TPG Mortgage Investment Trust, Inc. Q1 FY2025 earnings call

• T.J. Durkin highlighted first quarter earnings showcasing book value stability, market volatility in April, and potential GSE reforms opportunities. - Nick Smith discussed portfolio performance with a 2% economic return, focus on home equity sector, macro landscape trends, and Arc Home's strong performance with increasing lock volumes and improving gain on sale margins. - Anthony Rossiello noted positive momentum, investment portfolio growth, securitization activity, book value stability, dividend increase to $0.20 per share, EAD details, and Arc Home's contribution to earnings available for distribution.

The investment portfolio grew by 6.2% to $7.1 billion during the first quarter. Book value was stable with a slight increase to $10.65 per share. Net interest income on the investment and swap portfolios increased by $1 million or 5% from the prior quarter. The home equity sector saw significant activity: a $500 million home equity securitization was issued, $130 million of additional home equity loans were acquired, and new partnerships for home equity exposure were established. Revenue contribution from the home equity segment is part of the overall portfolio growth, with the home equity sector being a focus for capital allocation moving forward.

• Book value remained stable with a slight increase to $10.65 per share. - Dividend was increased by 5.3% to $0.20 per share. - Investment portfolio was grown by 6.2% to $7.1 billion. - Continued focus on expanding in the home equity sector, with expectations for Arc Home to contribute more to earnings as it innovates and diversifies its product offering.

• Market volatility starting in March and continuing into April, which affected spreads on retained securities and led to an estimated 3% drop in book value through April. - Potential impacts of GSE reforms, though no immediate massive reform is known. - Risks associated with securitization activity, including transaction expenses that partially offset gains from equity method investments.

Q: You have one of the legacy commercial mortgage loans that's set to mature this month. Just hoping you could give us an update on that and how much capital that would free up for investing?

A: Yes. So we have one of those two loans legacy from the WMC acquisition maturing this month. We expect that to go into kind of pre-negotiated forbearance. So we've been actively in dialogue with the borrower and the rest of the lender group, and we feel reasonably confident that we'll get to a positive outcome there in the short term and then ultimately, within a realistic time frame kind of culminate in a full payoff probably within 2025. And it's about $16 million of equity capital.

Q: Can you talk about the health of the securitization markets over the last several months, especially amid the recent volatility and then how they might be performing today?

A: Yes. So I think we saw markets perform fairly well through March despite maybe broader sort of equity turbulence. When you got to Liberation Day, call it, the first two weeks of April, we saw them effectively close. And I think that was in a glass half full way, it was -- no one was forced to issue. People sat out the volatility. By the end of the month, you saw deals coming back to market and quite a decent amount of them by the last 2 weeks of April and into the beginning of May. And I would say their Capital Markets are fully open. I think spreads are wider, right? So I think if you look at where we're retaining securities, I think there may be 50 to 75 wider based on where we're seeing pricing today. And so I think that's how we're thinking about book value in April. But I would say the markets are back open.

Q: Just wanted to continue on Arc. Can you just talk about volume trends in the second quarter, the spread widening you noted in the securitization markets? Has that been able -- can you pass that on to consumers? Is that impacting the demand there? Just color on that?

A: Yes. So I think it's been widely publicized in the NBA, and we'll see if the trend continues. But the consumer has pulled back slightly on home purchases. Obviously, it's early in sort of the purchasing cycle. So we would expect the overall market to be down, but we do think Arc is somewhat insulated given where it attaches itself to the market. As far as gain on sale margins, we do expect them to normalize/maybe gain a little bit into this volatility. Certain segments have been better bid versus others, if anything, maybe creating a little bit of opportunity. But we're still optimistic coming into this part of the buying season.

Q: First, on the home equity securitization, can you talk a little bit more about that, what advance rates and sort of execution levels you were able to achieve there?

A: Yes. So the advance -- I want to maybe just starting with the collateral. We're talking mid-700s FICO, high 60%, low 70% type LTV. The advances to the non-IG part of the stack, which what we retain, generally is, call it, 95-ish percent of market value. From sort of where you're funding that, that's changed a little bit. As T.J. alluded to earlier, slightly wider, but you're funding that, call it, 200-ish context, plus or minus 10, 15 basis points today.

Q: I want to dive in a little bit more on how we're like responding to volatility and such. And when mortgage spreads are wider, I mean, do you see that as an opportunity to maybe add risk and like add leverage? And do you see some of the typical non-QM originators retrench from the market when mortgage spreads are widening? Or just like what's the behavior in the market right now?

A: Yes. I mean I think, Eric, the volatility in early April was, I would say, more in like the macro spaces. So you saw it in rates, in equities and the closest derivative would be the basis on the agency side. And I think -- we think our shareholders are expecting us to kind of operate in the non-agency space and not try and time tactical trades there. So we've been disciplined in not taking debate there. At the end of the day, there wasn't that much for selling of whether it be home equity loans or non-QM loans or even securities backed by those products. So it was -- from our opinion, it's probably in the rearview mirror at this point. And so it's kind of back to business as usual.

Q: On the securitized non-QM loans that you guys show on Slide 11, it looks like the yield to your cost basis is 5.7%. But how should we think about like a market yield for that portfolio at this point? Because it looks like the cost of funds that you're showing is probably a market cost of funds. So how should we think about like the economic spread that you're earning in that portfolio right now?

A: I mean I think we would probably point to the ROE on the right side.