Earnings Call Transcript - MITT Q4 2020

Operator, Operator

Welcome to AG Mortgage Investment Trust's Fourth Quarter 2020 Earnings Call. My name is Sylvia, and I'll be the 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 that this conference is being recorded. I will now turn the call over to Christopher Moore. Mr. Moore, you may begin.

Christopher Moore, President

Thank you, Sylvia. Good morning, everyone. Welcome to the fourth quarter and full year 2020 earnings call for AG Mortgage Investment Trust. 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.

David Roberts, CEO

Thank you very much, Chris. Good morning to everybody. Our goals for MITT continue to be increasing the Company's long-term earnings power while maintaining adequate liquidity as well as increasing book value. We continue to emphasize residential whole loans as a key part of our strategic direction, given the significance of our investment in Arc Home and our experience and expertise in the non-QM space. I am pleased to report that our adjusted GAAP book value per common share increased to $3.94 as of year-end compared to $3.08 as of September 30. Our adjusted book value excludes as an asset the capitalized issuance costs of our preferred stock and therefore is about $0.20 lower per share than GAAP book value. As well, January was a positive month for our book value in our company, and we have estimated that our adjusted book value as of January 31 is in the range of $4.15 to $4.25 per share. The increase in our book value quarter-over-quarter and in January was driven primarily by a rise in the value of our residential whole loans and our CMBs as well as continued strong performance from our mortgage affiliate, Arc Home. As we announced in November, the Board approved the payment of accrued and unpaid dividends on our preferred stock in December, and we have returned to normal course dividend payments on our preferred stock with the first quarter dividend payable on March 17. In the fourth quarter, we also reinstated the dividend on the Company's common stock. With that, I will turn the call over to our Chief Investment Officer, TJ Durkin.

Thomas Durkin, CIO

Thank you, David, and good morning, everyone. During the quarter, we executed on accretive opportunities to strengthen our capital base by redeeming 1.3 million shares of preferred stock in exchange for 4.6 million shares of common stock and $8 million of cash in two separate transactions. We also utilized our ATM program to raise net proceeds of $2.4 million through the issuance of 700,000 shares of common stock. Subsequent to year-end, we sold two of our four remaining commercial real estate whole loans at prices slightly above our year-end marks. We reinvested that capital into both agency whole pools and entered into agreements to purchase approximately $73 million of non-QM whole loans. Turning to our presentation on Page 5, we present the fourth quarter portfolio update and snapshot of the portfolio for January month end. During the fourth quarter, we increased the size of the portfolio from $1.10 billion to $1.4 billion, mainly through agency purchases of approximately $273 million, while increasing the portfolio's leverage from 0.9 turns to 1.5 turns of economic leverage. We continue to deploy capital in the first quarter of 2021 into agency mortgages and non-QM whole loans. The effects of these transactions have grown our portfolio further to $1.6 billion with a corresponding economic leverage ratio of 2.2 turns as of January 31. And again, putting this all together, as David previously mentioned, the effect of all this activity has improved book value in 2021 year-to-date, and we have estimated our adjusted book value as of January 31 in the $4.15 to $4.25 per share range. Turning to Slide 6. Again, we want to highlight the strong performance of Arc Home, our licensed mortgage origination affiliate during 2020. Arc Home achieved overall growth in origination volume of 136% year-over-year and generated $49 million of net income for the year. During the fourth quarter, the team at Arc continued to take advantage of the tailwinds in the mortgage banking sector with another strong quarter in both volume and margins within the agency channels. As we stated on our second quarter earnings call, Arc Home was one of the first originators to reenter the non-QM business post-COVID. And you can see clearly how this product represented an increasing percentage of Arc's fundings in the fourth quarter. We believe this early reentry into non-QM will build strong brand awareness and recognition for Arc Home in the non-agency correspondent and wholesale markets as the agency refi wave begins to recede over the near to medium term.

Anthony Rossiello, CFO

Thank you, TJ, and good morning, everybody. During the fourth quarter, we reported net income available to common stockholders of approximately $47 million or $1.16 per fully diluted share. Earnings were driven by asset appreciation in our credit investments as well as $10 million of earnings from our equity method investment in Arc Home, which is held in the taxable REIT subsidiary. As you'll see on Slide 12, we provided a reconciliation of our GAAP book value per common share, which increased $0.79 during the quarter. This increase reflects the combined impact of our current quarter earnings and the preferred stock exchanges transacted in October, offset by the preferred and common dividends reinstated during the fourth quarter. In addition, we utilized our ATM program to issue common stock for net proceeds approximating $2.4 million. As David noted earlier, we also disclosed adjusted book value per common share of $3.94, which is computed based on total equity less the entire liquidation preference of our preferred stock. We're introducing this metric to supplement GAAP book value per share, which is computed using the carrying value of our preferred stock on balance sheet. Although we previously disclosed the liquidation preference of our preferred stock, we believe also disclosing adjusted book value will provide transparency into the impact of liquidation preference on common equity. Turning to Slide 13. As the Company has now stabilized and we've reinstated both the common and preferred dividends, we disclosed the reconciliation of GAAP net income to core earnings for the fourth quarter, recognizing core earnings of $0.22 per common share. During the first three quarters of the year, we did not disclose core earnings as we determined this measure did not appropriately capture our business, liquidity, results of operations, financial condition, or our ability to make distributions to our stockholders.

Operator, Operator

Thank you. We will now begin the question-and-answer session. And our first question comes from Doug Harter from Credit Suisse.

Douglas Harter, Analyst

Hoping you could talk a little bit more about kind of the expected pace of capital deployment into non-QM loans, kind of how you think that market continues to develop? And I guess, just talk about how MITT gets this allocation relative to other Angelo Gordon funds just as we think about the sizing potential?

