Prepared remarks
Thank you. Good morning, everyone, and welcome to the Second Quarter 2025 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, 2024, and our subsequent reports 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 view the slide presentation, turn to our website, www.agmit.com, and click on the link for the Q2 2025 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. Good morning, everyone. I'm pleased to report our second quarter earnings, which showcase the continued execution of our core business strategy and industry-leading results, particularly around book value stability. During the second quarter, we increased our common dividend by 5% or $0.01 per share. Focusing on the second quarter, Liberation week in April created volatility in the broader markets we hadn't seen in some time. The merits of our core strategy and discipline around terming out warehouses with securitization showed in the continued strength of our capital structure. We entered this heightened period of volatility with materially less financial leverage and smarter leverage like our non-mark-to-market whole loan warehouses. This setup means we are not as vulnerable to forced deleveraging or panic delta hedging. As a result, we saw a modest book value decline of 2.4%, moving from $10.65 to $10.39 while supporting and paying our increased $0.21 dividend. Therefore, producing a roughly breakeven quarterly economic return on equity for our shareholders in a very difficult quarter for the MREIT space. We hope our shareholders can appreciate the results of MITT's differentiated business strategy and discipline around risk coming out of such a challenging quarter. For the second quarter, we experienced what we expect to be a one-time drop in economic asset distribution, mostly related to 3 of our remaining commercial real estate loans to one borrower from the WMC acquisition hitting their maturity date. Therefore, we're taken off accrual as we work towards the ultimate resolution, which we believe should be by year-end. On a more positive and longer-term note, subsequent to quarter end, MITT refinanced the expensive structured repo we inherited from the WMC acquisition into current market terms, which will have a significant lift to go-forward economic asset distribution, which Nick will give more details on later. In addition to our normal activity during the quarter, we are excited to announce a strategic transaction for the company. This morning, MITT acquired an additional 21.4% of Arc Home from original seed investors in private funds managed by TPG AG. A total of 2 million MITT shares were issued for consideration for their interest, creating minimal dilution of 2% to June 30 book value, while creating meaningful earnings accretion potential. The sellers are funds that are generally in the later or liquidating stage of their life cycle. We're obligated to register the shares pursuant to a registration rights agreement, which can take a bit of time, and there are various restrictions in that agreement governing the timing of sales. Based on that, we don't expect the sellers to be able to sell meaningfully before year-end. When we embarked upon MITT 2.0 in 2021, we set out to be a best-in-class vertically integrated residential mortgage origination and securitization platform. We believe this is a logical next step for our company's business strategy. The transaction will bring many benefits to MITT with meaningful earnings accretion expected in 2026, driven by anticipated growth in the mortgage market and Arc's proven capability to be a leader in the non-QM space. There's also a positive step forward in scaling the company and enhancing our capital structure. As we said on prior calls, we will continue to seek and pursue opportunities that further this goal only where we believe the results are to enhance value for shareholders. Both Nick and Anthony will go into more detail on the transaction later in the call. I'll now hand it over to Nick.
Thank you, and good morning. During the quarter, MITT completed 2 securitizations. Gains from these transactions partially offset mark-to-market losses driven by broad risk asset weakness following Liberation Day in early April. The first was MITT's second agency-eligible investor securitization of the year, while the second was a joint venture with a leading HELOC originator. In addition to its securitization activity, MITT closed 2 residential mortgage warehouse facilities. These facilities are designed to reduce mark-to-market risk during the gestation period and enhance cash management, which is expected to modestly improve economic asset distribution. After the quarter end, the company refinanced high-cost inefficient debt backed by retained interest in WMC issued non-agency securitizations. The refinancing reduced the cost of capital by over 500 basis points and generated approximately $40 million additional cash for redeployment. These proceeds have been redeployed through the home equity securitization partnership with a leading nonbank mortgage originator we first introduced in the first quarter. In addition, the company has a strong pipeline of residential mortgage loan acquisitions and anticipates issuing 2 more securitizations in the third quarter. As T.J. mentioned, MITT increased its ownership of Arc Home. In the first quarter's prepared remarks, we reiterated our commitment to this business and outlined how strategic investments in it were beginning to pay off. We saw a continuation of these trends throughout this quarter, which were offset by pipeline losses attributable to Liberation Day. A quick reversal in markets positioned Arc to recover most of these pipeline losses and provides insight into more normalized profitability. As Arc continues to execute on its plan to contribute to MITT's earnings available for distribution should increase. And with greater ownership share, this is expected to be an important driver of earnings. We are confident that Arc can continue to gain share in a growing and increasingly attractive corner of the mortgage market. I'll now turn the call over to Anthony.
