TPG Mortgage Investment Trust - Q1 2024

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the AG Mortgage Investment Trust First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's remarks, there will be a question-and-answer session. In order to ask a question, please press the Star key, followed by the number one on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press Star zero. I'd now like to turn the call over to Jenny Neslin, General Counsel for the company. Please go ahead.

Jenny Neslin (General Counsel)

Thank you. Good morning, everyone, and welcome to the first 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 Russiello, 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, 2023, 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 Q1 2024 earnings presentation on the homepage. Again, welcome to the call, and thank you all for joining us today. With that, I'd like to turn the call over to T.J.

T.J. Durkin (CEO and President)

Thank you, Jenny. Good morning, everyone. Last quarter, we were able to walk you through the merits of the WMC transaction, but with only less than a month of true financial impact. I'm excited to report our first full quarter post-merger, which we believe gives a clear picture of the compelling benefits.

Walking through MIT's financial position as of March 31st, we grew adjusted book value from $10.20 to $10.58 while paying our $0.18 dividend, producing a 5.5% economic return on equity for the quarter. While still preliminary, we see estimated book values for months, for the end of month April to be roughly flat from quarter end.

The company now has an equity base of $540 million and $140 million of liquidity, with only 1.4 turns of economic leverage to end the quarter. With market expectations for rate cuts in the near term tempered, our first quarter results demonstrate our ability to grow earnings power in this higher for longer interest rate environment while protecting book value.

During the quarter, we earned $18.2 million of net interest income, $0.55 of earnings per share, and $0.21 of EAD per share, covering our dividend onward by $0.03. Since closing the WMC transaction on December sixth and through quarter end, approximately $50 million of assets have already been monetized to be rotated into our core strategy of newly originated residential mortgage loans.

In terms of capital markets activity, we completed one GSE-eligible securitization and more notably, issued approximately $35 million of investment-grade unsecured bonds, addressing a sizable portion of the legacy WMC convertible notes, which are due this coming September. And like I said last quarter, the team and I are very excited to be able to finally discuss with the market the successful acquisition of WMC this past December and the future prospects for MIT going forward.

We believe the WMC acquisition was another substantial step in further positioning MIT as a premier pure-play residential mortgage REIT. And we have confidence in our ability to continue to deliver on strong earnings off the investment portfolio while seeking ways to continue enhancing scale and G&A efficiencies.

Demonstrating my confidence, I was pleased to personally purchase another 50,000 shares in MITT following last quarter's earnings release, strengthening alignment of interests with our shareholders as we continue to execute on our mission. I'll now turn the call over to Nick.

Nick Smith (Chief Investment Officer)

Thanks, T.J. In the first quarter, the company grew the investment portfolio by 4.8%, delivered an economic return of 5.5%, and reduced economic leverage. The 3.7% book value increase was driven by continued flattening of the credit curve, underpinned by strong performance in risk assets, continued strength in housing fundamentals, and limited supply of residential credit.

The company securitized $377 million of residential home loans, acquired another $285 million of home loans, and built a current pipeline of additional $284 million from Arc Home and other third-party originators. In addition to the activity in loans, we properly rotated additional assets acquired from WMC, bringing the aggregate equity return to approximately $36 million. We anticipate being in the market with our second securitization of this year in the coming weeks.

While credit spreads have tightened into the end of last year and throughout this past quarter, equity returns in the mid- to high teens post-securitization remain.... While the origination landscape continues to be challenging, Arc Home's Q1 lock volumes were $687 million, with continued strength in April of approximately $300 million.

Notably, funding volumes increased over 40% from the first quarter of the previous year. While this increase is over two and a half times the industry- the increase in origination seen for the industry over the same period, we expect these increases to keep pace or increase over the next year as we continue growing our footprint in both wholesale and correspondent channels. Now I'd like to turn the call over to Anthony.

Anthony Russiello (CFO)

Thank you, Nick, and good morning. In December, we closed the WMC acquisition, helping to grow MIT's investment portfolio and equity base while improving scale for the company. Further, MIT immediately began to benefit from the substantial synergies we previously highlighted in our announcement of the transaction, which is evident through our performance this quarter.

