Earnings Call Transcript - MITT Q1 2024

Jenny Neslin, General Counsel

Thank you. Good morning, everyone, and welcome to the First Quarter 2024 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 Statement 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, 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 Q1 2024 Earnings Presentation on the home page. Again, welcome to the call, and thank you all for joining us today. With that, I'd like to turn the call over to T.J.

Thomas Durkin, CEO

Thank you, Jenny. Good morning, everyone. Last quarter, we were able to walk you through the merits of the WMC transaction, but with only less than a month of true financial impact. I'm excited to report our first full quarter post-merger, which we believe gives a clear picture of the compelling benefits. Walking through MITT's financial position as of March 31, we grew adjusted book value from $10.20 to $10.58, while paying our $0.18 dividend, producing a 5.5% economic return on equity for the quarter. While still preliminary, we see estimated book value per month, to the end of April, to be roughly flat from quarter end. The company now has an equity base of $540 million and $140 million of liquidity with only 1.4 turns of economic leverage to end the quarter. With market expectation for rate cuts in the near-term, our first quarter results demonstrate our ability to grow earnings power in this higher for longer interest rate environment while protecting book value. During the quarter, we earned $18.2 million of net interest income, $0.55 of earnings per share and $0.21 of earnings available for distribution per share, covering our dividend by more than $0.03. In closing the WMC transaction on December 6, and through quarter end, approximately $50 million of assets have already been monetized, to be rotated into our core strategy of newly originated residential mortgage loans. In terms of capital markets activity, we completed one GSE eligible securitization and more notably, issued approximately $35 million of investment grade unsecured bonds, addressing a sizable portion of the legacy WMC convertible notes, which are due this coming September. Like I said last quarter, the team and I are very excited to finally discuss with the market the successful acquisition of WMC this past December and the future prospects for MITT going forward. We believe the WMC acquisition was another substantial step in further positioning MITT as a premier pure-play residential mortgage REIT. We have confidence in our ability to continue to deliver strong earnings on the investment portfolio while seeking ways to continue enhancing scale and G&A efficiencies. Demonstrating my confidence, I was pleased to personally purchase another 50,000 shares in net, following last quarter's earnings release, strengthening our line of interest with our shareholders as we continue to execute on our mission. I'll now turn the call over to Nick.

Nicholas Smith, Chief Investment Officer

Thanks, T.J. In the first quarter, the company grew the investment portfolio by 4.8%, delivered an economic return of 5.5% and reduced economic leverage. The 3.7% book value increase was driven by continued flattening of the credit curve, underpinned by strong performance in risk assets, continued strength in housing fundamentals and limited supply of residential credit. The company securitized $377 million of residential whole loans, acquired another $285 million of home loans and built a current pipeline of an additional $284 million from Arc Home and other third-party originators. In addition to the activity in loans, we properly rotated additional assets acquired from WMC, bringing the aggregate equity return to approximately $36 million. We anticipate being in the market with our second securitization of this year in the coming weeks. While credit spreads have tightened into the end of last year and throughout this past quarter, equity returns in the mid- to high teens post-securitization remain. While the origination landscape continues to be challenging, Arc Homes Q1 lock volumes were $687 million with continued strength in April of approximately $300 million. Notably, funding volumes increased over 40% from the first quarter of the previous year. While this increase is over 2.5 times the increase in originations seen for the industry over the same period, we expect these increases to keep pace with increase over the next year as we continue growing our footprint in both wholesale and correspondent channels. Now I'd like to turn the call over to Anthony.

Anthony Rossiello, Chief Financial Officer

Thank you, Nick, and good morning. In December, we closed the WMC acquisition, helping to grow MITT's investment portfolio and equity base, while improving scale for the company. Further, MITT immediately began to benefit from the substantial synergies we previously highlighted in our announcement of the transaction, which is evident through our performance this quarter. During the quarter, we recorded GAAP net income available to common shareholders of $16.3 million or $0.55 per share. Our book value of $10.84 per share and adjusted book value of $10.58 per share increased by approximately 3.7% from December. The book value increase was driven by mark-to-market gains on our investment portfolio from credit spread tightening, gains on our hedge portfolio from rising rates, and improvement in our earnings available for distribution or EAD. Arc Home had a neutral impact on book value this quarter as mark-to-market gains on its mortgage servicing rights portfolio, driven by rising interest rates, offset losses from EAD. We generated EAD of $0.21 per share for the first quarter. Net interest income, inclusive of interest earned on our hedge portfolio was $0.69 per share, which exceeded our operating expenses and preferred dividends of $0.44, generating earnings of $0.25 per share. This was offset by a loss of $0.04 contributor from Arc Home. During the quarter, net interest income, including swaps, increased by $4.1 million resulting from a full quarter of earnings from the acquired WMC portfolio, while operating expenses only increased by $1.4 million. As discussed on our previous earnings call, we estimated that approximately $5 million to $7 million of operating expenses would be removed on an annual basis upon combining MITT and WMC. These synergies are now being realized, with annual operating expense savings trending toward the higher end of our estimated range. Lastly, we ended the quarter with total liquidity of approximately $140 million. This concludes our prepared remarks, and we'd now like to open the call for questions.

Operator, Operator

Our first question comes from Doug Harter with UBS.

