Welcome to the AG Mortgage Investment Trust Fourth Quarter 2021 Earnings Call. My name is John and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note, the conference is being recorded. And I'll now turn the call over to Jenny Neslin..

Thank you, John. Good morning, everyone, and welcome to the fourth quarter 2021 earnings call for AG Mortgage Investment Trust. With me on the call today are David Roberts, our Chairman and CEO; T.J. Durkin, our 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, 2020, 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 fourth quarter 2021 earnings presentation on the Home Page in the Investor Presentation section. Again, welcome to the call, and thank you for joining us today. With that, I’d like to turn the call over to David..

Thank you, Jenny. 2021 was a successful year for AG Mortgage Investment Trust in many ways. But most importantly, we are proud to have achieved our transition to a pure play residential credit REIT.

We begin this year 2022 with the liquidity, the infrastructure and the talent to continue to be a growing and focus leader in residential mortgage origination and securitization.

We have demonstrated our ability to execute this strategy through the rapid acceleration of our originations and subsequent securitizations in the latter part of 2021 and into 2022. Over time, we believe this will lead to increased earnings and increased dividends for our shareholders.

That is how we evaluate ourselves and how we believe in time, the market will evaluate us. A notable event in 2021 was our equity capital raise of approximately $80 million. The most important effect of this capital is that it will fuel our growth for the foreseeable future.

Of course, we would have been far more pleased to have raised equity at a higher stock price than we did.

That said, from the long-term view of our earnings and dividend progress, we consider the capital we raised to have been necessary to not only support our continued growth, but also to strengthen our position, making us well capitalized to seize on the opportunities that are unfolding in the face of the current volatility in the markets.

I would also point out that in 2021, through a combination of the common equity capital raise, a significant increase in book value from earnings, and some exchanges of common equity for preferred equity, we were able to take the preferred equity percentage of total equity capitalization from 58% at the start of the year, down to 39% at year-end.

We believe this year-end capital structure positions the company much more solidly to achieve our goals. As we are all well aware, the start of 2022 has seen volatility in nearly all financial markets. The bottom line is we have been and are well protected against interest rate rises.

The widening of credit spreads will cost our current book in the near-term. However, given our robust liquidity at both MITT and our mortgage affiliate Arc Home, that same volatility is providing us with increased opportunities, which we have already started to capitalize on.

In terms of our dividend policy, we will continue to be guided by our view of earnings on a go-forward basis. As we have highlighted in the last few calls, given our current business model, we consider GAAP earnings to be a more meaningful go-forward guide than core earnings in evaluating our business and our dividend policy.

Finally, we are well aware that the stock market has not yet given us credit for what we believe is our significant growth opportunity. We will strive to make the levers of both existing and new shareholders.

If you have followed our ownership filings, you will see that we, members of the management team, have backed up our own belief and confidence in this future with sizeable ownership stakes. With that, I will now pass the call over to T.J..

Thank you, David, and good morning, everybody. Putting some specific numbers to David's opening remarks. MITT generated $5.29 of GAAP earnings per share during 2021, along with $1.11 of core earnings, while paying out $0.81 of common dividends.

During the year, we grew adjusted book value by approximately 21% from $14.32 per share from -- to $14.32 per share from $11.81 per share. We grew the portfolio from $1.4 billion to $3.2 billion, increasing our economic leverage ratio from 1.5x to 2.4x from last year to enhance our earnings power.

Turning to Page 6 and diving a bit deeper into the company's fourth quarter activity. We were active in purchasing approximately $1.2 billion of non-agency loans, while completing two non-QM securitizations during the quarter.

We did take a one-time hit to book value as a result of the capital raise in November, but we ended the year with $137 million of liquidity, which puts us in a strong position to take advantage of the current market volatility.

And finally, our mortgage affiliate Arc Home continues to have strong results within its non-agency channel with approximately $500 million of originations during the quarter. I'll now pass the call over to Nick, who will provide further detail on our execution and Arc Home's performance..

Thanks, T.J. Turning to Page 7. Here, we summarize our purchase activity throughout 2021 along with our 2022 year-to-date purchases in current pipeline. During 2021, we acquired approximately $2.5 billion of Non-Agency loans, steadily increasing our purchase pace over the course of the year.

We also successfully deployed approximately $105 million of equity corresponding with the November offering pipeline, and have purchased over $500 million of assets year-to-date in 2022.

With additional pools of loans in the pipeline, we are well-positioned to continue to build off this momentum given our liquidity, financing fasci and current portfolio available for securitization. During 2021, we executed five securitizations.

