TPG Mortgage Investment Trust Inc (MITT) Q3 2021 Earnings Report, Transcript and Summary

Welcome to the AG Mortgage Investment Trust Third Quarter 2021 Earnings Conference Call. My name is John. I'll be operator for today's call. [Operator Instructions] 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 Third 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 periodic reports filed 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 third 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.

Thanks, Jenny, and good morning to everyone. I'm pleased to report that we had a terrific third quarter as we continue to execute on our transition to a pure-play residential credit mortgage REIT. As part of our new focused mission, we substantially completed the exit of our legacy assets at prices and terms that were better than or in line with our expectations. These transactions contributed to a material increase in our book value per share. As of September 30, our book value per share was $16.92, and our adjusted book value per share was $16.45, both figures represent a net increase of 12% from June 30. These successful sales and resolutions of our legacy assets provide us with significant liquidity. We have been using a portion of that liquidity to execute on and expand our go-forward business plan of originating and securitizing non-agency loans. We continue to believe that we have a competitive advantage in executing that plan, an advantage based on our proprietary origination engine of Arc Home, combined with the broad resource resources and expertise of Angelo Gordon's structured credit group. As T.J. and Nick will discuss, our origination and securitization activities year-to-date have been comfortably within our projected range of 14% to 18% return on equity. We have also been pleased with the volume and quality of our originations as well as the continued rollout of new origination programs and new origination channels all of which will help propel our growth over the long term. As we shift our lower-yielding investments and excess liquidity into these very attractive returns, we have continued to make progress towards realizing the full earnings potential of our go-forward strategy. For the third quarter, our earnings were heavily influenced by the exit of our legacy assets. Our third quarter GAAP earnings per share was $1.87, and our core earnings per share was $0.96. As we did on our second quarter earnings call, we'd like to point out that core earnings does not capture certain important elements of our originate and securitized go-forward business plan, and Anthony will highlight that later in the call. For the third quarter, we maintained our dividend of $0.21 per share. Future dividend decisions, which, of course, are always subject to Board approval, will be influenced by our expectations and projections of the continued execution of our rotation into our go-forward strategy and the resulting positive effect we believe that will have. I will now turn the call over to T.J.

