Good day, and thank you for standing by. Welcome to the AG Mortgage Investment Trust Inc Fourth Quarter 2023 and Full Year Earnings Conference Call. At this time, all participants are in a listen-only mode. After managements remarks there will be a question and answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to turn the call over to Jenny Neslin, General Counsel for the company. Please go ahead.

Thank you. Good morning, everyone, and welcome to the full year and fourth quarter 2023 earnings call for AG Mortgage Investment Trust. With me on the call today are T.J. Durkin, our CEO and 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, 2022, our quarterly report on Form 10-Q for the quarter ended June 30, 2023, and our subsequent reports filed from time to time with the SEC. Except as required by law, we are not obligated and do not intend to update or to review or revise any forward-looking statements, whether as a result of new information, future events or otherwise. During the call today, we will refer to certain non-GAAP financial measures. Please refer to our SEC filings for reconciliations to the most comparable GAAP measures. We will also reference the earnings presentation that was posted to our website this morning. To review the slide presentation, turn to our website, www.agmit.com and click on the link for the Q4 2023 earnings presentation on the home page. Again, welcome to the call, and thank you for joining us today. With that, I'd like to turn the call over to T.J.

Thank you, Jenny. I'm very excited to be able to finally discuss with the market the successful acquisition of WMC this past December and the future prospects for MITT going forward. While we believe the WMC acquisition is another substantial step in further positioning MITT as a premier pure-play residential mortgage REIT, we all know there is still plenty of work to do as we continue to deliver on strong earnings off the investment portfolio while seeking ways to continue enhancing scale and G&A efficiencies. Now turning to Page 5. Before we review the fourth quarter and full year 2023 financials, we thought we'd take a step back to review the scope of the transformation that's already occurred since year-end 2020 when we first set out to shift to a pure-play residential mortgage REIT. You can see here the equity allocation over time as we successfully exited noncore asset classes without any drag to earnings and while demonstrating the ability to scale into the deploying capital within our target asset class by acquiring over $7.3 billion of strong credit quality residential mortgage loans during this time frame, with over 1/3 of them being sourced from our captive mortgage originator Arc Home. We actively and prudently executed our securitization strategy, having issued 16 deals into the market, further bolstering our GCAT helps recognition for both consistency and credit quality, which are institutional bondholders value. The disciplined approach to risk management via securitization and derisking of recourse leverage has not only lowered our economic risk during this time frame, but also reallocated a significant portion of our equity to higher-yielding securitized assets, which is what we set out to do. Building on this successful track record, we'll employ the same strategy to the newly onboarded WMC portfolio, and we have already begun…

Thanks, T.J. As outlined earlier in the presentation, the simplification of the balance sheet through the redeployment of capital into securitized residential whole loans continue throughout the year. The securitized loan portfolio grew by over $1.7 billion were approximately 45% this past year. The performance of the portfolio is benefited by the housing sector's continued strong performance, surpassing most market expectations despite multi-decade highs in mortgage rates. Delinquency rates remain low and are trending below the original underwrite and are broadly outperformed based upon age-adjusted comparables. As you are all aware, the fourth quarter exhibited the same sort of volatility fixed income markets have grown accustomed to since the Federal Reserve began its tightening campaign over two years ago. While risks remain, the narrative changed considerably from the beginning of the fourth quarter. The markets are now hopeful again. The Fed will be able to manufacture the soft landing many expected at the onset of 2023, but had lost hope as the year progressed. This shift to narrative has been good for risk assets broadly and should be supportive of continued strength in the fundamental performance of the securitized residential whole loan portfolio. MITT’s proprietary origination channel Arc Home is well positioned to manage through the current origination landscape given its ample liquidity and strong balance sheet. While we have likely seen the lows in the origination market, the first quarter is expected to be slow, prior to moving into the spring and summer buying season. The MBA is projecting origination volumes to increase over 20% from last year's cyclical low, and The Street is looking for non-agency originations to nearly double year-over-year. These market dynamics, combined with Arc Home's newly appointed executive leadership's focus on profitability, prudent expansion, product development and operational leverage, make us optimistic in the future. The investment portfolio continues to generate attractive ROEs in the mid-to high teens with modest economic leverage. There remains significant liquidity that can be deployed into the core strategies along with equity that can be opportunistically rotated as the portfolio's fundamental performance continues along the current path. In addition to organic recycling of capital, a significant portion of the noncore WMC commercial real estate exposure we expect to pay off at par over the next few years. Now I'd like to turn the call over to Anthony.

