AG Mortgage Investment Trust - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered mixed results: EAD per diluted share was $0.18, below consensus $0.23, while GAAP EPS was $(0.05) on a modest 2.4% book value decline to $10.39; the common dividend was raised 5% to $0.21.
• The company expanded its vertically integrated model by acquiring an additional 21.4% stake in Arc Home, taking ownership to 66.0%; management expects the transaction to be accretive to EAD in 2026 with ~2% book value dilution.
• Financing remained conservative: Economic Leverage Ratio fell to 1.3x (from 1.6x in Q1) with $89.7mm liquidity and largely term, non-mark-to-market securitized debt, helping absorb April spread volatility.
• Near-term stock catalysts: dividend increase, Arc Home consolidation/accretion trajectory, continued programmatic securitization and home equity loan investment pipeline ($1.2bn UPB).

What Went Well and What Went Wrong

What Went Well

• Dividend increase underscores confidence in earnings power: common dividend raised 5% to $0.21 per share in Q2 2025.
• Strategic consolidation: ownership in Arc Home increased to 66.0%; management highlights enhanced collateral sourcing and accretion to EAD in 2026 with minimal (~2%) book value dilution.
• Execution in securitizations and loan purchases: $331.4mm UPB of agency-eligible loans securitized in Q2; $301.3mm UPB of home equity loans securitized in July; Q2 loan purchases of $444.9mm fair value; investment pipeline of $1.2bn UPB.

What Went Wrong

• Earnings vs estimates: EAD per diluted share of $0.18 missed Wall Street consensus ($0.23); revenue ($15.0mm) missed consensus ($21.0mm) amid April spread volatility and legacy commercial headwinds.
• Book value compression: book value per share declined 2.4% QoQ to $10.39, yielding a quarterly economic ROE of (0.5)%.
• Legacy WMC commercial loans continued to suppress EAD; hotel loans matured in May and remain on non-accrual, with resolution targeted by year-end.

Transcript

Speaker 8

Today, and thank you for standing by. Welcome to the AG Mortgage Investment Trust, Inc. Second Quarter 2025 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 during this session, please press the star key followed by the number one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star, then zero. I'd now like to turn the call over to Jenny Neslin, General Counsel for the company. Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and welcome to the Second Quarter 2025 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 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, 2024, and our subsequent reports 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 this live presentation, turn to our website www.agmit.com and click on the link for the Q2 2025 earnings presentation on the homepage. 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.

Speaker 6

Thank you, Jenny. Good morning, everyone. I'm pleased to report our second quarter earnings, which showcases the continued execution of our core business strategy and industry-leading results, particularly around book value stability. During the second quarter, we increased our common dividend by 5% or $0.01 per share. Focusing on the second quarter, Liberation Week in April created volatility in the broader markets we hadn't seen in some time. The merits of our core strategy and discipline around terming out warehouses with securitization showed in the continued strength of our capital structure. We entered the tightened period of vol with materially less financial leverage and smarter leverage, like our non-mark-to-market whole-owned warehouses. This setup means we are not as vulnerable to forced delevering or panic delta hedging.

As a result, we saw a modest book value decline of 2.4%, moving from $10.65 to $10.39, while supporting and paying our increased $0.21 dividend. Therefore, producing a roughly break-even quarterly economic return on equity for our shareholders in a very difficult quarter for the agency mortgage REIT space. We hope our shareholders can appreciate the results of Nick's differentiated business strategy and discipline around risk coming out of such a challenging quarter. For the second quarter, we experienced what we expect to be a one-time drop in EAD, mostly related to three of our remaining CRE loans to one borrower from the WMC acquisition hitting their maturity date, and therefore, we're taking off accrual as we work towards the ultimate resolution, which we believe should be by year-end.

On a more positive and longer-term note, subsequent to quarter-end, Nick refinanced the expensive structured repo we inherited from the WMC acquisition into current market terms, which will have a significant lift to go forward EAD, which Nick will give more details on later. In addition to our normal activity during the quarter, we are excited to announce a strategic transaction for the company. This morning, Nick acquired an additional 21.4% of our common from original seed investors in private funds managed by TPG Angelo. A total of 2 million MITT shares were issued for consideration for their interests, creating minimal dilution of 2% to June 30 book value, while creating meaningful earnings accretion potential. The sellers are funds that are generally in the later or liquidating stage of their life cycle.