Thank you, David, and good morning, everyone. As David mentioned, we grew adjusted book value by approximately 12% during the quarter to $16.45 per share from $14.72 per share last quarter. We grew the portfolio from $2 billion to $2.2 billion, while decreasing our economic leverage ratio from 2.2x to 1.8x. During the quarter, we doubled our liquidity to over $143 million of cash in unencumbered Agency MBS. We will walk you through our robust pipeline and how we see the company rapidly deploying this fresh capital. To dig a bit deeper into the company's activity, we are active in purchasing approximately $610 million of non-agency loans. Our mortgage affiliate Arc Home also hit record production within its non-agency channel during the third quarter, which Nick will walk through in more detail later in the call. During the month of October, the company continued its robust acquisition pace by purchasing an additional $386 million of loans, demonstrating the consistency in our pipeline of assets to support MITT's growth. As previously disclosed, both legacy commercial loans that were on our books heading into the third quarter were paid off at par. Those proceeds, combined with our previously disclosed sale of CMBS earlier in the quarter, generated net proceeds of over $63 million for reinvestment. As David mentioned, but it bears repeating, MITT has no remaining commercial exposure, and we are now fully focused on building our residential loan portfolio. During the quarter, we further reduced our exposure to Agency MBS as we thought the basis had reached a point where further tightening was unlikely and also sold our remaining excess MSR portfolio. Further strengthening our liquidity position, we also generated proceeds just shy of $30 million from a large accretive sale of our legacy RPL and NPL whole loans, which we provide more details on later in the presentation. Moving on to our financing and capital activity during the quarter. We successfully completed another securitization during August, which -- and we provide more details on this transaction later in the deck. As I've previously stated on past earnings call, we are committed to being very disciplined with regards to the pacing of our securitizations to derisk our warehouse lines. Given our expanding investment pipeline and in an effort to provide flexibility, during the quarter, we increased our borrowing capacity for non-QM products to $1.1 billion and added $500 million of borrowing capacity to finance GSE nonowner-occupied loans. Notably, this quarter, we were active in using the capacity under our existing share repurchase program. In aggregate, we repurchased approximately 260,000 shares at a weighted average price of $11 even, a price well below our book value, deploying approximately $2.8 million of the company's excess liquidity. The company has approximately $11.8 million of additional capacity left under the current buyback plan, and we'll continue to evaluate repurchases to the extent it is accretive to our balance sheet. Turning to Slide 7. We felt it was important to take some additional time to walk investors through this visual of what was a particularly active and important quarter in MITT's repositioning to a pure-play residential mortgage credit REIT. We began the quarter with $71 million of liquidity. Securitization proceeds in excess of warehouse lines created an additional $30 million. The par payoff of our remaining CRE loans and sales of CMBS created an additional $63 million of net proceeds. The sale of reperforming and nonperforming loans generated $29 million. And rounding it out was another $6.8 million from agency sales. We effectively deployed this liquidity during the quarter to invest $58 million net of financing into non-QM loans, invest another $16 million net of financing into GSE nonowner-occupied loans, repurchased $2.8 million of common shares, again at a weighted average price of $11 and paid common and preferred dividends in aggregate of $8.9 million. So in summary, during the quarter, we were able to double our liquidity, successfully exiting our noncore business lines at a profit, providing the company with ample firepower to continue deployment within the residential whole loan space. Subsequent to quarter end, we have deployed $48 million of liquidity into new whole loan investments, leaving us with $91 million of liquidity as of October 31. On the next slide, we wanted to show the remarkable progress made since our fourth quarter earnings call when we began making the transition to a pure-play residential credit REIT, and our portfolio composition has only continued to shift more towards non-agency loans as a result of our October purchases. During the first 3 quarters of 2021, we achieved substantial growth in MITT's investment portfolio and adjusted book value per share from $1.4 billion and $11.81 per share to $2.2 billion and $16.45 per share, respectively. This portfolio growth was led by strong loan acquisition channels resulting in $1.3 billion of gross residential purchases during the year and further volume growth at our operating partner, Arc Home. During the year, we were patient in exiting legacy noncore assets at the opportune time in order to maximize proceeds and profits for our investors. While we are pleased with the progress that has been made year-to-date, what really drives our strong convictions in our business model is the growing pipeline of opportunities we see and future potential earnings power growth, this shift provides our investors, which brings us to the next slide. We have spent a lot of time formulating our plan for MITT's future, particularly in light of all the team's accomplishments year-to-date in simplifying the business and growing our whole loan portfolio, enabling the company to reposition to its new focused strategy. This slide illustrates the compelling investment opportunity we see in MITT by highlighting how we expect to unlock the embedded earnings power of MITT's equity by redeploying it into our new strategy. At a high level, we believe we can create retained investments post securitization at loss adjusted ROEs of 14% to 18%. Further, we've seen the returns play out through our most recent securitization. And despite all the progress that has been made year-to-date, we still see approximately 40% of our equity base available to be rotated into our securitization strategy, which should further drive earnings power. Away from the investment portfolio, we will still be proactive in addressing our balance sheet optimization, including through further repurchases of our common shares at discounts and continuing to work with our preferred shareholders on exchanges that make sense for both parties. With that, I'll turn the call over to Nick to further discuss our portfolio in Arc Home.

