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

Thank you, Sylvia. Good morning, everyone, and welcome to the Second Quarter 2021 Earnings Call for AG Mortgage Investment Trust. With me on the call today are David Roberts, our Chairman and CEO; and 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 first quarter 10-Q. 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 second 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 very much, Jenny, and good morning to everybody. Since our last call, AG Mortgage Investment Trust has made great progress in our transition to a company focused on residential mortgage origination and securitization. On the buy side of our business, in the second quarter, we purchased $446 million of non-QM loans from our affiliate Arc Home as well as third parties. In June, we completed a non-QM securitization of $224 million, raising non-mark-to-market, nonrecourse financing on these assets. Additionally, Arc Home doubled its production of non-QM loans during this quarter to $376 million. Going forward, we intend for our business model to be fueled primarily by non-QM and other residential origination followed by securitizations on a quarterly or more frequent basis. On the sell side of our business, we have sold all of our CMBS and certain RMBS positions throughout the quarter and subsequent to quarter end, supporting our continued transition. We also have good reason to believe we are progressing towards being paid off on our 2 remaining commercial real estate loans. The CMBS sales have resulted in favorable gains during and subsequent to quarter end, and potential payoffs of the commercial loans are expected to be favorable to our second quarter remarks. These completed and anticipated sales provide ample liquidity to fund continued expansion of our go-forward business model. In terms of our financial results for the quarter, our book value increased by 3%, driven by earnings of $0.70 per share. This is after accounting for the declared second quarter dividend of $0.21 per share. Both per share numbers are on a post-split basis. Core earnings for the quarter were approximately breakeven. However, the definition we use for core earnings does not capture important elements of our go-forward business strategy. Specifically, core earnings does not include MITT share of the gain that Arc Home recognizes when it sells loans to us, nor does it include earnings that MITT recognizes when we securitize the loans purchased from both Arc Home and third parties. As I mentioned before, the sales of commercial assets have and are expected to continue to increase our liquidity. This comes at the short-term cost of reduced net interest margin. But more importantly, in the longer term, this liquidity will enable us to continue growing our origination securitization strategy, a strategy, we believe, offers a superior risk reward to AG Mortgage Investment Trust and its shareholders. For our dividend policy going forward, we will be looking most closely at those earnings metrics that most accurately reflect the evolution of our business strategy. And as we always do in our dividend policy, we will consider not only the current quarter but our outlook for earnings over the intermediate term. Thanks very much. And with that, I will turn it over to T.J. Durkin.

Thank you, David, and good morning, everyone. To dig a bit deeper into the company's activity during the quarter, we were active in purchasing $446 million of non-QM loans during the quarter from 5 originators, including our mortgage affiliate, Arc Home, which originated $376 million during the quarter with MITT purchasing approximately 50% of that production. MITT contributed loans into 2 securitizations during the quarter, and we intend to be very disciplined with regards to the pacing of our securitizations to derisk our warehouse lines. In other asset classes, we continue to prudently dispose of noncore assets and repositioning to MITT's forward-looking strategy by selling CMBS and other RMBS securities where we don't have any control or access to the underlying whole loans. During the quarter, we also reduced our exposure to Agency MBS as we thought the basis had reached a point where further tightening was unlikely. Subsequent to quarter end, we sold the remaining CMBS positions and a slight gain from Q2 marks, generating gross proceeds of $34 million or approximately $15 million of equity proceeds. And moving on to our capital activity during the quarter, we successfully utilized our ATM program to raise $3.1 million of fresh capital by issuing 226,634 shares at an average price of $14.21 per share adjusting for the split. We also completed our fifth exchange with a preferred holder, exchanging 240,861 shares of preferred for 429,802 shares of common. This brings our cumulative preferred to common exchange notional at approximately $51 million of par value. And lastly, we completed a 1-for-3 reverse stock split, which went effective July 22 with the ultimate goal of reducing volatility in the stock price into the future. Now turning to Slide 6. Our investment portfolio grew slightly over the quarter based on the rotation I previously…