Thomas Durkin, CIO

Yes, Doug. I think we're observing a resurgence in market volume. While there is competition, we're actively engaged in multiple avenues. The competitive bulk auctions are happening, and our team is focusing on building relationships with existing originators with whom we have agreements, and we're aiming to broaden that acquisition strategy over time with new partners. Regarding allocation, we have a comprehensive process overseen by management that is compliant and applies to all our trades, not just non-QM. The details are available in our filings, and I'm happy to provide more information if needed. There is no fundamental difference in our approach to non-QM compared to our other investments.

Douglas Harter, Analyst

Sure. Could you discuss how you are financing those assets and which sites, apart from yours, might be considered for securitization financing?

Thomas Durkin, CIO

Yes. So we're using, I would say, traditional warehouses currently. And I think we're aiming to term those out once we get to what we deem to be critical mass in terms of being able to amortize the fixed cost of any securitization, which generally speaking, we target around $250 million of loans as that threshold.

Operator, Operator

Our next question comes from Bose George from KBW.

Bose George, Analyst

Actually, first question is just on room for further recovery on book value. How should we think about that?

Thomas Durkin, CIO

So, okay, great. And then actually switching over to just the earnings power of the existing portfolio. Can you just talk about the earnings power? And also just in terms of whether there's room to increase leverage? Just how do we think about the run rate of earnings of this business? Yes, sure. I mean I think we're sort of displaying that we're prudently growing the portfolio with increased modest leverage quarter-over-quarter and quarter-to-date versus year-end. I think we'll continue to look to grow the portfolio. We do think that looking at the assets that we're owning, there's certainly room to run in terms of increasing the leverage prudently, which obviously would flow down into increased earnings power. So, I mean, I think we would expect to continue to do that.

David Roberts, CEO

And it's David, just to add that part of that prudence is the nature of that leverage. So, as TJ mentioned, creating the opportunity to do securitizations, we view securitized leverage as part of that overall prudent leverage strategy. Sorry to cut you off.

Bose George, Analyst

And just to follow up on the return. Should we think about it as having a low double-digit return on equity based on your book value? Because obviously, the core earnings this quarter were much higher than that, so I'm trying to piece that together in terms of how we model it.

Thomas Durkin, CIO

Yes. I think it's obviously hard to model. Obviously, the mortgage banking sector experienced generational ROEs in 2020. We all expect those to come down into '21. We don't know how much and how fast, but we would expect that to not be a repeat within 2021. And then at the same time, on the other side of the portfolio, we are increasing that capital invested and the portfolio is growing via the leverage increase we just talked about. So, it's probably from February today, hard to exactly model, but I mean, I think that's generally how you would think the earnings power is going to shift in 2021 versus 2020.

Operator, Operator

Our next question comes from Trevor Cranston from JMP Securities.

Trevor Cranston, Analyst

A question on the agency investments. It sounds like the real core focus right now is more so on the non-QM space. Should we think about the agency investments more so as a place to deploy liquidity, pending loans that you can acquire in the non-QM space? Or are you guys approaching the agency more so as a core part of the portfolio going forward? As a second part of that question, can you talk about where you're seeing returns on the agency investments? Thanks.

Thomas Durkin, CIO

Yes, looking at the agency market with a typical 9:1 leverage ratio, we're likely around 10. As a portfolio, we are concentrating our operating business plan on the whole loan side. Our goal is to manage our liquidity and earnings potential with agencies, while also being mindful of our goals. We are achieving these three objectives.

Operator, Operator

And the next question is from Eric Hagen from BTIG.

Eric Hagen, Analyst

We've seen several mortgage REITs call pieces of their preferred capital structure. I would love to get your thoughts on whether you're looking at potentially a similar move and whether you feel comfortable with the liquidity in the room on your balance sheet to make that happen? And second question, can you just provide some detail on how the re-performing and non-performing loans are being financed in the advance rate and cost of funds and such on that piece of the portfolio?

David Roberts, CEO

Can you repeat the first part of your question? I didn't catch the verb when you mentioned certain REITs.

Eric Hagen, Analyst

Yes. Sorry about that. Yes. I'm asking about mortgage REITs calling pieces of their preferred capital structure and whether you guys feel like you have the liquidity and room on your balance sheet to make a similar move?

David Roberts, CEO

We will always evaluate the optimal use of our capital and determine the appropriate scale for the company. Considering these factors, I can confirm that there are currently no plans to redeem our preferred issue.

Eric Hagen, Analyst

In terms of the NPL book, the majority of that is currently financed through securitization. What’s the breakdown of re-performing versus non-performing in that portfolio?

Thomas Durkin, CIO

I don't have that in front of me, Eric. We can definitely get back to you on that.

Eric Hagen, Analyst

Okay. Regarding the GAAP book value versus adjusted book value, I am curious about your thoughts on capital raising and the level of accretion. Are you using the GAAP number or the adjusted number as a basis for potential capital issuance?

Thomas Durkin, CIO

Yes. I think we put that in response to some investor calls we've had over the past couple of quarters, just to show, I think, more in line with some of the way some other REITs are reporting how their prefers show up on their book value. So in some ways, it's trying to flatten the numbers between some of the other REITs and how we've been reporting it. It felt like investors were telling us we were doing it. The majority of the REITs were doing it in a different way, and we're trying to show both.

David Roberts, CEO

Yes, and we thought it was more realistic. I mean more accurate, I should say, as well.

Operator, Operator

We have no further questions.

David Roberts, CEO

Terrific. Well, thank you very much for joining the call, and we look forward to giving you a report after the first quarter. Wish everyone a good day and a great weekend. Thank you very much.

Operator, Operator

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