Thanks, T.J., and good morning, everyone. Turning to Page 10. Here, we provided a breakdown of our residential portfolio where you can further see the migration of assets into newly originated non-agency loans, driven by sales of legacy assets and continued reinvestment into residential mortgages. Given our acquisition pace, we thought it would be helpful to highlight our post-quarter activity, which included further growing the residential mortgage book by approximately $386 million, with loans sourced from both Arc Home and third-party originators. While I'll discuss more on Arc in later slides, I think it's worth noting here that we have seen a meaningful pickup in registrations and locks through various Arc Home origination channels, which we believe will further support our portfolio growth. Also on this slide, we highlighted the assets currently on warehouse totaling $760 million, which we will seek to securitize in the near term as part of our strategy. On Page 11, we provided a summary of loan characteristics for our non-QM portfolio as well as the GSE nonowner-occupied loans we began acquiring in the third quarter. We believe we can continue to acquire similar credits through the expansion of existing acquisition channels and the rollout of new ones. Year-to-date, we have acquired approximately $1.3 billion of newly originated non-agency product and continue to grow our footprint at Arc Home, which I will cover in more detail on the next slide. During the quarter, we also purchased approximately $213 million of investor loans, an additional $105 million in October. As many expected, the FHFA and Treasury suspended certain amendments to the PSPA implemented by the previous administration. One amendment was the 7% GSE acquisition cap on nonowner-occupied and second homes. Although we've seen a slowdown in the pace of GSE eligible nonowner-occupied acquisitions subsequent to the suspension, we remain confident in our ability to deploy capital in this space at attractive returns. We are happy with our progress this year in repositioning our portfolio and currently have adequate warehouse capacity and liquidity to support continued growth. To reiterate what T.J. said earlier, as we grow, we are focused on increasing the pace of our securitizations to keep up with the pace of acquisitions and decrease our warehouse exposure. Over the summer, we successfully completed multiple securitizations significantly improving our cost of financing, which we expect to benefit our net interest margin and earnings going forward, and we continue to work through various securitizations for the fourth quarter. Moving on to Page 12. Arc Home had a strong quarter, recognizing pretax income of $5.6 million, $2 million of which contributed to MITT's earnings during this quarter. Also on this page, we wanted to provide more transparency to investors regarding Arc Home's financial positions as well as characteristics on its outstanding MSR exposure. Arc Home continues to actively manage this exposure and sold approximately $2 billion of UPB in the third quarter, resulting in approximately $16 million of proceeds. The remaining MSR portfolio's fair market value is approximately $62 million and can be used for additional liquidity given the current low utilization of Arc's existing MSR lending facility. Staying on Arc Home, but turning to the next page. Origination and lock volumes have remained relatively stable quarter-over-quarter, while Arc continued to shift towards non-agency production. This shift has helped support margins in an environment where compression is still occurring in the conventional and gove space. Non-QM and GSE nonowner-occupied loan fundings increased to roughly 50% of Arc Home's total production. And as mentioned previously, we have more recently seen an uptick in registrations and locks. Given this growth, Arc has proven to be an important contributor to MITT's strategy with MITT currently acquiring approximately half of Arc Home's non-QM production with the balance flowing to other Angela Gordon affiliates. MITT has also purchased primarily all of Arc's GSE nonoccupied loan production. Overall, we remain constructive on being able to prudently grow MITT's non-agency pipeline organically through Arc Home. Moving on to Page 14. This page provides a summary of our credit-sensitive loan position over the previous 12 months. As mentioned by T.J., we continue to actively manage this portfolio. And during the quarter, we sold additional loans, resulting in approximately $6 million of gains. This sale, combined with continued asset management has resulted in a significant reduction in the size of this portfolio since the middle of last year. Beyond these liquidations, the portfolio continues to benefit from strong housing tailwinds and historically low mortgage rates. Currently, 79% of the portfolio is performing, while nearly 1/3 of the 21% of contractually delinquent loans are making payments. Voluntary prepayments continue to trend upward with a 12-month average voluntary prepayment rate in the low teens. Of the 26% of borrowers that received COVID-related assistance, nearly 2/3 are contractually current today. Flipping to the next page. Here, you will find a summary of our agency portfolio. As of the end of the quarter, approximately 22% of our equity was allocated in Agency RMBS. As we previously mentioned, we have continued to reduce our agency exposure, selling off $190 million during the third quarter and expect that trend to continue as we transition our equity into residential credit assets. Anthony will now go over our financial results in more detail. Anthony?

