AG Mortgage Investment Trust (MITT) Q2 2020 Earnings Call Transcript

Image source: The Motley Fool.

AG Mortgage Investment Trust (MITT)
Q2 2020 Earnings Call
Aug 10, 2020, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

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. [Operator instructions] Please note that this conference is being recorded. I will now turn the call over to Raul Moreno.

Mr. Moreno, you may begin.

Raul Moreno -- Secretary and General Counsel

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 and 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 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 -- Chief Executive Officer

Thank you, Raul. Good morning to everybody. As we discussed last quarter, our immediate goals have been to reduce leverage, increase liquidity, and begin to restore book value. I am pleased to report that our book value per common share increased to $2.75 as of June 30 compared to an estimated range of $1.80 to $1.90 as of April 30.

In terms of leverage, we reduced our mark-to-market non-recourse financing to about $280 million this quarter -- I'm sorry, our mark-to-market recourse financing to about $280 million this quarter from $1.2 billion last quarter. This $900 million reduction came mostly from asset sales and paydowns, although we also were able to shift about $200 million of financing from mark-to-market recourse to non-mark-to-market non-recourse. As of quarter-end, our total investment portfolio was $1 billion. Our economic leverage was 0.8 times, and we had cash of nearly $70 million on hand.

Our mortgage originator affiliate, Arc Home, had, by far, its best quarter in its history. We continue to see substantial opportunity over the longer term for MITT in residential origination, both through ARC and our other channels. In terms of dividends, as previously announced, we did not pay common or preferred dividends this quarter. Based on current conditions for our company, we do not anticipate paying dividends on our common or preferred stock for the foreseeable future.

Thank you for listening. And I'll now turn the call over to T.J. Durkin, chief investment officer.

T.J. Durkin -- Chief Investment Officer

Thank you, David, and good morning, everyone. Turning to our presentation on Page 5, we walk through our high-level activity for the quarter. Beginning on March 23 through June 30, we delevered the company by selling approximately $1 billion of various mortgage investments. We officially exited forbearance on June 10, and we are pleased to report, as of August 10, the company resolved and settled any outstanding deficiency claims with lenders.

Our resulting financing profile is now primarily nonrecourse non-mark-to-market with only a small number of counterparties. Subsequent to quarter-end, the company repaid $10 million at its scheduled maturity of the secured debt the manager issued at the request of participating forbearance lenders. The remaining and final $10 million is due and payable on March 31, 2021. As we indicated on last quarter's call, the company was active in securitizing and terming out debt on its residential mortgage whole loan portfolio, completing an unrated refinancing of reperforming and nonperforming loans in June, returning over $6 million of cash back to the company, and subsequent to quarter-end also completed its second-rated non-QM securitization of 2020, along with other Angelo Gordon-affiliated funds.

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 6. 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 tailwinds 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 7, we lay out our portfolio metrics. We had a fair value of approximately $959 million as of 6/30, representing 0.0 turns 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 toward 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 -- Chief 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 our 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 30 from an estimated range of $1.80 to $1.90 at April 30 and $2.63 at March 31. 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 the last quarter, we are not currently disclosing core earnings, a non-GAAP financial measure, as we determine 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 to 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 31 to 0.8x times at June 30. As a result of asset sales and the restructuring of one of our larger financing agreements, which amended the terms of the arrangement to be 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 31 to six as of June 30. 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 on manager as it became due.

Additionally, we participated through our unconsolidated ownership interest in that A-rated non-QM loan securitization, in which non-QM loans with a fair value of $221 million were securitized. This turned out our repo financing into lower-cost 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?

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question comes from Eric Hagen from KBW.

Eric Hagen -- KBW -- 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?

David Roberts -- Chief Executive Officer

On the vast majority of the -- regular way repo is just a few ships or securities versus old loans. We have more in -- we've transferred more of that into the non-mark-to-market-type facilities. I don't have the exact numbers in front of me.

