TPG Mortgage Investment Trust, Inc. Q2 FY2024 earnings call

• After the WMC acquisition, the company successfully issued $65 million of investment-grade senior unsecured notes to cover the upcoming convertible note maturity on September 15, 2024, and invested a portion of the proceeds into agency MBS with modest leverage. The company ended the quarter with $180 million of liquidity and a leverage of 2.5 terms. - Since closing the WMC acquisition on December 6 of the previous year, approximately $57 million of assets have been monetized, returning $41 million of equity to be rotated into the core strategy of newly-originated residential mortgage loans. - The company was included in the Russell 2000 as of June 28, which is expected to broaden the investor base and improve investor liquidity. - Arc Home opportunistically sold its MSR portfolio at the end of April, generating liquidity for its core business and capital for new opportunities in the residential mortgage origination market. The volumes of Arc Home grew considerably quarter-over-quarter, and margins modestly increased. - The company was active in securitization markets, managing its exposure to mark-to-market financing. It ended the quarter with $300 million of loans financed on warehouse lines, with $87 million sold in July, reducing the risk profile.

As of June 30, adjusted book value moved modestly lower from 10.58 to 10.37. The company earned $17.4 million of net interest income, had a negative $0.02 earnings per share, and $0.21 EAD per share. The investment portfolio increased by approximately 11% to $6.9 billion through acquiring $423 million of residential mortgage loans and $428 million of agency RMBS. Arc Home opportunistically agreed to sell its MSR portfolio, generating liquidity for its core business.

• The company anticipates returning to more historical levels of leverage at the company level post-retainment of the convertible notes at maturity in September. - There is an expectation that the extra capital from Arc Home's MSR sale may be returned. - The company will continue to be active in securitization and deploying capital into its core residential mortgage loan strategy.

• Elevated levels of interest rate volatility pose a risk to the company's financial performance. - Market conditions, including changes in supply and demand for securitization, can impact the company's portfolio. - The risk associated with the upcoming maturity of the $86 million convertible notes and the subsequent impact on leverage and liquidity.

Q: Can you talk about the timeframe you think it'll take to kind of rotate out of agency MBS into your core assets and what you think of kind of the return differential as you make that rotation?

A: I think about it kind of as some sequencing, so I think we want to address the convertible note in September with obviously the liquidity that we have on balance sheet today, and then I think rotating that kind of excess liquidity will probably take no more than, probably two to three quarters kind of post that. We're not using, if you look at sort of the agency rates, we're using probably about half the leverage there, so it's an interim kind of stopgap to earn some carry, so I think the ROEs are not a place to look at.

Q: And I guess just with, I mean, you are taking lower leverage, just how should we think about the book value risk that you're taking, kind of on the agencies given kind of the large moves in interest rates, especially on days like today?

A: Yes. I mean, I think, like I said, we probably got, I mean, we're running from a duration perspective, I think, a consistent strategy, just less leverage in terms of our hedge ratios, et cetera. So it should be muted versus a fully leveraged agency rate.

Q: Can you give us an update on book value? I guess before the noise of today, earlier this week.

A: We haven't produced a traditional high book value yet. Too early.

Q: Can you talk about the bid for securitization you're seeing? I know you mentioned on the last dollar still tends to be less supply than demand. If you can just shed any color on what you're seeing, that would be helpful.

A: It's sort of sector by sector. I think I spoke a little bit earlier answering Trevor's question in sort of non-QM space. If anything, as more loans get sold to real money, there's been less supply in that space. So that gap has done better relative to maybe some of the other sectors. The prime jumbo market as of late has been under pressure. There is no release valve, if you will, to non-securitization outlets today, which has widened out that space as there's just been increase of issuance. But in general, the market has been healthy across residential credit up and down the stack. So any widening in the previously mentioned assets have been truly marginal from a historical standpoint. And if anything, in the non-QM space, we're sitting at local tights.

Q: Do you have a view on where you see volume shredding for Arcom as we exit 2024 and into 2025 after posting a strong quarter in 2Q? And what type of rate scenario would you need to see play out before we see a more normalized origination environment there?

A: We've said previously that, and obviously you can look at the MBA forecast. I don't think we're going to deviate a ton from sort of MBA forecast. A lot of our gains have just been from being more competitive and more efficient, rather than sort of market conditions. So I also think there's going to be a lot of seasonality to these businesses, as you would expect, given as much of how much purchase money Arcom is relying upon. But I think the trends you've seen should be similar. And if you were to seasonally adjust sort of where we are today, I think, that's what you would expect. So we're still in growth mode. We're still trying to be bigger, better, more efficient. So trajectory is still up, but conditioning it, then it will be highly seasonal.

Q: Just going back to leverage in the agency RMBS portfolio, I know you talked about it a little, but just hearing some things that would maybe lead you guys to raise leverage in the portfolio, and if you guys kind of have a target range for it, just some color there would be helpful.

A: Yes. I think if you fast forward through next quarter, we would kind of expect to be materially smaller in agencies and kind of returning to the one handle of economic leverage that we've been running the company at over the past four or six quarters. So this is just an interim stopgap to earn some carry on the cash proceeds we raised from the bond offering.

Q: Turning to the non-QM portfolio, do you guys have a sense or estimate for how much prepayment speeds could accelerate, and if they were to increase, how that would translate to earnings or spreads in the portfolio?

A: Yes. So the vast majority of the loan block, and you can see this in our presentations, is far out of the money. Like our securitized coupon, if you look at it is 5.4%, which if you think about even where conforming rates are, it's way out of the money. So obviously we're very focused on prepayment speeds and inverted curve and sort of the efficiencies entering the market, but this book of business is fairly well protected from any convexity event or expected convexity event.