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Edited Transcript of MITT.N earnings conference call or presentation 10-Aug-20 12:30pm GMT

Q2 2020 AG Mortgage Investment Trust Inc Earnings Call

New York Aug 13, 2020 (Thomson StreetEvents) -- Edited Transcript of AG Mortgage Investment Trust Inc earnings conference call or presentation Monday, August 10, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Chad Sigman

AG Mortgage Investment Trust, Inc. - CFO & Treasurer

* David Nathan Roberts

AG Mortgage Investment Trust, Inc. - Chairman of the Board, CEO & President

* Raul Enrique Moreno

AG Mortgage Investment Trust, Inc. - General Counsel & Secretary

* Thomas J. Durkin

AG Mortgage Investment Trust, Inc. - CIO & Director

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Conference Call Participants

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* Eric J. Hagen

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Trevor John Cranston

JMP Securities LLC, Research Division - Director & Equity Research Analyst

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Presentation

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Operator [1]

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Welcome to AG Mortgage Investment Trust Second Quarter 2020 Earnings Call. My name is Sylvia, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Raul Moreno, Mr. Moreno, you may begin.

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Raul Enrique Moreno, AG Mortgage Investment Trust, Inc. - General Counsel & Secretary [2]

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Thank you, Sylvia. Good morning, everyone, and welcome to the Second Quarter 2020 Earnings Call for AG Mortgage Investment Trust, Inc. Before we begin, please note that the information discussed on today's conference 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 the risk factors and MD&A sections of our most recent SEC filings. 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 earnings release, in our earnings presentation and in our SEC filings. 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 Q2 2020 Earnings Presentation link on the home page. Again, welcome, and thank you for joining us today. With that, I would like to turn the call over to our CEO, David Roberts.

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David Nathan Roberts, AG Mortgage Investment Trust, Inc. - Chairman of the Board, CEO & President [3]

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Thank you, Raul. Good morning to everybody. As we discussed last quarter, our immediate goals have been to reduce leverage, increase liquidity and begin to restore book value. I am pleased to report that our book value per common share increased to $2.75 as of June 30 compared to an estimated range of $1.80 to $1.90 as of April 30. In terms of leverage, we reduced our mark-to-market nonrecourse financing to about $280 million this quarter -- I'm sorry, our mark-to-market recourse financing to about $280 million this quarter from $1.2 billion last quarter. This $900 million reduction came mostly from asset sales and paydowns, although we also were able to shift about $200 million of financing from mark-to-market recourse to non mark-to-market nonrecourse. As of quarter end, our total investment portfolio was $1 billion. Our economic leverage was 0.8x, and we had cash of nearly $70 million on hand. Our mortgage originator affiliate, Arc Home, had by far its best quarter in its history. We continue to see substantial opportunity over the longer-term for MITT in residential origination, both through Arc and our other channels. In terms of dividends, as previously announced, we did not pay common or preferred dividends this quarter. Based on current conditions for our company, we do not anticipate paying dividends on our common or preferred stock for the foreseeable future. Thank you for listening. And I'll now turn the call over to T.J. Durkin, Chief Investment Officer.

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Thomas J. Durkin, AG Mortgage Investment Trust, Inc. - CIO & Director [4]

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Thank you, David, and good morning, everyone. Turning to our presentation on Page 5, we walk you through our high level activity for the quarter. Beginning on March 23 through June 30, we delevered the company by selling approximately $1 billion of various mortgage investments. We officially exited forbearance on June 10, and we are pleased to report as of August 10, the company resolved and settled any outstanding deficiency claims with lenders. Our resulting financing profile is now primarily nonrecourse non mark-to-market with only a small number of counterparties. Subsequent to quarter end, the company repaid $10 million at its scheduled maturity of the secured debt the manager issued at the request of participating forbearance lenders. The remaining and final $10 million is due and payable on March 31, 2021. As we indicated on last quarter's call, the company was active in securitizing and terming out debt on its residential mortgage whole loan portfolio, completing an unrated refinancing of reperforming and nonperforming loans in June, returning over $6 million of cash back to the company, and subsequent to quarter end, also completed its second rated non-QM securitization of 2020, along with other Angelo Gordon affiliated funds. Also subsequent to quarter end, we took advantage of strong secondary markets within CMBS and sold positions, which resulted in approximately $24.4 million of proceeds.

Turning to Slide 6. We want to highlight the strong performance of Arc Home, our fully licensed mortgage originator affiliate. The team at Arc have been able to fully take advantage of the tailwinds in the mortgage banking sector with both record volume and margins within the agency channels. In July, the company was also one of the first originators to reenter the non-QM business, and we expect to see volumes grow as we look ahead in 2020 and beyond. And just as a reminder, MITT owns approximately 45% of Arc Home and the remainder is owned by other Angelo Gordon managed funds.

