TPG Mortgage Investment Trust Inc 9.500% Senior Notes due 2029 Q1 FY2025 earnings call

T.J. Durkin

• Reported first quarter earnings showcasing core business strategy and industry-leading results around book value stability.
• Highlighted first 2 months had positive investor sentiment and functional capital markets, while April saw market volatility with widened spreads on retained securities.
• Shared views on potential GSE reforms and MITT's positioning to take advantage of opportunities.

Nick Smith

• Portfolio performed well with 2% economic return, supporting 5.3% dividend increase.
• Focused on protecting book value and growing investment portfolio, with modest leverage increase.
• Increased capital allocation to home equity, partnered for $500M securitization, acquired home equity loans, and cosponsored securitization.
• Discussed macro landscape, prudency in leverage, constructive view on residential mortgage credit, and Arc Home's strong performance with lock volumes up 50% YOY and breakeven in Q1.

Anthony Rossiello

• MITT maintained positive momentum with increased investment portfolio, active in securitization market.
• Book value stable with slight increase, GAAP net income available to common shareholders was $6.2 million or $0.21 per share.
• Net interest income increased, earnings from equity method investments were $1.2 million, offset by transaction expenses.
• Grew investment portfolio by 6.2%, maintained low economic leverage ratio, and ended quarter with $133 million liquidity.

The investment portfolio grew by 6.2% to $7.1 billion during the first quarter. Book value was $10.65 per share, with a slight increase of 0.1%. Net interest income earned on the investment and swap portfolios increased by $1 million or 5% primarily due to continued capital deployment into target assets. In the home equity sector, the company partnered to issue a $500 million home equity securitization, acquired approximately $130 million of additional home equity loans, and cosponsored a securitization of $492 million UPB of closed-end seconds, retaining $26 million of non-Agency RMBS securities.

Guidance

• Expect continued focus on home equity sector with potential growth.
• Anticipate Arc Home to contribute more to earnings available for distribution as it innovates and diversifies.
• Confidence in ability to navigate market volatility and capitalize on future shifts, with potential quick rebound in spreads after April's peak volatility.

Risks

• Market volatility affecting book value and securitization markets.
• Uncertainty around GSE reforms and their impact on the business.
• Potential retrenchment of non-QM originators during spread widening, affecting market activity.
• Leverage risks if not managed prudently.

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.