And in 2022 have already completed two securitizations, including our first GSE Non-Owner Occupied collateral deal. We expect to continue this pace of two to three securitizations a quarter throughout 2022. Moving to Page 8, This slide outlines our current portfolio along with the corresponding asset yields and cost of funds.

In the lower left, we highlight the portfolio's repositioning over the course of 2021 as we rotated capital into Non-Agency loans. By year-end, roughly 85% of our equity was allocated to residential investments. As mentioned, year-to-date in 2022, we have purchased an additional $519 million of Non-QM and GSE eligible Non-Occupied Loans.

These are first rated securitization of GSE eligible Non-Occupied Loans. Issued $300 million securitization with one of origination partners, and sold $133 million of Agency RMBS. On Page 9, we provide a summary of our Non-Agency new origination loans. 2021, we acquired approximately $2 billion of no-QM loans.

As you can see on the table on the right, these acquisitions have significant equity along with other strong credit characteristics. Approximately $800 million is financed with non-mark-to-market, non-recourse debt, while the remainder is financed through aggregation warehouse lines that will be termed VR programmatic securitizations.

We also acquired approximately $500 million of GSE eligible Non-Occupied Loans, of which many were securitized in the beginning of January, while the remainder will be securitized at the end of Q1 or the beginning of Q2 alongside additional acquisitions from 2022. Moving on to Page 10.

During 2021, Arc Home generated $22.8 million of pre-tax earnings, $9 million of which contributed to MITT's earnings during the year. During the fourth quarter, Arc's earnings were driven by mark-to-market gains on its MSR portfolio, which also continued to perform well during the first quarter of 2022, given the rising rate environment.

Arc Homes current MSR portfolio has a fair market value of approximately $68 million and can be used for additional liquidity given the current low utilization of Arc's existing MSR lending facilities. On Page 11, we continue our discussion on Arc. Arc Home continues to differentiate itself through its growth and Non-Agency Originations.

Over the past year, Arc has grown its Non-Agency volumes to approximately 50% of its originations, up from less than 5% 2020. This is coupled with an increase in total originations from $3.8 billion in 2020 to $4.4 billion in 2021.

As Arc continues to expand its Non-Agency footprint, we expect it will offset margin compression in conventional and government products. Anthony, will now go over our financial results in more detail.

Anthony?.

Thank you, Nick, and good morning, everyone. Turning to Slide 12. We provide an update on our financing profile as of December 31. During the quarter, we remain focused on our securitization business, completing two Non-QM securitizations of approximately $450 million UPB, obtaining non-recourse non-mark-to-market financing.

As of year-end, approximately 35% of our financing was through securitized debt. We expect this allocation to continue to increase as we rotate our existing portfolio from warehouse financing to securitized financing. And as Nick previously mentioned, we completed an additional two transactions through February.

The uncommitted borrowing capacity on our warehouse lines grew quarter-over-quarter, as we increase the capacity on one existing facility and entered into new facility to finance Non-Agency Loans.

This capacity along with liquidity from previous sales of non-core assets, cash generated from securitization transactions, and capital raised from our November common stock offering fueled our growth plan, enabling us to acquire approximately $1.2 billion of Non-Agency Loans in the fourth quarter.

This fourth quarter acquisition activity alone represented approximately 50% of our total 2021 purchases. On Slide 13, we provide a reconciliation of our book value per common share for both the quarter-to-date and year-to-date periods.

During 2021, book value grew approximately 20%, largely as a result of year-to-date GAAP net income available to common shareholders of $86 million, or $5.29 per fully diluted share.

GAAP earnings was driven by asset appreciation on our credit investments, and profitable sales or payoffs of our legacy non-core investments as we reposition our portfolio to focus on Non-Agency strategy.

Book value decreased in the fourth quarter by approximately 13%, which was primarily driven by our November common stock offering and the preferred and common dividends declared during the fourth quarter, offset in part by net income.

Net income available to common stockholders during the fourth quarter, approximated $6.3 million or $0.33 per fully diluted share. These earnings included realized gains on the sale of certain Non-Agency bonds, net mark-to-market gains on Non-QM loans inclusive of earnings from our related hedges.

Mark-to-market gains on certain RPL/NPL investments as a result of improved borrower performance and non-core earnings contributed from Arc Home, our 45% equity method investment, which is held in a taxable REIT subsidiary.

