TPG Mortgage Investment Trust, Inc. (MITT) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the AG Mortgage Investment Trust, Inc. Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to turn the call over to Jenny Neslin, General Counsel for the company. Please go ahead.

Thank you. Good morning, everyone, and welcome to the Second 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 could 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 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 events -- 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 Q2 2024 earnings presentation on the home page. Again, welcome to the call, and thank you for joining us today. With that, I'd like to turn the call over to T.J.

Thank you, Jenny. I'm excited to report our second quarter financials, which show our continued execution of our core business strategy and the compelling benefits of our recent merger. Walking through MITT's financial position as of June 30, we saw adjusted book value move modestly lower from $10.58 to $10.37, producing a roughly breakeven economic return on equity for the quarter. With it being too early to give an estimate of July's book value. More notably, on June 13, the Board voted unanimously to increase our dividend 5.6% to $0.19 per share. During the quarter, we earned $17.4 million of net interest income, negative $0.02 of earnings per share and $0.21 of EAD per share, covering our newly set dividend previously declared by $0.02. One of the key areas of focus for us coming out of the WMC acquisition was efficiently addressing the impending maturity of their $86 million convertible notes due on September 15, 2024. We were happy to report during the quarter, we successfully issued another $65 million of investment-grade senior unsecured notes to more than cover the upcoming maturity when considering our $34.5 million issuance from Q1 of this year. Effectively replacing the convertible debt with the senior unsecured notes, positions met with a materially more advantageous corporate debt structure going forward. As a result of these bond issuances and to avoid holding excess cash, we have invested a portion of these proceeds into Agency RMBS using only modest leverage in order to generate strong short-term risk-adjusted returns. As a result, the company ended the quarter with $180 million of liquidity and moderately higher than normal leverage of 2.5 turns. We would anticipate post repayment of the convertible notes at maturity in September, we will return to more historical levels of leverage at the company level. In closing the WMC acquisition on December 6 of last year through quarter end, approximately $57 million of assets have already been monetized, returning $41 million of equity to be rotated into our core strategy of newly originated residential mortgage loans. One significant result of the merger is our inclusion into the Russell 2000 (sic) [ Russell 3000 ] as of June 28. We believe this is a critical step in both broadening our investor base and improving investor liquidity. Like I stated last quarter, the team and I are very excited to show the market the benefits we see in the power of the combined company. I'll now turn the call over to Nick.

Thanks, T.J. This quarter, we saw the continuation of various themes we've pointed out over recent quarters. Elevated levels of interest rate volatility, continued outperformance of housing, a resilient residential mortgage borrower and modestly tighter residential credit spreads with outperformance in the lower-rated parts of the capital stack. The delinquency rate of our loan portfolio remains low at approximately 1% with a modest improvement quarter-over-quarter and an increase of only 10 basis points since the end of last year. The team executed 2 securitizations during the quarter. The second transaction of the quarter was an inaugural private label securitization backed by Fannie and Freddie eligible investor loans from one of the nation's largest mortgage originators where we acted as the co-sponsor. Through the next quarter and throughout the rest of the year, we expect to remain active and issue at a similar pace as the past 2 quarters. Moving on to Arc Home. We are excited to announce that Arc Home opportunistically agreed to sell its MSR portfolio at the end of April. Most of this year's peak in interest rates, we settled subsequent to quarter end. This sale generates ample liquidity for continued growth in Arc Home's core business, along with capital that we expect to be deployed in compelling new opportunities developing in the residential mortgage origination market. As you can see on Page 9, volumes grew considerably quarter-over-quarter, adding to the scale needed to be profitable. Additionally, Arc Home has seen modest increases in margins and is optimistic that these games are not only durable, that likely have room to improve as additional liquidity for non-EMC residential mortgage loans enters the market has recently become a well-publicized pocket of capital. Now I'd like to turn the call over to Anthony.

