Q2 2023 AG Mortgage Investment Trust Inc Earnings Call

Participants

Anthony W. Rossiello; CFO, Treasurer & Principal Accounting Officer; AG Mortgage Investment Trust, Inc.

Jenny B. Neslin; General Counsel & Secretary; AG Mortgage Investment Trust, Inc.

Nicholas Smith; CIO & Director; AG Mortgage Investment Trust, Inc.

Thomas J. Durkin; President, CEO & Executive Director; AG Mortgage Investment Trust, Inc.

Presentation

Operator

Good day and thank you for standing by. Welcome to the AG Mortgage Investment Trust Second Quarter 2023 Earnings Conference Call. (Operator Instructions) I'd now like to turn the call over to Jenny Neslin, General Counsel for the company. Please go ahead. Thank you.

Jenny B. Neslin

Good morning, everyone. And welcome to the Second 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 Rosiello, 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 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 Q2 2023 earnings presentation on the home page.
Further, please note that we are not going to comment on or discuss the terms or status of our proposed transaction with Western Asset Mortgage Capital Corporation at this time. And as a result, we will not be taking Q&A after our prepared remarks. 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.

Thomas J. Durkin

Thank you, Jenny. And good morning, everyone. We entered the second quarter on the heels of the turbulence from the regional banking crisis in March. I'm sure of where the market was headed. The policy actions taken to stem further broad-based deposit runs but markets in the second quarter to determine the regional banking crisis was largely contained. And then subsequently, with the suspension of the debt ceiling in early June, we've seen the markets improve.
That said, interest rates continued to rise throughout the quarter, bringing the higher for longer inverted yield curve back to the forefront and leaving the mortgage origination market challenge. Despite these challenges, our hard work continues to serve to protect our book value. Book value grew by 0.3% per share to $11.89 and $11.52 on an unadjusted and adjusted basis, respectively while we maintained ample liquidity of $80 million and only 1.6 turns of economic leverage.
During the quarter, mid had $0.17 of earnings per share were generating $0.08 of EAD and paid its $0.18 dividend. As we've discussed in prior calls, our prudent and disciplined securitization strategy is beginning to evidence in our earnings power. The EAD improvement quarter-over-quarter reflects a combination of higher NIM of our investment portfolio and related hedging strategy as well as the improving fundamentals in Arc Home. Based on our early preliminary read, book values were approximately flat for the month of July.
During the second quarter, we saw strong demand from balance sheet players, namely insurance companies who are looking for residential whole loan exposure without the intent to securitize. We took advantage of this opportunity to sell both newly originated loans at a gain and to sell legacy RPL loans out of the 2020 securitization, further reducing our legacy exposure there. The pending sale of RPLs is expected to settle this month, bringing in approximately $30 million in additional liquidity available to deploy and generate in the higher ROEs that we're targeting today.
As I stated last quarter, we continue to see an environment with higher ROEs based on both some competition retreating and opportunities that we believe are in the early innings of presenting themselves given the lindering effects of the disruption amongst the regional bank balance sheets. Putting this all together, we are very pleased with MITT's performance year-to-date, and importantly, I believe we are well positioned to drive higher results for both GAAP and EAD metrics per share looking forward. We remain focused on continuing to build on this positive momentum and look forward to updating you on our progress in the coming quarters. I'll now turn it over to Nick to discuss our investment activities in Arc Home in more detail.