Thank you, Nick, and good morning. Turning to Slide 16. We provide a summary of our current financing profile. In executing our non-agency strategy, we continue to focus our efforts on increasing the pace of securitizations so we can obtain nonrecourse non-mark-to-market financing on our loan portfolio, which provides meaningfully lower financing costs as compared to when loans are financed on warehouse. On this slide, we highlight that approximately 37% of our financing is through securitized debt, which increased this quarter due to our all the securitization. We expect this allocation to continue increasing given our existing loan population available for securitization, which again speaks to the earnings potential in our current portfolio. Additionally, our current liquidity position discussed by T.J. earlier coupled with our available capacity of $944 million puts the company in a good position for further growth. Please note that we included a slide in our appendix which provides details on how we structure our most recent deal, which is consolidated on the company's balance sheet. Overall, we securitized approximately $268 million of non-QM UPB, which -- this appendix will provide more details on our retained interest. On Slide 17, we provided a reconciliation of our book value per common share, which increased by $1.74 quarter-over-quarter. During Q3, we reported net income available to common shareholders of approximately $30 million or $1.87 per fully diluted share. Earnings during the quarter were driven by various factors, including mark-to-market gains across our new origination and RPL/NPL portfolios; gains from the resolution of our 2 remaining commercial loans and the sale of our remaining CMBS portfolio; gains from the sale of RPL/NPLs; and earnings contributed from our 45% equity method investment in Arc Home, which is held in a taxable REIT subsidiary. This increase in book value is reflective of our current quarter earnings, offset by the preferred and common dividends declared during the quarter and our common share repurchases approximating $2.8 million. As discussed on our previous earnings call, we also disclosed adjusted book value per common share of $16.45, which is computed based on total equity less the entire liquidation preference of our preferred stock. Turning to Slide 18. We disclosed a reconciliation of GAAP net income to core earnings for the third quarter, where you will see core earnings was $0.96. Core earnings was primarily driven by 2 items. The first included receiving 12 months of deferred interest upon the resolution of Commercial Loan L, which was modified during 2020. The second related to previously mentioned RPL/NPL sale. Specifically, the proceeds from the sale went to pay down the bonds secured by the underlying loans and the company held certain of those bonds at discounts. As the company received par value on the bonds, this resulted in accelerated accretion on these assets during the quarter. It should be noted that core earnings does not include $1.6 million of gains Arc Home recognized during the quarter on loans sold to MITT. However, these earnings are recognized as unrealized gains contributing to our overall book value increase. Lastly, I'll reiterate that we ended the quarter with total liquidity of approximately $144 million, which was inclusive of $102 million of cash and $42 million of unlevered Agency RMBS. And as we continue to purchase non-agency residential loans subsequent to quarter end, we ended October with $91 million of liquidity. This concludes our prepared remarks. And we would now like to open the call for questions. Operator?

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

You just said you ended October with $91 million of liquidity. How are you thinking about what is the liquidity cushion that you guys want to maintain. So how should we think about kind of the "excess liquidity" position today?

Yes. I mean -- Doug, it's T.J. We obviously sort of have our internal risk models to maintain liquidity for margin calls and the like. So I think we're well through that given the amount of cash we generated during the quarter. So we think we can further spend that down by a decent amount as we look into kind of year-end. Roughly speaking, like $40 million to $50 million based on the pipeline and sort of where we're seeing the size of our gestation financing or warehouse risk.

Got it. And then I guess how do you think about the timing of future sales in the NPL market, which is -- that market's quite strong today. How do you think about taking advantage of that, but maybe it's a little bit a ways away until you actually need the liquidity? How do you kind of balance those 2 factors?

Yes. It's a couple of factors. One, it's -- we've financed a lot of that asset class through various securitizations. So some of it is getting to -- getting through periods of where we can sell the assets or where we can either collapse, refinance or sell out of traditional sort of NPL securitization. So some of it is structurally timed. And then we just find that aggregating to some sort of critical mass, gets better execution than selling in smaller pools. So those 2 things I would say, drive us towards less frequent, but larger, probably hopefully more accretive disposition. So we'll continue to do it into 2022.

Got it. And then just from a REIT standpoint, is there any -- or liquidity standpoint, any amount of agency that you would kind of want to hold long term as you can kind of continue to build towards the future?

Yes, Doug. The way we think about it is the assets that we're currently acquiring with the new origination or qualified assets for retest. So the idea would be to wind down the agency portfolio, and we would need to be relying upon it for REIT and the AG Trust.

Our next question is from Bose George from KBW.

Actually, I just wanted to go back to Slide 18, I guess it was where you had the GAAP reconciliation. Can you just go over that $15 million again sort of the different drivers of that?

Yes. So that $15 million is the -- we refer to the RPL/NPL sale. So upon selling or liquidating those assets, we held bonds that were recorded at a discount to par, and we received par on those bonds. So that's the accelerated accretion.

Okay. That makes sense. And then the investment in affiliate line item on your balance sheet, can you remind me what's in there? I assume Arc's part of it, but what's -- yes, what's -- and it's kind of come down over time. Just wanted to figure that out as well.

That's correct. Arc is approximately $52 million of that balance. The remainder is what we refer to as land-related financing, and we also have a small joint venture that has non-QM loans that we invest in.

