Q4 2023 AG Mortgage Investment Trust Inc Earnings Call

Participants

Doug Harter; Analyst; UBS Securities LLC

Bose George; Analyst; Keefe, Bruyette & Woods, Inc.

Eric Hagen; Analyst; BTIG, LLC

Presentation

Operator

Good day and thank you for standing by, and welcome to the AG Mortgage Investment Trust Incorporated fourth quarter 2023 and full year earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded.
I'd now like to turn the call over to Jenny Neslin, General Counsel for the Company. Please go ahead.

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. The Company's actual results may differ materially from these statements, and 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, 2020, to 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 homepage. Again, welcome to the call, and thank you for joining us today.
With that, I'd like to turn the call over to TJ.

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 rate. We all know there are still plenty of work to do as we continue to deliver on strong earnings from 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 rate.
You can see here the equity allocation over time as we successfully exited noncore asset classes without any director earnings and while demonstrating the ability to scale into deploying capital within our target asset class by acquiring over $7.3 billion of strong credit quality residential mortgage loans during this timeframe with over one-third 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 key cap shelves recognition for both consistency and credit quality, which our institutional bondholder value.
The disciplined approach to risk management, the securitization and derisking of recourse leverage has not only lowered our economic risk during this timeframe, but also reallocated a significant portion of our equity to higher yield and securitized assets, which is what we've set up to do.
Building on this successful track record, we are applying 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 middle 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 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 it were to have remained a standalone 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 delta 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 approximately at $0.39 on the WMC side, which includes our manager termination payment and $0.20 of transaction expenses from the MITT 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 will move away from the transaction to address mix fiscal year performance. As previously stated, we ended the year with a book value of $10.46 and 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 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 for the year the per share for the year. We believe it's also worth noting that all one-time 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 other 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 generated $0.17 of EAD and [$0.18] dividend. We are reporting GAAP net income of $1.35 per share this quarter, which includes a one-time $30 million bargain purchase price gain.
While the current study and see 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 non-agency bonds acquired via WMC at gains and also had one $12.3 million CRE loan payoff 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 triple-B 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 and 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 some September 15 maturity for the WMC convertible notes we assumed. And lastly, we see January book value up approximately 2% to 3% from year end.
Before I pass to Nick, I want to reiterate that the team is very proud of what we accomplished during 2023 and year to date so far, and we believe we're taking all the right steps to making it a more scaled and profitable investment vehicle for shareholders to access the residential mortgage ecosystem.
The I 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 our home in more detail.

Thanks, TJ. As outlined earlier in the presentation, the simplification of the balance sheet through the redeployment of capital into securitized residential whole loans continued throughout the year. The securitized loan portfolio grew by over $1.7 billion or approximately 45% this past year.
The performance of the portfolio has benefited by the housing sectors, continued strong performance, surpassing most market participations expectations. Despite multi-decade highs in mortgage rates, delinquency rate rates remain low and are trending below the original underwrite and are broadly outperforming peers based upon age-adjusted comparables.
As you are all aware, the fourth quarter exhibited the same sort of volatility that the 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 that we'll be able to manufacture the soft landing many expected at the onset of 2023 for the lost hope as the year progressed.
This shift the narrative has been good for risk asset property and should be supportive of continued strength in fundamental performance of the securitized residential whole loan portfolio. Mix 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 had likely seen the lows in the originate 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 our company'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 10s] with modest economic leverage. There also 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 non-core 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.

Thank you, Nick, and good morning. In December, we closed the WMC acquisition, helping to grow MITT 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 WCS, [$81 million] of equity acquired over the fair value of MITTs common stock issued to WMC shareholders at closing of $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 one month of earnings from the acquired WMC portfolio, along with lower operating expenses quarter over quarter, driven by certain expense reductions provided by our manager in connection with the WMC transaction.
Realized and unrealized P&L was relatively neutral this quarter as gains in our investment portfolio were offset by losses on our securitized debt and hedge portfolio. While Arc Home experienced unrealized mark-to-market losses on our 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 book value of 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 our account 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 dividend 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 overtime. EAD during the fourth quarter incorporates $600,000 of the management fee waiver and $220,000 of the expense reimbursement waiver or in aggregate [$0.035] per share, which leaves us with an aggregate $2.9 million of management fee and expense reimbursement reductions to come through in 2024.
It's also notable that either in the fourth quarter only includes one month of earnings from the acquired WC 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 $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.
That concludes our prepared remarks. We'd now like to open the call for questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) Trevor Cranston, JMP Securities.

