Q1 2024 AG Mortgage Investment Trust Inc Earnings Call

Participants

Jenny Neslin; General Counsel, Secretary; AG Mortgage Investment Trust Inc

T. Durkin; President, Chief Executive Officer, Director; AG Mortgage Investment Trust Inc

Nick Smith; Chief Investment Officer; AG Mortgage Investment Trust Inc

Anthony Rossiello; Chief Financial Officer, Treasurer; AG Mortgage Investment Trust Inc

Doug Harter; Analyst; UBS Securities LLC

Jason Weaver; Analyst; Jones Trading

Bose George; Analyst; Keefe, Bruyette & Woods Inc

Eric Hagen; Managing Director; BTIG LLC

Presentation

Operator

Good day, and thank you for standing by, and welcome to the AG Mortgage Investment Trust first quarter 2024 earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I'd now like to turn the call over to Jenny Nestle and General Counsel for the Company. Please go ahead.

Jenny Neslin

Thank you. Good morning, everyone, and welcome to the First Quarter 2020 for earnings call for AG Mortgage Investment Trust. With me on the call today are TJ Durkin, our CEO and President, Nick Smith, our Chief Investment Officer, and Anthony Rocheleau, our Chief Financial Officer.
Before we begin, please note that the information discussed in today's call may contain forward looking statements and 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, and we encourage you to read the disclosure regarding forward-looking statements contained in our SEC filings.
Including our most recently filed Form 10K for the year ended December 31, 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, and we will also reference the earnings presentation that was posted to our website this morning to view the slide presentation turn to our website, w. w. w. dot HGMIT. dot com and click on the link for the Q1 2024 earnings presentation on the home page. Again, welcome to the call, and thank you all for joining us today. And with that, I'd like to turn the call over to TJ.

T. Durkin

Thank you, Jenny, and good morning, everyone. Last quarter we were able to walk you through the merits of the WMC transaction, but with only less than a month of true financial impact. I'm excited to report our first full quarter post merger, which we believe gives a clear picture of the compelling benefits walking through immense financial position.
As of March 31, we grew adjusted book value from $10.20 to $10.58, while paying our $0.18 dividend producing a 5.5% economic return on equity for the quarter. While still preliminary, we see estimated book value per month for the end of month April to be roughly flat from quarter end. The Company now has an equity base of $540 million, $140 million of liquidity.
It's only 1.4x turns of economic leverage to end the quarter with market expectation for rate cuts in the near term, tempered our first quarter results demonstrate our ability to grow earnings power in this higher for longer interest rate environment while protecting book value. During the quarter, we earned $18.2 million of net interest income, $0.55 of earnings per share at $0.21 of ED. per share covering our dividend. By the way, I had $0.03 and closing WMC transaction on December sixth and through quarter end, approximately [$50 million] of assets have already been monetized to be rotated into our core strategy of newly originated residential mortgage loans.
In terms of capital markets activity, we completed one GSE eligible securitization and we notably issued approximately $35 million of investment grade unsecured bonds addressing a sizable portion of the legacy WMC. convertible notes, which are due this coming September. And like I said last quarter, the team and I are 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.
We believe the WMC acquisition was another substantial step, further positioning that as a premier pure play residential mortgage rate. And we have confidence in our ability to continue to deliver on strong earnings of the investment portfolio while seeking ways to continue enhancing scale and G&A efficiencies, demonstrating my confidence, I was pleased to personally purchase another 50,000 shares and that following last quarter's earnings earnings release, strengthen the alignment of interests with our shareholders as we continue to execute on our mission.
I'll now turn the call over to Nick.

Nick Smith

Thanks, TJ. In the first quarter, the Company grew the investment portfolio by 4.8% and delivered an economic return of 5.5% and reduced economic leverage. The 3.7% book value increase was driven by continued flattening of the credit curve, underpinned by strong performance in risk assets, continued strength in housing fundamentals and limited supply of residential credit.
The Company securitized $377 million of residential whole loans acquired another $285 million of home loans and built a current pipeline of additional $284 million from Arc Home and other third party originators. In addition to the activity in loans, we properly rotated additional assets acquired from WMC, bringing the aggregate equity return to approximate approximately $36 million we anticipate being in the market with our second securitization of this year in the coming weeks, while credit spreads have tightened into the end of last year and throughout this past quarter, equity returns in the mid to high 10s post securitization remains.
While the origination landscape continues to be challenging, our homes Q1 lock volumes were $687 million with continued strength in April of approximately $300 million. Notably, funding volumes increased over 40% from the first quarter of the previous year, well, this increase is over 2.5 times the industry, the increase in originations seen for the industry over the same period. We expect these increases to keep pace WERE increase over the next year as we continue growing our footprint in both wholesale and correspondent channels.
Now I'd like to turn the call over to Anthony.