We're obligated to register the shares pursuant to a registration rights agreement, which can take a bit of time, and there are various restrictions in that agreement governing timing of sales. Based on that, we don't expect the sellers to be able to sell meaningfully before year-end. When we embarked upon MITT 2.0 in 2021, we set out to be a best-in-class, vertically integrated residential mortgage origination and securitization platform. We believe this is a logical next step for our company's business strategy. The transaction will bring many benefits to AG Mortgage Investment Trust, Inc., with meaningful earnings accretion expected in 2026, driven by anticipated growth in the mortgage market and ARC Home's proven capability to be a leader in the non-agency-owned space. There's also a positive step forward in scaling the company and enhancing our cap table.

As we've said on prior calls, we will continue to seek and pursue opportunities that further this goal, only where we believe the results are to enhance value for shareholders. Both Nick Smith and Anthony Rossiello will go into more detail on the transaction later in the call. I'll now hand it over to Nick Smith.

Speaker 0

Thank you and good morning. During the quarter, Nick Smith completed two securitizations. Gains from these transactions partially offset mark-to-market losses driven by broad risk asset weakness following Liberation Day in early April. The first was Nick Smith's second agency-eligible investor securitization of the year, while the second was a joint venture with a leading HELOC originator. In addition to its securitization activity, Nick Smith closed two residential mortgage warehouse facilities. These facilities are designed to reduce mark-to-market risk during the gestation period and enhance cash management, which is expected to modestly improve EAD. After the quarter ended, the company refinanced high-cost, inefficient debt backed by retained interest in WMC-issued non-agency securitizations. The refinancing reduced the cost of capital by over 500 basis points and generated approximately $40 million in additional cash for redeployment.

These proceeds have been redeployed through the home equity securitization partnership with a leading non-bank mortgage originator we first introduced in the first quarter. In addition, the company has a strong pipeline of residential mortgage loan acquisitions and anticipates issuing two more securitizations in the third quarter. As T.J. Durkin mentioned, Nick Smith increased its ownership of our ARC Home. In the first quarter's prepared remarks, we reiterated our commitment to this business and outlined how strategic investments in it were beginning to pay off. We saw a continuation of these trends throughout this quarter, which were offset by pipeline losses attributable to Liberation Day. The quick reversal in markets positioned ARC Home to recover most of these pipeline losses and provides insight into more normalized profitability.

As ARC Home continues to execute on its plan to contribute to Nick Smith's earnings available for distribution should increase, and with greater ownership share, this is expected to be an important driver of earnings. We are confident that ARC Home can continue to gain share in a growing and increasingly attractive corner of the mortgage market. I'll now turn the call over to Anthony Rossiello.

Speaker 5

Thank you, Nick. Good morning, everyone. Despite April's volatility, we ended the quarter with a book value of $10.39 per share, representing a modest 2.4% decline from prior quarter. We also increased our quarterly dividend by 5% to $0.21 per share. Including this dividend, our economic return was essentially flat at negative 0.5%, highlighting our ability to maintain shareholder value in a challenging quarter. We reported a GAAP net loss available to common shareholders of $1.4 million or $0.05 per share. We continued to see steady growth in net interest income from our residential investments as we deployed additional capital into core strategies. However, net interest income was down $1.1 million or 6% from prior quarter due to certain commercial loans that matured in May and were placed on non-accrual.

Our portfolio also recognized net unrealized losses on securitized loans from April's spread widening, although these were partly offset by unrealized gains recognized on our portfolio in May and June. Additionally, it's important to note that about 1% of book value decline was due to upfront transaction expenses related to a home equity loan securitization completed in early July. During the quarter, we recognized EAD of $0.18 per share. Net interest income, inclusive of our hedge portfolio, was $0.64, exceeding operating expenses and preferred dividends of $0.46. The slight decline in EAD from prior quarter was largely due to placing commercial loans on non-accrual. However, we expect this to be temporary as we work towards recovering and redeploying this capital into target assets during the second half of the year.

EAD also benefited from a slight decline in operating expenses, and ARC Home's contribution to EAD remained break-even, consistent with prior quarter. Our investment portfolio grew 2.3% in the quarter to $7.3 billion, with additional activity continuing into July. We maintained a low economic leverage ratio, ending the quarter at 1.3 turns. During the quarter, we purchased and securitized $341 million of agency-eligible loans and purchased $104 million of home equity loans, securitizing substantially all of our home equity loans in early July. These deals not only reduced our warehouse risk but also positioned us well for future growth. In July, we also replaced high-cost debt financing securitized loans acquired from WMC, significantly reducing our cost and freeing up $39 million of capital that was immediately reinvested to strengthen our earnings profile.