On Slide 7, we lay out our portfolio metrics. We had a fair value of approximately $959 million as of 6/30, representing 0.08 turns of economic leverage. The portfolio was approximately 78% residential securities and loans and 22% commercial securities and loans, not inclusive of Arc Home and the cash on hand within the company. And lastly, overall, market conditions improved for all products during the second quarter with residential credit assets taking the lead earlier on in the quarter and commercial credit assets firming towards the end of the quarter and continuing that strength, thus far, into the third quarter. With that, I'll turn the call over to Brian to review the financial results.

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Brian Chad Sigman, AG Mortgage Investment Trust, Inc. - CFO & Treasurer [5]

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Thanks, T.J. Overall for the second quarter, we reported net losses available to common stockholders of negative $2.6 million or $0.08 per fully diluted share. Earnings for the quarter include higher than normal interest expenses due to elevated rates during our forbearance period. Earnings also include $7.8 million of restructuring-related expenses, which we have separated out on our income statement in order to add clarity to our outsized operating expenses for the quarter. As we mentioned, we did not declare dividends on our preferred stock. However, the $2.6 million net loss does reflect a decrease of $5.7 million of preferred dividends in the quarter. During the quarter, our book value increased to $2.75 at June 30, from an estimated range of $1.80 to $1.90 at April 30 and $2.63 at March 31. Per GAAP, and unlike earnings, the balance sheet does not include an accrual of the undeclared preferred dividends, and therefore, book value does not include the accumulated unpaid preferred dividend. Consistent with the last quarter, we are not currently disclosing core earnings, a non-GAAP financial measure, as we determined that this measure, as we have historically calculated it, would not appropriately capture the materially negative economic impact of the COVID-19 pandemic on our business, liquidity, results of operations and ability to make distributions to our stockholders. As financial markets stabilize, we will evaluate whether core earnings or other non-GAAP financial measures would help both management and investors evaluate our operating performance for future periods. Our economic leverage decreased from 3.3x at March 31 to 0.8x at June 30 as a result of asset sales and the restructuring of one of our larger financing agreements, which amended the terms of the arrangement to be non mark-to-market with respect to margin calls as well as nonrecourse to us. Additionally, we reduced the number of counterparties we had debt outstanding with from 18 as of March 31, to 6 as of June 30. We issued approximately 1.4 million shares of common stock for net proceeds of approximately $5 million through our ATM program, with some of the shares settling in July. Subsequent to quarter end, we sold certain CMBS positions for proceeds of approximately $24.4 million. We also repaid $10 million of secured debt plus accrued interest to our Manager as it became due. Additionally, we participated through our unconsolidated ownership interest in MITT in a-rated non-QM loan securitization in which non-QM loans with a fair value of $221 million were securitized. This termed out our repo financing into lower-cost, fixed rate, long-term financing within our subsidiary. That concludes our prepared remarks, and we'd now like to open the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Eric Hagen from KBW.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [2]

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Which assets, including the assets of your affiliates, are now being funded with repo? And what was the level of unencumbered assets that you carried at the end of June?

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Thomas J. Durkin, AG Mortgage Investment Trust, Inc. - CIO & Director [3]

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On the vast majority of the, Eric -- of regular rate repo is just CUSIPs or securities versus old loans. We have more in -- we've transferred more of that into the non mark-to-market type facilities. I don't have the exact numbers in front of me.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [4]

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Okay. And what was the rough level of unencumbered assets? Like how much could you draw against those securities from here?

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Thomas J. Durkin, AG Mortgage Investment Trust, Inc. - CIO & Director [5]

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We'll have to get back to you on that as well.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [6]

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Okay. Did you say where your book value is currently, inclusive of the ATM issuance that settled in July? And can you say where in the portfolio you had some unrealized losses and the outlook to recover a portion of those from here?

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David Nathan Roberts, AG Mortgage Investment Trust, Inc. - Chairman of the Board, CEO & President [7]

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On the book value, we have not done anything beyond June 30. So we'll just stick with June 30. Obviously, there's more changes than just the ATM. I'll let my colleagues handle the other question.

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Thomas J. Durkin, AG Mortgage Investment Trust, Inc. - CIO & Director [8]

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Yes. On the unrecovered, I would say that's more geared towards security. So the things like CMBS and CRT probably are further away from, call it, pre COVID levels versus, I think, the residential whole loans have recovered more of that so far, throughout August 10.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [9]

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Got it. Okay. And can you give any color on how Arc Home is capitalized, including just, kind of, a rough idea of the fair value of MSR on its balance sheet and how that's funded?

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Thomas J. Durkin, AG Mortgage Investment Trust, Inc. - CIO & Director [10]

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Yes. So we funded that -- Arc Home funds that through, they have lending relationships with various banks as well as utilized excess MSR stripping transactions, which MITT and other Angelo Gordon funds help fund, so to minimize the fair value there. I don't have the aggregate fair value of the MSRs in front of us right now, but we can get back to you on that.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [11]

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Sure. But just to get a sense for how much capital is in the business, just how much net asset value is in the business right now?

