TPG Mortgage Investment Trust, Inc. Q1 FY2024 earnings call

• The first full quarter post-WMC merger showed adjusted book value growth and a 5.5% economic return.
• Investment portfolio grew by 4.8%, with $377 million of residential whole loans securitized, $285 million of home loans acquired, and a $284 million pipeline.
• Completed one GSE eligible securitization and issued $35 million of investment grade unsecured bonds.
• Realized annual operating expense savings from WMC acquisition, trending toward the higher end of the estimated $5M-$7M annual savings range.
• CEO purchased additional 50,000 shares, demonstrating confidence in the company.

The company's investment portfolio grew by 4.8% in the first quarter, delivering an economic return of 5.5% and reducing economic leverage. The book value increased by 3.7% due to credit curve flattening, strong risk asset performance, housing fundamentals, and limited residential credit supply. Arc Home had a neutral impact on book value this quarter, with mark-to-market gains on its MSR portfolio offset by losses from EAD. The investment portfolio generated net interest income of $18.2 million, and Arc Home had a negative contribution to EAD.

• Expect to recycle capital leveraging the flattening credit curve to sell well-performing positions and reinvest.
• Pacing of incremental new investments is driven by market opportunities, with growth in Arc Home's channels.
• Synergies from WMC acquisition are being realized, with annual operating expense savings trending higher than initial estimates.
• Anticipate a second securitization in the coming weeks.

• Uncertainties related to interest rate movements impacting the investment portfolio and book value.
• Market volatility affecting securitization activity and MBS spreads.
• Risks associated with legacy WMC convertible notes due in September requiring careful cash management.

Q: 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 cap?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: Thanks. 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 and offsetting the kind of higher ROEs we're producing on the investment side and then obviously just scale in G&A. And so I think as we look forward now with 1 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 in terms of how that's penciling out. And then I think, we show on page 9, I think the Arc Home, sort of negative contribution to EAD has gradually been kind of working towards breakeven and obviously, with the goal 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 and this higher range on a more sustainable basis. We don't view this as one off.

Q: Any perspectives on the support for agency and non-agency MBS spreads following the side meeting this week. Any catalysts you 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 news that we've received recently?

A: 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 at being generally fairly valued in here with [indiscernible] 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 can see that sort of credit outperformed a lot of the parts of the capital stack that are more impacted by IG spreads and interest rate volatility.

Q: Lots of capabilities around the stressed credit at Angelo Gordan and TPG. I mean, are there any opportunities you guys are seeing out there yet that could speak for that opportunity?

A: I mean certainly not an hazard 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, honestly, in the short to medium term either.