Good day, thank you for standing by. Welcome to the TPG Mortgage Investment Trust fourth quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After management's remarks, there will be a question-and-answer session. In order to ask a question during the session, please press Star one on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press Star zero. I'd now like to turn the call over to Jenny Neslin, General Counsel for the company. Please go ahead.
Thank you, Chelsea. Good morning, everyone, and welcome to the full year and fourth quarter 2022 earnings call for TPG Mortgage Investment Trust. With me on the call today are T.J. Durkin , our CEO and President, Nicholas 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 co-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, 2021, and our subsequent reports filed 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.mitt.tpg.com, and click on the link for the fourth quarter 2022 earnings presentation on the homepage in the Investor Presentation section.
Welcome to the call, and thank you for joining us today. With that, I'd like to turn the call over to T.J Durkin
Thank you, Jenny. Good morning, everyone. 2022 was an extremely challenging year across markets, particularly in mortgage markets, where an abrupt pivot by the Fed created convexity movements we haven't seen since the taper tantrum of 2013. While MIT did experience mark-to-market losses on assets it owned coming into the year, the vast majority of these losses are unrealized, we continue to have confidence in the earnings power of the portfolio, which Nick will walk you through in more detail later in the call. During this volatile year, MIT remained disciplined by programmatically terming out its financing and avoided taking undue risk by holding loans on warehouse lines, hoping things would simply get better.
As a result of this discipline, we believe MIT is materially de-risked with ample liquidity as we head into 2023 in a position to play offense when others may not be. We used a portion of our excess liquidity to repurchase almost 2.7 million shares at a weighted average price of $6.82, creating 7% accretion for shareholders. Those numbers have both improved since quarter end, which Nick will walk through. Finishing our 2022 year in review on slide six, MIT created $67.6 million of NIM during the year while recording a loss of $3.12 in earnings per share.
MIT declared $0.81 of dividends per share and created $0.08 of EAD per share. EAD is the performance metric we'll be using going forward to replace core, which Anthony will explain in further detail later in the call. Turning to slide seven. The fourth quarter opened with continued weakness in the market, December was the first month almost all year to show signs of life, with a significant reversal in interest rates, lower new issue volumes, creating a catalyst for spreads within the non-agency space to tighten. As such, we saw our adjusted book value improve 3% from $10.68 to $11.03 per share. MIT had $0.33 of earnings per share while generating $0.05 of EAD and declared its newly stated dividend of $0.18.
Based on our early preliminary read, book value is up approximately another 3%-4% for the month of January. While the markets in January got off to a nice start, we don't think the path forward is going to be a straight line towards tighter spreads in our market. We believe the company was able to materially de-lever and raise liquidity during a challenging 2022 in order to face 2023 with a clean balance sheet and lots of liquidity to deploy into this new higher interest rate environment. Lastly, before I pass it to Nick, I'll reiterate what I stated last quarter. The management team is frustrated with our stock price, particularly given what we believe to be a year in which MIT effectively navigated choppy markets, created lots of excess liquidity, and returned capital to shareholders via its share repurchase program.
As a reminder, each of us on the management team and Angelo Gordon, the manager, have a meaningful ownership in MIT. We will continue to work hard in earning the confidence of the market by remaining focused, executing our strategy, and taking advantage of compelling opportunities, which we believe will translate into the earnings power to generate attractive risk-adjusted returns for our shareholders over the long term. In spite of what may be another year of challenging market conditions, we and AG are excited about MIT's outlook for the year and look forward to sharing our progress in the coming quarters.
Thanks, TJ. Sticking with slide seven, as you might recall from our Q3 prepared remarks, we stated that we estimated that our book value was down approximately 5%-6% for the month of October. TJ noted, our book value ultimately recovered 3% in the fourth quarter. We estimate that it is up another approximately 3%-4% in January. We have stated previously that although mark-to-market losses have been significant, that most of these losses are unrealized. Consistent with this messaging, this past quarter's modest recovery represents only a small fraction of these unrealized losses. Our economic leverage ratio has significantly declined due to the two additional non-agency securitizations executed in the fourth quarter and into the beginning of the year.
