Logo of jester cap with thought bubble.

Image source: The Motley Fool.

AG Mortgage Investment Trust (NYSE:MITT)
Q1 2020 Earnings Call
Jun 12, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


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. [Operator instructions] Please note, this conference is being recorded. And I will now turn it over to Raul Moreno.

You may begin, sir.

Raul Moreno -- General Counsel and Secretary

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 sections 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 Q1 2020 earnings presentation link on the homepage. 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 -- Chief Executive Officer

Thank you, Raul. Good morning. The initial stages of the COVID crisis in March disrupted the markets in every aspect of AG MITT's portfolio. Normal two-way markets evaporated, in 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 season 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 of Angelo Gordon, made two $10 million subordinated loans as a key element of the negotiations. As well, MITT's manager also agreed to defer payments of both its management fees and expense reimbursements 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 so we could 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 a 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 in a range 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 markets. Thank you for listening, and I'll now turn the call over to T.J. Durkin.

T.J. Durkin -- Chief Investment Officer

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 funds, priced its fourth non-QM securitization.

However, as the fears of COVID made their way into the U.S. domestic markets, 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 CMBS market as the basis widened to levels not seen since the GFC but also began having liquidity evaporate in the market as well. This all happened very quickly, and 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 had to step into the fixed income and repo funding markets multiple times throughout the course of March to stabilize the plumbing of the fixed income markets. And by late April, the agency market had largely returned to normal. Turning to our presentation on Page 7. 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 82% residential and 18% commercial. After the sale of our agency whole pools, 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. Since quarter end, the broader markets and structured credit markets has 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 see 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 toward securitization to obtain term non-recourse financing for our whole loan investments as the debt markets remain open.

With regards to the underlying fundamentals, early data of post-COVID mortgage payments indicate residential delinquency and forbearance numbers are performing in line to slightly better than industry estimates, but we note, there is still a long way to go. We believe 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 -- Chief Financial Officer and Director

Thanks, 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 stockholder equity decreased by 58% in the first quarter.

The losses were primarily a result of the global pandemic associated with COVID-19 and the drastic cause on financial and mortgage-related asset markets. We did not disclose core earnings for the first quarter of 2020. We determined that this measure, as we have historically calculated it, did not appropriately reflect the economic impact of the 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 markets caused a decrease in the prices of our assets, as well as, increased margin calls from 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've 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 and then exited forbearance with only six lenders who we will look to partner with in the future. At May 31st, we had liquidity of approximately $45 million comprised entirely of cash and cash equivalents. That concludes our prepared remarks, and we'd now like to open the call for questions. Operator?

Questions & Answers:


Operator

Thank you. [Operator instructions] And from Credit Suisse, we have Doug Harter. Please go ahead.

Doug Harter -- Credit Suisse -- Analyst

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

David Roberts -- Chief Executive Officer

T.J.?

T.J. Durkin -- Chief Investment Officer

Yeah, sure, Doug. I mean, it was a combination of multiple factors. I mean, we were delevering the portfolio throughout March up until this month. We are building liquidity that way.

We -- as David mentioned or Brian mentioned, condensed the lenders, which also made just operationally exiting much easier. And lastly, to some extent, the market coming back, obviously, also helped as well. So, it was a combination of all those things.

Doug Harter -- Credit Suisse -- Analyst

Got it. And then you mentioned that you would sort of look to continue to kind of reduce assets and delevers, any sense of the magnitude that you would be looking there? Or kind of where the portfolio size might be able to stabilize?

T.J. Durkin -- Chief Investment Officer

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

Doug Harter -- Credit Suisse -- Analyst

All right. And then lastly for me, do you have ability to issue all of the ATMs given that you're trading well above book value?

David Roberts -- Chief Executive Officer

I'm sorry, could you repeat that question?

Doug Harter -- Credit Suisse -- Analyst

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

David Roberts -- Chief Executive Officer

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

Doug Harter -- Credit Suisse -- Analyst

Great. Thank you.

Operator

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

Eric Hagen -- KBW -- Analyst

Hey, thanks. Good morning. 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 of weeks in June, can you just give us a breakdown of what the portfolio looks like right now?

T.J. Durkin -- Chief Investment Officer

Yeah, sure. I mean, listen, at a high level, June has 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 -- KBW -- Analyst

OK. I mean it would be helpful, I guess, to see just a general sense between securities and loans on the resi and commercial side. I realize that you want to be -- you can't comment, I guess, at the end of May but is there any kind of indication or breakdown that you can sort of guide us to?

T.J. Durkin -- Chief Investment Officer

We don't have that prepared, no.

Brian Sigman -- Chief Financial Officer and Director

Yeah. I think, Eric, in the 10-Q, you will be able to see a little bit -- you'll obviously see more [Inaudible] on that 3/31 from the subsequent events. So there will be probably, especially with the large residential loan sale that we've talked about and announced, I think, you'll be able to make its way a little bit better than just from the presentation that we posted in the earnings release, and we're going to file that later today.

David Roberts -- Chief Executive Officer

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

Eric Hagen -- KBW -- Analyst

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

Brian Sigman -- Chief Financial Officer and Director

Yup. That's the expectation.

Eric Hagen -- KBW -- Analyst

OK. 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 -- Chief Investment Officer

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 less -- that's returned to somewhat regular way business on that side.

Eric Hagen -- KBW -- Analyst

OK. But does most of the repo apply 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 -- Chief Investment Officer

Yeah. So, it's daily mark-to-market and we do have residential and commercial securities, as well as, residential and commercial whole loans on facilities.

Eric Hagen -- KBW -- Analyst

Got it. OK. Great. Thank you very much.

