Welcome to the AG Mortgage Investment Trust's First Quarter 2019 Earnings Call. My name is Sylvia, and I will be your operator for today's call. [Operator Instructions]. Please note that this conference is being recorded. I would now turn the call over to Karen Werbel. Karen, you may begin..

Thanks, Sylia. Good morning, everyone. We appreciate you joining us for today's conference call to review AG Mortgage Investment Trust's first quarter 2019 results and recent developments. Before we begin, I'd like to review our safe harbor statement.

Today's conference call and corresponding slide presentation contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are intended to be subject to the safe harbor protection provided by the Reform Act.

Statements regarding our business and investment strategy, market trends and risks, assumptions regarding interest rates and prepayments, changes in the yield curve and changes in government programs or regulations affecting our business are forward-looking statements by their nature.

The company's actual results may differ materially from those projected due to the impact of these factors and others beyond its control. All forward-looking statements included in this conference call and the slide presentation are made as of today, May 3, 2019, and we disclaim any obligation to update them.

We will refer to certain non-GAAP measures on this call. And for reconciliations, please refer to the earnings press release and 8-K, which are posted on our website and have been filed with the SEC. At this time, I would like to turn over the call to David Roberts..

Thank you, Karen, and good morning, everyone. I'd like to share some highlights from our first quarter 2019 financial results with you today. Our core earnings for the quarter was $0.45 per share after a negative $0.01 per share retrospective adjustment. For the first quarter, we declared a dividend of $0.50 per share.

Following the challenging conditions in the fourth quarter, Agency spreads stabilized and credit spreads tightened in the first quarter. As a result, our undepreciated book value per share increased 1.5% in the first quarter.

We are pleased that during the quarter, we raised net proceeds of approximately $66 million through an overnight common equity offering and our ATM, at-the-market program. We fully invested the proceeds into Agency RMBS, but we intend to rotate most of these proceeds into credit over time.

During the quarter, we focused on purchasing credit assets that played to the sourcing and diligent strengths of our extensive RMBS/CMBS team as well as the AG platform. Alongside other Angelo Gordon funds, we continued our purchases of non-QM pools and sourced 2 new commercial real estate loans.

We see both non-QM and commercial real estate loans as playing to our differentiated strengths. During the quarter, the performance of our single-family rental portfolio improved with increased occupancy and increased operating margin. TJ will expand upon the single-family rental performance. And with that, I will turn the call over to TJ..

Thank you, David. Good morning, everyone. After the above trend rate of growth in 2018, all economic indicators pointed to slower growth in the first quarter of 2019 as the fiscal boost from the tax cuts waned, global growth stalled and both the government shutdown and trade tensions weighed on sentiment.

The labor market continued to tighten in the first quarter, but inflation, as measured by year-over-year core PCE, slips below the Fed's target.

At the March meeting, the Federal Reserve maintained the federal fund interest rate at a target range of 2.25% to 2.5% but moderated its outlook for growth and expressed concern over persistently low inflation.

In response, the Fed pivoted away from its more hawkish message from the fourth quarter by pausing its interest rate tightening campaign in an effort to loosen financial conditions. In the Fed's projections, they effectively removed all but one tightening through the end of 2021.

The Fed also announced that the end of its balance sheet runoff would occur in the third quarter of this year. During the first quarter, as David previously mentioned, our book value increased primarily due to stabilizations of Agency spreads, strong performance of specified Agency pools and credit spread tightening.

The Fed pivot during the quarter removed fear of materially higher rates from the market and approximately $25 billion of buying power of REIT capital that's raised during the quarter, which underpinned demand for Agency MBS and fixed income in general. The CRT market found its footing following a volatile and illiquid year-end.

Spreads rallied to meet increased liquidity and then further tightened later in the quarter alongside broader market rallies. CRT exhibited additional price tiering among structures, deepening the cloud profile during the quarter.

Legacy RMBS spreads tightened modestly and other RMBS sectors, including short-duration senior tranches of securitized non, and reperforming loans were met with increased demand and tighter spreads.

