AG Mortgage (NYSE:MITT) Investment Trust Inc. (MITT), a real estate investment trust, announced its fourth quarter 2023 and full year financial results, emphasizing significant growth and strategic advancements. The company reported a GAAP net income of $1.35 per share for the quarter and a book value of $10.46 per share. Following the successful acquisition of WMC in December, AG Mortgage Investment Trust Inc . has seen a nearly 50% increase in market cap and significant annual expense savings. The investment portfolio expanded by over $1.7 billion, and the company's proprietary origination channel, Arc Home, is well-positioned for future profitability.
Key Takeaways
- AG Mortgage Investment Trust Inc. achieved a GAAP net income of $1.35 per share for the quarter.
- The company reported a book value of $10.46 per share.
- The acquisition of WMC led to a nearly 50% increase in market cap and substantial expense savings.
- The investment portfolio grew to $5.9 billion, a 26% increase quarter-over-quarter.
- AG Mortgage Investment Trust Inc. recorded a bargain purchase gain of $30 million from the WMC acquisition.
- The company expects Arc Home to be profitable in the current year.
- They plan to keep $75-$85 million in cash reserves and are exploring refinancing opportunities in the capital markets.
Company Outlook
- AG Mortgage Investment Trust Inc. anticipates continued growth in origination volumes and non-agency originations.
- The company is repositioning its loan acquisition strategy to focus on residential whole loans and a securitization strategy.
- Arc Home is expected to contribute to profitability and is expanding its loan acquisition channels.
Bearish Highlights
- The company operates in a more credit-sensitive space, requiring close monitoring of credit performance and market conditions.
- Regional banking pressures are being closely observed for potential impacts on the prime jumbo space.
Bullish Highlights
- Strong performance is projected in the non-QM loan space due to favorable housing fundamentals and low delinquency trends.
- The company's originations are outperforming those in the broader non-agency market.
Misses
- There were no specific misses mentioned in the earnings call summary.
Q&A Highlights
- No further questions were received during the call, indicating that the presented information was comprehensive and clear to participants.
AG Mortgage Investment Trust Inc. is capitalizing on its recent acquisition and market position to drive future growth. The company's strategic focus on its proprietary origination channel and the expansion of its investment portfolio demonstrates its commitment to strengthening its financial standing and enhancing shareholder value. With a solid quarter behind it and a positive outlook for the year ahead, AG Mortgage Investment Trust Inc. remains vigilant in monitoring market conditions and credit performance to ensure sustained success.
InvestingPro Insights
AG Mortgage Investment Trust Inc. (MITT) has recently shared its financial results, shedding light on the company's growth trajectory and strategic positioning. To further understand MITT's performance and potential, let's delve into some key metrics and InvestingPro Tips that offer a more nuanced perspective.
InvestingPro Data:
- The company's P/E ratio stands at an attractive 7.81 when adjusted for the last twelve months as of Q4 2023, suggesting that the stock may be undervalued compared to earnings.
- With a market capitalization of $171.61 million, MITT has shown a remarkable revenue growth of 29,100% in the last twelve months as of Q4 2023.
- Despite a quarterly revenue decline of -23.9% in Q1 2023, MITT maintains a strong gross profit margin of 84.17%, indicating efficient cost management and a potentially sustainable business model.
InvestingPro Tips:
- Management's aggressive share buybacks signal confidence in the company's valuation and future prospects.
- MITT's commitment to dividend payments, with a history of 13 consecutive years, provides a level of income stability for investors.
For those interested in a deeper analysis, there are additional InvestingPro Tips available, including insights on net income expectations, liquidity, and price trends. With a total of 8 InvestingPro Tips for MITT, investors can gain a comprehensive understanding of the company's financial health and market position.
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Full transcript - AG Mortgage Investment Trust Inc (MITT) Q4 2023:
Operator: 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.
Jenny Neslin: 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.
T.J. Durkin: 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 that process, which we will get into in more detail. Moving to Page 6. We provide a quick recap of the WMC acquisition with the highlights being an almost 50% increase in MITT's market cap, which should add to our shares trading volume and liquidity. We'd also like to highlight the strong support from our external manager, TPG Angelo Gordon, through three key metrics. Cash contribution of $5.7 million from our manager to WMC shareholders to help secure the deal, resulting in $1.3 million in future reimbursable expense offsets; and lastly, an additional $2.4 million in management fee waivers beginning in the fourth quarter of 2023. The transaction creates significant long-term annual expense savings to the tune of $5 million to $7 million per annum, and we believe this deal will be accretive to 2024 earnings. Moving to Page 7. We provide a walk-through on book value to show the effects of the WMC transaction. If MITT were to have remained a stand-alone company, we would have seen book value actually improved during the year from $11.39 to $11.51 as you can see on the left side of the page. On the right side of the page, we break out the various components of the WMC transaction, which affect book value. You may recall the transaction was structured based on a fixed exchange ratio using June 30 valuations. As we close the books for year-end, we did see some valuation deltas on certain WMC assets since the June 30 fixed exchange ratio date and our closing December 31 marks of approximately $0.44. Transaction expenses, which made up the majority of the impact, approximated $0.39 on the WMC side, which includes their manager termination payment and $0.20 of transaction expenses from the mid-side. The remaining $0.02 decline represents net losses contributed by WMC from the acquisition date through year-end offset by the incremental dividend declared associated with the shares issued to acquire WMC, resulting in our final 2023 book value of $10.46 per share. On Page 8, we'll move away from the transaction to address MITT fiscal year performance. As previously stated, we ended the year with a book value of $10.46 at an adjusted book value of $10.20 per share. We have over $528 million of total equity and $112 million of liquidity, resulting in an economic leverage of 1.5 turns. Since year-end, our liquidity increased as a result of our inaugural bond issuance, which I'll touch on later, and our economic leverage ratio has declined as we executed a securitization in January, further reducing our warehouse exposure. On Page 9, when looking back