Thank you, T.J., and good morning, everyone. Turning to Slide 10. Year-to-date, we've acquired over $650 million of non-QM loans with over $250 million acquired from our affiliate Arc Home. In July, we increased our uncommitted warehouse capacity to $1.1 billion to accommodate future acquisitions while simultaneously terming out approximately $224 million of non-mark-to-market and nonrecourse debt. We also securitized approximately $171 million of non-QM loans alongside other Angelo Gordon funds within an unconsolidated joint venture. The remaining assets held in this joint venture are primarily retained interest from other prior -- or from prior securitizations. The tables on this page show the continued delinquency curing over the past year for our non-QM portfolio, along with collateral characteristics of our current borrower base. Subsequent to quarter end, we also entered into agreements to acquire GSE-eligible nonowner-occupied pools. In connection with these acquisitions, we added $500 million of uncommitted warehouse capacity specifically for GSE-eligible loans. We expect these credits to continue to offer attractive risk-adjusted returns and look forward to adding additional sellers and capacity. Moving on to Slide 11. This page provides a high-level summary of the performance of our credit-sensitive loan positions over the past 12 months. As you can see, this portfolio has benefited from strong housing tailwinds and historically low mortgage rates. Prepayment speeds have increased significantly and approximately 75% of the borrowers that received COVID-related assistance are either contractually current or making payments on a loss mitigation plan. Over the past year, approximately 30% of the portfolio has been liquidated through a combination of opportunistic loan sales, voluntary and involuntary prepayments. Turning to Slide 12. As mentioned in previous quarters, Arc Home, our licensed mortgage origination affiliate, continues to benefit from being one of the first originators to reenter the non-QM business. The tables below clearly shows the benefit of these early investments as Arc Home's non-QM volumes offset declines in agency volumes and was able to mitigate margin compression during the quarter. Mark-to-market losses in Arc Home's MSR portfolio driven by lower nominal yields and a full flattening of the curve generated pretax net losses of $3.7 million resulting in $2.7 million of losses from MITT, which does not include $1.4 million of gains recognized by Arc Home in connection with its mortgage loan sales to MITT. With that, I'll turn it over to Anthony.

Thank you, Nick, and good morning. Before providing an update on the second quarter, I wanted to reiterate that we completed a 1-for-3 reverse stock split post quarter end, which became effective on July 22. This reduced our common shares outstanding from approximately 48.5 million to 16.2 million. As a result, you will see that we adjusted all common share and per share metrics within our press release, earnings presentation and 10-Q on a retroactive basis to reflect the reverse split for all periods presented. With that being said, during the first quarter, we reported net income available to common stockholders of approximately $10.9 million or $0.70 per fully diluted share. Earnings during the quarter were driven by mark-to-market gains on residential and commercial assets within our portfolio, along with realized gains from the sales of certain RMBS and CMBS. These gains were offset by mark-to-market losses within our interest rate swap portfolio driven by the decline in interest rates during the quarter as well as the previously mentioned loss from our 45% equity method investment in Arc Home, resulting from mark-to-market losses on its MSR portfolio. Operating expenses increased slightly from the first quarter. However, this was attributable to transaction expenses related to the non-QM securitization that occurred in June. On Slide 14, we provide a reconciliation of our book value per common share, which increased by $0.41 during the quarter. This increase reflects our current quarter earnings offset by the preferred and common dividends declared during the second quarter. And you'll also see the increases related to a preferred stock exchange transaction entered into during the quarter as well as net proceeds raised from issuing common stock through our ATM program approximating $3 million. As discussed on our previous earnings call, we also disclosed adjusted book value per common share of $14.72, which is computed based on total equity less the entire liquidation preference of our preferred stock. Turning to Slide 15. We disclosed a reconciliation of GAAP net income to core earnings for the second quarter, where you will see core earnings was breakeven for the quarter. One item to note is that core earnings does not include $1.4 million of gains Arc Home recognized during the quarter on loans sold to us. Lastly, we ended the quarter with total liquidity of $71 million, which is inclusive of $64 million of cash and $7 million of unlevered Agency RMBS. This improvement in liquidity from the first quarter was a result of the previously mentioned 2 non-QM securitizations transacted along with the sale proceeds on our MBS portfolio offset by the purchase activity to grow our non-QM portfolio. This concludes our prepared remarks, and we would now like to open the call for questions. Operator?

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

Can you just talk about the level of competition kind of in the QM market today and how that -- how returns still look today versus kind of the early days where Arc was one of the first movers?