CMBS spreads also tightened with new issue bond -- AAA bonds tightening approximately 15 basis points, while BBB securities tightened by more than 100, reversing all of the widening we saw in the first -- fourth quarter. Focusing on Slide 6 of our quarterly earnings presentation, we outline our first quarter activity.

On the Agency side, we purchased Agency MBS whole pools and TBAs, closely deploying the proceeds from the capital raised during the quarter. On the credit side, we purchased CRT securities, a pool of primarily RPL mortgage loans and several non-QM pools along other AG funds.

We also purchased CMBS securities, sourced 2 commercial real estate loans and refinanced an existing commercial real estate loan. Additionally, we sold predominantly legacy, prime, Alt A and subprime RMBS securities. On Slide 9, we've laid out our investment portfolio composition for the quarter.

The net carrying value of the aggregate portfolio was approximately $4.1 billion for the quarter, comprised approximately of 60% Agency, 37% credit and 3% SFR. Focusing on our Agency portfolio on Slide 10, you will see breakout of our current exposure by product type.

The constant prepayment rate for Agency book was 4.3% for the first quarter versus 7.6% for the 30-year Fannie Mae universe. Our disciplined Agency MBS asset selection process allows us to position the portfolio for a variety of prepayment environments.

As 90% of our Agency MBS holdings are made up of pools backed by lower loan balance loans or loans in favorable geographic locations, we expect the portfolio will outperform the overall universe of Agency MBS as speeds pick up over the coming months in response to lower interest rates.

Turning to Slide 12, focusing on our commercial real estate loans portfolio. We funded approximately $15 million of equity commitments related to construction loans during the first quarter. We have approximately 54 remaining -- $54 million remaining in equity commitments.

These construction loans are primarily first mortgages that sit in senior positions at the top of their respective capital structures. Turning to Slide 13, we provide portfolio statistics on our SFR portfolio.

Operational improvements at Conrex, combined with a focused action plan, helped rapidly offset the increase in vacancies experienced last quarter. Once the vacant homes were returned and made rent ready, Conrex was able to quickly lease them while adhering to the enhanced tenant underwriting that has been implemented in prior quarters.

While there were higher expenses related to the high volume of turnover during the quarter, the 5.8% increase in occupancy helped improve the operating margin from 43.8% to 46.3%. We are also in the process of negotiating expense reimbursement which was in our purchase agreement.

Funds recurring, held in escrow and the negotiated reimbursement amount would offset some of these onetime expenses. Looking ahead, Conrex is focused on tenant communication and experience in order to retain those tenants in the home as well as increase rents and operating margin.

Moving ahead to Slide 15 of the quarterly earnings presentation, we lay out the duration gap of our portfolio. Our overall duration gap increased from 0.74 years at the end of the fourth quarter to 0.95 years at the end of the first quarter.

At this level of interest rates, our Agency MBS holdings should exhibit some degree of directionality, underperforming in a move to lower rates due to increased prepayment concerns and increased gross supply and outperforming in a move to higher interest rates as these concerns fade.

We felt it prudent to adopt a slightly longer duration profile to counteract some of this dynamic. Along with this, we also increased the size of our payer swaption hedges from $260 million notional to $485 million notional in the event of an unexpected near-term reversal in rates.

Looking ahead, we continue to see a large pipeline of credit opportunities at favorable risk-adjusted returns sourced via the Angelo Gordon platform. We are gratified that we are able to successfully access the equity capital markets for the first time in 6 years in order to fund these opportunities.

As previously mentioned, we invested the new capital into liquid Agency Securities to earn current carry as the credit opportunities we are pursuing typically have longer settlement time lines like the residential and CRE loans we purchased this quarter. We think having this flexibility will provide more stable earnings power over the long term.

With that, I will turn the call over to Brian to review our financial results..

Thanks, TJ. Overall, for the first quarter, we reported net gains available to common stockholders of $25.8 million or $0.84 per fully diluted share. Core earnings in the first quarter was $13.6 million or $0.45 per share versus $13.6 million or $0.47 per share in the prior quarter.