Combined, these transactions decreased our warehouse exposure by approximately $600 million, significantly outpacing additional whole loan purchases of approximately $140 million. Turning to page eight. As you can see, our securitization issuance in the fourth quarter and into the beginning of the first quarter continued to outpace our acquisition of new loans. The table on the right shows the continued growth of our securitized loan portfolio along with the corresponding reduction in warehouse exposure. In previous quarters, we have emphasized that we believed it prudent to rightsize our aggregation risk considering both current market volatility and expected future volatility. We are still cautious and believe it critical to appropriately size our aggregation risk based upon current and expected market conditions, the current positioning likely represents a low in our aggregation pipeline for this year and next.
While origination volumes are down considerably given the current economic backdrop, we continue to see opportunity in acquiring high-quality assets with attractive risk-adjusted returns. Very recently, we've seen increased competition as a likely consequence of lower volumes coupled with improvements in broader market conditions. Despite the recent tightening, we still believe we can source new credits around an 8% yield with equity returns in excess of 20% on the retained tranches while deploying one to two turns of leverage. It is also worth noting that while many other market participants have recently widened their credit box, some significantly, to combat lower origination volumes, we have not followed this trend.
While we remain constructive on residential mortgage credit fundamentals, we do not think this is a prudent time to be relaxing credit standards as home prices are likely to continue to decline and a recession is the more probable scenario. Turning to page nine. On this page, we provide high-level summary statistics of our aggregate loan portfolio. As we have emphasized previously, the weighted average mark-to-market LTV of the underlying residential home loans is approximately 66%, and the 60-plus day delinquent population across over a $4 billion portfolio is less than 100 basis points. Although the forward-looking economic backdrop is likely to remain uncertain, we have not seen any early signs of deterioration in the portfolio's performance. On page 10, we summarize the earning power of our portfolio.
In doing so, we strip out the securitized debt components of our consolidated loans to clearly show only our retained interest in our securitizations, along with the corresponding repo financing held on the retained bonds. The retained interests are our true economic exposure in these securitizations, not withstanding the securitized loans that are consolidated on our balance sheet due to GAAP accounting. In this table, we also break out the subordinate positions from the interest-only excess servicing and net interest margin positions. We have stated previously that the combination of these two profiles provide stable cash flows along with mark-to-market upside. The underlying mortgages backing the interest-only and excess spread certificates are substantially out of the money. This provides significant and predictable cash flows while the subordinate certificates represent the relatively thick parts of the capital stack at deep discounts.
It is worth reiterating that these subordinate certificates are backed by high-quality residential mortgages with low mark-to-market LTVs. While we retain the option to refinance much of the debt we've issued on or after the 3rd anniversary of each transaction, we expect this option to remain out of the money for the transactions issued prior to the 2nd or 3rd quarter of last year. For the transactions issued in the 3rd and 4th quarter, we believe these options are likely to prove valuable given the historically inverted yield curve and wide spreads at time of issue. As mentioned earlier, we expect the markets to remain volatile and consequently don't expect the recovery in book value to be a straight line. However, we are confident in the underlying credits and the capital structure of the debt we issued to provide long-term value.
This table demonstrates the portfolio's current earning power along with its significant total return upside. As you can see, the fair value of the subordinate certificates is at over a 30-point discount to face representing historically elevated spread and interest rate levels. It is also worth noting the ROE on the far right of the table is achieved by deploying only a modest amount of recourse leverage. On page 11, we outline our investment portfolio along with the corresponding size and cost of the securitized debt and repo financing. As a reminder, given our continued involvement in securitizations issued, we consolidate the loans and securitize debt on our balance sheet. As noted on this slide, our investment portfolio currently contains asset yields of 5.1%, with a weighted average cost of financing of 4.3%.
Turning to page 12, the top right bar chart outlines our leverage ratio over the past year. Here you can see the loans transitioning from warehouse lines to securitized debt, bringing down the recourse leverage to where it is today. In the last quarter's prepared remarks, we stated that although we had made substantial progress in bringing down our recourse leverage ratio from its peak, that it was likely to go lower. Today, we are comfortable stating that we do not expect recourse leverage to decrease materially from these levels, and believe we can prudently increase this over time as we adjust for market conditions and opportunities. As you can see, our recourse leverage as of quarter end was approximately 1.3x, which subsequent to quarter end has been reduced further to 0.7x.
