TPG Mortgage Investment Trust Inc (MITT) Q1 2021 Earnings Report, Transcript and Summary

Welcome to the AG Mortgage Investment Trust First Quarter 2021 Earnings Call. My name is Erin, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I'll now turn the call over to Jenny Neslin. Jenny, you may begin.

Thank you, Erin. Good morning, everyone, and welcome to the first 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. Except as required by law, we are not obligated and do not intend to update or to review or revise any forward-looking statement, 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 first quarter 2021 earnings presentation on the homepage 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. Good morning, everyone, and thank you for joining us. I'd like to welcome Jenny Neslin from whom you just heard. Jenny recently joined Angelo Gordon and was appointed as our General Counsel. She has served as both in-house and outside counsel to a number of companies in our industry. She brings valuable legal oversight, public company reporting and governance experience to MITT, and we are extremely happy to have her on our team. Our company remains focused on our previously stated plan to increase the company's long-term earnings power while maintaining adequate liquidity and increasing book value. A key component of our plan is to play to our strengths in residential whole loans, specifically our significant investment in Arc Home, and our experience and expertise in the non-agency space. To help us execute that plan, we are delighted to have Nick Smith join us as our Chief Investment Officer. Nick will work closely with T.J. Durkin, who as you heard is now -- and you've seen is now MITT's President. Nick will work with T.J. to accelerate our company's emphasis on whole loans. And you'll hear from Nick later on the call. We believe that over the long-term we can drive more value for our shareholders with our differentiated whole loan strategy. We call our strategy differentiated not because we are unique but because only a subset of mortgage REITs have our combination of skills, experience and infrastructure to execute the strategy, which we will discuss in further detail later on the call. Now turning to our first quarter financial performance, I am pleased to report that our adjusted book value per common share increased to $4.76 per share as of March quarter end compared to $3.94 per share as of December 31, 2020. That's an increase of $0.82 per share or 21%. As a reminder, adjusted book value excludes as an asset the capitalized issuance costs of our preferred stock, and therefore is $0.16 lower per share than our GAAP book value. The increase in our book value quarter-over-quarter was driven primarily by a rise in the value of our residential whole loans and our CMBS as well as continued strong performance from our mortgage affiliate Arc Home. In the fourth quarter, we reinstated the dividend on the company's common and preferred stock. Building off this momentum, the company declared an increased dividend on our common stock for the first quarter of $0.06 per share. In addition, we have returned to normal course dividend payments on our preferred stock, with the first quarter dividend paid on March 17. Now I am pleased to turn the call over to T.J. Durkin to cover our operational highlights for the quarter.