Anthony Rossiello

Thank you, Nick, and good morning. In December, we closed the WMC acquisition, helping to grow mid to investment portfolio and equity base while improving scale for the Company. Further, net immediately began to benefit from the substantial synergies we previously highlighted in our announcement of the transaction, which is evident through our performance this quarter. During the quarter, we recorded GAAP net income available to common shareholders of $16.3 million or $0.55 per share.
Our book value of $10.84 per share and adjusted book value of $10.58 per share increased by approximately 3.7% from December. The book value increase was driven by mark-to-market gains on our investment portfolio and credit spread tightening gains on our hedge portfolio from rising rates and improvement in our earnings available for distribution or CAD.
Arcom had a neutral impact on book value this quarter as mark-to-market gains on MSR portfolio driven by rising interest rates offset losses from VAG. We generated EBIT of $0.21 per share for the first quarter. Net interest income, inclusive of interest earned on our hedge portfolio was $0.69 per share, which exceeded our operating expenses and preferred dividends of $0.44, generating earnings of $0.25 per share. This was offset by a loss of $0.04 contributed from ArCom during the quarter.
Net interest income, including swaps, increased by $4.1 million, resulting from a full quarter of earnings from the acquired WMC portfolio. While operating expenses only increased by $1.4 million. As discussed on our previous earnings call, we estimated that approximately $5 million to $7 million of operating expenses would be removed on an annual basis upon combining MITT and WMC, these synergies are now being realized with annual operating expense savings trending toward the higher end of our estimated range. Lastly, we ended the quarter with total liquidity of approximately $140 million.
This concludes our prepared remarks, and we'd now like to open the call for questions.
Operator?

Question and Answer Session

Operator

Thank you. And if you would like to ask a question at this time, please press star one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, if you would like to ask a question, please press star one. Our first question comes from Doug Harter with UBS. Please go ahead and thanks.

Doug Harter

Good morning. Tom, hoping you could talk about your outlook for for incremental new investments, how to how we should think about the pacing of that and kind of your plans to fund that either through recycling of through recycling of capital? Or do you have any plans to? And I raise NuComm?

Nick Smith

Thanks, Doug. This is Nick. So we, for the most part can recycle capital that we have, particularly given the flattening of the credit curve that we mentioned. I think that builds an opportunity to sell down positions that have done well and reinvest on pace wise on. There's still plenty of opportunity in the market. I mentioned growth in he checked both channels at Arc Home. And yes, the certainly the ease or availability of credits in the market and where you can buy them. It will not be the constraint.

Doug Harter

Craig and Tom, I guess how are you thinking about what is the return differential between now and call it the legacy WMC assets that you have on now that you're selling and where you think you can put that money to work on today?
Arcom production?

Anthony Rossiello

Yes. So a lot of that paper has as seasoned out as the credit curve flattened. And we're talking some of the people who were selling was high 100, low 200 sites spread, I think we can double those sort of spreads or more the recycling. And then obviously with the modest deployment of back ended up leverage, it get you to the mid to high 10s returns.

Doug Harter

Great. Thank you.

Operator

Thank you. Our next question will come from Jason Weaver, Jones Trading. Please go ahead by the

Jason Weaver

morning. Bob, I was wondering, can you talk a bit about the what we see the origination capacity that is personnel-wise at Arc Home looking out further into the year, are you preparing for more volume if we do see a decline in rates in the back half.

Anthony Rossiello

I think our comments well positioned for the current environment. When we think about rallies in rates, we think a lot more about seasonality than what 100 basis 200 basis point rally in rates will do to volumes and sort of given that outlook, we think the staffing is well-positioned on that. And we put a lot of work into, I'm making the Company more and more efficient. So so that, yes, if we see increases that those can be it's readily handled.