Okay. And the decline there is -- are those investments just going down over time because it's kind of gone down over a few quarters?

That's correct. And that decline also related to the RPL/NPL sale because the loans we sold were in that line item.

Okay. Great. And then just 1 more for me. The 14% to 18% ROE on the purchased loans, can you just go through a little bit just the leverage structural? And then what repo on top of that you're assuming?

Yes. So when we quote the 14% to 18%, that sort of post securitization. So obviously, during the gestation period, we're highly incentivized to turn that -- to shorten up that ramp period. The leverage we're taking out on the securitizations is, call it, mid-90s percent, it could be slightly higher, could be slightly lower versus our acquisition price. And that's how you arrive at the 14% to 18%. Certainly as certain assets deleverage over time, structurally, we can add additional financial leverage throughout sort of our holding period for those assets. But generally, that is very modest.

Okay. And so the 14% to 18% -- sorry, go ahead.

I was going to add that we've also been able to take that sort of traditional repo financing and term that out with non-mark-to-market as well.

Okay. So just excluding the repo do you get to the 14% just structure -- with the securitization leverage. Yes, I was just wondering what that would be excluding like if there was no repo at all on it.

Yes, we're probably slightly lower than that.

Slightly lower.

Our next question is from Eric Hagen from BTIG.

A couple of questions. Can you highlight some more detail around how you think about the trade-off between potentially raising the dividend and buying back stock? And then can you also describe the profile of the non-QM loans that you're buying at this point how the credit has maybe evolved over the last, call it, year from what you've been buying?

On the dividend point -- it's David Roberts. As we've said in the past, we look at our dividend policy based on the current quarter and our go-forward look, and we will continue to do that. In terms of repurchase versus dividends, I would say that we are -- one is the repurchase is an opportunistic episodic type of investment. And the dividend is, I think, at the heart of why people are invested in the mortgage REIT space for that dividend income. And so we're really focused on growing our earnings, which would enable us to grow our dividend over time if we're successful.

Eric, this is Nick. On the credit quality and sort of positioning of the assets. The nice thing is we do have, and have emphasized in the presentation a bunch, the Arc Home channel. Through that channel, we've had minimal or almost no expansion of our guidelines. We still don't feel a tremendous amount of pressure. It's generally very up in credit. We're talking high 60s, low 70 type LTV in aggregate and mid-700s FICOs. We actually see a decent amount of opportunity going up in credit. So we continue to be constructive on the availability to source attractive assets without really having to go further and further out in credit.

Our next question is from Jason Stewart from Jones Holding.

Nice quarter. I wanted to get your updated thoughts on Arc and given the strength in that platform, if there's any new thoughts about continuing to be a JV or if it makes sense to be a separate entity at some point?

We have no current thoughts of changing that structure. I think that answers your question.

Yes. No, sure, does. Okay. Fair enough. And then just switching to FHFA and thoughts around product structure that potentially could be evolving with Sandra Thompson and any sort of thoughts around the credit box changing and what that market opportunity looks like for Arc would be helpful.

So the current administration I don't think is going to be the sort of changes out of there will impact sort of our ability to source assets. Obviously, the suspension of the 7% cap that's already happened. And as mentioned in the presentation, we've already seen a slowdown there, albeit we're still sourcing those assets. We still like the returns. Certainly, it's still on the table that you could see that get reversed. It's currently sort of pending review by the FHFA. We would have seen other changes, but I think that has more to do with sort of the capital base of Fannie and Freddie and the CRT coming back as they revisit sort of capital rules there. So I don't see that as impacting our current book of business, if anything, that's just another asset class that down the road we could potentially look at. Obviously, today, we are not. So I think it's still the same sort of policy changes that happened earlier in the year are in place. And that's where we really see growth and expansion for our business. So that's sort of what we see for now.

And congratulations on some nice results.

Thanks, Jason.

And we have no further questions at this time.

Okay. Just -- it's David Roberts. Just to conclude, I hope what came through all the information we had -- certainly had a lot to talk about this quarter is our enthusiasm or not only where we're positioned, but for the strength of our team and our resources and the successful execution so far of our transition. I can tell you that as a management team, we're very excited for the future and really believe that we have all the tools necessary to finish this transition and continue to grow. So thank you very much for your time, and we look forward to reporting to you next quarter.

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