Thank you, David, and good morning everyone. During the quarter, we executed another accretive opportunity to strengthen our capital base by redeeming approximately 500,000 shares of preferred stock at a slight discount in exchange for 2.8 million shares of common stock. We also successfully utilized our ATM program during the quarter to raise net proceeds of approximately $10 million through the issuance of 2.2 million shares of common stock at a weighted average price of $4.53 per share. We reinvested that capital during the quarter into residential asset classes, including both non-QM loans and agency whole pools. Turning to our presentation on Page 5, we present the first quarter portfolio update. As previously mentioned on our last quarterly earnings call, we sold 2 of our 4 remaining commercial real estate whole loans at prices slightly above our year-end marks. During the quarter, we increased the size of the portfolio from $1.4 billion to $1.9 billion, mainly through agency purchases of approximately $443 million and non-QM whole loan purchases of approximately $209 million. Across the bottom table, you can see we continue to prudently increase the earnings power of the portfolio while maintaining adequate liquidity. Turning to Slide 6, you can see the allocation of equity among residential credit investments, agency MBS and commercial investments. During the quarter, we made continued progress shifting the portfolio into residential loans, which now represent over 60% of the portfolio, and deploying excess liquidity into agency MBS to keep liquid NIM in the portfolio as we continue to build out a pipeline of residential loans. Moving to Slide 7, we took advantage of strong credit markets within the first quarter to sell securities, which we were passive owners in and not related to our securitizations or whole loan activity. Along with other Angelo Gordon funds, we also completed a non-QM securitization subsequent to quarter end and have increased our borrowing capacity on warehouse lines for further acquisitions. On Slide 8, you can see we continue to be able to create an agency MBS book with better prepayment performance to the market due to our size and selectiveness when purchasing spec pools. On Slide 9, you can see our CRE and CMBS exposure continues to shrink given the 2 CRE loan sales mentioned earlier along with other CMBS sales during the quarter. Subsequent to quarter end, we exited all our remaining Freddie K multi-family securities. At this point, our commercial exposure is less than 5% of our overall investment portfolio, with 2 commercial real estate loans left and 3 CMBS single asset, single borrower securities remaining. We believe there is further book value upside remaining in these assets, and we'll prudently continue to manage this exposure down while being disciplined on the exit prices. Now turning to Slide 10, we want to, again, highlight the strong performance of Arc Home, our licensed mortgage origination affiliate during the first quarter. During the quarter, the team at Arc continued to take advantage of the talent in the mortgage banking sector with another strong quarter in both volume and margins within the agency channels. And as we stated on previous earnings calls, Arc Home was one of the first originators to reenter the non-QM business post-COVID, and you can see clearly how this product represented an increasing percentage of Arc's fundings since. We believe this early re-entry into non-QM built strong brand awareness and recognition for Arc Home in the non-agency correspondent and wholesale markets as the agency refi wave begins to recede over the near- to medium-term. We've provided additional detail on Arc's funding volumes by channel, product and overall gain on sale margin for reference in the chart here on Slide 10. I'll point out post quarter end, we have seen margins in the agency space continued to narrow due to both interest rates and some GSE implementation affecting certain forms of delivery into the cash window. And just as a reminder, MITT owns approximately 45% of Arc Home and the remainder is owned by other Angelo Gordon managed funds. So for me, wrapping up, we're pleased with the progress we made over the last year, simplifying our asset mix and balance sheet to be focused on growing our residential whole loans in concert with the growth from Arc Home while maintaining a prudent balance of agency mortgages for both earnings power and liquidity. We think there is a lot happening within the mortgage origination ecosystem, which MITT will be well-positioned to take advantage of. As I look ahead, I'm very excited to have Nick Smith on our team to help us execute on this strategy as the CIO of MITT. With that, I'll turn the call over to Nick.

Good morning, everyone, and thank you for the introduction. After nearly 2 decades of working in different capacities on the sell side, and most recently running the non-agency RMBS and whole loan trading business at BoFA Securities, I couldn't be happier joining the MITT management team. My career coincides with a very exciting environment for residential mortgage finance. Recently, regulatory structural and market changes have set the backdrop for what likely will be the most dynamic period for investing in the new origination, non-agency residential space in decades. As origination community begins to grapple with margin pressure and capacity remains at historic highs, we anticipate a quick return by originators into the non-agency market. As T.J. mentioned, in anticipation of this, we have been early in reentering and expanding our presence in the non-QM space. As they return, they will be pleasantly surprised by the new QM rules released by the CFPB. We expect these new rules to allow originators to embrace the past decade's technological gains in underwriting to streamline originator's originations while simultaneously reducing manufacturing risks and the associated costs. In addition to underwriting efficiencies, these new rules better align the risk retention requirements with the actual credit risk. Although there is some uncertainty around exactly what credits will qualify as QM, we are adapting our product offerings to maximize anticipated capital efficiencies. With mortgage credit availability at levels last seen almost a decade ago, we strongly believe these expanded product offerings will deliver attractive risk adjusted returns. If, as anticipated, the new risk retention rate requirements better align capital requirements with actual credit risk, the deployment of structural versus financial leverage can more prudently be managed to deliver returns. Said differently, no longer will additional terms of leverage be required to deliver market returns since we will be able to sell these lower returning securities to the market. Additionally, the increased liquidity in these credits will allow us to optimize the risk and return profile throughout each investment's respective horizon. If these changes were not encouraging enough, the treasury department and the FHFA recently announced an amended preferred stock purchase agreement with the GSEs. This agreement commits to further GSE reform while introducing limits on acquisitions of mortgage loans secured by second homes and investment properties as well as single family mortgage loans with multiple higher risk characteristics. Although subsets of these loans have been included in private label securitization previously, these changes are good steps towards leveling the playing field for private capital. Despite recent trade group's reservations about the potential disruptive nature of these policies, we believe that ultimately originators, consumers and investors will benefit. We are confident that we will be able to prudently grow our non-agency loan portfolio by delivering our origination partners attractive product offerings. Alongside our proven track record of sourcing assets is our vertically integrated mortgage originator, Arc Homes, an affiliated loan asset management service provider. The ability to organically grow originations with Arc Home, combined with access to in-house asset management services, sets us apart from many of our peers. While many other markets may struggle with sourcing attractive assets, we expect non-agency loan volumes to grow while simultaneously benefiting from near historic lows and risk-free yields and credit spreads. The current market conditions and proprietary capabilities already in place along with knowing T.J. and many from the investment team here at Angelo Gordon for over a decade, made this career move to MITT an easy decision. Again, I'm excited to be on Board and look forward to updating you on our continued progress over the coming quarter earnings. Anthony, I'll turn it to you for an overview of our financial performance.