Eric Hagen -- KBW -- Analyst

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

David Roberts -- Chief Executive Officer

I'll have to get back to you on that one.

Eric Hagen -- KBW -- Analyst

OK. 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 -- Chief Executive Officer

You know, on the book value, we have not done anything beyond June 30, so we'll just stick with June 30. Obviously, there's more changes in just the ATM. I'll let my colleagues handle the other question.

T.J. Durkin -- Chief Investment Officer

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

Eric Hagen -- KBW -- Analyst

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

David Roberts -- Chief Executive Officer

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

Eric Hagen -- KBW -- Analyst

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

Brian Sigman -- Chief Financial Officer

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

Eric Hagen -- KBW -- Analyst

Right. OK. So we're $40 million, $45 million worth of book value in the business. Got it.

OK. Thank you, guys.

Operator

[Operator instructions] Our next question comes from Trevor Cranston from GMPC Securities.

Trevor Cranston -- JMP Securities -- Analyst

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

Brian Sigman -- Chief Financial Officer

So unfortunately, it's hard to -- we don't typically give out that type of guidance, and there were just so many kind of moving parts in the quarter in terms of different outstanding finances that it's hard to kind of take a good shot at what it will be without it just being a too high-level. So we don't really have that. Obviously, we did -- I did say that it was increased in the second quarter. The non-mark-to-market financing did cost us a little bit more, obviously, and secured financings do cost more than repos.

But during the forbearance agreement, we also were at an elevated interest rate, so that's come down. And now that we're back to kind of regular way repo on our securities and loans, you'll start to see a more normalized run rate in the third quarter.

Trevor Cranston -- JMP Securities -- Analyst

OK. Fair enough. Thanks. And then I appreciate that you stripped out the restructuring expenses.

Were there any other sort of elevated or one-time items that are within the other operating expense item?

David Roberts -- Chief Executive Officer

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 is something that should naturally decline given the shrinkage of the portfolio.

Trevor Cranston -- JMP Securities -- Analyst

OK. Thanks. And then one more question on Arc Home. Can you provide any color on -- in terms of what you've seen with margins there sort of as the second quarter progressed and into the third quarter? It seems like they may have peaked first on originators early in the second quarter and have been trending a little tighter.

Just sort of trying to get a sense what you guys are seeing and if we should think about second quarter as maybe sort of being a peak in the earnings for that business over the near term. Thanks.

David Roberts -- Chief Executive Officer

Yeah. 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.

Trevor Cranston -- JMP Securities -- Analyst

OK. Fair enough. Thank you.

Operator

Our following question comes from Ryan James from Springfield Capital.

Unknown speaker

Hi, guys. Is there anything preventing you from -- any limitation in the company [Inaudible]? I was just surprised in selling more shares based on where the stock price was. Are there limitations, or is that just a judgment call? Can you guys make [Inaudible] how much to sell?

David Roberts -- Chief Executive Officer

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

Brian Sigman -- Chief Financial Officer

Yeah. That's right. There are some limitations in terms of daily trading activity as well. And as David mentioned, you're trying to do it through the market.

There's also windows -- trading windows that we work with legal on in terms of when our information is published that can restrict the -- not the volume but the days that you can issue.

Unknown speaker

OK. Thanks. And 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 -- Chief Executive Officer

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.

Unknown speaker

OK. Thanks.

Operator

We have no further questions.

David Roberts -- Chief Executive Officer

OK. Thanks, everyone, for joining. We'll speak next quarter.

Operator

[Operator signoff]

Duration: 20 minutes

Call participants:

Raul Moreno -- Secretary and General Counsel

David Roberts -- Chief Executive Officer

T.J. Durkin -- Chief Investment Officer

Brian Sigman -- Chief Financial Officer

Eric Hagen -- KBW -- Analyst

Trevor Cranston -- JMP Securities -- Analyst

Unknown speaker

More MITT analysis

All earnings call transcripts