AG Mortgage Investment Trust (MITT) Q1 2022 Earnings Call Transcript

AG Mortgage Investment Trust (MITT 1.09%)
Q1 2022 Earnings Call
May 06, 2022, 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 2022 earnings conference call. My name is Brendan, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

[Operator instruction] As a reminder, this conference is being recorded. I will now turn the call over to Jenny Neslin. Jenny, you may begin.

Jenny Neslin -- General Counsel and Secretary

Thank you, Brandon. Good morning, everyone, and welcome to the first quarter 2022 earnings call for AG Mortgage Investment Trust. With me on the call today are David Roberts, our chairman, and CEO; T.J. Durkin, our 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, 2021, 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 first quarter 2022 earnings presentation on the homepage and the investor presentation section. Again, welcome to the call, and thank you for joining us today. With that, I'd like to turn the call over to David.

David Roberts -- Chairman and Chief Executive Officer

Thank you, Jenny, and good morning to everybody. In my fourth quarter comments, I said that we were proud to have achieved a smooth transition and become a pure-play residential credit reit. In this first quarter of 2022, we had to contend with a near doubling of interest rates, and considerable widening of credit spreads. We can, and did hedge against the move in rates.

But when spreads increase rapidly, and we have a robust inventory of originated loans yet to be securitized, that will lead  to mark to market losses. That was largely the tale of the first quarter, and the main reason we lost $0.74 per share of GAAP earnings. When spreads widened, we moved quickly to adjust our pricing on newly originated loans. Despite the rise in rates and spreads, we were able to continue originating new loans at a rapid pace.

Much of that, is due to the fact, that we have continued to roll out new origination programs and channels. As well, we have seen some of our competitors retreat from the non-agency origination arena. Finally, our mortgage affiliate, Arc Home, has continued to build out its human capital, taking advantage of an improved environment for attracting talent. Despite our first quarter loss, we maintained a dividend of $0.21 per share.

Our dividend policy will continue to be guided by our view of earnings on a go-forward basis over a multi-quarter period. I should note that we do not believe that the first quarter movement and spreads will be repeated. In April, spreads relevant to our business ceased to widen and we began to see some tightening. During the quarter, we executed three securitizations and we continued our momentum, issuing another deal in April.

One of our primary objectives is to make the transition from origination to securitization as seamless as we can. While the industry is experiencing an overall decline in origination volumes, this factor serves to benefit us, freeing up more capacity in the securitization markets to execute with increased efficiency. This improved the company's return on equity going forward. All was not negative.

We entered this quarter with ample liquidity to continue to propel our growth strategy at higher asset yields. We continue to be strong believers in our strategy as capable of delivering long-term earnings growth. And so we also believe, we will be able to report better results as the year goes on. I'll now turn the call over to T.J.

Durkin, our president.

T.J. Durkin -- President

Thanks, David. Good morning, everyone. We continue to be an active participant in the market during the first quarter, acquiring and settling on over 900 million of non-agency and agency-eligible loans. We also reduced our agency RMBS exposure during the quarter through net sales of approximately $225 million.

We continue to be disciplined about our warehouse risk and are very proud of the fact we executed three securitizations during a very challenging quarter. These transactions not only de-risk our warehouse lines but gave us additional liquidity to take advantage of the dislocation and opportunities that presented to us since the beginning of the year, as some historical players had to step away from their acquisition programs. Nick will cover our [inaudible] in more detail later in the call. But I'd briefly point out Arc's continued success in taking market share this past quarter, as many non-QM originators were adversely affected by the interest rate move with many simply not hedging their pipelines at all.

Turning to page seven. As our purchase activity accelerates, the velocity of our securitization activity needs to increase. This past quarter's record interest rate sell-off brought with it much sought after operational capacity, which will provide us with the necessary resources to increase both our velocity and purchases. Much of this capacity comes from other segments of the mortgage market that are more sensitive to interest rates.

We have already benefited from this as large players in the mortgage market. They're looking for opportunities away from conventional originations. And we believe this is just the beginning. We expect the investments we have made in our infrastructure over the past year to drive organic loan growth.

As our securitization portfolio grows, our exposure to mark to market warehouse financing will continue to shrink relative to the portion that has been termed out via securitization. As you can see in the exhibit on this page, this trend has already started. Lastly, I want to highlight our NIM yield and cost of fund metrics on our securitized loan portfolio. We normally don't spend much time on this quarter-to-quarter, but given the velocity of the interest rate movement this quarter, I think it's important to point out the cost of funds is going up in large part because we are increasing the company's aggregate securitization notional.