Thank you, Nick, and good morning. It continued its positive momentum in the second quarter, growing its investment portfolio, increasing in securitization activity and positioning ourselves to address the upcoming convertible note maturity, while generating strong earnings available for distribution and increasing the common dividend. During the quarter, our book value of $10.63 per share and our adjusted book value of $10.37 per share, decreased by approximately 2% from March. When considering the $0.19 common dividend, our economic return was roughly breakeven. We recorded a GAAP net loss available to common shareholders of approximately $700,000 or $0.02 per share. The modest book value decline was driven by unrealized mark-to-market losses on our investment portfolio, partially offset by EAD exceeding our quarterly dividend and gains on our investment in Arc Home. We generated EAD of $0.21 per share for the second quarter. Net interest income, inclusive of interest earned on our hedge portfolio was $0.67 per share, which exceeded our operating expenses and preferred dividends of $0.43, generating earnings of $0.24 per share. This was offset by a loss of $0.03 contributed from Arc Home, which continued to improve quarter-over-quarter. Our investment portfolio increased by approximately 11% to $6.9 billion through acquiring $423 million of residential mortgage loans and $428 million of Agency RMBS. As mentioned earlier, we were active in the securitization markets, managing our exposure to mark-to-market finance. We ended the quarter with $300 million of loans financed on warehouse lines, of which $87 million were sold in July, further reducing our risk profile and returning capital for reinvestment. Our economic leverage ratio at quarter end was 2.5 turns, with approximately one turn relating to the Agency RMBS portfolio, which we anticipate will be removed in connection with the funding of the convertible note maturity in September. Lastly, we ended the quarter with total liquidity of approximately $180 million, consisting of $120 million of cash and $59 million of unencumbered Agency RMBS. This concludes our prepared remarks, and we now like to open the call for questions. Operator?

[Operator Instructions] Our first question will come from Doug Harter with UBS.

Can you talk about the time frame you'd think it will take to kind of rotate out of Agency MBS into your core assets and what you think of kind of the return differential as you make that rotation?

Yes, look, I think about it kind of some sequencing. So I think we want to address the convertible note in September with obviously the liquidity that we have on the balance sheet today and then I think rotating that kind of excess liquidity, will probably take more than 2 -- probably 2 to 3 quarters kind of post that. We're not using -- if you look at sort of the agency rates, we're using probably about half the leverage there. So it's an interim kind of stop gap to earn some carry. So I think the ROEs are not applicable here. I think we're targeting on the new origination side, I would call it mid, high teens gross ROEs as part of the plan going forward. And that's where we see the market.

And I guess just with, I mean, you are taking lower leverage. Just how should we think about the book value risk that you're taking kind of on the agencies, given kind of the large moves in interest rates, especially on days like today?

Yes. I mean I think like I said, we probably got -- I mean we're running from a duration perspective, I think, a consistent strategy just less leverage in terms of our hedge ratios, et cetera. So it should be muted versus a fully levered agency REIT.

Makes sense. And then just on the Arc-MSR sale, that extra capital that kind of gets freed up. Does that stay within Arc? Or does some of that get distributed up to net?

Good morning Doug, it's Nick. So our management team, along with our Arc Home management team has evaluated the appropriate capitalization of the company. And at the moment, we expect there to be a likely return of capital.

Our next question will come from Bose George with KBW.

I actually wanted to ask first just about the trend in EAD. With the liquidity you'll be holding in the third quarter, I mean, could we see a little downward pressure there? Or should it continue to trend up as you're deploying capital?

Yes. I mean, I guess, I think you're thinking about it right, this is interim quarter, if you will, to kind of get through that September maturity. But I mean we're certainly working towards avoiding cash drag and creating some ROE in the interim. But I would think of it kind of on a prospective basis, it will look like a more normalized portfolio. I understand the logic of your question.

No, that makes sense. And then can you just give us an update on book value quarter to date, I guess, before the noise of today, but yes, earlier this week?

We haven't produced a [indiscernible] book value yet. It's too early.

Our next question will come from Trevor Cranston with Citizens JMP.

I guess first question, obviously, the securitization activity this quarter was focused on the agency eligible market. Can you give a little bit of color in general on what you guys are seeing in the loan markets and kind of where you're seeing the best opportunities for securitization today?