Doug Harter, Analyst

Hoping you could talk about your outlook for incremental new investments, how we should think about the pacing of that, and kind of your plans to fund that either through recycling of capital? Or do you have any plans to kind of raise new capital?

Nicholas Smith, Chief Investment Officer

Thanks, Doug. This is Nick. So we, for the most part, can recycle capital that we have, particularly given the flattening of the credit curve that we mentioned. I think that builds an opportunity to sell down positions that have done well and reinvest. Pace-wise, there's still plenty of opportunity in the market. I mentioned growth in the check book channels at Arc Home. Certainly, the availability of credits in the market and where you can buy them will not be the constraint.

Doug Harter, Analyst

And I guess how are you thinking about what is the return differential between, call it, the legacy WMC assets that you have on that you're selling and where you think you can put that money to work today in Arc Home production?

Nicholas Smith, Chief Investment Officer

Yes. So a lot of that paper has seasoned out and as the credit curve flattened, we're talking some of the paper we were selling was high 100s, low 200s type spread. I think we can double those sorts of spreads more via recycling. Then, obviously, with the modest deployment of back-ended leverage, get you to the mid- to high teens returns.

Operator, Operator

Our next question will come from Jason Stewart with JonesTrading.

Jason Stewart, Analyst

I was wondering, can you talk a bit about where you see the origination capacity that is personnel-wise at Arc Home looking out further into the year? Are you preparing for more volume if we do see a decline in rates in the back half?

Thomas Durkin, CEO

I think Arc Home is well positioned for the current environment. When we think about rallies in rates, we think a lot more about seasonality than what 100 basis point or 200 basis point rally in rates will do to volumes. Given that outlook, we think the staffing is well positioned, and we've put a lot of work into making the company more and more efficient so that if we see increases, they can be readily handled.

Jason Stewart, Analyst

And then more of a clarification. Just given the volatility we saw starting in April, would you say that the bid for securitization really hasn't been materially affected?

Thomas Durkin, CEO

Yes. I don't think it's been materially affected. In fact, if you look at a lot of the inflows across bond funds, those supply-demand technicals are well supported for continued issuance. There still tends to be less supply than demand.

Operator, Operator

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

Bose George, Analyst

Can you talk about the sustainability of the current level of the EAD you reported this quarter? And then just on a related note, I guess you had a little over $100 million of cash. Can you remind us how much of that is cash you want to keep and how much of that you think of that as kind of deployable?

Thomas Durkin, CEO

Thanks. So in terms of the cash question, I mean, we've got $140 million listed on Page 5. I think when we think about where we've been running leverage over the recent quarters or so, we have an ability to probably deploy $40 million to $50 million of that. We obviously have the maturity coming up in September on the convertible note, it's payable starting in June. So we're managing cash into that maturity. In terms of EAD, I think the way we think about things is if you were to go back to when rates really started moving in 2022, we've done a really good job of protecting book value on the investment portfolio. The ROEs that we've been posting there have captured these higher rates. I think that's a tailwind. Our headwind has been twofold. One has been just the kind of core earnings at Arc Home contributing and offsetting the higher ROEs we're producing on the investment side and then obviously just scale in G&A. As we look forward now with one quarter behind us, you're clearly seeing the G&A synergies that Anthony mentioned, and we're happy to go into more detail there in terms of how that's coming together. We also show on page 9 that the Arc Home contribution to EAD has gradually been working towards breakeven with the goal of crossing into a positive position in the back half of this year. Putting all that together, we feel pretty good about EAD and this higher range on a more sustainable basis. We don't view this as a one-time event.

Bose George, Analyst

Okay. Great. And then actually, just on acquisitions, we see it as a very positive transaction. How do you sort of think about potential future transactions? How much energy is focused on that as a potential?

Thomas Durkin, CEO

Yes. Listen, I think we're still very open to other acquisitions, other ways to enhance the scale of the company. The manager has shown to be very supportive in continuing to grow it. We're definitely open for business and fielding calls about opportunities. We don't view WMC as a one-and-done transaction; I think it was a building block for future growth.

Operator, Operator

Our next question comes from Eric Hagen with BTIG.

Eric Hagen, Analyst

Any perspectives on the support for agency and non-agency MBS spreads following the side meeting this week? Any catalysts you see for MBS spreads to tighten from here? What do you guys feel like is the upper bound for MBS spreads, just given some of the news that we've received recently?

Nicholas Smith, Chief Investment Officer

Look, we pay close attention to the agency basis and non-agency basis. Obviously, we're not in the agency market as our core business. That being said, we look at agencies as generally fairly valued. When agency spreads come off, they should do better. However, our book is largely insulated from what goes on in that market. You can look at even this past quarter's performance and see that credit outperformed a lot of the parts of the capital stack that are more impacted by investment grade spreads and interest rate volatility.

Eric Hagen, Analyst

Okay. That's helpful. Lots of capabilities around the stressed credit at Angelo Gordon and TPG. Are there any opportunities you're seeing out there that could speak for that opportunity?

Thomas Durkin, CEO

I mean certainly not on a hazard scale on the residential side at this point. I think there's way more opportunity focusing on new origination. I probably don't see that changing in the short to medium term either.

Operator, Operator

Thank you. At this time, we have no further questions in queue. This will conclude today's AG Mortgage Investment Trust First Quarter '24 Earnings Conference Call. You may disconnect your line at this time. Have a wonderful day.