Thank you, Nick. Good morning, everyone. Despite April's volatility, we ended the quarter with a book value of $10.39 per share, representing a modest 2.4% decline from the prior quarter. We also increased our quarterly dividend by 5% to $0.21 per share. Including this dividend, our economic return was essentially flat at negative 0.5%, highlighting our ability to maintain shareholder value in a challenging quarter. We reported a GAAP net loss available to common shareholders of $1.4 million or $0.05 per share. We continue to see steady growth in net interest income from our residential investments as we deployed additional capital into core strategies. However, net interest income was down $1.1 million or 6% from the prior quarter due to certain commercial loans that matured in May and were placed on nonaccrual. Our portfolio also recognized net unrealized losses on securitized loans from April spread widening, although these were partly offset by unrealized gains recognized on our portfolio in May and June. Additionally, it's important to note that about 1% of book value decline was due to upfront transaction expenses related to a home equity loan securitization completed in early July. During the quarter, we recognized earnings available for distribution of $0.18 per share. Net interest income, inclusive of our hedge portfolio was $0.64, exceeding operating expenses and preferred dividends of $0.46. The slight decline in earnings available for distribution from the prior quarter was largely due to placing commercial loans on nonaccrual. However, we expect this to be temporary as we work towards recovering and redeploying this capital into target assets during the second half of the year. Earnings available for distribution also benefited from a slight decline in operating expenses and Arc Home's contribution to earnings available for distribution remained breakeven, consistent with the prior quarter. Our investment portfolio grew 2.3% in the quarter to $7.3 billion, with additional activity continuing into July. We maintained a low economic leverage ratio, ending the quarter at 1.3 turns. During the quarter, we purchased and securitized $341 million of agency eligible loans and purchased $104 million of home equity loans, securitizing substantially all of our home equity loans in early July. These deals not only reduced our warehouse risk but also positioned us well for future growth. In July, we also replaced high-cost debt financing securitized loans acquired from WMC, significantly reducing our cost and freeing up $39 million of capital that was immediately reinvested to strengthen our earnings profile. With these proceeds, we sponsored a securitization backed by $647 million of closed-end second loans and continue to expand our home equity portfolio. As previously mentioned, today, we acquired an additional 21.4% interest in Arc Home, taking our ownership to 66%. This represents an incremental investment of $16 million purchased through the issuance of approximately 2 million common shares. The dilution impact on book value from this acquisition is minimal, and we expect the transaction to be accretive for our shareholders in 2026 as Arc Home continues to execute on its strategic growth initiatives. Our increased ownership interest will continue to be reported as an equity method investment at fair value on our balance sheet, which was valued at 1x book as of June 30. This concludes our prepared remarks, and we would now like to open the call for questions.
Questions and answers
We'll take our first question from Crispin Love with Piper Sandler.
Congrats on the additional Arc Home ownership. Just on Arc Home, can you talk a little bit about long-term plans there? Is it over time owning the whole company? Who owns the remaining portion today? And then can you just dig into a little bit of the accretion potential in earnings as you look over the near and long term?
So I think to answer your first question, other funds managed by TPG AG own the balance. At this point, there's no other transactions kind of pending or in the pipeline. And so they'll remain co-owners with MITT. I think as Nick mentioned, we've been investing in Arc, both in people and process, and we're seeing the results. You see it in the volume growth. Assuming that trajectory holds, we're going from, call it, breakeven at Arc to a more profitable company, and we're largely hitting those goals. So that's what we see as the positive earnings contribution going forward in late '25 and really in earnest in '26. So it’s a strategic long-term hold. And we think just executing the business plan, not having to do anything additional will be positive to earnings available for distribution in '26.
Great. That makes sense. And then just a second question for me on securitization demand from investors, definitely a volatile second quarter, April, specifically around the Liberation Day. But curious on recent demand, appetite for securitizations and then just recent spread trends?
Look, this is Nick. As the sector has grown we've seen more and more stability in the issuance of the debt. Had you rewind the clock not too far back, it would have been more volatile. Post Liberation Day, the markets returned very, very quickly, including ourselves issued, and it was well received and spreads have behaved very well and in line with a lot of other asset classes or better.
And we'll go next to the line of Doug Harter with UBS.
Can you just talk about kind of the one-time book that you were able to acquire your additional stake? It seems like there were some other transactions that went for significant premiums in the market. Just kind of how you got to that price, and how you're kind of arriving at the current carrying value?
Yes. So I think in terms of the transaction, the MITT Board engaged KBW actually for a fairness opinion and the Board, including all the independent directors sort of approved that. So we went to a true third party. I think all these originators are at different scales and profitability, which I think also factors into maybe what you've seen in some of the other recent transactions.
Great. And I guess now as you have a larger ownership stake, do you envision that changing kind of any of the hold strategy for any of the originations? Or like as you ramp up non-QM, would you plan on holding any of that? Or do you still kind of want to sell it? So any change in that strategy?