Thanks. Good morning and congrats on getting the WMC deal finished. I guess related to that, I mean you guys have made a lot of effort to transition your capital base to the pure-play residential strategy on I guess in that context, can you talk about how you're thinking about the legacy CRE portfolio on WMC on and the return of holding onto that versus potentially selling and redeploying into other residential assets?

Thanks. Yes, sure. Thank you, Tom. I think we've broken it down on page 14 of the deck. I think the simplest way to think about it is you've got some CRE whole loans there. As Nick mentioned, I think we look at them as fairly short duration and probably thinking about that more to a hold to maturity concept given bid-ask in the CRE space right now, although we feel kind of confident about and the outcomes there.
And I think as you think about the CMBS space, Tom will probably be in the market more observing sort of, you know where execution could be. And so we'll pay attention closer on that part of the portfolio. But I mean, this is something we know we've done before on and across the businesses more broadly, we're active in the CMBS space in other parts of the of the structured credit business here. So it's a market we're very comfortable with. We're in it on a day-to-day basis, and we will opportunistically look to exit to rotate that capital if the market cooperates.

Okay. And on the revenue side, you guys had noted that you opportunistically sold on a little bit of the RMBS portfolio. And is there anything additional you guys are sort of looking to, you know, so if the market is fairly strong, are you reasonably comfortable with yet anything was there anything like that?

They had some kind of we don't take disparate like asset classes that we'll definitely look to rotate that capital into as we're just in the markets so that the goal is to over time, prudently rotate really all of that equity into effectively what we what we've been focused on for the last few years, which we are acquiring from residential whole loans and executing securitization strategy. So we're not going to force it, but we will look to rotate it.

Got it. Okay. I appreciate the comments.

Operator

Matthew Erdner, Jones Trading.

Yes, good morning. Thanks for taking the question. You mentioned the $5 million to $7 million savings in cost synergies, my expenses, where are you guys expecting to see the most improvement from that $5 million to $7 million?

And then it really comes from just sort of the redundant costs needed to just run a public company accounting fees, compensation that was typically bomb being recorded on WMC's books, external professional fees that were recorded on. So it's really just on general operating expenses that we see the savings we would not need to duplicate in our company.

Got you. That's helpful. And then on origination volume, non-agency, you mentioned it's going to be up 50% year over year, at least that's the forecast. And, you know, how do you think ARC is positioned for this? And then when do you see are kind of turning to profitability is an X amount of originations that need to be done? And can you just kind of walk through that?

Look, we stay close to the ever-changing dynamics in the resin market on your part of that list, it has to do with sort of yield having reached lows and the mortgage market and part of the other lesser increase in volumes is the expectation of growth in the sector for very different reasons. We emphasize certain parts of the sourcing channel at Arc Home, which we're already starting to see some gains in which we think pulls forward the profitability, the expectation is for Arc Home to be profitable this year.

That's helpful. Thanks. And then did you guys provide book value quarter to date?

Yeah, through January, we saw book value up to 3%.

Thanks for taking the questions.

Operator

Doug Harter, UBS.

Doug Harter

Thanks. Can you talk a little bit about how you're thinking about the payback period from the short term dilution on the WMC acquisition? And just how we should think about that positives to come from that short-term dilution?

Yes, I think we walk you through that dilution in detail on Page 7. And then I think it's been 1.5 to 2.5 timeframe.

Doug Harter

Okay, thank you. And then this year with the new baby bond issuance, how much of your capital structure do you think that could be going forward? Would you expect to kind of be a regular issuer there? Just more thoughts about that market?

I mean, I think we are happy with the execution there. I think, like I mentioned, where we're probably ahead of schedule in our own minds of sort of addressing the September maturity so that if that market is open I think we would definitely utilize that further in addressing and addressing that convert maturity. So I think the windows open and close. And so I think you know, now that we're at sort of in business there. I think we can access that more efficiently going forward.

Doug Harter

Great. Thank you.

