Good day, and thank you for standing by. Welcome to the AG Mortgage Trust third quarter 2023 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. Good afternoon, everyone, and welcome to the third quarter 2023 earnings call for AG Mortgage Investment Trust. With me on the call today are T.J. Durkin, our CEO and President, Nick 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 risks, certain risks and uncertainties, which are outlined in our SEC filings, including under the 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 31st, 2022, our quarterly report on Form 10-Q for the quarter ended June 30th, 2023, 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.agmit.com, and click on the link for the Q3 2023 earnings presentation on the homepage. Again, welcome to the call, and thank you for joining us today. With that, I'd like to turn the call over to T.J.
Thank you, Jenny. Good afternoon, everyone. The third quarter continued to be a challenging one for both fixed income and mortgage markets, but I'm extremely happy with how MITT performed in what was a busy quarter for the team. I think the team did a great job of protecting book value again, as we have over the past few quarters, with a modest drop in adjusted book value of just 14 cents from $11.52 per share in June to $11.38, before factoring in one-time transaction-related expenses of $7.6 million, driving adjusted book value to an even $11 per share as of quarter end. During the quarter, MITT generated 10 cents of EAD and paid its 18-cent dividend.
We are reporting a $0.33 loss, again, mainly driven by one-time transaction expenses, as well as a valuation adjustment on Arc Home, which Anthony will walk through in more detail. As we've discussed in prior calls, our prudent and disciplined securitization strategy is beginning to evidence itself in our earnings power. The EAD improvement quarter-over-quarter reflects a combination of higher NIM off of our investment portfolio and related hedging strategy, as well as improving fundamentals in Arc Home. During the third quarter, we remained disciplined, completing two securitizations, which lowered our economic leverage to 1.2 times from 1.6 times, and have ample liquidity of almost $119 million to end the quarter.
As I stated last quarter, we continue to see an environment with higher ROEs based on some competition retreating and opportunities that we believe are just beginning to present themselves, given the lingering effects of the disruption amongst the regional bank balance sheets. Finally, to address the WMC merger, we are happy to report our shareholders vote today was successful in approving the merger. Meanwhile, as you may be aware, WMC adjourned its shareholders meeting due to a lack of quorum and is still in process of obtaining the required shareholder approval. The WMC board continues to unanimously recommend that WMC stockholders approve the transaction, and we will continue to work with them towards successfully completing the merger. The transaction is still expected to close during the fourth quarter.
Now, as we head into the fourth quarter in 2024, I believe we have taken material actions to help improve the profitability of MITT for the future through the strategic merger with WMC to gain scale efficiencies, along with our focus on improving Arc Home's volumes and profitability through management changes, which we believe is now complete with Arc Home's recent addition of Brian Devlin as its new incoming president and will become Arc Home's CEO. With more than two decades of diverse mortgage industry experience, Brian's extensive background in product development, capital markets, and the non-agency space positions him as the ideal leader to steer Arc Home during its next phase of growth. The Arc Home team is very excited for what lies ahead. I'll now turn it over to Nick to discuss our investment activities and Arc Home in more detail.
Thanks, T.J. Before considering transaction expenses associated with the WMC merger and the two loan securitizations executed during the quarter, our book value was down approximately 1.2%. Having the benefit of most mortgage rates falling already. These results represent a significant outperformance on a relative basis. While the third quarter presented similar challenges as past quarters, residential credit spreads were resilient relative to their more liquid counterparts, such as agency RMBS. This, combined with MITT's modest economic leverage, resulted in comparatively better performance. During the third quarter, we securitized nearly $750 million of residential home loans across two transactions at attractive costs of funds while selling out a significant portion for agency RMBS exposure. Along with this activity, we also sold certain non-agency loans and legacy credit-sensitive loans, generating capital we can deploy in our target asset classes.
This activity decreased economic leverage to approximately 1.2 times, the lowest in over two years after pivoting to our securitization strategy in 2021. In the previous quarter's prepared remarks, we have emphasized that we would appropriately size the aggregation risk based upon current and expected market conditions. Although bond market volatility is well off highs of recent quarters, we expect it to remain elevated given the massive buildup in rich countries' public debts, the unwinding of quantitative easing, along with significant economic uncertainty and geopolitical risk. Given this uncertainty, we continue to manage the balance sheet to modest levels of leverage while remaining focused on credit.