Nicholas Smith

Thanks, T.J. As volatility normalized across credit and interest rate markets we took advantage of the increased liquidity created and sold credit-sensitive loans, raising equity that can be deployed into higher ROEs in the coming quarters. We also built a strong pipeline of newly originated loans and expect to issue 2 securitizations before the end of the third quarter. While spreads on loan tightened throughout the quarter hey lagged more liquid cohorts of structured credit and mortgage markets setting the stage for potential upside on where we sell debt on the upcoming securitizations.
We continue to see attractive ROEs to early signs of regional and midsized banks pulling back. Although still in the early stages, we expect this now widely accepted narrative to lead to opportunities to deploy equity capital in our targeted asset classes. Throughout the quarter, Arc Home built on the momentum from previous quarters, even as nominal yields be traced close to the high in the past year. While there remains significant progress being made in a difficult origination market, the changes we outlined in previous quarters were beginning to show through improved volumes and benefits from operational efficiencies.
In this quarter's earnings presentation, we provided additional information on Page 8, outlining the retained non-agency securities. As outlined in previous quarters, the debt we issue of our non-QM securitizations is callable on or after the third anniversary of each transaction. Extreme yield curve inversion, coupled with historically wide spreads make this options very valuable by providing a potential path to pull forward these deep discounts in the coming years.
Pie chart shows that over 1/3 of the fair market value of these retained physicians are Mezzanine and Subordinate securities from 2002 Non-QM securitizations, held at deep discounts to par. As the Fed approaches the end of this piping cycle, home prices have been much more resilient than projected and mortgage credit continues to perform well.
In line with this trend, credit spreads flattened throughout the quarter, supported by these strong fundamentals, along with significant supply technicals. Our portfolio continues to perform in line or better than originally underwritten as (inaudible) remain low and home prices stabilized nationally. While financing costs have increased considerably since the beginning of this tightening cycle, we are constructive on being able to deploy current excess liquidity and rotate equity into attractive ROEs in the mid- to high teens with modest mark-to-market leverage. I will now turn the call over to Anthony.

Anthony W. Rossiello

Thank you, Nick. And good morning. During the second quarter, the company recorded book value of $11.89 per share and adjusted book value of $11.52 per share, representing an increase of 0.3% from prior quarter. This increase, coupled with our dividend, generated a quarterly economic return of 1.9% for our shareholders. Our book value performance this quarter is attributable to improvement in earnings available for distribution, net gains on our investment portfolio and accretive share repurchases, which exceeded our accrued common dividend. During the quarter, we recognized GAAP net income available to common shareholders of approximately $3.5 million or $0.17 per fully diluted share. Net interest income, inclusive of our hedge interest increased quarter-over-quarter by approximately $500,000 and while expenses declined due to $1.3 million less of transaction-related expenses.
Although benchmark rates increased during the quarter, gains on our interest rate swap portfolio more than offset mark-to-market losses on our investment portfolio, resulting in $1.7 million of realized and unrealized earnings. We continue to utilize our share repurchase program, returning $1.1 million of capital to our shareholders. We repurchased 187,000 shares or 1% of our total outstanding shares at the start of the quarter resulting in 0.4% of book value accretion as our purchase price was approximately 50% of our adjusted book value. Year-to-date, we've deployed $6.4 million of capital in repurchasing our common stock as of quarter end, and our remaining repurchase authorization was approximately $16.5 million.
Our investment portfolio was flat quarter-over-quarter at $4.5 billion as loan purchases of $220 million were offset by paydowns and loan sales. Our financing profile was also relatively consistent with 82% of our financing funded through securitization at a weighted average cost of 4.2%. As a result, our economic leverage ratio at quarter end was 1.6 turns, of which 1 turn related to our credit portfolio and 0.6 turns to our Agency RMBS portfolio. In addition, we ended the quarter with approximately $2 billion of borrowing capacity to support continued growth in our portfolio.
We generated earnings available for distribution or EAD of $0.08 per share for the second quarter. Net interest income, inclusive of interest earned on our hedge portfolio was $0.73 per share, which was $0.05 higher than prior quarter. Net interest income exceeded operating expenses and preferred dividends, generating earnings of $0.15 per share. This was offset by a loss of $0.07 contributed from Arc Home. However, Arc Home's contribution to EAD improved by $0.03 quarter-over-quarter when excluding the impact of gains recorded by Arc on loans sold to mid.
Lastly, we ended the quarter with total liquidity of approximately $80 million of cash and expect to generate additional capital from the loan sales and securitizations mentioned earlier. I'll now turn the call back to T.J.

Thomas J. Durkin

Thanks, Anthony. We want to thank everyone again for joining us this morning. And as Jenny mentioned at the top of the call, we won't be taking Q&A this quarter. We appreciate your understanding, and we look forward to speaking again next quarter.

Operator

That concludes today's teleconference. Thank you for your participation. You may now disconnect.