On Slide 14, we disclose a reconciliation of GAAP net income to core earnings, where you can see core earnings was $1.11 per share for 2021, a negative $0.05 per share during Q4.

Core earnings for the year was primarily driven by accretion recognized on the sale of certain RPL/NPL loans held at discounts, as well as deferred interest received on the resolution of a commercial loan in the third quarter last year.

As a reminder, core earnings is limited and that it does not include our portion of gains recorded by Arc Home in connection with the sale of residential mortgage loans to us. These gains were $0.33 for the year and $0.10 for the fourth quarter.

And we're recognizing the unrealized gain line item on our income statement, contributing to GAAP earnings during 2021. Lastly, we ended the quarter with total liquidity of approximately $137 million, which was inclusive of $68 million of cash and $69 million of unlevered agency RMBS.

As of January 31, our liquidity was relatively consistent, approximating $134 million, which will support our continued growth in our investment portfolio throughout 2022. This concludes our prepared remarks. And we would now like to open the call for questions.

Operator?.

Thank you. Our first question is from Doug Harter from Credit Suisse..

Hi. This is John Kilichowski on for Doug. Thank you so much for having me.

First question just sort of how do you size the risk? Or could you quantify the risk of when you're aggregating these loans and you're putting them into different buckets before you securitize kind of what's the timeline there until you're ready to securitize? And could you sort of size that risk for us?.

Yes, certainly. The good news in that regard is, as QE begins to roll off, a lot of capacity is returned to the market from a resource standpoint.

So, to the extent that's the case, what sort of where the COVID turd times, if you will, of more like 90 to 120 days, our expectation, we're going to get that down closer to 30 to 60 days from when loans hit our warehouses to when they find their way into securitization. So that's sort of the positive there..

Okay, great. Thank you.

And then second question, new loan, the kind of the widening on -- or the spread to new loans, how is that impacted returns? And where do you see it going?.

Yes, so that's if anything of bright spot. Obviously, as David mentioned, in the prepared remarks, there's a spread binding with our current book, but we continue to be able to source assets at more attractive yields, if anything earlier into the year, we sort of hadn't seen the spread widening in the loan space that we were seeing to the secondary.

But that's fully present today, over the past couple 3 weeks, and into that, if anything, expectations or volumes should actually be higher..

Okay, great. Thank you.

And then just last question, how is the impacting of the FHFA LLPA on high balance and second home opportunities?.

Yes, I think that's very interesting opportunity. Maybe a little bit unexpected, given sort of the rollback of some of the amendments, the PSPA earlier in the year. We welcome any LLPA increases. I think those will be very meaningful. We are focused on originate cohorts of origination where it makes sense for balance sheet to participate.

And given the fact that, that has -- it was implemented as of April 1, basically it locks from call even a month ago, have already started flowing into private capitals hands. I think that'll continue being an opportunity for ourselves and a lot of other participants in the markets in the loan space..

Great. Thank you for your time..

Our next question is from Bose George from KBW..

Good morning. Actually, first, just wanted to ask how do you see the core run rate earnings from the portfolio? I mean, this quarter the core number was slightly negative. Just what do you see as a normalized ROE and just help us kind of think about how we get there from here..

Yes, Bose, I can take that. So, when you think about the current quarter, we did try and isolate the portion from Arc that's not included, which was the $0.10. I would say the best way to think about it and we've talked about this before where we -- we've completed the transition on the balance sheet side.

And on the income statement side, we do expect core and earnings to continue to grow and we did include a slide in the presentation on Slide 7, where you can really see purchases ramp up in Q3, Q4, of what you're not really seeing that earnings come through yet in the fourth quarter.

And Q1 and really Q2 onward we really see us -- see that earnings come through as the purchases settle in and begin to earn..

And just in terms of the normalized ROEs, I mean, should we think of kind of a double-digit number after sort of on a net basis?.

Post securitization, yes..

Okay, great.

And then actually just looking at the book value slide last quarter, if you sort of strip out the impact of the deal, was the book value kind of roughly flat?.

Yes, flat to slightly up due to the GAAP earnings outweighing the dividends..

Okay.

And then just this quarter-to-date just any update on changes to book value?.

Yes, so quarter-to-date through January 31, approximately down 1% for book value..

Okay, great. Thanks..

Our next question is from Herbert Cranston from JMP Securities..

Hey, thanks. Good morning. Just another question on Arc. I think in the prepared comments, you guys mentioned that you expect an expanded footprint to offset the margin pressure that we've seen in the origination business.