While residential mortgage credit fundamentals and technicals remained resilient, creating a backdrop for this quarter's relative outperformance, we have not and will not widen our credit box to combat lower origination volumes, even as we face 3- to 4-decade lows in existing home sales and housing affordability, along with multi-decade highs in mortgage rates. Instead, we have focused on items we can control. Third quarter funding volumes at Arc Home of approximately $530 million, or 225% of the first quarter's volumes. When normalizing this versus aggregate mortgage originations reported by the MBA, this represents an approximately 67% increase in market share relative to the overall market.
These gains have been made largely by taking market share from other wholesale non-agency-focused originators, along with significant growth in other channels as large and medium-sized retail originators have adopted non-agency products to offset agency production declines. Although we expect origination margins to remain compressed, we do expect modest gains in the coming quarters. These gains, along with continued growth, puts Arc Home on a path to become profitable in the coming quarters. We acknowledge this is behind schedule, but it's worth noting that the original projections were estimated based upon a more favorable economic backdrop than has been realized. Moving on to our portfolio. Earlier in our prepared remarks, we reiterated our commitment to maintaining prudent underwriting standards, even as many competitors have not. We believe that because of this discipline, MITT's existing exposure continues to significantly outperform the original underwriting.
As you can see on page nine, the delinquency of the aggregate exposure of the securitized and non-securitized portfolio is only approximately 1%. This strong credit performance, combined with ample liquidity for reinvestment and attractive yields and obtaining term debt prior to the move to significantly higher rates, is the foundation on which the earnings power of the company is built on. I will now turn the call over to Anthony.
Thank you, Nick. Good afternoon. The notable themes of MITT's third quarter include stable book value performance, improvement in EAD, an increase in purchase and securitization activity, while also transacting strategic sales of certain assets, and our continued progress towards closing our merger with WMC. During the third quarter, the company recorded book value of $11.37 per share and adjusted book value of $11 per share. This represents a decrease of 4.5% from prior quarter. However, the decline in book value this quarter was primarily driven by transaction-related expenses. During the quarter, MITT incurred $4.9 million of expenses related to the pending merger with WMC, along with $2.7 million of upfront expenses recorded in connection with two securitizations. In aggregate, these transaction expenses accounted for approximately 3.3% of the book value decline.
On the income statement side, we recognize a GAAP net loss available to common shareholders of approximately $6.8 million, or $0.33 per fully diluted share, which again, is largely driven by the $7.6 million or $0.38 of transaction-related expenses. When evaluating our performance exclusive of the impact of transaction-related expenses, we experienced continued improvement in earnings available for distribution, and mark-to-market losses on our investment portfolio were largely offset by gains on our securitized debt and interest rate swaps. Our book value performance is also reflective of a reduction in the fair value of our investment in Arc Home, as we reduced the valuation multiple from 0.94 book to 0.89 of book. This reduction resulted in an unrealized mark-to-market loss of $1.9 million to MITT, or a decline in book value of approximately 1%.
Our investment portfolio increased 5% quarter-over-quarter to $4.7 billion, driven by loan purchases of approximately $700 million. We were also active in the securitization markets this quarter, securitizing approximately $725 million of UPB. In addition, we sold approximately $149 million of agency RMBS, $74 million of non-agency loans and $69 million of legacy reperforming loans, which returned capital for reinvestment. As a result of these securitizations and asset sales, our financing profile also improved, with 87% of our financing funded through securitization at a weighted average cost of 4.7%. Our economic leverage ratio at quarter end was 1.2 turns, of which 0.9 turns related to our credit portfolio and 0.3 to our agency RMBS portfolio.
In addition, we ended the quarter with approximately $1.9 billion of borrowing capacity to support continued growth in our portfolio. We generated earnings available for distribution, or EAD, of $0.10 per share for the third quarter. Net interest income, inclusive of interest earned on our hedge portfolio, was $0.74 per share, which is $0.01 higher from prior quarter. Net interest income exceeded operating expenses and our preferred dividends, generating earnings of $0.17 per share. This was offset by a loss of $0.07 contributed from Arc Home. However, Arc Home's contribution to EAD improved by $0.02 quarter-over-quarter, when excluding the impact of gains recorded by Arc on loans sold to MITT. Lastly, as of September thirtieth, our total liquidity approximated $119 million of cash, and we continued to deploy this capital into our target assets post-quarter end.
This concludes our prepared remarks, and we'd now like to open the call for questions.
Thank you. At this time, if you would like to ask a question, please press star one on your telephone keypad. 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 Trevor Cranston with JMP Securities. Your line is open.