Given the rate backdrop, our fixed rate cost of funds is higher today than it was six months ago, and it's reflected in the 2.6% cost of funds. Now our current yield of 4.2% notably doesn't capture the earnings profile going forward, given these yields are based on our historical cost basis and don't reflect today's fair values. So when we are acquiring new investments today, at current share values, assuming all other factors being equal, the credit quality, level financing, etc., we expect this to translate into higher asset yields and NIMS for our investments, which will help drive higher core earnings going forward. I'll now turn the call over to Nick.

Nick Smith -- Chief Investment Officer

Thanks, T.J., and good morning, everyone. Turning to page eight, as you can see here, we have ample liquidity to support loan growth, which we expect to be further supported by our financing strategy, including cash generated from securitization activity. Our captive originator continues to add relationships through its broker and correspondent channels, which will support this organic growth. Year to date, we have executed four securitizations and expect this pace to continue throughout the year.

We are currently targeting post securitization returns of 14% to 25%, which does not include any ancillary income from our originator. Although this is a wider range than our target [inaudible] from prior quarters, it takes into consideration the current market volatility, which as all resulted in near-decade wide spreads and whole loans along with the corresponding term financing. Turning to page nine. Looking at the chart on the bottom left, the portfolio mix has tracked our pure-play residential mortgage rate strategy, which now has over 85% of our equity allocated to residential investments.

The top chart, outlines the current portfolio yields, along with corresponding cost of funds. Over the quarter, debt yields have moved dramatically as risk-free rates have increased over 125 basis points, with credit spreads at the top of the capital stack widening approximately 60 to 70 basis points. Today we see asset yields in the low to mid 5% with term financing in the mid to high 4% area. Over the past few quarters, we negotiated higher advance rates and lower spreads in a warehouse lines.

The earliest maturity of these facilities is in November, although we intend to shorten our dwell time substantially, the lower cost of funds on our warehouse lines and higher debt yield will improve our returns during the gestation period. Subsequent to quarter end, we settle on approximately $250 million of loans with a pipeline of over $500 million. We also successfully completed our second agency eligible non [inaudible] Securitization April, with a balance of approximately $425 million. Turning to page ten.

Here we outline the loan portfolio's characteristics as of quarter end. The portfolio continues to perform well, and we anticipate being able to maintain our tight credit profile on future purchases, which will include the aforementioned pipeline. The recent market volatility has created an opportunity for us to provide liquidity on asset profiles we like while creating brand awareness at a time that other originators and capital providers have pulled back. We've already seen a pickup in activity and interest in our product offerings, as a result of Arc's commitment to its clients.

Turning to page 11. As you can see in the bottom left chart, Lock volumes increased in Q1, with much of this being on the back half of the quarter as competitors pulled back significantly. Arc is forecasting approximately $3.5 to $5 billion of non-agency originations for the year, driven by our increased brand awareness, which helped attract new brokers and correspondents for platform. MITT purchased approximately $4 million of loans this quarter from Arc, representing over 40% of our acquisitions.

Anthony will now go over financial results in more detail. Anthony.

Anthony Rossiello -- Chief Financial Officer

Thank you, Nick. And good morning, everyone. Turning to Slide 12. We provide a reconciliation of our Book Value per common share.

During the first quarter, Book Value declined by approximately 6.6%, as a result of recognizing a GAAP net loss available to common shareholders of approximately $18 million or $0.74 per fully diluted share. Overall, the net loss was driven by realized and unrealized losses on our investment portfolio, resulting from the rising interest rate environment and credit spread widening across asset classes. Aside from the price volatility on our investments, we recorded net interest income of $17 million during the first quarter, a 24% increase from the prior quarter resulting from the continued growth in our residential loan portfolio. In connection with this growth, and the current market volatility, we also increased our interest rate swap portfolio resulting in higher hedge expense.

Lastly, we recognize the high level of transaction-related expenses during Q1. Given our increased pace of securitizations previously discussed. On Slide 13, we disclosed a reconciliation of GAAP net income to core earnings, as well as provide a summary of the components making up core earnings. During the quarter, we recognized a loss in core earnings of $0.02 per share.

Overall net interest income exceeded our hedge and operating expenses by approximately $3 million. However, our investment in our home contributed a $3.6 million loss to core earnings, despite having a profitable quarter. This is because Arc Homes MSR mark to market gains, as well as gains on the sale of loans sold to MITT or excluded from core earnings. As a reminder, although the gains on the sale of loans from Arc Home to MITT are excluded from core earnings, they are recognized as unrealized gains in our income statement contributing to GAAP earnings.