During the quarter, we recorded GAAP net income available to common shareholders of $16.3 million, or $0.55 per share. Our book value of $10.84 per share, and adjusted book value of $10.58 per share, increased by approximately 3.7% from December. The book value increase was driven by mark-to-market gains on our investment portfolio from credit spread tightening, gains on our hedge portfolio from rising rates, and improvement in our earnings available for distribution, or EAD.

Arc Home had a neutral impact on book value this quarter, as mark-to-market gains on its MSR portfolio, driven by rising interest rates, offset losses from EAD. We generated EAD of $0.21 per share for the first quarter. Net interest income, inclusive of interest earned on our hedge portfolio, was $0.69 per share, which exceeded our operating expenses and preferred dividends of $0.44, generating earnings of $0.25 per share.

This was offset by a loss of $0.04 contributed from Arc Home. During the quarter, net interest income, including swaps, increased by $4.1 million, resulting from a full quarter of earnings from the acquired WMC portfolio, while operating expenses only increased by $1.4 million. As discussed on our previous earnings call, we estimated that approximately $5 million-$7 million of operating expenses would be removed on an annual basis upon combining MIT and WMC.

These synergies are now being realized, with annual operating expense savings trending toward the higher end of our estimated range. Lastly, we ended the quarter with total liquidity of approximately $140 million. This concludes our prepared remarks, and we'd now like to open the call for questions. Operator?

Operator (participant)

Thank you. If you would like to ask a question at this time, please press star one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, if you would like to ask a question, please press star one. Our first question comes from Doug Harter with UBS. Please go ahead.

Doug Harter (Equity Research Analyst)

Thank you. Good morning. Hoping you could talk about your outlook for incremental new investments. You know, how we should think about the pacing of that and, you know, kind of your plans to fund that, either through recycling of capital, or do you have any plans to, kind of, raise new capital?

Nick Smith (Chief Investment Officer)

Thanks, Doug. This is Nick. So we, for the most part, can recycle capital that we have, particularly given the flattening of the credit curve that we mentioned. I think that builds an opportunity to, you know, sell down positions that have done well and reinvest. Pace-wise, you know, there's still plenty of opportunity in the market. I mentioned, you know, growth in the broker channels at Arc Home and, you know, certainly the sort of availability of credits in the market and where you can buy them will not be the constraint.

Doug Harter (Equity Research Analyst)

Great. And you know, I guess, how are you thinking about what is the return differential between, you know, call it the legacy WMC assets that you have on. You know, that you're selling, and where you think you can put that money to work today in Arc Home production?

Nick Smith (Chief Investment Officer)

Yeah. So a lot of that paper has seasoned out and as the credit curve flattened, you know, we're talking some of the paper we were selling was, you know, high 100s, low 200 type spread. I think we can, you know, double those sort of spreads or more via recycling, and then obviously with the modest deployment of back-ended leverage, you'll get you to the mid- to high-teens returns.

Doug Harter (Equity Research Analyst)

Great. Thank you, Nick.

Operator (participant)

Thank you. Our next question will come from Jason Weaver with JonesTrading. Please go ahead.

Jason Weaver (Managing Director of Equity Research)

Hi, good morning. I was wondering, can you talk a bit about where you see the origination capacity that is, you know, personnel-wise at Arc Home, looking out further into the year? Are you preparing for, you know, more volume if we do see a decline in rates in the back half?

Nick Smith (Chief Investment Officer)

I, I think Arc Home is well positioned for the current environment. When we think about rallies and rates, you know, we think a lot more about seasonality than what a 100 basis point, 200 basis point rally in rates will do to volumes. and sort of given that outlook, we think, you know, the staffing's well positioned. And we've put a lot of work into making the company more and more efficient. So that, you know, if we see increases, that those can be, you know, readily handled.

Jason Weaver (Managing Director of Equity Research)

Thank you. And then, more of a clarification. Just given the volatility we saw starting in April, would you say that the bid for securitization really hasn't been materially affected?

Nick Smith (Chief Investment Officer)

Yeah, I don't think it's been materially affected. In fact, if you look at a lot of the inflows across bond funds, you know, those supply-demand technicals are well supported for continued issuance. You know, there still tends to be less supply than demand.

Jason Weaver (Managing Director of Equity Research)

Great. Thank you very much.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, please press star one at this time. We'll take our next question from Bose George with KBW. Please go ahead.