Thank you, Nick, and good morning. In December, we closed the WMC acquisition, helping to grow MITT's investment portfolio and equity base while improving scale for the company. The acquisition was accounted for as a business combination. And in accordance with this accounting treatment, we recognized a bargain purchase gain of approximately $30 million during the quarter. This represents the excess of WMC's $81 million of equity acquired over the fair value of MITT's common stock issued to WMC shareholders at closing $51 million. As a reminder, we issued approximately 9.2 million shares of common stock, increasing our market cap by approximately 46%. Overall, we recorded GAAP net income available to common shareholders of $35.4 million or $1.68 per share for the full year and $30.8 million or $1.35 per share for the quarter. During the quarter, in addition to the bargain purchase gain I mentioned, other notable items included an increase in net interest income, including swaps, of $1.1 million or approximately 7% driven by 1 month of earnings from the acquired WMC portfolio along with lower operating expenses quarter-over-quarter, driven by certain expense reductions provided by a manager in connection with the WMC transaction. Realized and unrealized P&L was relatively neutral this quarter as gains on our investment portfolio were offset by losses in our securitized debt and hedge portfolio, while Arc Home experienced unrealized mark-to-market losses on its MSR portfolio driven by the rate decline towards the end of the quarter. The company recorded book value of $10.46 per share and adjusted book value of $10.20 per share. Although adjusted book value declined by 7.2%, approximately 4% of the decline related to transaction expenses incurred by WMC prior to the acquisition, which impacts MITT's book value upon combining the two companies, coupled with the final $1.2 million…

[Operator Instructions] And we'll take our first question from Trevor Cranston with JMP Securities. Your line is open.

Congrats on getting the WMC deal finished. I guess related to that, I mean, you guys have made a lot of effort to transition your capital base to the pure-play residential strategy. And I guess in that context, can you talk about how you're thinking about the legacy CRE portfolio of WMC and the returns of holding on to that versus potentially selling and redeploying into their residential assets?

I think we've broken it down on Page 14 of the deck. I think the simplest way to think about it is, you've got some CRE space loans where, as Nick mentioned, I think we look at them as fairly short duration and probably thinking about that more a hold-to-maturity concept given bid ask in the CRE space right now, and we feel kind of confident about the outcomes there. And I think as you think about the CMBS space, we'll probably be in the market more observing sort of where execution could be. So we'll pay attention closer on that part of the portfolio. But I mean this is something we've done before and across the businesses, more broadly, we're active in the CMBS space in other parts of the structured credit business here. So it's a market we're very comfortable with. We're in it on a day-to-day basis, and we'll opportunistically look to exit to rotate that capital if the market cooperates.

And on the resi side, you guys noted that you opportunistically sold a little bit of the RMBS portfolio. Is there anything additional you guys are sort of looking to sell if the market is fairly strong? Or are you reasonably comfortable with pertaining residential assets?

They had some kind of -- I would say, disparate like asset classes that we'll definitely look to rotate that capital into as we're just in the markets. So the goal is to, over time, prudently rotate really all of that equity into effectively what we've been focused on for the last few years, which would be acquiring residential whole loans and executing the securitization strategy. So we're not going to force it, but we will look to rotate it.

And we'll take our next question from Matthew Erdner with JonesTrading. Your line is open.

You mentioned the $5 million to $7 million savings and cost synergies on expenses. Where are you guys expecting to see the most improvement from that $5 million to $7 million?

It really comes from just sort of the redundant costs needed to just run a public company accounting fees, compensation that was typically being recorded on WMC's books external professional fees that were recorded. So it's really just general operating expenses that we see the savings in that we would not need to duplicate in our company.

And then origination volume Non-Agency you mentioned, it's going to be up probably 50% year-over-year, at least that's the forecast. How do you think Arc is positioned for this? And then when do you see Arc kind of turning to profitability? Is it an x amount of originations that need to be done? Can you just kind of walk through that?

Yes. Look, we stay close to the ever-changing dynamics in the resi market. Part of that lift has to do with sort of having reached lows in the mortgage market and part of the other lift or increase in volumes is expectation of growth in the sector for varying different reasons. We have emphasize certain parts of the sourcing channel at Arc Home, which we're already starting to see gains in, which we think pulls forward the profitability the expectation is for Arc Home to be profitable this year.

And then did you guys provide book value quarter-to-date?

Yes. Through January, we saw book value up 2% to 3%.

And we'll take our next question from Doug Harter with UBS. Your line is open.

Can you talk a little bit about how you're thinking about the payback period from the short-term dilution on the WMC acquisition? And just how we should think about the positives to come from that short-term dilution?