Of course. There certainly is more competition. That being said, capacity has returned to the market as sort of agency stuff has run off or refis have runoff, and we still see plenty of opportunity to buy these assets and others at attractive levels. And we don't see that changing in the near future.

Got it. And then could you just compare the relative attractiveness of returns of kind of non-QM versus nonowner-occupied loans and kind of which is a more attractive opportunity today?

We see them fairly comparable. If anything, in the non-QM side, a lot of those positions are investor properties already and they're fairly similarly priced. On the Agency side, we just -- it's one of those things where we expect that to be opportunistic and to be sort of interesting opportunity for the coming years, and we expect pricing to come in and out, and we'll obviously keep the relative value between the 2 products in mind.

Got it. And then just one kind of accounting question. You mentioned that there was the negative MSR mark at Arc Homes. What was the size of that? And I guess how would the profitability of Arc have looked if you excluded the net MSR mark?

The net MSR mark was down about $4 million for the quarter. So if you think about pulling that out from earnings, you'd probably be around plus $2 million -- $2 million to $3 million during the quarter without the MSR markdown.

Great. And then so even if you stripped out the $1.4 million of gains, I guess, the contribution to you would be, I guess, closer to slightly positive to closer to breakeven versus the 2-point -- or versus the loss you mentioned?

That's correct. One clarification of the mark-to-market loss that I mentioned was pre our 45% share. So that $4 million, we would only get 45% of that.

Next question comes from Bose George from KBW.

Actually, just first, just a clarification. You mentioned that the mid-quarter earnings doesn't include the sales of the Arc Homes to MITT. Can you just remind me what from Arc is included in the core earnings?

Their operating business, which is their gain on sale on the agencies and the non-QM that are not sold to us are included in core.

And is there -- like in terms of what you buy from them, is that percentage going to remain stable because it seems like if it increases, you almost kind of hurt your core income, right, because it won't count?

Yes, that's correct. We -- it has remained stable. We have bought approximately 50% of the production from non-QM from them, but your thinking is correct.

Okay. Great. And then if you just -- sort of looking forward, I guess what are kind of the things that need to happen to get to a more whatever normalized core number? I mean, obviously, from an economic return, your returns are good, but I feel like a lot of people focus on core. So just what's the best way to kind of think about that?

This is David Robert answering that. I think the best way to think about this is that this quarter and in all likelihood, the next few quarters, we're in a transition to the new business model or to the go forward, I should say, business model. So it's a mix of the 2. We've got legacy assets that we're rotating into first cash and then into our origination securitization business, and that's going to take some time.

Our next question comes from Trevor Cranston from JMP Securities.

I wanted to clarify something on the commercial loans, and thanks for all the additional detail on those. In the prepared comments, I think you made the comment that you were hopeful that there could be a payoff on those in the near term. I just wanted to clarify, was that comment related to both of the loans? Or was that maybe more directed towards the construction loan in particular?

Yes. I mean I would say it's more -- it's obviously, we're working with the borrower on the maturity issue on that loan in particular. I think obviously on the other loan, we fully anticipate that coming out of the modification period, it will remain contractually current and they could pursue other financing options at that point.

Okay. And can you remind us when the -- when that period ends?

Yes. It was a 1-year modification from last September, so it will end this September.

Okay. Got it. And then on the GSE non-owner -- GSE-eligible nonowner occupied loans, can you maybe talk about that opportunity a little bit more and help us think of kind of what the potential market size is there relative to the sort of more traditional non-QM opportunity?

Yes, certainly. So historically, the supply of -- or origination of investor properties via the GSEs or Fannie and Freddie has ranged from approximately $75 billion to $95 billion a year. It's not had -- it doesn't have nearly sort of the same sort of cyclical impacts. So if anything, if this refi comes off, essentially, you're lowering your denominator of other nonowner acquired assets. So as that denominator goes lower, that 7% cap that's been instituted in the latest PSPA or amendment with Fannie and Freddie, the assumption is that, that will sort of normalize and that excess will be higher. So if -- obviously, if the number goes to 12%, you have to solve for that excess of 7%. That being said, even prior to this, a good portion of GSE loans actually best [indiscernible] and offered attractive returns for investors like ourselves. And our expectation is as originators get more familiar with selling to the private markets away from Fannie and Freddie that this space could grow. Now exactly how much of sort of the overall market, we'll ultimately see, there's a lot of factors that go into it. But at least it's a decent sized notional.