On Slide 14, we provide further details related to our investment in our home. Currently, our investment approximates $54 million, which we value using a multiple of approximately one times book. During the quarter Arc Home generated after-tax net income of $7 million, driven by a mark to market gains on its MSR portfolio due to the rising rate environment, offset by reduced volumes, lower gain on sale margins, and income tax expense as our investment is held within the taxable reach subsidiary. Midst portion of the earnings generated from Arc Homes operating business was approximately $3 million.

And another point to highlight is Arc Homes MSR portfolio, which is $84 million at fair value as of March 31st, and it remains virtually unlevered. Turning to Slide 15, we provide an update on our financing profile as of March 31st. After completing three securitizations during the quarter, securitized debt makes up 56% of our total financing, up from 35% at December 31st. Expect this trend to continue increasing as we sponsored an additional deal in April and remain focused on our pace of securitization strategy.

Lastly, we currently have $1.3 billion of additional borrowing capacity on our warehouse lines, and ended the quarter with total liquidity of approximately $138 million, which was inclusive of $50 billion in cash, as well as $88 million of unlevered agency RMBS, $38 million of which was sold and settled post quarter end. This capacity and liquidity level will support the continued growth in our investment portfolio throughout 2022. This concludes our prepared remarks, and we would now like to open the call for questions. Operator?

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instruction] And from Credit Suisse, we have Doug Harter. Please go ahead.

Doug Harter -- Credit Suisse -- Analyst

Thanks. Nick, you mentioned the 14% to 25% expected early on securitizations. Can you just remind us what the prior range was, and kind of where you see returns on the loans that are on the warehouse lines.

Nick Smith -- Chief Investment Officer

Of course. So previously we'd stated 14% to 18%, which probably tracks what guys have been quoting for a pretty long period of time. On the warehouse lines, we still see quite very low double-digit [inaudible]. We have had a decent amount of benefit from negotiating better terms on those.

And as mentioned in the script, early as maturity one is in November.

Doug Harter -- Credit Suisse -- Analyst

Got it. And that return for a further securitization, is that on duly purchased loan? I mean, I guess how does this spread widening higher cost of funds impact the loans that you transition them from the warehouse to securitization today?

Nick Smith -- Chief Investment Officer

Yeah, of course. So that takes into consideration, really, so that is more forward-looking. So it's where we've been acquiring loans, call it, for the vast part of the first quarter entered into the new quarter. Now obviously, looking backward, the mark to market losses on the loans from the spread widening, that given those mark to market losses.

The subsequent [inaudible] are still post securitization in that range.

Doug Harter -- Credit Suisse -- Analyst

Got it. That makes that make sense. And then just to make sure I understand, slide 13. So our call made the $3.1 million per quarter.

Does that $3.1 include the MSR gain? So if you strip out the MSR gain, would that be kind of a small negative for the quarter?

T.J. Durkin -- President

That's correct, Doug. If you look at that slide, the $4.4 million? That being backed out is essentially the MSR mark during the quarter permitted.

Doug Harter -- Credit Suisse -- Analyst

Got it. I guess how do you think about the profitability, both on kind of a true operating basis, and then also, kind of on a core basis, as we kind of go through 22 and obviously, the world has kind of changed for originators.

T.J. Durkin -- President

Yeah. I mean, I think what we're trying to highlight on the earlier slide is we continue transition the share of origination toward agency products. So obviously, agency margins are challenging. They probably aren't going to get materially better anytime soon, and so as we invest in.

The pipeline, if you will, and getting more credit product in, we hope that will be good for the operational efficiency. I think quarter earnings, we're trying to, I would say, walk through what's a bit convoluted from an accounting perspective and try to give you the reversals, if you will, of it. But we're trying to look at it as a holistic versus maybe the traditional like core definition of Arc Homes, profitability vertically up intimate. So that's why we're trying to give a little bit more detail on what we have to back out versus what's really happening on the ground.

Doug Harter -- Credit Suisse -- Analyst

Makes sense. Thank you.

Operator

JonesTrading, we have Jason Stewart. Please go ahead.

Jason Stewart -- JonesTrading -- Analyst

Great. Good morning. Thanks. Just following on the Arc MSR, if I'm doing the math right, does that mean it was marked up at Arc about $10 million quarter to quarter?

Anthony Rossiello -- Chief Financial Officer

Yes, Jason at Arc was about 12 quarter to quarter.

Jason Stewart -- JonesTrading -- Analyst

12? OK. And can you give us the multiple on that?

Anthony Rossiello -- Chief Financial Officer

Multiples 4 9 as of March 31st.