Thank you, Nick, and good morning, everybody. During the first quarter, we reported net income available to common stockholders of approximately $39 million or $0.91 per fully diluted share. Earnings were driven by several positive factors, including asset appreciation across both residential and commercial credit investments, improvement in net interest margin on our non-QM and agency RMBS portfolios and $6 million of earnings from our 45% equity method investment in Arc Home, which is held within the taxable REIT subsidiary. Net interest margin expanded as a result of improved asset yields as well as reduced financing rates within the non-QM and agency portfolios. We also were able to mitigate much of the interest rate risk within our agency RMBS portfolio through economic hedges we put in place. On Slide 14, we provided a reconciliation of book value per common share, which increased by $0.79 during the quarter. This increase reflects our current quarter earnings, offset by the preferred and common dividend declared during the first quarter. And you will also see increases related to the preferred stock exchange transaction entered into during the quarter as well as the net proceeds raised from issuing common stock through our ATM program, which approximated $10 million. As discussed on our previous earnings calls, we also disclosed adjusted book value per common share of $4.76, which has computed based on total equity, less the entire liquidation preference of our preferred stock. Turning to Slide 15, we disclosed the reconciliation of GAAP net income to core earnings for the first quarter where you will see we recognized core earnings of $0.08 per common share. When compared to core earnings in the fourth quarter of $0.22 per common share, the decline is representative of core earnings -- record earnings achieved that Arc Home in response to the elevated origination and gain on sale market conditions experienced during 2020. Despite normalizing margins, Arc Home continued to contribute to core earnings through its origination business while also recognizing mark-to-market gains on its MSR portfolio, which is not included in core earnings. Lastly, we ended the quarter with total liquidity of $52 million, which is after paying down the remaining secured note we had outstanding with our manager for $10.6 million. And subsequent to quarter end, CMBS sales and non-QM securitization that we transacted also generated additional liquidity for reinvestment. This concludes our prepared remarks, and we would now like to open the call for questions. Operator?

[Operator Instructions] And we do have our first question in from Bose George with KBW.

Actually, the first question was just curious where you see sort of incremental ROEs on the capital you're putting to work, especially on the whole loan side? And then just how we should think about kind of run rate returns for the business model?

Yes. Bose, it's T.J. I think -- breaking it down, I think on the agency side, we see probably very, very low double digit ROEs when we're hedging out the rate risk. On the whole loan side, I think it's probably closer to the lower- to mid-teen ROEs post securitization. And then, I think, as you think about the run rate where we're still kind of in the transition mode of rotating the capital and, I think, in a few quarters, once we get the portfolio sort of in the place we want it to be, it will be a more consistent kind of run rate that, I think, we'll be able to better forecast to you. So we're not quite there yet, but I think we're getting close.

Okay. No, that makes sense. And then actually just at Arc Home, it seems like there's a -- I guess, a handoff from the agency market to more of a QM market as that -- as the volume there ramps up. But when we think about sort of the earnings outlook, should we think there's potentially a dip as the agency market slows and -- before non-QM really sort of picks up a little more?

Yes. So we intend to maintain our agency business at Arc Home . I think we're just cognizant of the fact that: One, volumes are coming down; and two, margins are coming down, but we still are fully in that business. At the same time, historically speaking, credit products typically have wider margins and so we continue to look to grow and gain market share there, given sort of the proprietary relationship that we have. And -- we hope that will somewhat even out some of the probably earnings headwinds on agencies with more volume within the non-agency space as a tailwind. But I mean, we're obviously subject to the mortgage industry's volumes.

And your next question comes from Trevor Cranston with JMP Securities.

A couple more questions on Arc Home. On the non-QM side, volumes obviously started to pick up nicely there. Can you guys share any thoughts on sort of your targets for Arc Home? And how much you think they might be able to originate in the non-QM space on a quarterly basis over the next few quarters?