Operator

Bose George, KBW.

Bose George

Good morning. Just speaking to the capital structure, in terms of the Series C preferred that goes to floating in September and what is as Todd says that to just keep that as part of the capital structure, is that happens?

Well, I would like to convert any we're not forced to do anything in terms of material, obviously reset to floating rate and where spots over today, it would be a move higher. So I think you were we're clearly kind of actively monitoring the capital markets based on what we did in January with the baseline deal.
If there is a more accretive way to address that, we feel we're constantly in touch with the market to address it. But it's very different than that hard maturity that we are starting to address in September. So on We sort of how that I'm going to do list, but it will be obviously market dependent on where the ability to refinance our debt.

Bose George

Yes, that makes sense. Thanks. And then if you can you remind us just how much is the cash and you have at year end is kind of deployable like how much is sort of the minimum amount that you need to keep and how much you deploy?

Yes. I mean, I think from a from like a risk reserve perspective, we probably want to keep some $75 million to $85 million depending on our leverage, whether we're in between deals or how big or sort of loan balance on warehouses, right? Total go kind of accordion up and down depending where we are in that securitization pacing. But that's probably a rough range of cash that we'd want to keep around a times. So we had excess liquidity.

Doug Harter

Okay. Thanks.

Operator

Eric Hagen, BTIG.

Thanks. Good morning. One follow up on the new originations in the non-QM. I mean are all the loans that are coming into the portfolio originated by Arc Home? Or do you see opportunities to buy loans from banks and other brokers just anywhere across the street or you guys are you sourcing those words. Thank you.

Thanks, and thanks for the question, Eric, on yes, I alluded to in the previous answer for Matt. We've sort of reposition how we're acquiring some loans, given some changing dynamics, we're finding more and more a larger originators are willing to make this product rather than a broker it out.
And to the extent that's the case we're expanding the delegated or B2B channel through Arc Home. So even though our call will be purchasing these loans and be the intermediary on them on, they will necessarily be funding the borrower. So we see that as an area of growth.
With regard to the the banking pressure in the regional space, obviously that's a well telegraphed narrative, obviously, with Wells Fargo's exit a good amount of time ago and chase issuing the first deals post-GFC come from the portfolio side. There's obviously, yes, flows to be found out. I think it speaks more to the returns that that exist in sort of that prime prime jumbo space where banks tend to traffic more on at the moment. We don't see that as particularly attractive, but are paying very close attention to it.
On our expectation is and what we're seeing from most of the securitization market today, despite the broader narrative of regional bank selling most of the originations hitting the securitization market. And by most, it's very, very large portion is actually from non-bank originators on which sort of flies in the face of this narrative, not saying that that will change, but we're paying close attention to it. And if it does change and we'd like to think we'd be in a place to off the we'll opportunistically take it advantage of that dislocation.

Eric Hagen

And that's really helpful. And just one on the credit in the portfolio, just in general, I mean, you guys have been pretty active in non-QM and the investor property space. Has any thoughts any thoughts there on the credit performance going forward? I mean, is there a way to like sensitize how sensitive some of the credit could be relative to like the agency space, for example?

Certainly. So obviously, we traffic in slightly more credit sensitive space. And that being said, even in my prepared marks. We talk about the strong housing fundamentals. The mark-to-market LTV or HPI, adjusted LTV of the book is very, very low on the performance as I stated in the prepared remarks on delinquency trends are still below our original underwrite.
So there has been a modest uptick, but that modest uptick is still well below our underwriting. You have also in the prepared remarks you have versus the broader non-Agency market on our originations, the credits we've securitized have been outperforming comparables.

Eric Hagen

Yes --

So I think it's also worth noting there that unlike the broader market on average, we probably don't make 25% to 35% of the loans and sort of the average yield issuer shelf out there with some issuers being as much as 50% we would make. So we have a tighter box credit box. I mean, we've stayed true to what we've said over the years and expect to do so going forward.

Eric Hagen

Yes. Thanks for the complete response. Thank you.

Operator

And it appears that we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.

And thank you to everyone for joining us and for your questions. And we very much appreciate it. Look forward to speaking to you again next quarter for the day.

Operator

That concludes today's teleconference. Thank you for your participation. You may now disconnect and have a wonderful day.