Jason Weaver

Thank you. And then more of a clarification I had just given the volatility we saw starting in April, would you say that the bid for securitization really hasn't been materially affected?

Anthony Rossiello

Yes, I don't think it's been materially affected. In fact, if you look at a lot of the inflows across bond funds, some of those those supply demand technicals are well supported for continued issuance. And there's there's still tends to be less supply than demand.

Jason Weaver

Great. Thank you very much.

Operator

Thank you. As a reminder, if you would like to ask a question, please press star one at this time we'll take our next question from Bose George with KBW. Please go ahead.

Bose George

Hey, guys. Good morning, happen. Can you talk about the sustainability of the current level of the EAD. you reported this quarter. And then just on a related note, I guess you had a little over $100 million of cash. Can you remind us how much of that is cash you want to keep? And how much of that think of that's kind of deployable?

Anthony Rossiello

And so in terms of the cash question, I mean, we've got $140 million listed on page 5. I think when we think about where we've been running some leverage from over the recent quarters or so, I think we have an ability to probably deploy $40 million to $50 million of that. We obviously have the maturity coming up in September on a convertible note from it payable starting in June. So we're obviously managing cash into that maturity.
In terms of E and D, I think the way we think about things is if you were to go back to when rates really started moving in 2022. I think we've done a really good job of protecting book value on the investment portfolio and the ROEs that we've been putting up there, I think have been able to capture these higher rates. And so I think that's sort of it. But the tailwind, I think our headwind has been twofold.
One has been and just the kind of core earnings at Arc Home, contributing by an offsetting the kind of higher ROEs we're producing on the investment side and then obviously just scale and G&A. And so I think as we look forward now with one quarter behind us bidding, you're clearly seeing the G&A synergies, which Anthony mentioned, and we're happy to go into more detail there on terms of how that's penciling out, Bob. And then I think you'll we show our numbers.
Page 9 bonus. I think you know that our CONE sort of negative contribution EAD. has gradually been kind of working towards breakeven and obviously with the goal of towards the back half of this year, kind of crossing into a positive. So I think when you put all that together, I think we feel pretty good about sort of EAD. in this higher range on a more standard basis, but we don't view this as one.

Bose George

Okay. Great, thanks. And then actually, just on acquisitions, obviously, I mean, this was I mean, we see it as a very positive transaction. And how do you sort of thinking about potential future transactions, obviously where you're trading makes it somewhat challenging. But and it's like how much sort of energy is focused on that as a potential catalyst.

T. Durkin

And I think things are still very open to other acquisitions other ways to, I would say, enhance the scale of the company. And I think the manager has shown to be very supportive in continuing to grow that. So we're definitely open for business and you're fielding calls about opportunities. And we don't view WMC as sort of one and done. I think it was sort of building blocks for hopefully future growth.

Bose George

Okay, great.
Thanks.

Operator

Thank you. Our next question comes from Eric Hagen with BTIC. Please go ahead.

Eric Hagen

High-density warning to any perspectives on a support for agency and non-agency MBS spreads following the Fed meeting this week, any catalyst we see for MBS spreads to tighten from here? What do you guys feel like is like the upper bound for MBS spreads, just given some of the some of the news that we have receivers? Thank you.

T. Durkin

Look, we pay close attention to the agency basis and on agency basis. Obviously, we're not in the agency market as sort of the core business. That being said, we look at agencies have been generally fairly valued here, yes, with buying vol comes off, agency spreads should do better on. But I do think that our book is largely insulated from what goes on in that market. I think you can look at even this past quarter's performance and you could see that sort of credit outperformed a lot of the a lot of the parts of the capital stack that are more impacted by.
Yes, IG spreads and interest rate volatility.

Eric Hagen

Okay.
That's helpful.
Hale.
Lots of capabilities around distressed credit at Angelo, Gordon, NTPG., I mean, are there any opportunities you guys are seeing out there yet that could speak speak to that opportunity.

T. Durkin

I mean, certainly not in a sort of scale on the residential side at this point. I mean, I think there's way more opportunity sort of focusing on new origination, probably don't see that changing obviously in the short to medium term either.

Eric Hagen

Thank you.

Operator

Yes, thank you. At this time, we have no further questions in queue. This will conclude today's AG Mortgage Investment Trust first quarter 24 earnings conference call. You may disconnect your line at this time and have a wonderful day.