AG Mortgage Investment Trust, Inc. (NYSE:MITT) Q4 2023 Earnings Call Transcript
AG Mortgage Investment Trust, Inc. (NYSE:MITT) Q4 2023 Earnings Call Transcript February 22, 2024
AG Mortgage Investment Trust, Inc. beats earnings expectations. Reported EPS is $0.17, expectations were $0.15. MITT isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the AG Mortgage Investment Trust Inc Fourth Quarter 2023 and Full Year Earnings Conference Call. At this time, all participants are in a listen-only mode. After managements remarks there will be a question and answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to turn the call over to Jenny Neslin, General Counsel for the company. Please go ahead.
Jenny Neslin: Thank you. Good morning, everyone, and welcome to the full year and fourth quarter 2023 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, 2022, our quarterly report on Form 10-Q for the quarter ended June 30, 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 review the slide presentation, turn to our website, www.agmit.com and click on the link for the Q4 2023 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.
T.J. Durkin: Thank you, Jenny. I'm very excited to be able to finally discuss with the market the successful acquisition of WMC this past December and the future prospects for MITT going forward. While we believe the WMC acquisition is another substantial step in further positioning MITT as a premier pure-play residential mortgage REIT, we all know there is still plenty of work to do as we continue to deliver on strong earnings off the investment portfolio while seeking ways to continue enhancing scale and G&A efficiencies. Now turning to Page 5. Before we review the fourth quarter and full year 2023 financials, we thought we'd take a step back to review the scope of the transformation that's already occurred since year-end 2020 when we first set out to shift to a pure-play residential mortgage REIT.
You can see here the equity allocation over time as we successfully exited noncore asset classes without any drag to earnings and while demonstrating the ability to scale into the deploying capital within our target asset class by acquiring over $7.3 billion of strong credit quality residential mortgage loans during this time frame, with over 1/3 of them being sourced from our captive mortgage originator Arc Home. We actively and prudently executed our securitization strategy, having issued 16 deals into the market, further bolstering our GCAT helps recognition for both consistency and credit quality, which are institutional bondholders value. The disciplined approach to risk management via securitization and derisking of recourse leverage has not only lowered our economic risk during this time frame, but also reallocated a significant portion of our equity to higher-yielding securitized assets, which is what we set out to do.
Building on this successful track record, we'll employ the same strategy to the newly onboarded WMC portfolio, and we have already begun that process, which we will get into in more detail. Moving to Page 6. We provide a quick recap of the WMC acquisition with the highlights being an almost 50% increase in MITT's market cap, which should add to our shares trading volume and liquidity. We'd also like to highlight the strong support from our external manager, TPG Angelo Gordon, through three key metrics. Cash contribution of $5.7 million from our manager to WMC shareholders to help secure the deal, resulting in $1.3 million in future reimbursable expense offsets; and lastly, an additional $2.4 million in management fee waivers beginning in the fourth quarter of 2023.
The transaction creates significant long-term annual expense savings to the tune of $5 million to $7 million per annum, and we believe this deal will be accretive to 2024 earnings. Moving to Page 7. We provide a walk-through on book value to show the effects of the WMC transaction. If MITT were to have remained a stand-alone company, we would have seen book value actually improved during the year from $11.39 to $11.51 as you can see on the left side of the page. On the right side of the page, we break out the various components of the WMC transaction, which affect book value. You may recall the transaction was structured based on a fixed exchange ratio using June 30 valuations. As we close the books for year-end, we did see some valuation deltas on certain WMC assets since the June 30 fixed exchange ratio date and our closing December 31 marks of approximately $0.44.
Transaction expenses, which made up the majority of the impact, approximated $0.39 on the WMC side, which includes their manager termination payment and $0.20 of transaction expenses from the mid-side. The remaining $0.02 decline represents net losses contributed by WMC from the acquisition date through year-end offset by the incremental dividend declared associated with the shares issued to acquire WMC, resulting in our final 2023 book value of $10.46 per share. On Page 8, we'll move away from the transaction to address MITT fiscal year performance. As previously stated, we ended the year with a book value of $10.46 at an adjusted book value of $10.20 per share. We have over $528 million of total equity and $112 million of liquidity, resulting in an economic leverage of 1.5 turns.
