MITT - NYSE

Good day, everyone. Thank you for standing by. Welcome to the AG Mortgage Investment Trust, Inc. First Quarter 2025 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. Good morning, everyone, and welcome to the First 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 Statements 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 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 Q1 2025 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.

Thank you, Jenny. I'm pleased to report our first quarter earnings, which showcases the continued execution of our core business strategy and industry-leading results, particularly around book value stability. I won't go into monologue about tariffs. The first quarter was clearly a tale of two distinct parts. The first 2 months saw a continuation of positive investor sentiment and very functional capital markets. Securitization discipline from the team and control around leverage led to MITT's strong financial performance during the first quarter. We saw book value largely unchanged, moving higher by $0.01 from $10.64 to $10.65 while supporting and paying our newly increased $0.20 dividend, therefore, producing a healthy quarterly economic return on equity of 2% for our shareholders. The volatility that began in April -- that began in March continued through the majority of April. We have widened out spreads on our retained securities to reflect these market conditions and would estimate book value through April to be down approximately 3%. We are in a strong liquidity position to take advantage of any continued volatility. With that being said, we saw very little trading or forced capital markets activity during the peak volatility of early April, which we think bodes well for a potential quick rebound in spreads. Lastly, I wanted to share our views on the impacts and opportunities around potential GSE reforms. While we have no knowledge of massive reform coming imminently, we do see clear signs of reduced footprint from the entities they manage. We believe that MITT is uniquely positioned to take advantage of these potential opportunities given our vertical integration with Arc Home, along with our well-established securitization shelf GCAT. When you add all together, we believe MITT is extremely undervalued at today's price. I'll now turn the call over to Nick.

Thanks, T.J., and good morning. The portfolio continues to perform well, delivering a 2% economic return while fully supporting the 5.3% increase in our dividend. We maintained a strong focus on protecting book value while growing the investment portfolio. Leverage increased modestly, yet remains well below peer averages, providing flexibility for rotation and growth into target asset classes. During the quarter, we increased our capital allocation to the home equity sector, a trend that we expect to continue. This quarter, we partnered with a leading nonbank mortgage originator to issue a $500 million home equity securitization. We acquired approximately $130 million of additional home equity loans from various nonbank originators, and we established a new partnership to aggregate home equity exposure while collaborating on programmatic securitizations. Our team remains focused on expanding partnerships in this space. Turning to the macro landscape, the current positioning and the portfolio. The global market is undergoing a significant transformation as the U.S. redefines its role in an evolving global order. While the worst of the recent volatility appears to be behind us, we are well positioned to navigate and capitalize on future market shifts. We have exercised prudence in leverage and discipline in capital allocation. We avoided chasing levered agency basis trades despite their popularity and as a result, preserved book value. We remain constructive on residential mortgage credit. As previously mentioned, we increased our capital allocation to home equity mortgages. We believe this sector is in the early stages of development and is set to outperform other residential mortgage credit sectors. We are lending exclusively to borrowers that have demonstrated ability to service their debts over a long period of time and who also are the beneficiaries of large increases in home prices, along with historically low interest rates. We believe this aligns with the goal of providing the best risk-adjusted returns in the residential sector. At a national level, housing continues to appear stable, which is supported by familiar narratives. Existing home sales have increased modestly from their lows a few years ago, but remain historically very low and the supply of newly constructed homes is slowly narrowing shortages in certain markets. Regionally, there are signs of pullback in markets that have seen some of the most significant increases in the recent past, but we believe these are contained. Similarly, we are seeing an uptick in delinquencies in certain cohorts of recent origination. In aggregate, underwriting standards remain historically tight. However, the past few years, we have seen expansion among certain participants, which is driving some of these recent increases. Despite the recent volatility and indications of modest weakness in certain housing markets and mortgage originations, it's important to note the strength of our portfolio. At the end of the quarter, our current loan-to-value was approximately 59% and serious delinquencies were only 1.3%. When you put all these ingredients together, our low economic leverage, our disciplined capital allocation and our strong portfolio performance, we are confident in our ability to continue to deliver results through broader macro-driven volatility. Before handing the call over to Anthony, I'd like to reiterate some of the key messaging around MITT's originator, Arc Home. Strategic investments in a high-caliber management team and talent have delivered meaningful results in a short period. Arc Home has demonstrated strong performance with lock volumes increasing 50% year-over-year. Gain on sale margins also improved during the quarter, supporting the company's achievement of breakeven. We expect Arc Home to remain committed to driving growth across origination channels, enhancing the customer experience and expanding market share. As Arc Home continues to innovate and diversify its product offering, we anticipate growing contribution to our earnings available for distribution. Our ability to generate assets through Arc Home is a key differentiator, providing flexibility and a compelling value proposition for our shareholders. With that, I'd like to turn the call over to Anthony.