There was a negative $0.01 retrospective adjustment in the first quarter due to the premium amortization on our Agency portfolio versus a de minimis retrospective adjustment in the prior quarter. At March 31, our GAAP book value was $17.44 as compared to $17.21, an increase of 1.3% from last quarter.

Our undepreciated book value was $17.56 as compared to $17.30 last quarter, an increase of 1.5% from last quarter. This was due to Agency spreads stabilizing and credit spreads tightening, as David mentioned. As described on Page 5 of our presentation, the portfolio at March 31, 2019, had a net interest margin of 2.1%.

This was comprised of an asset yield of 5.2%, offset by a total cost of fund of 3.1%. The net interest margin decline from the prior quarter was due to the flattening of the yield curve and our increased allocation to Agency during the quarter. As of March 31, we had 44 financing counterparties and are financing investments with 32 of them.

In general, funding continues to be plentiful with new entrants in both the credit and agency space. Additionally, at quarter end, our estimated undistributed taxable income was $42 million or $1.29 per share. We continue to evaluate this on a quarterly basis to make sure that we're compliant with our REIT distribution requirements.

That concludes our prepared remarks, and we'd now like to open the call for questions.

Operator?.

[Operator Instructions]. And the first question comes from Doug Harter from Crédit Suisse..

Can you talk about the return difference on some of the lendings, on credit assets versus agencies, how that might impact returns as you rotate that new capital over the coming months or quarters?.

Sure, Doug. I think we have a layout on Page 8. I think given the rate move, Agency, NBS on the [indiscernible] was a tighter ROE versus prior quarters.

And so I think as we rotate into particularly the -- on the loan side, both resi and in commercial, we would expect to see a pickup of probably a couple hundred basis points at the minimum if we're able to execute on the whole loan strategies..

Got it.

And then are you planning on increasing allocation to the single-family sector as part of that rotation?.

We're constantly evaluating the opportunities in that space that are in the market. There's nothing that we're actively pursuing right now in contrast. But I think we've been more active in purchasing the -- both new non-QM whole loans on the resi side as well as some of the commercial loans that we're seeing.

It's a much more active pipeline on that side..

Our next question comes from Trevor Cranston from JMP Securities..

Question on the credit opportunities in the pipeline you guys were seeing. On the commercial side, I was wondering if you could maybe provide a little bit more color on specifically where you're seeing opportunities within the CRE loan market..

Sorry, I think we're seeing in two general forms. We're seeing some opportunities through our real estate private equity group with some of their operating sponsors on unaffiliated transactions. So we're sourcing it kind of out of comp in that way.

And then secondly, there's been some larger development loans that some of the investment banks have underwritten and then in parts syndicated. And so we've seen a couple of those of late.

So again, first lien, they are construction loans, and we are able to get pretty attractive financing from those investment banks that are underwriting the actual CRE loan..

Yes. It's David. I would just add that we have real estate equity folks who really help us to underwrite these assets and whoever is -- whoever are sponsors of these assets. So it's very helpful to us in choosing which loans to participate in..

Got you. Okay. And on the resi said, I know you've mentioned that it sounds like non-QM is probably the primary focus. But I was curious if you can say if they're still finding any opportunities within the RPL space or any other newer loan types in the resi market outside of non-QM..

Yes. So we did close a small RPL transaction in Q1. I mean, I think the theme there is consistent with what we mentioned in that. We do see opportunities in the RPL and NPL space. They're typically not the $1 billion-plus type loan size trades that are out in the market. We're typically focused kind of in that $250 million and below transactions.

That's where I think the yields are just wider given some of the large players [indiscernible] pools of that size..

Okay. Then last question. I know you guys still have a lot of undistributed taxable income.

But with the slight gap between where core income is and sort of what the taxable income was just for the first quarter versus the dividend level, I was curious if you guys could provide any current thoughts around how you're thinking about the dividend going forward..

Sure. It's David. We don't give any -- typically don't give any forward guidance. We will look at where we are this quarter and in the second quarter and for the rest of the year and consult with our board and make a decision at that time..

[Operator Instructions]. We have no further questions at this time..

Thank you, everyone. We look forward to speaking with you next quarter..

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