Should we interpret that to mean that you guys believe Arc can remain profitable on an operating basis throughout 2022? It seems like from some of the other originator calls, that there's been quite a bit of continued margin compression into the first quarter.

So, I was curious, have you guys seen that as well and what the sort of outlook is for Arc in terms of operating profitability this year? Thanks..

Thanks, Herbert. This is Nick. So, on the sort of transitioning to our Non-Agency footprint, there's no hiding from the margin compression, which is obviously going to -- has been well telegraphed and will likely be more and more of it across sort of the industry.

I think, if anything, Arc is counter cyclical, given our repositioning and to the extent that resources become available as employment comes off of really all-time highs, since 2007, that if anything, it gives us an opportunity to both expand volumes and profitability. So, we're optimistic..

Okay, got it. Appreciate the comments. Thank you..

Our next question is from Eric Hagen from BTIG..

Thanks. Good morning. Maybe a couple from myself. I think you responded to the first question saying that, as the Fed rolls off its balance sheet and spreads widen, there should be more capacity in the securitization market. Maybe hoping you can explain that a little bit.

And then as an agency and originator, Arc Home has regulatory capital that it needs to exceed above a certain threshold for the agencies. Can you say where Arc Homes regulatory capital sits with regard to that threshold? Thanks..

Yes. Eric, we don't have the exact numbers on the regulatory capital. But we're very comfortable lead through that. That's not even an issue at the top of mind.

And I think what the earlier comment was, is that not so much the Fed rolling off their balance sheet more the -- I think the changes out of the FHFA in terms of LLPA is what's creating, I would say more volume or opportunity for non -- for securitizers to effectively play in that space, not so much directly the balance sheet runoff..

Okay.

So, with regards to securitization and spreads that you might confront there, can you talk about how you think about financing loans through your warehouse versus turning them around in finance and then through securitization, if there's volatility in that market?.

Of course. We expect to still prudently de-risk our warehouse risk and securitize assets. Although no one likes spread widening on the securitize space, that sort of, obviously prevalent across all sort of fixed income products and risk products.

The -- what alluded to before is, we can replace the risk at these wider levels and actually sort of dig in more and increase volume. So, albeit, painful on current inventory. There is -- you can replace risk at the current market, and so create the ROEs that we talked about..

All right. Thanks a lot..

Next question is from Jason Stewart from Jones Trading..

Thanks. Good morning. I think he talked a little bit around this.

Can you describe the ROE opportunity in the pool market versus the origination market, if you're seeing some dislocation in pools? Is that a better opportunity than buying from Arc at the moment?.

So, we pay very close attention to where we can organically create products at Arc versus where assets trade in the secondary. Certainly, there are -- until recently, there hadn't been a tremendous amount of opportunity, if anything there's probably a lag effect maybe just trading shops and guys being opportunistic or optimistic.

Earlier in January, certainly as February has taken hold, we do see more opportunity than we had over the past year in the bulk markets for sure. Is doing stuff organically still net-net better today? Yes. But the basis has there has certainly tightened considerably..

Okay, fair enough on that. And then back to Arc, on the MSR, if my math is right, it looks like the MSR at 4Q was marked around something like 4.2x.

Can you talk about where you see the sensitivity on that asset and whether that was included or any markup was included at your January 31 estimate of book value from it?.

Yes, Jason, I can comment on the January impact. So, there was a markup on the MSR Arc from MITT's portion is approximately $2 million markup on that asset during January..

Okay.

And any comments around sensitivity to that asset on from a rate perspective? And I guess we can sort of back into it based on that January 31 mark, but any generic comments there?.

Yes, we do disclose the very high-level portfolio characteristics, given those characteristics -- obviously, those coupons are well out of the money today, and into any sell off, there should be additional expansion, albeit, the next 25, 50 basis points move won't have the same sort of impact to sort of the expansion of value there.

As we've mentioned before, obviously, we carry that unlevered. So, a sort of additional source of capital, if you will..

Got it. Okay. Thanks a lot. Appreciate it..

And we have no further questions at this time..

It's David Roberts. Thanks to everyone for joining us on this busy morning. I would leave you with one thought, which is that conjunction with our infrastructure and our talent, it is a fortuitous time for us to have a lot of liquidity to deploy as we watch the volatility of this market, and we are optimistic about the rest of the year.

And I hope everyone has a good day. Thank you..

Thank you, ladies and gentlemen. That concludes today's call. Thank you for participating, and you may now disconnect..