Thank you, Nick, and good morning, everyone. MITT maintained positive momentum during the first quarter. We increased our investment portfolio by continuing to acquire agency eligible and home equity loans. Additionally, we remain active in the securitization market, executing two deals during the quarter. Importantly, despite the market volatility that began in March, we protected our book value, grew our earnings available for distribution and increased our quarterly dividend by 5.3% to $0.20 per share. During the quarter, our book value remained stable with a slight increase of 0.1% to $10.65 per share. Including our common dividend of $0.20 per share, we generated a 2% economic return for our shareholders. GAAP net income available to common shareholders was $6.2 million or $0.21 per share. Net interest income earned on our investment and swap portfolios increased by $1 million or 5% from prior quarter, primarily driven by continued capital deployment into target assets. Our investment portfolio recognized modest net realized and unrealized gains on a hedge-adjusted basis, reflecting continued strength in home equity assets and our securitized loan portfolio. In addition, our earnings from equity method investments was $1.2 million during the quarter, which includes gains on our investment in Arc Home valued at 1x book. These gains were partially offset by $1.1 million of transaction expenses primarily related to securitization activity. We recorded EAD of $0.20 per share, which increased from $0.18 in the prior quarter and covered our first quarter common dividend. Net interest income, including interest earned on our swap portfolio, totaled $0.68 per share. After accounting for operating expenses and preferred dividends of $0.48, this resulted in net earnings of $0.20 per share. Arc Home's contribution to EAD improved by $0.02 compared to last quarter and was breakeven in Q1, bolstered by continued strength in volumes and improving gain on sale margins. During the quarter, we grew our investment portfolio by 6.2% to $7.1 billion and maintained focus on expanding our presence in the Home Equity space. Specifically, we purchased $367 million of Agency Eligible loans and subsequently securitized $423 million of UPB. We also purchased $128 million of home equity loans, increasing our portfolio to $228 million as of quarter end, while continuing to build in April, acquiring an additional $52 million. Further, expanding on home equity, we cosponsored a securitization of $492 million UPB of closed-end seconds, retaining $26 million of non-Agency RMBS securities. From a financing perspective, we continue to operate with a low economic leverage ratio, which is 1.6x at quarter end. We have prudently managed our leverage exposure through our programmatic securitizations, ending the quarter with only $223 million of warehouse financing, primarily related to Home Equity loans. And lastly, we ended the quarter with total liquidity of approximately $133 million, consisting of $116 million of cash and $17 million of unencumbered Agency RMBS. This concludes our prepared remarks, and we'd now like to open the call for questions. Operator?

[Operator Instructions]. We'll take our first question over the phone from Doug Harter with UBS.

You have one of the legacy commercial mortgage loans that's set to mature this month. Just hoping you could give us an update on that and how much capital that would free up for investing?

Yes. So we have one of those two loans legacy from the WMC acquisition maturing this month. We expect that to go into kind of pre-negotiated forbearance. So we've been actively in dialogue with the borrower and the rest of the lender group, and we feel reasonably confident that we'll get to a positive outcome there in the short term and then ultimately, within a realistic time frame kind of culminate in a full payoff probably within 2025. And it's about $16 million of equity capital.

Got it. And then I guess, away from that, how do you think about your current capacity to continue to fund new loan acquisitions like the $50 million of Home Equity that you did in April?

Doug, this is Nick. we alluded to in the prepared remarks, sort of our ability to increase leverage. We've also commented in the past on some inefficient financings that are rolling off from the WMC acquisition, along with sort of the combination of the commercial. So we actually think we have a good amount of runway over the next, call it, 2, 3 quarters to, one, rotate capital and then two, take some of that additional leverage into the Home Equity space.

We'll take our next question over the phone from Crispin Love with Piper Sandler.

Can you talk about the health of the securitization markets over the last several months, especially amid the recent volatility and then how they might be performing today?

Yes. So I think we saw markets perform fairly well through March despite maybe broader sort of equity turbulence. When you got to Liberation Day, call it, the first two weeks of April, we saw them effectively close. And I think that was in a glass half full way, it was -- no one was forced to issue. People sat out the volatility. By the end of the month, you saw deals coming back to market and quite a decent amount of them by the last 2 weeks of April and into the beginning of May. And I would say their Capital Markets are fully open. I think spreads are wider, right? So I think if you look at where we're retaining securities, I think there may be 50 to 75 wider based on where we're seeing pricing today. And so I think that's how we're thinking about book value in April. But I would say the markets are back open.

Perfect. Makes sense. I appreciate the color there. And then can you expand and share your views on the home equity market. It was a good chunk of your prepared remarks and just the attractiveness opportunities that you doubled your exposure in the quarter off of a relatively small base, remained active in April. But curious on your longer-term views there, especially if the rate outlook changes meaningfully from current levels?