As of quarter end, recourse debt accounted for approximately 16% of the aggregate, down from 24% at the end of last quarter. Turning to page 13. As you can see in the table to the right, origination volumes continue to fall in the fourth quarter, contributing to an after-tax loss of $6.1 million for Arc Home. There is still room to become more efficient, most of the cost-cutting measures are behind us and we have likely seen the lows in origination volumes. The combination of historic sell-off, seasonality, the lock-in effect, and cautious home buyers, among other factors, are here to stay, but we believe we will experience modest volume increases as the impact of these components wear off and expect the company to return to profitability in 2023.
Despite the challenging backdrop, it is important to note Arc Home's strong capital position as outlined on this page. As of quarter end, Arc Home has $20.7 million of cash, and MSR is valued at approximately $92 million, with modest leverage of just under $20 million. We continue to believe Arc Home is well-positioned relative to many of its competitors, expect this challenging period to show its resiliency while gaining market share. This strong capital position, combined with the current origination environment, enabled Arc Home to return capital to the AG investor group in the fourth quarter, of which approximately $4.5 million was distributed to MITT. I will now turn the call over to Anthony.
Thank you, Peter. Turning to slide 14, we provide year-to-date and quarter-to-date reconciliations of book value per common share. As we mentioned earlier, the financial markets were extremely volatile throughout the year and our 2022 earnings is reflective of unprecedented increases in benchmark interest rates, coupled with historic credit spread widening. This resulted in mark-to-market losses on our investment portfolio, partially offset by realized gains on our derivative portfolio. In addition, a portion of our book value declined during the year related to upfront securitization expenses as we were disciplined throughout the year in securitizing our warehouse population, executing eight deals during 2022. During the fourth quarter, we did experience some book value recovery, which increased by approximately 3% as a result of recording GAAP net income available to common shareholders of approximately $7 million or $0.33 per fully diluted share.
Income during the fourth quarter was driven by unrealized mark-to-market gains recorded on securitized assets due to credit spread tightening in the latter half of the quarter, coupled with realized gains on our interest rate swap portfolio. This was offset by $1.5 million of transaction-related expenses which were associated with the securitization that closed in October. We also remained active in share buybacks during the year, which contributed to book value accretion of approximately 2% for the quarter and 7% for the year. During the fourth quarter, we repurchased approximately 850,000 shares at a weighted average price of $5.68 per share. For the full year, we deployed approximately $18 million of capital to repurchase 2.7 million shares at a weighted average price of $6.82 per share.
Overall, we repurchased about 11% of our outstanding shares during the year at an approximate 40% discount to our December 31st adjusted book value. As a reminder, we authorized a $15 million repurchase program in August of 2022, our remaining capacity under this program is $7.3 million as of today. As TJ noted earlier, beginning with the fourth quarter, we've decided to change the name of core earnings to Earnings Available for Distribution, or EAD, with no changes to the definition. We continue to believe that EAD provides useful supplemental information for our shareholders, although as we've discussed in prior quarters, it continues to have important limitations as it does not include certain earnings or losses our management team considers in evaluating our financial performance.
On slides 15 and 16, we provide the components of earnings available for distribution, as well as disclose a reconciliation of GAAP net income to EAD for the full year and the fourth quarter. On slide 15, you can see that EAD for the full year was $0.08 per share. Overall, our net interest income on our investment portfolio exceeded our hedge cost, expense load, and preferred dividends by $0.83, which was offset by losses contributed to EAD from Arc Home of approximately $0.75. It is important to note that EAD from Arc Home does not include mark-to-market gains on its MSR portfolio, which was a significant portion of its GAAP earnings during 2022. MITT's portion of the MSR gain was approximately $8.6 million for the year.
Arc Home's gain on sale of loans sold to MITT approximated $6 million or $0.26 per share for the year, which you can see is also excluded from EAD. As a reminder, these are recorded as unrealized gains contributing to GAAP earnings. Turning to slide 16, we present the fourth quarter EAD, which was $0.05 per share. Net interest income inclusive of interest earned on our hedge portfolio exceeded operating expenses and preferred dividends, generating earnings of $0.18 per share. We recorded net interest income inclusive of hedge interest of approximately $15 million during the quarter, our net interest margin at quarter end was 83 basis points. Our expenses impacting EAD decreased during the quarter, primarily driven by lower non-investment related expenses and less purchase activity.