With these proceeds, we sponsored a securitization backed by $647 million of closed-end second loans and continued to expand our home equity portfolio. As previously mentioned, today we acquired an additional 21.4% interest in ARC Home, taking our ownership to 66%. This represents an incremental investment of $16 million purchased through the issuance of approximately 2 million common shares. The dilution impact on book value from this acquisition is minimal, and we expect the transaction to be accretive for our shareholders in 2026 as ARC Home continues to execute on its strategic growth initiatives. Our increased ownership interest will continue to be reported as an equity method investment at fair value on our balance sheet, which was valued at one times book as of June 30. This concludes our prepared remarks, and we'd now like to open the call for questions. Operator?

Speaker 8

Yes, thank you. As a reminder again, if you would like to ask a question, it is the star and one on your touch-tone telephone. If at any point you find your question has been answered, you may remove yourself from the queue by pressing star two. We'll take our first question from the line of Crispin Love with Piper Sandler. Please go ahead.

Thank you. Good morning. Congrats on the additional ARC Home ownership. Just on ARC Home, can you talk a little bit about long-term plans there? Is it over time owning the whole company? Who owns the remaining portion today? Can you just dig into a little bit of the accretion potential and earnings as you look over the near and long term? Thank you.

Good morning, Crispin. I think to answer your first question, other funds managed by TPG AG own the balance. At this point, there's no other transactions pending or in the pipeline, and they'll remain co-owners with Nick. I think, as Nick mentioned, we're seeing we've been investing in ARC Home both in people and process, and we're seeing the results. You see it in the volume growth. Assuming that trajectory holds, we're going from, call it, break-even at ARC Home to a more profitable company, and we're largely hitting those goals. That's what we see as the positive earnings contribution going forward in late 2025 and really in earnest in 2026. Strategic long-term hold, and we think just executing the business plan, not having to do anything additional, will be positive to EAD in 2026.

Great. That makes sense. The second question for me on securitization demand from investors, definitely a volatile second quarter, April, specifically around Liberation Day. Curious on recent demand, appetite for securitizations, and just recent spread trends.

Speaker 0

Look, this is Nick. As the sector has grown, we've seen more and more stability in the issuance of the GAAP. Had you rewound the clock not too far back, it would have been more volatile. Post-Liberation Day, the markets returned very, very quickly. Folks, including ourselves, issued, and it was well received, and spreads have behaved very well and in line with a lot of other asset classes or better.

Great. Thank you. I appreciate taking my questions.

Speaker 8

Thank you. We'll go next to the line of Doug Harter with UBS. Please go ahead.

Thanks. Can you just talk about the one-times book that you were able to acquire your additional stake? It seems like there were some other transactions that went for significant premiums in the market. Just how you got to that price, how you were arriving at the current carrying value?

I think, in terms of the transaction, the MITT board engaged KBW for a fairness opinion, and the board, including all the independent directors, approved that. We went to a true third party. I think all these originators are at different scale and profitability, which I think also factors into maybe what you've seen in some of the other recent transactions.

Great. I guess now, as you have a larger ownership stake, do you envision that changing any of the hold strategy for any of the originations? As you ramp up non-QM, would you plan on holding any of that, or do you still want to sell it? Any change in that strategy?

I think from an operating perspective, the management team at ARC Home is sort of business as usual and continuing. There's no change in the strategy or at that level.

Great. Lastly, can you give us some more detail on those commercial loans? What changed that led them to be put on non-accrual? You helped talk through your comfort in being able to recognize the capital that is in those loans and a timeframe for when you would expect to receive that?

Yeah, of course. I think, you know, as I'm sure you're following, lots of the commercial REITs, like the maturity dates are flexible, to say the least. This borrower on those three properties, one borrower for the hospitality loans, is working through an asset disposition plan. We're in constant contact and, you know, working towards a productive solution there.

Got it. Since they're working on that plan, I guess you feel comfortable that that plan should cover your current carrying basis for those loans?

Yeah, based on the information we have today, yes.

Okay. Appreciate it. Thank you.

Thank you. We'll go next to the line of Jason Weaver with Jones Trading. Please go ahead.

Hi guys, good morning. First of all, can you comment on your comfort level with the $89 million of liquidity here and what sort of approach you're likely to take to adjust that? I know you have some things coming up in Q3, with the deferral on the WMC and not having that capital come back in right away before year-end.

Speaker 0

Yeah, we're comfortable with the current cash positioning. We've enhanced some of the ways that we finance the balance sheet, as alluded to in the prepared remarks, and think that this is a level that is likely to be a range it will be in and maybe even slightly lower in the future.