Bose George (Managing Director)

Hey, guys. Good morning. Can you talk about the sustainability of the current level of the EAD you reported this quarter? And then just on a related note, I guess you had a little over $100 million of cash. Can you remind us how much of that is, you know, cash you want to keep, and how much of that we think of as kind of deployable?

T.J. Durkin (CEO and President)

Thanks, Bose. So in terms of the cash question, I mean, we've got, you know, $140 million listed on page five. I think when we think about where we've been running, leverage over the, you know, recent quarters or so, I think we have an ability to probably deploy, you know, $40 million-$50 million of that. We obviously have the maturity coming up in September on the convertible note.

It's payable starting in June, so we're obviously managing cash into that maturity. In terms of EAD, I think the way we think about things is if you were to go back to when rates really started moving in 2022, I think we've done a really good job of protecting book value on the investment portfolio.

The ROEs that we've been putting up there, I think, have been able to capture these higher rates. So I think that's sort of a tailwind. I think our headwind has been twofold. One has been just the kind of core earnings at Arc Home contributing and offsetting the kind of higher ROEs we're producing on the investment side, and then obviously just scale on G&A. So I think as we look forward now with one quarter behind us, I think you're clearly seeing the G&A synergies, which Anthony mentioned, and we'll have to go into more detail there in terms of how that's penciling out.

And then I think, you know, we show on page nine, Bose, I think, you know, the Arc Home sort of negative contribution EAD has gradually been kind of working towards breakeven, and obviously with the goal of towards the back half of this year, kind of crossing into a positive. So I think when you put all that together, I think we feel pretty good about sort of EAD in this higher range on a more sustainable basis. We don't view this as one-time.

Bose George (Managing Director)

No. Okay, great. Thanks. And then actually just on acquisitions, obviously, I mean, this was a, we see it as a very positive transaction. You know, how do you sort of think about potential, you know, future transactions? Obviously, where you're trading makes it somewhat challenging, but, you know, like, how much sort of energy is focused on that as a, as a potential?

T.J. Durkin (CEO and President)

Yeah, listen, I think, I think we're, we're still very open to other acquisitions, other ways to, I would say, enhance the scale of the company. I think the manager has shown to be very supportive in continuing to grow MIT. So, we're, we're definitely open for business and, and, and, you know, fielding calls about opportunities. And, we don't view WMC as sort of one and done. I think it was a, a building block for hopefully future growth.

Bose George (Managing Director)

Okay, great. Thanks.

Operator (participant)

Thank you. Our next question comes from Eric Hagen with BTIG. Please go ahead.

Eric Hagen (Managing Director)

Hi, thanks. Good morning. Hey, any perspectives on the support for agency and non-agency MBS spreads following the Fed meeting this week? Any catalysts you see for MBS spreads to tighten from here? What do you guys feel like is like the upper bound for MBS spreads, just, you know, given some of the, some of the news that we've received recently? Thank you.

T.J. Durkin (CEO and President)

Look, we pay close attention to the agency basis and non-agency basis. Obviously, we're not in the agency markets as sort of the core business. That being said, you know, we look at agencies as being, you know, generally fairly valued in here. You know, if vol comes off, agency spreads should do better. But I do think that our book is largely insulated from what goes on in that market. I think you can look at even this past quarter's performance, and you can see that sort of credit, you know, outperformed a lot of the, you know, parts of the capital stack that are more impacted by, you know, IG spreads and interest rate volatility.

Eric Hagen (Managing Director)

Okay. That's helpful. Hey, you know, lots of capabilities around distressed credit at Angelo, Gordon and TPG. I mean, are there any opportunities you guys are seeing out there yet that could, you know, speak, speak to that opportunity?

T.J. Durkin (CEO and President)

I mean, certainly not in any sort of scale on the residential side at this point. I mean, I think there's way more opportunity sort of focusing on new origination. Probably don't see that changing, honestly, in the short to medium term either.

Eric Hagen (Managing Director)

Okay. All right. Thank you, guys.

Operator (participant)

Thank you. At this time, we have no further questions in queue. This will conclude today's AG Mortgage Investment Trust first quarter 2024 earnings conference call. You may disconnect your line at this time, and have a wonderful day.