Yes. I mean I think we walk you through that dilution in detail on Page 7. And then I think it's in the 1.5 to 2.5 -- 1.5 to 2-year type time frame.

And then with the new baby bond issuance, how much of your capital structure do you think that could be going forward? Would you expect to kind of be a regular issuer there? Just more thoughts about that market.

Yes. I mean I think we were happy with the execution there. I think, like I mentioned, we're probably ahead of schedule in our own minds of sort of addressing the September maturity. So if that market is open, I think we would definitely utilize that further and addressing that convert maturity. So I think the window is open and then they close. And so I think now that we're sort of in business there, I think we can access that more efficiently going forward.

And we'll take our next question from Bose George with KBW. Your line is open.

Just sticking to the capital structure. In terms of the Series C preferred that goes to floating in September, what are the thoughts there? Is it to just keep that as part of the capital structure as that happens?

Well, unlike the convert, I mean, we're not forced to do anything in terms of maturity. You'll obviously reset to floating rate and where spot offers today, it would be a move higher. So I think we're clearly kind of actively monitoring the capital markets based on what we did in January with the baby bond deal. If there is a more accretive way to address that, we're constantly in touch with the market to address it. But it's very different than that hard maturity that we are starting to address in September. So we sort of have that on the to-do list, but it will be obviously market dependent on where the ability to refinance that would be.

And then can you remind us just how much of the cash you have at year-end is kind of deployable. Like how much is sort of the minimum amount that you need to keep and how much you deploy or could deploy?

Yes. I mean I think from like a risk reserve perspective, we probably want to keep $75 million to $85 million, depending on our leverage, whether we're in between deals or how big our sort of loan balance on warehouses, right? So it'll kind of accordion up and down depending where we are in that securitization basing, but that's probably a rough range of cash that we'd want to keep around at times. So we have excess liquidity.

[Operator Instructions] We'll take our next question from Eric Hagen with BTIG. Your line is open.

One follow-up on the new originations in the non-QM. I mean, are all of the loans that are coming into the portfolio originated by Arc Home? Or do you see opportunities to buy loans from banks, other brokers, just any word across the street? Are you guys are sourcing those loans?

Yes, I alluded to in the previous answer for Matt. We've sort of repositioned how we're acquiring some loans given some changing dynamics. We're finding more and more large originators willing to make this product rather than broker it out. And to the extent that's the case, we're expanding the delegated or B2B channel through Arc Homes. So even though Arc Home will be purchasing these loans, and be the intermediary on them, they won't necessarily be funding the borrower. So we see that as an area of growth. With regard to the banking pressure in the regional space, obviously, that's a well telegraphed narrative. Obviously, with Wells Fargo's exit a good amount of time ago and Chase issuing the first deals post-GFC from the portfolio side, obviously, flows to be found. I think it speaks more to the returns that exist in sort of that prime jumbo space where banks tend to traffic more. At the moment, we don't see that as particularly attractive, but are paying very close attention to it. Our expectation is and what we're seeing from most of the securitization market today despite the broader narrative of regional banks selling, most of the originations hitting the securitization market and by most the very, very large portion is actually from nonbank originators, which sort of flies in the face of this narrative. Not saying that, that won't change, but we're paying close attention to it. And if it does change, we'd like to think we'd be in a place to be able to opportunistically take advantage of that dislocation.

Just one on the -- just the credit in the portfolio just in general. I mean, you guys have been pretty active in non-QM in the investor property space. Just any thoughts there on the credit performance going forward? I mean, is there a way to like sensitize how sensitive some of the credit could be relative to like the Agency space, for example?

Yes, certainly. So obviously, we traffic in a slightly more credit-sensitive space. That being said, even in my prepared remarks, we talk about the strong housing fundamentals, the mark-to-market LTV or HPI adjusted LTV of the book is very, very low. And the performance, as I stated in the prepared remarks, the delinquency trends are still below our original underwrite. So there has been a modest uptick, but that modest uptick is still well below our underwrite also in the prepared remarks versus the broader non-agency market our originations, the credits we've securitized have been outperforming comparables. I think it's also worth noting there that unlike the broader market, on average, we probably don't make 25% to 35% of the loans in sort of the average issuer shelf out there with some issuers being as much as 50% [indiscernible]. So we have a tighter credit box. We've stayed true to what we've said over the years and expect to do so going forward.

And it appears that we have no further questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.

Thank you to everyone for joining us and for your questions. We very much appreciate it. Look forward to speaking to you again next quarter. Good day.

That concludes today's teleconference. Thank you for your participation. You may now disconnect, and have a wonderful day.