This was offset by a loss of $0.13 contributed from Arc Home for the quarter, driven by lower volumes and gain on sale margin. Lastly, we ended the quarter with total liquidity of approximately $87 million. As of today, liquidity was approximately $120 million, with the increase primarily due to cash generated from our February securitization. This concludes our prepared remarks, and we'd now like to open the call for questions. Operator?
Thank you, sir. At this time, if you would like to ask a question, please press the Star and one key on your touch tone phone. If at any time you find that your question has been addressed, you may remove yourself from the queue by pressing Star two. Once again, that is star one to ask a question. Our first question will come from Douglas Harter with Credit Suisse. Your line is open.
Thanks. Just touching on the liquidity point that you made there at the end. Of that $120, how much of that do you think is kind of available for investment? You know, as you said, you might be able to play some more offense in 2023.
Yeah, Doug, I think we probably think about running the company with $40 million-$50 million of cash, if you look at kind of our historic leverage ratios over the last, you know, 12, 18 months. I think we've got kind of significant liquidity right now.
You know, you mentioned that the calls on older securitizations are kind of unlikely to be exercised. You know, how would you describe the health of kind of financing subordinates in today's market? As those de-lever, would you consider, you know, kind of adding leverage to some of the subordinates to kind of build equity since you can't kind of pull it out by re-securitizing?
Yeah, certainly. Obviously, as, you know, the underlying securitizations de-lever, the availability of, you know, additional financing typically increases. You know, our expectation is over time that we'd be able to take out more liquidity from those securities, although realistically, that's, you know, although maybe some of them are under-levered today, I think broadly speaking, you know, I think you have to see sort of that de-leveraging occur before we could take out a ton more cash.
What is the timeframe for that? Would that be another 1 year or 2 years? Just help us frame that.
You know, on, you know, certain transactions, it could be as soon as 6-12 months. Other transactions, it might be two years. You know, these tend to be incremental. You know, it's not you just take out-
Sure.
another 10%, 20%. It's, you know, sort of 5% at a time, so.
Okay. Great. Thank you.
Thank you. Our next question will come from Bose George with KBW. Your line is open.
Hey, guys. This is actually Mike Smith on for Bose. Can you just help us get a sense for, you know, the current run rate earnings power of the portfolio? The $0.05 implies a low single-digits ROE. Just kind of wondering how you're thinking about the timeline for getting to that 16% ROE on slide 10. As a follow-up, how are you kind of thinking about that and kind of balancing capital deployment versus buying back stock?
I think on the earnings power, the reality is our quarter to quarter earnings, I think, are gonna be choppy because of things like transaction expenses for securitizations, et cetera. We're focusing more on, like, the long-term earnings power, which we're trying to display on page 10 there. That's obviously, you know, I think showing a, you know, a portfolio or company that has significant liquidity to invest at those yields, if not higher in, you know, 2023 terms. I think that's how we're thinking about things. We obviously just recently restructured dividend. That is how we're thinking about things, you know, in terms of the medium long term. You know, I do think like the quarter to quarter numbers, you know, could still be choppy.
I think we would obviously hope to take advantage of opportunities to deploy this capital.
You know, in a timely manner as we think the opportunity set is probably gonna present itself in the near term. In terms of buybacks, I think, you know, depending where we are on the stock price, we obviously have good liquidity to continue buying back stock accretively. I think we are conscious of just looking at our volumes and the liquidity in the stock and don't want to perversely do something damaging over the long term by reducing investor liquidity. It's a balance.
Right. Yeah, maybe just kind of on that one, on the discount to book the appetite for some type of strategic transaction, whether it be, you know, rolling MITT back into the parent company or merging with a smaller company for some scale and operating leverage. Would kinda just be curious to hear your thoughts on how you're thinking about that given the discount to book.
Well, I mean, listen, I think holistically, we think the company's in a very good position, you know, financially from a balance sheet perspective, from a leverage perspective. I think we're always looking for opportunities to grow responsibly and to the extent the right opportunity came to MITT, I think the manager would be supportive in helping grow MITT, with its kind of financial support to the extent the opportunity was compelling.
Great. Thanks a lot for taking the questions.
Thank you. As a reminder, that is star one to ask a question. Our next question will come from Eric Hagen with BTIG. Your line is open.