Yes, certainly. So obviously, as a non-agency focused REIT, we focus on sort of the wider array rather than just one sort of non-agency asset. In the non-QM space, we continue to see the lowest cost of capital being no longer levered credit buyers. Obviously, that could change. But at the moment, we believe it's prudent the best Arc Home's origination to those sort of buyers and deploy mid-capital and higher returning opportunities. Some of those opportunities actually are, I think, somewhat counterintuitively, the agency eligible positions we've added well actually price another one of those transactions later this morning, along with other sort of co-issue opportunities I mentioned in the script in that space. We're also paying close attention to home equity space and expect to be acted there.

That's helpful. I appreciate that you don't have a book value update for July. But I guess when you look at the portfolio as of June 30, can you talk about kind of what you think the overall net duration positioning of the [indiscernible]?

I don't think we have anything sort of published ever.

Our next question will come from Brad Capuzzi with Piper Sandler.

I appreciate all the commentary. Can you just talk about the bid for securitizations you're seeing? I know you mentioned on the last call, there still tends to be less supply than demand. If you can just shed any color on what you're seeing, that would be helpful.

Yes. It's sort of sector by sector. I think I spoke a little bit earlier answering Trevor's question in sort of non-QM space, if anything, as more loans get sold to real money, there's been less supply in that space. So that debt has done better relative to maybe some of the other sectors. The prime jumbo market as of late has been under pressure. There is no release valve, if you will, to nonsecuritization outlets today, which is widened out that space as there's just been an increase of issuance. But in general, the market has been healthy across residential credit up and down the stack. So any widening in the previously mentioned assets that have been truly marginal from a historical standpoint. And if anything, in the non-QM space, we're sitting at local types.

I appreciate the color there. And then give a view on where you see volumes trending for Arc Home as we exit 2024 and into 2025 after posting a strong quarter in 2Q, and what type of rate scenario would you need to see play out before we see a more normalized origination environment there?

Yes. We've said previously that -- and obviously, you can look at the MBA forecast, I don't think we're going to deviate a ton from sort of MBA forecast, a lot of our gains have just been from being more competitive and more efficient, rather than sort of market conditions. So I also think there's going to be a lot of seasonality to these businesses, as you would expect, given as much of how much purchase money Arc Home is relying upon. But I think the trends you've seen should be similar. And if you were to seasonally adjust sort of where we are today, I think that's what you would expect. So look, we're still in growth mode. We're still trying to be bigger, better, more efficient. So trajectory is still up, but condition of that, that will be highly seasonal.

Our next question will come from Eric Hagen with BTIG.

This is Jake Katsikas for Eric Hagen. First one, just going back to leverage in the Agency MBS portfolio. I know you talked about it a little, but just hearing some things that would maybe lead you guys to raise leverage in the portfolio? And if you guys kind of have a target range for it? Just some color there would be helpful.

Yes. I think if we fast forward through next quarter, we would kind of expect to be materially smaller in the agencies and kind of returning to the one hand of economic leverage that we've been running the company at over the past 4, 6 quarters. So this is just an interim stop gap to earn some carry on the cash proceeds we raised from the bond offering.

And then my other one, turning to the non-QM portfolio, do you guys have a sense or estimate for how much prepayment speeds could accelerate? And if they were to increase, how that would translate to earnings or spreads in the portfolio?

Yes. So the vast majority of the loan book, and you can see this in our presentation is far out of the money, like our securitized coupon, if you look at it as 5%, 4%, which if you think about even where conforming rates are, it's way out of the money. Obviously, we're very focused on prepayment speeds and inverted curve and sort of the efficiencies entering the market. But this book of business is fairly well protected from any convexity event or expected convexity event.

Thank you. At this time, I'm showing no further questions in queue. I'll turn the call back to management for any additional or closing remarks.

Well, thank you to everyone for joining us and for your questions. We greatly appreciate it and look forward to speaking with you again next quarter.

Thank you. This does conclude the AG Mortgage Investment Trust, Inc. Second Quarter 2024 Earnings Conference Call. You may disconnect your line at this time, and have a wonderful day.