Got it. Okay. That's very helpful. And then last thing, I think you noted that you guys had a short TBA position in the second quarter. Can you say how large that position is and if you're still carrying that into the third quarter?

The position size is $130 million notional on the TBA that went on at quarter end.

Our next question comes from Jason Stewart from JonesTrading.

A couple of follow-ups. On commercial loan, is the mark at [ 6/30 ] at 86% of part reflective of the coupon or your confidence in the payoffs?

Well, the mark -- we use third-party vendors to help us determine the mark. So it's 86% of par, which is a $51 million notional.

So is your thinking updated that you're going to get a full par payoff at September 30 when the modification period is over?

Well, no, at September 30, their coupon will turn back on. And I think we'll see what pricing vendors, how they view these sort of modifications that are all starting to expire, if you will, right? We're kind of getting to that point in the calendar from a year ago. So I don't have any certainty into how they'll look at that, but we would expect that based on our conversations that the loan will start cash paying come Q4.

Okay. So not necessarily a payoff, but it will be turned back on. Okay, got it. And then if you can update us on book value quarter-to-date, if you don't mind.

Yes. Book value quarter-to-date was up 3%, approximately, and that was primarily driven by some of the mark-to-market gains that we've been talking about in the resi and commercial portfolio as well as some of the realized gains through the sales that we mentioned during the quarter.

Was your -- I'm sorry, was your question about this third quarter that we're in now? Or was it looking back to the third quarter?

Yes, David, to the latest point available.

Yes, we're not -- we're just going to stick with what we've reported.

Okay. And then on the Arc MSR, when we look at that portfolio, can you give us any detail in terms of what SATO looks like or maybe like what a plus 50 or 100 move in the rates market looks like for the valuation of that MSR?

Well, just to be clear, so we sold the third-party purchased MSR. So the volatility going forward will be lower. And I would say we're not, at this point, really reporting like SATO or shifts. The goal is really to reduce that volatility in that business and really have them focused on the origination side.

Okay, okay. Last one for me then. I guess I understand sort of the rationale for the TBA sort of given valuations in the space, but how does that fit into the overall hedging strategy? And what's your propensity to carry that position going forward?

This is Nick. So part of the TBA short is the contemplation that we'll be selling debt off of the recently acquired GSE positions. And when you think about when you sell that debt, it's benchmarked versus TBA. So when you actually go sell that debt to third parties in the market, your benchmark is TBA because you're selling loans backed by agency collateral. So it's really just a hedge similar to other hedges we put on against non-QM loans.

So Jason, yes, I mean basically the pricing convention for traditional non-QM debt is off of swaps. And then for AAA seniors on the agency eligible, it will be benchmarked off TBAs.

Our next question comes from Eric Hagen from BTIG.

Within the debt and equity of affiliates, can you give a snapshot of what the balance sheet looks like there, including the amount of capital that's sitting at Arc Home?

Sure. In that line item, Arc Home is approximately $51 million of equity in that balance and then we also have approximately $30 million investment in a joint venture where we historically acquired non-QM. If you recall, we're now acquiring the non-QM directly into the REIT. And then the other asset in there is approximately $80 million of the land-related financing that T.J. mentioned earlier.

Got it. Okay. That's helpful. And then on the non-QM securitizations, how much leverage are you guys applying to the retained tranches to get to the return profile that you outlined in the deck?

Somewhere between 1.5 to 2.5 turns.

Okay. And are those mark-to-market, refi?

Correct.

Our next question comes from [ Jim DeLisle ] from [ Seven Canyon ].

The MSI, I'm presuming that Arc continues to carry some MSR on its self-generated portfolio.

Yes, that's correct.

And that would be in the $50 million or so line item you just referenced to Eric Hagen.

It's embedded within -- the way that we account for it is we bring -- we show the net equity that we own of Arc, we don't look through into Arc Home's balance sheet within our financials, but the asset would be flowing up into that net equity.

Right. Can you give us some understanding as to what percentage of that $50 million carrying value of your holding of Arc is represented by the MSR of their self-generated portfolio?

Jim, we don't have that number in front of us, but we can look into that.

We have no further questions at this time. I'll now turn the call over to our host for closing remarks.

Thank you, Sylvia, and thank you for -- to everyone for joining the call today. Enjoy the rest of your weekend.

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