Hey, thanks. Good morning. I hope you guys are well. A couple questions from me. Can you talk a little bit about the warehouse funding for loans right now, just how the environment is, how readily available that source of funding is? Maybe even what the cost of funds looks like on a new warehouse line today. Even how many counterparties you currently have providing you warehouse funding on the back book. Thanks a lot.
Great. morning. maybe.
Morning
address it on the loan side first. The availability of financing for loans is still far out. It strips sort of what we need. I think if you think, you know, no warehouse lenders lost money in obviously a very volatile year last year. Given the short duration of the asset, it's, you know, a very desirable lend. I think also given sort of the broader pullback in the residential mortgage market, guys agency volumes, you know, they're at, you know, decade, multi-decade lows on sort of the balances they have out. They're very axed to put on what they can. We've not seen our cost of financing go up. If anything, I think, you know, it'll stay the same or get lower.
We've also not seen advance rates decrease, you know, our, you know, given the amount of folks sort of looking to still enter this space or grow their warehouse positions for non-agencies, you know, we expect that to be the same. You know, similar dynamic on the securities, although, you know, there's always a little bit less liquidity for, you know, down the stack in securities. You know, as you go up the stack, you know, it's fairly comparable to loan liquidity. From a counterparty standpoint, we currently have five. You know, realistically, you know, that's, you know, more than we need. You know, we're not looking to necessarily trim and, you know, we're always opportunistically can add.
Yep, that's helpful detail. Thanks, Nick. Maybe just one more. I mean, can you say how big of a margin call you sort of model for on the retained bonds from securitization, which are funded with repo? Just how you guys think about the approach to cushioning with liquidity.
Yeah
around that.
Yeah, I mean, I think generally speaking, we work with our risk department, independently. I mean, the simple answer is, I think we're looking at sort of a March 2020 COVID shock in terms of like credit spreads. You know, it's a recent enough event that I think that's the right shock to look at and having enough cash to meet that kind of a margin call.
Yep, that's helpful. That's it for me. Thanks.
Thank you. Our next question will come from Matthew Erdner with JonesTrading. Your line is open.
Hey, what do you think the best allocation of capital is, and where do you guys see opportunities going forward in 2023?
Yes, certainly. You know, obviously, given, you know, the sort of multi-decade loan origination values in resi, and sort of this being a transitional period, I think you don't necessarily have to be creative, but you have to be open to sort of changing, you know, investment theses and being open to new products. You know, we did, you know, sort of conveniently see the implementation, or maybe it hasn't been implemented yet, but it's been announced and will be implemented in May for May deliveries for Fannie and Freddie, new LLPAs. Net-net, these changes are beneficial to private label execution and competitiveness, there are some places where they actually become more competitive or sort of try to take away from being cherry-picked.
We certainly see that as, you know, an interesting place to deploy capital as the government, you know, sort of further makes explicit what was implicit, the subsidization of, you know, better credits, subsidizing lower credits. We see opportunity there and, you know, given wide spreads, as spreads come in in the private label market, the private label market will become, you know, increasingly competitive versus that bid. We think that, you know, that's our longer term view. We're also interested in looking at sort of prime second liens and HELOCs. Obviously given sort of the lock-in effect of first liens, we think there's an opportunity given the cash-out market more or less being shut out, for, you know, HELOCs and second liens to take that space.
Those are sort of the larger food groups, but always looking at more things.
That's helpful. Do you think the better opportunity is on a securitized CUSIP product or a loan origination?
I think we announced last quarter we saw opportunities in securities. We were able to deploy a little bit of capital there. I think spreads tightened in December and kind of into January where that's probably shifted back to loans. I think, you know, I think we announced to the market we're open to taking advantage of those opportunities within, call it new resi mortgage credit. We're certainly not gonna buy the loans and make the credit if we can buy it cheaper in the secondary. I don't think it's as obvious as an opportunity as it was, say, 90 days ago.
Awesome. Thanks for taking the questions.
Thank you. As a reminder, that is Star one to ask a question. All right. At this time, we have no further questions in the queue. I would like to turn it back to management for any additional or closing remarks.
Thank you. Thank you to everyone for joining us, this morning and for your questions. We appreciate it and look forward to speaking with you again next quarter. Enjoy the rest of the day.
Thanks, ladies and gentlemen. This does conclude today's call. We appreciate your participation. You may disconnect at any time.