Since year-end, our liquidity increased as a result of our inaugural bond issuance, which I'll touch on later, and our economic leverage ratio has declined as we executed a securitization in January, further reducing our warehouse exposure. On Page 9, when looking back at MITT's activities across 2023, we have consistently executed on our stated business plan by acquiring $1.2 billion of loans, not including the portfolio acquired from WMC. And in turn, securitizing $1 billion of loans during 2023 across three distinct securitizations. Throughout the year, we generated $53 million of net interest income, which drove our $0.39 of EAD&D per share for the year. We believe also worth noting that all onetime transaction expenses are now behind us as we head into 2024.
And when thinking about the current dividend run rate, we will now have the full benefits of the G&A scale we achieved the acquisition for the upcoming year. Moving to Page 10. During the quarter, MITT closed the WMC acquisition effectively raising $81 million of equity for the combined entity. Deterring of $0.17 of EAD and paid its $0.18 dividend. We’re reporting a GAAP net income of $1.35 per share this quarter, which includes a onetime $30 million bargain purchase price gain. While we closed WMC late in the quarter, we have already been successful in taking action. We took advantage of strong credit markets in December and opportunistically sold $20 million of non-agency bonds, acquired WMC at gains and also had one $12.3 million CRE loan pay off at par subsequent to the close, generating over $32 million of cash proceeds in total.
Additionally, and subsequent to quarter end, we were able to execute a capital raise of BBB- minus rated unsecured notes, or baby bonds, in January raising almost $35 million of gross proceeds. And further, we're able to use a portion of this capital in repurchasing over $7 million of the legacy WMC converts at a slight discount in the open market. We believe these actions put us well ahead of schedule in addressing September 15 maturity for the WMC convertible notes we assumed. Lastly, we see January book value up approximately 2% to 3% from year-end. Before I pass it to Nick, I want to reiterate the MITT team is very proud of what we accomplished during 2023 and year-to-date so far, and we believe we are taking all the right steps to making MITT a more scaled and profitable investment vehicle for shareholders to access the residential mortgage ecosystem.
We have fully acknowledge the work is not done, but we have demonstrated we have the right strategy, skills and resources to achieve our goals. We will continue to build on this momentum to create a long-term, more profitable net going forward. I'll now turn it over to Nick to discuss our investment activities and Arc Home in more detail.
Nick Smith: Thanks, T.J. As outlined earlier in the presentation, the simplification of the balance sheet through the redeployment of capital into securitized residential whole loans continue throughout the year. The securitized loan portfolio grew by over $1.7 billion were approximately 45% this past year. The performance of the portfolio is benefited by the housing sector's continued strong performance, surpassing most market expectations despite multi-decade highs in mortgage rates. Delinquency rates remain low and are trending below the original underwrite and are broadly outperformed based upon age-adjusted comparables. As you are all aware, the fourth quarter exhibited the same sort of volatility fixed income markets have grown accustomed to since the Federal Reserve began its tightening campaign over two years ago.
While risks remain, the narrative changed considerably from the beginning of the fourth quarter. The markets are now hopeful again. The Fed will be able to manufacture the soft landing many expected at the onset of 2023, but had lost hope as the year progressed. This shift to narrative has been good for risk assets broadly and should be supportive of continued strength in the fundamental performance of the securitized residential whole loan portfolio. MITT’s proprietary origination channel Arc Home is well positioned to manage through the current origination landscape given its ample liquidity and strong balance sheet. While we have likely seen the lows in the origination market, the first quarter is expected to be slow, prior to moving into the spring and summer buying season.
