagen with BTIG.

Eric Hagen, Analyst

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, do 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?

T.J. Durkin, CEO

Yes, I believe the volatility in early April was primarily related to macro factors. It was evident in rates and equities, and the closest derivative would be the basis on the agency side. We think our shareholders expect us to focus on the non-agency space without trying to time tactical trades there, so we have been disciplined in avoiding debates in that area. Ultimately, there hasn’t been much selling of home equity loans, non-QM loans, or securities backed by those products. In our view, that situation is likely behind us now, and we're returning to business as usual.

Eric Hagen, Analyst

Got you. Okay. On the securitized non-QM loans 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 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. So how should we think about the economic spread that you're earning in that portfolio right now?

T.J. Durkin, CEO

I mean I think we would probably point to the ROE on the right side. That's right.

Operator, Operator

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

Jenny Neslin, General Counsel

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, Operator

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