I mean, look, we continue to -- Arc Home, I should say continues to invest in that space. And -- obviously, people, technology and equity capital, we're getting to, I think, pretty good run rate volumes. You can see on Page 10, crossing 9 digits and hopefully that will be a fairly consistent run rate as it's less cyclical to rates and refinancing. So we would hope to be able to continue to produce in excess of $100 million a month going forward. And I think as Nick alluded to, having him on Board, we'll hopefully be able to also add some complementary products that Arc Home isn't currently offering to further expand the product mix and then by default the volumes.

Got it. Okay. And on the agency portfolio, I think you mentioned sort of a low double digit return opportunity. Are you guys currently investing in TBAs? And is part of that return coming from dollar rolls or is that more just on the pool side? And I guess a second question on the agency book. Your prepay speeds look like they've been exceptionally low relative to the market and relative to peers. So I was wondering if you could just provide some more detail on kind of the type of spec pools you guys have and then how you have achieved such low prepay speeds?

Yes. So, we're invested in spec pools in a cash format. We're not really participating in the TBA roll trade, if you will. The spec pools that we're buying, we give you a little bit of a breakout on Page 8 of the types of spec pools. It's going to be what you'd expect in terms of loan balance or investor paper or geo concentrations, New York, Florida pools, et cetera. And again, we have about $1 billion -- as of 3/31 of $900 million of fair value. That size of spec pools allows us to be very selective.And again, we're sort of positioned in probably lower coupon, 2s or 2.5s versus being up in coupon, which I think maybe has more yield, but obviously a different return profile and convexity profile.

Got it. Okay. And then last question, we've seen some M&A activity in the mortgage originator space. So I was curious if -- you guys already have Arc Home, obviously, but are there any other opportunities you're looking at to maybe make investments in like non-agency type focused originators? Or are you sort of content to source loans the way you've been doing them for the last couple of quarters?

Yes. So I think just in terms of sourcing loans, away from Arc Home, we've been buying from a small stable consistently over the past few years that we've obviously developed good relationships with. We always do take inbound calls from bankers about other opportunities to the extent they make sense. In conjunction with Arc Home, I don't think that we would be looking to stand up a competitor. So if there was something differential about the opportunity, we would look to pursue it, but we're not looking to have 2 different operating companies as part of M&A.

It's David Roberts. I would just add that the management team that runs Arc Home has experience across a wide range of product types and channels. So it's more -- as T.J. said, we wouldn't say never, but it's much more likely that we would do something organically in terms of expansion through Arc.

And we have another question in queue from Eric Hagen with BTIG.

Just a couple from me. Can you just share how much excess liquidity you estimate you have between cash and unencumbered assets? And then on the non-QM on the side, I mean, there's lots of different types of non-QM out there. Can you share which types you're focused on buying?

In terms of the excess liquidity, Eric, like we said, we had a couple of sales subsequent to quarter end on the CMBS side and we also generated some liquidity from the non-QM securitizations that we have. And when you think about liquidity, there's also a few other CMBS sales that we have in the portfolio that we would look to opportunistically exit, which -- when you think about that, at least just from the commercial side, we have probably an additional $12 million of liquidity on the CMBS side and I would say generation of probably $10 million on the securitization that we just entered into on the non-QM side.

This is Nick Smith. Addressing specifically the product mix and sort of forward-looking or what we're looking to potentially roll out, the current product mix looks a lot like the rest of the market. A good mix of DSCR, bank statements, small amounts of asset depletion, sort of the standard -- what the market has grown comfortable with over the years from sort of some of the peer securitizers and originators. As alluded to in the statements earlier, we do see the recent amendments or framework that the CFPB rolled out for QM, creating a good amount of opportunity to rethink what these product mixes should look like. And that's something we're working on as we speak. Certainly, I would not count out any sort of products outside of sort of what people have been familiar with over the past few years. Certainly, if capital requirements are more attractive, meaning you have to hold less capital with the new QM rules, that sort of expands a wide range of new products to make returns work where returns just had not historically worked.

We have another question in queue from Doug Harter with Credit Suisse.

This is Josh Bolton on for Doug. In your comments, you talked about as increased -- or as conventional products in mortgage originations gets pressured on the margin that you expect more competition in the non-QM space. Curious if you've seen that competition picking up? When that happened and kind of your expectations for how that might pressure margins in the coming quarters?

I think it's all starting to happen. I think April's rate move sort of pulled people forward in terms of thinking about this. So I think it's sort of in the lab, and we'll start seeing it kind of materialize in the coming months. But we haven't really seen it in the market yet, but we know it's coming.

And there are no more questions in queue at this time.

Okay. Thank you very much for joining our call, and we look forward to reporting to you next quarter.

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