Jason Stewart -- JonesTrading -- Analyst

OK. Great. Thank you. And then, I think someone else, if you didn't give it and I missed it, I apologize.

Do you have a book value? Quarter to date and 2Q?

Anthony Rossiello -- Chief Financial Officer

Yeah. Jason. Just since we're early in our process for April, we don't have an exact number. But given the volatility and what's going on, we think we're marginally down quarter to date.

Jason Stewart -- JonesTrading -- Analyst

OK. And then just pull it back up for a minute. I get the concept of trying to preserve liquidity. I guess two parts to that.

One is when you think about that in the volatility of spreads, were there opportunities? are there opportunities for you to be an opportunistic, I don't want to call a distressed, but buyer of assets in 1Q and 2Q based on that volatility. And then the second part is, have you adjusted sort of the way you think about liquidity and leverage going forward given that volatility?

T.J. Durkin -- President

Yeah. So we did have opportunities to acquire assets that were attractive. I still believe that given sort of the sell-off that we've gravitated toward positioning ourselves to current coupon. Our view is that, in the debt markets, there's potentiality that orphaned coupons will just be less liquid.

So we continue to look forward rather than backwards. So that's our general view there, and the nice thing is, I think we probably said three times or more in our presentation that as others pull back, that we've actually been able to drive volumes there at really what I consider near historic wides and spreads for the past decade.

Jason Stewart -- JonesTrading -- Analyst

Thanks. Nick, I wanted to pivot from the origination side to the acquisition side. Is there an opportunity to acquire pools, securities at discounts that are sort of from distressed or non-liquid sellers?

Nick Smith -- Chief Investment Officer

I think there's more rumors of distress out there than there is actual distress. Now, obviously, that can change. We have had success acquiring stuff through our both channel very recently and in the past. The expectation that should continue.

But quite honestly, probably, at a slow pace. I think sort of the event in widening has sort of already occurred and the people were going to pull back or pull back.

Jason Stewart -- JonesTrading -- Analyst

Got it. Fair enough. I'll jump out. Thanks.

Operator

From KBW, we have Bose George. Please go ahead.

Mike Smyth -- Keefe, Bruyette and Woods -- Analyst

Hi, guys. This is actually Mike Smith on for Bose. Just one on the securitization markets. Can you just provide some color on the volatility and how that's trended in April? Just wondering if most of the order inventory has cleared, and then if you see any changes to loan prices to reflect that volatility.

Nick Smith -- Chief Investment Officer

Yeah. So the low prices, earlier in the year, I think they were somewhat stubborn and then call it the back half of January or February, things sort of gapped by there, and that's when we really started to see an opportunity. So for a while, it didn't really necessarily track what was going on in the debt markets. Now, if anything, it's on sort of flip to the other side.

You can buy assets at attractive levels where you can sell debt. That being said, given the backdrop of volatility that can change quickly. We did see some relief very recently uncalled past two or three weeks in where we're selling the AG part of the stack. [Inaudible] Substantially tighter than sort of what we saw the wide's been call it anywhere from 30 to 50 basis points depending upon what part of the capital stack.

If anything, it feels like it was a little bit overdone, and if anything that was tightening where we're issuing debt, while sort of the markets, broader markets around us actually were a little bit weaker. So I think that plays into things being a little maybe, a little overdone.

Mike Smyth -- Keefe, Bruyette and Woods -- Analyst

OK. Great. That's helpful color. And just one more, can you use, is there anything strategic that you're considering? Because given the valuation of the shares.

Just wondering if you can maybe talk through how you're thinking about bridging the gap between the share price and book value.

David Roberts -- Chairman and Chief Executive Officer

Hi, it's David Roberts. We do have a share repurchase program that is outstanding. And we're always looking at opportunities to drive earnings growth, and therefore dividend growth. So it's definitely an arrow in our quiver in terms of improving shareholder value.

Mike Smyth -- Keefe, Bruyette and Woods -- Analyst

Great. Thanks for taking the questions.

Operator

And we have no further questions at this time.

Jenny Neslin -- General Counsel and Secretary

Thank you, everyone, for joining us, and for your questions. We appreciate it and look forward to speaking with you again next quarter. Thank you. Have a great weekend.

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Jenny Neslin -- General Counsel and Secretary

David Roberts -- Chairman and Chief Executive Officer

T.J. Durkin -- President

Nick Smith -- Chief Investment Officer

Anthony Rossiello -- Chief Financial Officer

Doug Harter -- Credit Suisse -- Analyst

Jason Stewart -- JonesTrading -- Analyst

Mike Smyth -- Keefe, Bruyette and Woods -- Analyst

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