The MBA is projecting origination volumes to increase over 20% from last year's cyclical low, and The Street is looking for non-agency originations to nearly double year-over-year. These market dynamics, combined with Arc Home's newly appointed executive leadership's focus on profitability, prudent expansion, product development and operational leverage, make us optimistic in the future. The investment portfolio continues to generate attractive ROEs in the mid-to high teens with modest economic leverage. There remains significant liquidity that can be deployed into the core strategies along with equity that can be opportunistically rotated as the portfolio's fundamental performance continues along the current path. In addition to organic recycling of capital, a significant portion of the noncore WMC commercial real estate exposure we expect to pay off at par over the next few years.
Now I'd like to turn the call over to Anthony.
Anthony Rossiello: Thank you, Nick, and good morning. In December, we closed the WMC acquisition, helping to grow MITT's investment portfolio and equity base while improving scale for the company. The acquisition was accounted for as a business combination. And in accordance with this accounting treatment, we recognized a bargain purchase gain of approximately $30 million during the quarter. This represents the excess of WMC's $81 million of equity acquired over the fair value of MITT's common stock issued to WMC shareholders at closing $51 million. As a reminder, we issued approximately 9.2 million shares of common stock, increasing our market cap by approximately 46%. Overall, we recorded GAAP net income available to common shareholders of $35.4 million or $1.68 per share for the full year and $30.8 million or $1.35 per share for the quarter.
During the quarter, in addition to the bargain purchase gain I mentioned, other notable items included an increase in net interest income, including swaps, of $1.1 million or approximately 7% driven by 1 month of earnings from the acquired WMC portfolio along with lower operating expenses quarter-over-quarter, driven by certain expense reductions provided by a manager in connection with the WMC transaction. Realized and unrealized P&L was relatively neutral this quarter as gains on our investment portfolio were offset by losses in our securitized debt and hedge portfolio, while Arc Home experienced unrealized mark-to-market losses on its MSR portfolio driven by the rate decline towards the end of the quarter. The company recorded book value of $10.46 per share and adjusted book value of $10.20 per share.
Although adjusted book value declined by 7.2%, approximately 4% of the decline related to transaction expenses incurred by WMC prior to the acquisition, which impacts MITT's book value upon combining the two companies, coupled with the final $1.2 million of MITT's merger-related transaction expenses recorded in the fourth quarter, which we highlighted on our last call. The remaining book value decline was driven by unrealized mark-to-market losses on certain assets acquired from WMC since the acquisition announcement in June as well as the mark-to-market losses on Arc Home's MSR portfolio previously noted. We generated earnings available for distribution, or EAD, of $0.17 per share for the fourth quarter. Net interest income, inclusive of interest earned on our hedge portfolio, was $0.70 per share, which exceeded our operating expenses and preferred dividends of $0.50, generating earnings of $0.20 per share.
This was offset by a loss of $0.03 contributed from Arc Home. In connection with the WMC acquisition, our manager agreed to waive $2.4 million of management fees beginning in the fourth quarter as well as $1.3 million of reimbursable expenses over time. EAD during the fourth quarter incorporated $600,000 of the management fee waiver and $220,000 of the expense reimbursement waiver or in aggregate $3.05 per share. This leaves us with an aggregate $2.9 million of management fee expense reimbursement reductions to come through in 2024. It's also notable that EAD during the fourth quarter only includes 1 month of earnings from the acquired WMC portfolio. Our investment portfolio increased by $1.2 billion or 26% quarter-over-quarter to $5.9 billion driven by the WMC acquisition and loan purchases of approximately $280 million.
85% of our financing is currently funded through securitization at a weighted average cost of 4.9%, and our economic leverage ratio at quarter end was 1.5 turns, which includes the convertible notes assumed from WMC. In January, we executed a securitization further reducing our economic leverage to 1.2 turns. Lastly, we ended the quarter with total liquidity of $112 million, which has since increased and currently approximately it's $140 million. Our increase in liquidity was driven by the recent issuance of our unsecured notes for estimated net proceeds of $32.8 million, offset by $7.1 million of convertible note repurchases. This concludes our prepared remarks. We now like to open the call for questions. Operator?
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