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Brian Chad Sigman, AG Mortgage Investment Trust, Inc. - CFO & Treasurer [12]

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Yes. We disclosed it. It's about $20 million that we have in the presentation. That's our share of the company, of the value, and we're about 46% of Arc Home.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [13]

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Right. Okay. So we're $40 million, $40 million-odd, $45 million-odd worth of book value in the business.

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Operator [14]

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(Operator Instructions) Our next question comes from Trevor Cranston from GMPC (sic) [JMP] Securities.

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Trevor John Cranston, JMP Securities LLC, Research Division - Director & Equity Research Analyst [15]

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Right. Can you talk about how much, roughly speaking, you expect interest expense to benefit, one, from having ended the forbearance agreements? And then secondarily, from some of the securitization refinancing you were able to do in June?

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Brian Chad Sigman, AG Mortgage Investment Trust, Inc. - CFO & Treasurer [16]

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So, unfortunately, it's hard to -- we don't typically give out that type of guidance. And there were just so many kind of moving parts in the quarter, in terms of different outstanding finances that it's hard to kind of take a good shot at what it will be without it just being a too high level. So we don't really have that. We -- obviously, we -- I did say that it was increased in the second quarter. The non mark-to-market financing did cost us a little bit more, obviously, and secured financings do cost more than repos. But during the forbearance agreement, we also were at an elevated interest rate, so that's come down. And now that we're back to kind of regular rate repo on our securities and loans, you'll start to see a more normalized run rate in the third quarter.

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Trevor John Cranston, JMP Securities LLC, Research Division - Director & Equity Research Analyst [17]

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Okay. Fair enough. And then I appreciate that you stripped out the restructuring expenses. Were there any other sort of elevated or onetime items that are within the other operating expense line item of $4.5 million?

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Brian Chad Sigman, AG Mortgage Investment Trust, Inc. - CFO & Treasurer [18]

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Not really. We tried to isolate that in the restructuring. So, not really. I mean, obviously, with the decrease in size, we do expect some of our operating expenses to come down as well. So that's not something that should be stripped out, but it is something that should naturally decline given the shrinkage of the portfolio.

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Trevor John Cranston, JMP Securities LLC, Research Division - Director & Equity Research Analyst [19]

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Okay. And then one more question on Arc Home. Can you provide any color on -- in terms of what you've seen with margins there, sort of, as the second quarter progressed and into the third quarter? It seems like they may have peaked for some originators early in the second quarter and have been trending a little tighter. Just, sort of, trying to get a sense what you guys are seeing and if we should think about second quarter as maybe sort of being a peak in the earnings for that business over the near term?

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Thomas J. Durkin, AG Mortgage Investment Trust, Inc. - CIO & Director [20]

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Yes. I mean I think into the third quarter, volumes and margins are still fairly robust. We obviously do expect that to dissipate over time. Whether it's next month or Q4, it's hard for us to predict.

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Operator [21]

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Our following question comes from [Ryan James] from [Spring Hill Capital].

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Unidentified Analyst, [22]

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Is there anything preventing you from -- is there any limitations on (inaudible) I was just surprised you didn't sell more shares based on where the stock price was. Are there limitations? Or is that just a judgment call you guys make as to how much to sell?

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David Nathan Roberts, AG Mortgage Investment Trust, Inc. - Chairman of the Board, CEO & President [23]

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The limitations that we set for ourselves are to -- typically, we don't like to move the market. So it's really based on volume and the length of our -- the window that's open to us. But Raul, I don't know, or Brian, if you want to comment further.

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Brian Chad Sigman, AG Mortgage Investment Trust, Inc. - CFO & Treasurer [24]

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Yes. That's right. There are some limitations in terms of daily trading activity as well. And as David mentioned, you're trying to do it through the market. There's also windows, trading windows that we work with legal on in terms of when our information is published that can restrict the, not daily volume, but the days that you can issue.

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Unidentified Analyst, [25]

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Okay. And would you guys consider a equity offering below market -- a formal equity offering, not at the money, just to kind of get scale and rebalance the capital structure?

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David Nathan Roberts, AG Mortgage Investment Trust, Inc. - Chairman of the Board, CEO & President [26]

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Look, we have a wide range of options that we're always considering, and we have to be certainly mindful of book value. And as I said, one of our goals has been to restore book value per share, and that's an important criterion for anything that we might do in the future.

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Operator [27]

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We have no further questions.

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Raul Enrique Moreno, AG Mortgage Investment Trust, Inc. - General Counsel & Secretary [28]

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Okay. Thanks, everyone, for joining. We'll speak next quarter.

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Operator [29]

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Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.