Operator

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

Trevor Cranston -- JMP Securities -- Analyst

Hey, thanks. Follow-up on the question on the remaining repo facilities. We've seen some peer companies move toward 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 and 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 -- Chief Investment Officer

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 securities side. At least, based on what we're seeing and hearing.

Trevor Cranston -- JMP Securities -- Analyst

OK. Gotcha. 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 -- Chief Investment Officer

Yes. There -- we solved what we believe to be the majority of them, but we do have two outstanding deficiency claims.

Brian Sigman -- Chief Financial Officer and Director

And they came up later after the quarter. So when you see the Q, you'll see that. The two that we settled are -- were taken into kind of book value at March 31st. And then, the two that remain are still open and they were accrued for in our kind of estimate that we put forth at April 30th to our best guess is 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.

Trevor Cranston -- JMP Securities -- Analyst

OK. Great. Thank you, guys.

Operator

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

Jason Stewart -- Jones Trading -- Analyst

Thank you for the -- taking the question. 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 these pretty substantial loan sale that was executed?

Brian Sigman -- Chief Financial Officer and Director

Yeah. Yeah. It was -- we -- we -- at that point, the way those types of loans settle, you kind of enter into the agreement, which, I think, we actually filed at the time. But then you -- the buyer has a chance to due diligence that takes some time, but you kind of agree on the price in advance.

So at that point, we knew what the sales price would be, maybe, subject to a little fallout to the extent there was. But we were able to take that into account.

Jason Stewart -- Jones Trading -- Analyst

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

Brian Sigman -- Chief Financial Officer and Director

Well, I mean, obviously, this seemed a lot. There was a lot of assumptions that were 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 and at the time, what we knew it definitely went into there. So to the extent we knew we were selling something, a couple of days later at a certain price, we certainly would have marked it into that number at that price.

Jason Stewart -- Jones Trading -- Analyst

OK. Thank you. Appreciate it.

Brian Sigman -- Chief Financial Officer and Director

Yeah. Thank you.

Operator

From Christofferson Robb, we have Brad Golding. Please go ahead.

Brad Golding -- Christofferson Robb and Company -- Analyst

Hi, guys. Thanks for taking my call. I'm just looking at the slide on the income statement and there's still about $4.5 million of kind 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 or going forward. But is this a viable entity? Is it time to just shut this down or return the capital to shareholders?

David Roberts -- Chief Executive Officer

It's David Roberts. I'll take that.

Brad Golding -- Christofferson Robb and Company -- Analyst

Hi, David. Nice -- haven't talked for a while. Thank you.

David Roberts -- Chief Executive Officer

We -- you know, 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've 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 and we really could not do that until we were out of forbearance. Now that we're out of forbearance, we'll be looking at all the various options. And you know, we'll 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 -- Christofferson Robb and Company -- Analyst

OK. Just -- I'm somewhat concerned about 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's -- I don't want to sound preachy or anything, but clearly, there's an existential crisis for the entity and it either has to grow or protect the remaining value for shared and preferred holders.

So, thank you.

David Roberts -- Chief Executive Officer

Thank you.

Operator

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

Eric Hagen -- KBW -- Analyst

Thanks for taking the follow-up. Can you just remind us of 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 -- Chief Financial Officer and Director

Sure. It's Brian. So Arc Home, as we've talked about our mortgage originator, obviously, they have been quite busy. We at MITT own, I think, slightly under 50% of that entity.

The rest of the entities owned by other funds that are managed by Angelo Gordon. And 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 residential mortgage loans at MITT, we would use them to service those fees, and MITT does not own any percentage of Red Creek.

Eric Hagen -- KBW -- Analyst

OK. And can you remind us the amount of your ownership that shows up for Arc Home is essentially the net asset value with your -- of your share of the net asset value of Arc Home. Is that correct?

Brian Sigman -- Chief Financial Officer and Director

Yeah. Yeah, that's right, Eric. So the -- I think, we -- it's about $20 million or so was the value at 3/31, and that's just like anything else that we own in conjunction with anybody else, we would only pick up our share of that value.

Eric Hagen -- KBW -- Analyst

Yeah. Great. Thank you for clarifying that.

Brian Sigman -- Chief Financial Officer and Director

Yeah. No problem.

David Roberts -- Chief Executive Officer

I think, operator, we have -- we're almost at the top of the hour. But if there's a quick -- we see there's a quick follow-up from Jason Stewart. So, go ahead for the last question.

Operator

Yes. Jason?

Jason Stewart -- Jones Trading -- Analyst

Thank you. Brian, just to go back to book value, I completely appreciate the intra-quarter and the nature of the estimates that you're putting into these, but not substantially higher than that range, including all the things that have happened, including exiting forbearance or loan sale, it 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 -- Chief Executive Officer

We -- I'm going to answer that question. It's David. You know, we purposely did not give a range to come up with a range that we feel comfortable with. It 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 -- Jones Trading -- Analyst

OK. Thank you.

David Roberts -- Chief Executive Officer

You're welcome. OK. 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.

Duration: 30 minutes

Call participants:

Raul Moreno -- General Counsel and Secretary

David Roberts -- Chief Executive Officer

T.J. Durkin -- Chief Investment Officer

Brian Sigman -- Chief Financial Officer and Director

Doug Harter -- Credit Suisse -- Analyst

Eric Hagen -- KBW -- Analyst

Trevor Cranston -- JMP Securities -- Analyst

Jason Stewart -- Jones Trading -- Analyst

Brad Golding -- Christofferson Robb and Company -- Analyst

More MITT analysis

All earnings call transcripts