Title

Presentation

Operator: Good day and thank you for standing by. Welcome to the AG Mortgage Investment Trust First Quarter 2024 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.

Jenny Neslin: Thank you. Good morning, everyone, and welcome to the first quarter 2024 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, 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 Q1 2024 earnings presentation on the home page.

Again, welcome to the call, and thank you all for joining us today. With that, I’d like to turn the call over to T.J.

T.J. 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 and $140 million of liquidity.

It’s only 1.4 times 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 and $0.21 of EAD&D per share covering our dividend by more than $0.03. In closing WMC transaction on December 6 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 the 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 REIT. 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 in that following last quarter’s 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, T.J. 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 home 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 approximately $36 million.

We anticipate being in the market with our second securitization of this year in the coming weeks. While credit spends have tightened into the end of last year and throughout this past quarter, equity returns in the mid to high teens post-securitization remain. While the origination landscape continues to be challenging, Arc 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. While this increase is over 2.5 times the increase in originations seen for the industry over the same period, we expect these increases to keep pace with 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 MITT’s investment portfolio and equity base, while improving scale for the company. Further, MITT 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 from credit spread tightening, gains on our hedge portfolio from rising rates, and improvement in our earnings available for distribution or EAD.

Arc Home had a neutral impact on book value this quarter as mark-to-market gains on its MSR portfolio, driven by rising interest rates, all set losses from EAD. We generated EAD 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 contributor from Arc Home. 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?

Operator: Thank you. [Operator Instructions] Our first question comes from Doug Harter with UBS. Please go ahead.

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

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. Pace-wise, there’s still plenty of opportunity in the market. I mentioned growth in the check book channels at Arc Home. And certainly the sort of availability of credits in the market and where you can buy them will not be the constraint.

Doug Harter: Great. And I guess how are you thinking about what is the return differential between, call it, the legacy WMC assets that you have on, that you’re selling and where you think you can put that money to work today in Arc Home production?

Nick Smith : Yes. So a lot of that paper has seasoned out and as the credit curve flattened, we’re talking some of the paper we were selling was high 100s, low 200s type spread. I think we can double those sort of spreads more via recycling. And then obviously, with the modest deployment of back-ended leverage get you to the mid to high teens returns.

Doug Harter: Great. Thank you, Nick.

Operator: Thank you. Our next question will come from Jason Weaver with JonesTrading. Please go ahead.

Jason Weaver : Hi. Good morning. I was wondering, can you talk a bit about the — where you 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?

T.J. Durkin : I think Arc Home is well-positioned for the current environment. When we think about rallies in rates, we think a lot more about seasonality than what 100 basis point, 200 basis point rally in rates will do to volumes. And sort of given that outlook, we think the staffing is well positioned and we’ve put a lot of work into making the company more and more efficient, so that if we see increases, that — those can be readily handled.

Jason Weaver : Thank you. And then more of a clarification. Just given the volatility we saw, starting in April, would you say that the bid for securitization really hasn’t been materially affected?

T.J. Durkin : Yes. I don’t think it’s been materially affected. In fact, if you look at a lot of the inflows across bond funds, those supply-demand technicals are well supported for continued issuance. There still tends to be less supply than demand.

Jason Weaver : Great. Thank you very much.

Operator: Thank you. [Operator Instructions] We’ll take our next question from Bose George with KBW. Please go ahead.

Bose George: Hi, guys. Good morning. 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 you think of that as kind of deployable?

T.J. Durkin : Thanks, Bose. 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 leverage 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 the convertible note, it’s payable starting in June. So we’re obviously managing cash into that maturity. In terms of EAD, 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 a tailwind. I think our headwind has been twofold. One has been 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, I think 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. And then I think you’ll we show — page nine. I think the Arc Homes are 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. How do you sort of think about potential future transactions, obviously where you’re trading makes it somewhat challenging. But it’s like how much sort of energy is focused on that as a potential.

T.J. Durkin: I think we’re still very open to other acquisitions, other ways to — I would say enhance the scale of the company. 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: Hi, thanks. Good morning. 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.J. Durkin: Look, we pay close attention to the agency basis and non 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. 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 IG spreads and interest rate volatility.

Eric Hagen: Okay. That’s helpful. 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 to that opportunity.

T.J. 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: Okay. All right. Thank you, guys.

Operator: 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.