Yes. I think from an operating perspective, the management team at Arc is sort of business as usual and continuing. There's no change in the strategy at that level.
Great. And then lastly, just can you give us some more detail on those commercial loans? What changed that led them to be put on nonaccrual? Can you talk through your comfort in being able to recognize the capital that is in those loans and the timeframe for when you would expect to receive that?
Yes, of course. So I think, as I'm sure you're following lots of the commercial REITs, the maturity dates are flexible to say the least. And so this borrower on those 3 properties, one borrower for the hospitality loans is working through an asset disposition plan. And so we're in constant contact and working towards a productive solution there.
Got it. And I guess since they're working on that plan, do you feel comfortable that, that plan should cover your current carrying basis for those loans?
Yes. Based on the information we have today, yes.
And we'll go next to the line of Jason Weaver with JonesTrading.
First of all, can you comment on your comfort level with the $89 million of liquidity here? And what sort of approach you're likely to take to adjust that? I know you have some things coming up in Q3, but with the deferral on the WMC not having that capital come back in right away before year-end?
Yes. We're comfortable with the current cash positioning. We've enhanced some of the ways that we finance the balance sheet, as alluded to in the prepared remarks, and think that this is a level that is likely to be a range that we'll be in and maybe even slightly lower in the future.
Got it. Got it. And Nick had mentioned something about refinancing the repo and the legacy WMC. Can you comment on the economics there?
We had $40 million of cash return as additional proceeds from the refinancing, significantly reduced costs, and have already reinvested that capital in the third quarter.
We'll go next to Michael Silberman from Citizens JMP.
If I may just ask about sort of a big picture view on the housing market. What is your view on home prices right now? And given some of the news that's coming out from some states, Texas, Florida, that prices are starting to sort of flatline, if not go down. Any geographies that you're avoiding and if you're tightening any underwriting standards at all?
Yes, good question. So I think our view is in line with consensus. Obviously, there's been some weakness in some of the markets that supply has returned to sort of pre-COVID levels. The weakness is still relatively modest. There are certain regions that are still hanging in tight/still getting good gains so from a guideline standpoint, like nothing changes because we've always had adjustments for weaker markets. We think that's relatively consistent across the whole business. But we pay very close attention to the trajectory of that but still believe that it's more or less steady as she goes or some mean reversion.
Great. And if I may sneak in a question. Any update on current book value through the quarter?
No, given our current position in the calendar and ongoing processes, there is no update at this time.
And we'll go next to the line of Bose George with KBW.
Actually a couple on the mortgage banking. At Arc Home, the pipeline hedging and volatility in April, does that impact the earnings available for distribution or yes, does it impact the earnings available for distribution?
Yes, Bose, that flows through the earnings available for distribution. You can see the impact to earnings available for distribution from Arc Home this quarter was a loss of $130,000. So April was largely offset by positive earnings in May and June at Arc Home.
Okay. So the setup, given the stability this quarter suggests that it should be a positive number.
Yes. That's accurate.
Okay. That's great. And then can you just talk about the gain on sale margin differential between the first liens and the second liens and just talk about the outlook for further growth in the second lien market, which has already obviously been pretty strong.
The gain on sale quarter-over-quarter for the non-QM market has been fairly consistent. We expect this to continue, considering the demand profile that appears to be well communicated. Regarding second liens, much of that is being purchased by non-affiliated third parties, so we don't focus on that business as much. However, there has been a decent gain on sale, driven by spread tightening and the capital efficiencies we have achieved.
Okay. So that's more of an investment product, essentially, so you look at it more on the capital that you deploy?
That's right. That could evolve over the coming quarters to year. But at the moment, that's a fair statement.
We'll go next to Eric Hagen from BTIG.
Can you say what the return on capital was that you expect from the closed-end seconds that you picked up from redeploying that $40 million? And were those loans originated by Arc Home or by a third party?
Those loans were originated by third parties. We expect returns there to be blended across the different parts we provided in the mid- to high teens.
Got it. Okay. Going to Arc Home here. And can you give us a quick snapshot of what the leverage and the capital structure looks like at Arc Home? Like how much total equity is in the business, how much sort of long-term debt?
There's no long-term debt. They use obviously warehouses for their own sort of origination gestation, but there’s no long-term debt in the company.
All right. Are there any securities that are capitalized on the balance sheet?
Eric, if you think about the balance sheet of Arc Home, it's essentially cash and loans on warehouse with approximately $70 million of equity at that level.
At this time, it does not appear we have any further questions. Speakers, do you have any closing remarks you'd like to give?
Just thank you to everyone for joining us and for your questions. We appreciate it and look forward to speaking with you again next quarter. Thanks, and have a good day.
Thank you. We'd like to thank everybody for joining. Please feel free to disconnect your line at any time.