at MITT's activities across 2023, we have consistently executed on our stated business plan by acquiring $1.2 billion of loans, not including the portfolio acquired from WMC. And in turn, securitizing $1 billion of loans during 2023 across three distinct securitizations. Throughout the year, we generated $53 million of net interest income, which drove our $0.39 of EAD&D per share for the year. We believe also worth noting that all onetime transaction expenses are now behind us as we head into 2024. And when thinking about the current dividend run rate, we will now have the full benefits of the G&A scale we achieved the acquisition for the upcoming year. Moving to Page 10. During the quarter, MITT closed the WMC acquisition effectively raising $81 million of equity for the combined entity. Deterring of $0.17 of EAD and paid its $0.18 dividend. We’re reporting a GAAP net income of $1.35 per share this quarter, which includes a onetime $30 million bargain purchase price gain. While we closed WMC late in the quarter, we have already been successful in taking action. We took advantage of strong credit markets in December and opportunistically sold $20 million of non-agency bonds, acquired WMC at gains and also had one $12.3 million CRE loan pay off at par subsequent to the close, generating over $32 million of cash proceeds in total. Additionally, and subsequent to quarter end, we were able to execute a capital raise of BBB- minus rated unsecured notes, or baby bonds, in January raising almost $35 million of gross proceeds. And further, we're able to use a portion of this capital in repurchasing over $7 million of the legacy WMC converts at a slight discount in the open market. We believe these actions put us well ahead of schedule in addressing September 15 maturity for the WMC convertible notes we assumed. Lastly, we see January book value up approximately 2% to 3% from year-end. Before I pass it to Nick, I want to reiterate the MITT team is very proud of what we accomplished during 2023 and year-to-date so far, and we believe we are taking all the right steps to making MITT a more scaled and profitable investment vehicle for shareholders to access the residential mortgage ecosystem. We have fully acknowledge the work is not done, but we have demonstrated we have the right strategy, skills and resources to achieve our goals. We will continue to build on this momentum to create a long-term, more profitable net going forward. I'll now turn it over to Nick to discuss our investment activities and Arc Home in more detail.
Nick Smith: 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.
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. 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 of MITT's merger-related transaction expenses recorded in the fourth quarter, which we highlighted on our last call. The remaining book value decline was driven by unrealized mark-to-market losses on certain assets acquired from WMC since the acquisition announcement in June as well as the mark-to-market losses on Arc Home's MSR portfolio previously noted. We generated earnings available for distribution, or EAD, of $0.17 per share for the fourth quarter. Net interest income, inclusive of interest earned on our hedge portfolio, was $0.70 per share, which exceeded our operating expenses and preferred dividends of $0.50, generating earnings of $0.20 per share. This was offset by a loss of $0.03 contributed from Arc Home. In connection with the WMC acquisition, our manager agreed to waive $2.4 million of management fees beginning in the fourth quarter as well as $1.3 million of reimbursable expenses over time. EAD during the fourth quarter incorporated $600,000 of the management fee waiver and $220,000 of the expense reimbursement waiver or in aggregate $3.05 per share. This leaves us with an aggregate $2.9 million of management fee expense reimbursement reductions to come through in 2024. It's also notable that EAD during the fourth quarter only includes 1 month of earnings from the acquired WMC portfolio. Our investment portfolio increased by $1.2 billion or 26% quarter-over-quarter to $5.9 billion driven by the WMC acquisition and loan purchases of approximately $280 million. 85% of our financing is currently funded through securitization at a weighted average cost of 4.9%, and our economic leverage ratio at quarter end was 1.5 turns, which includes the convertible notes assumed from WMC. In January, we executed a securitization further reducing our economic leverage to 1.2 turns. Lastly, we ended the quarter with total liquidity of $112 million, which has since increased and currently approximately it's $140 million. Our increase in liquidity was driven by the recent issuance of our unsecured notes for estimated net proceeds of $32.8 million, offset by $7.1 million of convertible note repurchases. This concludes our prepared remarks. We now like to open the call for questions. Operator?
Operator: [Operator Instructions] And we'll take our first question from Trevor Cranston with JMP Securities. Your line is open.
Trevor Cranston: 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?
T.J. Durkin: 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.
Trevor Cranston: 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?
T.J. Durkin: 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.
Operator: And we'll take our next question from Matthew Erdner with JonesTrading. Your line is open.
Matthew Erdner: 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?
Anthony Rossiello: 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.
Matthew Erdner: 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?
T.J. Durkin: 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.
Matthew Erdner: And then did you guys provide book value quarter-to-date?
T.J. Durkin: Yes. Through January, we saw book value up 2% to 3%.
Operator: And we'll take our next question from Doug Harter with UBS. Your line is open.
Doug Harter: 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?
T.J. Durkin: 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.
Doug Harter: 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.
T.J. Durkin: 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.
Operator: And we'll take our next question from Bose George with KBW. Your line is open.
Bose George: 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?
T.J. Durkin: 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.
Bose George: 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?
T.J. Durkin: 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: [Operator Instructions] We'll take our next question from Eric Hagen with BTIG. Your line is open.
Eric Hagen: 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?
Nick Smith: 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.
Eric Hagen: 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?
Nick Smith: 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.
Operator: 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.
Jenny Neslin: 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.
Operator: That concludes today's teleconference. Thank you for your participation. You may now disconnect, and have a wonderful day.
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