Got it. Nick had mentioned something about refinancing the repo in the legacy WMC. Can you comment on the economics there?

Yeah, look, as mentioned in the prepared remarks, we had $49 million of cash come back as additional proceeds through that refinancing, and we lowered the costs considerably and have already redeployed that capital in the third quarter.

Got it. Thanks for the color.

Speaker 8

Thank you. We'll go next to the line of Mikhail Silverman with Citizens JMP. Please go ahead.

Hey, good morning, gentlemen. Thank you for taking the questions. If I may just ask about a sort of a big-picture view on the housing market, what is your view on home prices right now? Given some of the news that's coming out from some states, Texas, Florida, that prices are starting to sort of flatline, if not go down, any geographies that you're avoiding, and if you're tightening any underwriting standards at all? Thank you.

Speaker 0

Good question. I think our view is in line with consensus. Obviously, there's been some weakness in some of the markets as supply has returned to sort of pre-COVID levels. The weakness is still relatively modest, and there are certain regions that are still hanging in tight, still getting good gains. From a guideline standpoint, nothing changes because we've always had adjustments for weaker markets. We think that's relatively consistent across the whole business. We pay very close attention to the trajectory of that, and still believe that it's more or less steady as she goes or some mean reversion.

Great. Thank you. If I may sneak in a question, any update on current book value through the quarter?

Speaker 5

Hey, Mikhail. No, just given where we stand in the calendar, I'm still working through our process, so no update at this time.

Gotcha. Thank you.

Speaker 8

Thank you. We'll go next to the line of Bose George with KBW. Please go ahead.

Hey guys, good morning. Actually, a couple on the mortgage banking. I'm at ARC Home, the pipeline hedging in volatility in April. Does that impact the EAD or, yeah, does it impact the EAD?

Speaker 5

Yeah, those that flows through EAD. You can see the impact to EAD from ARC Home this quarter was a loss of $130,000. April was largely offset by positive earnings in May and June at ARC Home.

The setup, given the stability this quarter, suggests that, you know, that should be a positive number.

Yes, that's accurate.

Okay. That's great. Can you just talk about the gain-on-sale margin differential between the first liens and the second liens, and just talk about the outlook for, you know, further growth in the second lien market, which has already obviously been pretty strong?

Speaker 0

The gain on sale quarter over quarter for sort of the non-QM market has been somewhat consistent. We expect that to remain the same going forward, given sort of the demand profile that I think has been fairly well telegraphed out there. On the second liens, when we think about that versus the origination business, a lot of that's being acquired by non-affiliate third parties. We don't think about that business as much, but a gain on sale will get more of those investors, although there has been decent gain on sales driven by some of the spread tightening and capital efficiencies we've been able to achieve.

Okay. That's more of an investment product, essentially. You look at it more on the capital that you deploy?

That's right. That could evolve over the coming quarters to year, but at the moment, that's a fair statement.

Okay. Great. Thank you.

Speaker 8

If you'd like to ask a question, it is the star and one on your touch-tone telephone. We'll go next to the line of Eric Hagen with BTIG. Please go ahead.

Hey, thanks. Good morning, guys. Can you say what the return on capital was that you expect from the closed end seconds that you picked up from redeploying that $40 million? Were those loans originated by ARC Home or by a third party?

Speaker 0

Those loans were originated by third parties. We expect returns there to be blended across the different parts we provided in the mid-high teens.

Got it. Okay. Going to ARC Home here, can you give a quick snapshot for what the leverage and the capital structure looks like at ARC Home? Like how much total equity is in the business? How much sort of long-term debt?

There's no long-term debt. They use, obviously, warehouses for their own sort of origination gestation, but there's no long-term debt in the company.

All right. Are there any securities? Go ahead.

Speaker 5

Eric, if you look at the, if you think about the balance sheet of ARC Home, it's essentially cash and loans on warehouse with approximately $70 million of equity at that level.

Okay, got it. There's no securities that are capitalized on the balance sheet?

No.

No securities or anything? Okay. All right. Thank you guys so much.

Speaker 0

Thank you.

Speaker 8

It is the star and one for questions. We'll pause briefly for any further questions to queue. At this time, it does not appear we have any further questions. Speakers, do you have any closing remarks you'd like to give?

Speaker 1

Thank you to everyone for joining us and for your questions. We appreciate it and look forward to speaking with you again next quarter. Thanks and have a good day.

Speaker 8

Thank you. We'd like to thank everybody for joining. Please feel free to disconnect your line at any time.