Yes. We get the question a lot about the rate outlook. So taking that part first, like we do believe that this is a durable place for us to commit capital in the future because rates can rally a tremendous amount, whether it be the front end, rally, no matter wherever it is. The lock-in effect from the stimulus eras during COVID. And for there to be any sort of degradation of the addressable market, you need a very, very significant rate rally. So we remain confident in our ability to -- of this being the relatively early stages of emerging asset class. To that end, we're seeing more and more originators ramp up this production and folks that were originating a decent amount of production, call it, a year back we're seeing a near doubling sort of sequentially year-over-year, and we expect sort of that momentum to continue.

We'll take our next question over the phone from Bose George with KBW.

Just wanted to continue on Arc. Can you just talk about volume trends in the second quarter, the spread widening you noted in the securitization markets? Has that been able -- can you pass that on to consumers? Is that impacting the demand there? Just color on that?

Yes. So I think it's been widely publicized in the NBA, and we'll see if the trend continues. But the consumer has pulled back slightly on home purchases. Obviously, it's early in sort of the purchasing cycle. So we would expect the overall market to be down, but we do think Arc is somewhat insulated given where it attaches itself to the market. As far as gain on sale margins, we do expect them to normalize/maybe gain a little bit into this volatility. Certain segments have been better bid versus others, if anything, maybe creating a little bit of opportunity. But we're still optimistic coming into this part of the buying season.

Okay. Great. And then in terms of earnings at MITT, so you've reached breakeven. Can you just talk about the expectations there for EAD, assuming volumes remain kind of subdued this year?

Yes. I think as we've said in the past, we bifurcate sort of how our equity is allocated, right? You've got a large chunk of it in what we call the investment portfolio. I think that's largely been doing its job both from a book value perspective as well as an earnings perspective. And then we had the headwind of kind of negative EAD coming out of Arc. We've now hit breakeven. And we think sort of $0.01, $0.02, $0.03 from Arc is just effectively adding to what that stable kind of earnings power has been on the investment side. So I think that's how we build forward earnings growth. It's effectively keep doing what we're doing on the investment side. And now we're seeing some positive contribution from Arc, and that should directly kind of increase what has been our kind of steady-state EAD range.

We'll take our next question from Jason Weaver with Jones Trading.

First, on the home equity securitization, can you talk a little bit more about that, what advance rates and sort of execution levels you were able to achieve there?

Yes. So the advance -- I want to maybe just starting with the collateral. We're talking mid-700s FICO, high 60%, low 70% type LTV. The advances to the non-IG part of the stack, which what we retain, generally is, call it, 95-ish percent of market value. From sort of where you're funding that, that's changed a little bit. As T.J. alluded to earlier, slightly wider, but you're funding that, call it, 200-ish context, plus or minus 10, 15 basis points today.

Got it. And maybe just to hone in a little bit more on Bose's question. Is there a level of originations that you need to see within Arc to maintain that sort of like $0.01 to $0.03 of profitability for the rest of the year?

So one, I think one, I think we're focused more on growing the top line there to be -- to exceed that. So obviously, there's a breakeven and volumes -- volumes and outright levels of margins will impact it. As we've shown in the past quarter, obviously, we broke even. There's been some volatility, but we think that we're sort of at those origination volumes today. But to make it more profitable, obviously, we have to continue to grow the top line.

[Operator Instructions]. We'll take our next question from Eric Hagen with BTIG.

I want to dive in a little bit more on how we're like responding to volatility and such. And when mortgage spreads are wider, I mean, do you see that as an opportunity to maybe add risk and like add leverage? And do you see some of the typical non-QM originators retrench from the market when mortgage spreads are widening? Or just like what's the behavior in the market right now?

Yes. I mean I think, Eric, the volatility in early April was, I would say, more in like the macro spaces. So you saw it in rates, in equities and the closest derivative would be the basis on the agency side. And I think -- we think our shareholders are expecting us to kind of operate in the non-agency space and not try and time tactical trades there. So we've been disciplined in not taking debate there. At the end of the day, there wasn't that much for selling of whether it be home equity loans or non-QM loans or even securities backed by those products. So it was -- from our opinion, it's probably in the rearview mirror at this point. And so it's kind of back to business as usual.

Got you. Okay. On the securitized non-QM loans that you guys show on Slide 11, it looks like the yield to your cost basis is 5.7%. But how should we think about like a market yield for that portfolio at this point? Because it looks like the cost of funds that you're showing is probably a market cost of funds. So how should we think about like the economic spread that you're earning in that portfolio right now?

I mean I think we would probably point to the ROE on the right side.

Okay. Okay. So that ROE is more like a market ROE and not an ROE using a cost basis?

That's right.

And there are no further questions on the line at this time. I will return the program to our speakers for any additional or closing remarks.

Thank you to everyone for joining us and for your questions. We very much appreciate it and look forward to speaking again next quarter. Have a great day.