Hey, thanks. Can you guys talk a little bit about the yield and return profile of the loans that you strategically sold during the quarter? And then as a second part of the question, you know, as you're looking at new investments, can you talk about sort of the supply of loans you're seeing available, and if there's been any sort of additional supply coming in of banks looking to get ahead of regulatory changes? Thanks.
Yeah, certainly. Thanks, Trevor. This is Nick. On the loans we sold, as Anthony, Anthony mentioned, some of the loans we sold were credit-sensitive loans from legacy positions where, you know, the, the thesis of the original investment had very much played out, and, the debt was inefficient on our balance sheet. For the loans that are part of our target asset class, there has been sort of a narrative that, you know, others have spoken about as well, of there being, you know, strong, real money, bids for these. You know, insofar as we can sell assets, you know, at levels, you know, through where our equity-target equity returns are, you know, we, we will evaluate that and, you know, oftentimes, you know, execute on that.
With regard to your second question, I believe that's very much an evolving story, and Wall Street Journal, others have picked up on it as recently as, you know, today. You know, we are seeing additional opportunities there. I think it's in its early stages, and we're paying close attention to it. You know, I think some of the folks that have pounded the table saying it's such an amazing opportunity are maybe a little bit ahead of it, but we are expecting that to become more meaningful. We, we-
Okay.
Yeah. We continue to see ROEs in, you know, the call it mid- to high teens after deploying call it a turn a turn plus of leverage on our call it practically 0-5, 0-10% for retained interest.
Got it. Okay. And on the transaction expenses related to the merger, are you expecting any additional expenses to flow through in the fourth quarter, or was that solely a third quarter event?
Hey, Trevor, it's Anthony. Yeah, so the expenses that came through this quarter are the bulk of it. On the MSR side, we have about another $1.1 million that we're expecting to come through in the fourth quarter. And then obviously, there's, you know, when you think about total transaction expenses, there's the termination fee, which is on the other side of the house.
Okay. Appreciate the comment. Thank you.
Thank you. Our next question will come from Bose George with KBW. Your line is open.
Hey, good afternoon. Actually, just kind of a follow-up to that in terms of, you know, deploying new capital. You know, I guess you show you've got $118.90 million of cash. How should we think of the timeline for deploying that, and, you know, and how much of a cash cushion, you know, would you want to keep?
On the cash cushion side, you know, we closely monitor reserves based upon our internal risk models. On the cash deployment side, you know, that leaves us probably, call it $40-ish million to spend, where we're looking today relative to that reserve. But that reserve obviously-
... moves over time relative to the, you know, repositioning of assets. So, you know, I wouldn't, I wouldn't say that that's, you know, a hard number. Certainly, that can, you know, evolve over time as we rotate the portfolio.
So just-
Go ahead.
Just because the $40 million is what's available to invest or after the cash cushions?
Yeah, versus approximately where we size risk reserves today. That being said, over time, risk reserves can move around, and we can rotate the portfolio.
Okay. And so if we, you know, if we take that and deploy that to the you know, to the ROE that you've got there, the 17%, and then sort of run your expense ratio through there. I mean, do you feel like it you guys can get to a double-digit return, you know, with the scale? I guess you'll have some benefit when, you know, from Western in terms of taking the cost base down. But so where do you kind of, you know, after all that's kind of in the numbers, do you get to a double-digit ROE?
Yeah. So, Bose, I think the way we're breaking it out pre-merger is I think the investment portfolio with the associated hedges is getting to that double-digit return. Arc Home's ROE, if you bifurcated the balance sheet or the equity, has been the drag. And so that's why, you know, I think the investment portfolio, if you look back over the last, call it, you know, 4-8 quarters, I think has, you know, done really well considering the market conditions. And I think we've really got that part of the business humming. I think we've been focused over the last few quarters on, you know, really, you know, helping drive ROEs in that Arc Home part of the equity pie, if you will.
And then on a forward-looking basis, pro forma, you know, if the deal were to consummate as expected, you know, we do get significant G&A savings, which, you know, we gave you a preview in that supplement we published, you know, a month or two ago. That's out there to give you a little bit more of a drill down on the G&A savings. So, you know, the investment portfolio is doing good, I think. We need to get Arc Home ROEs up, and then we're going to get G&A savings pro forma post-closing the deal.
Okay, great. And then just one more on leverage. Yeah, where should we see kind of a normalized leverage, especially with, you know, agency in the mix? You know, how should we kind of think about that number?
Yeah, I wouldn't think of having a lot of agency in the mix. So I think the way we're looking at it, it really depends on where we are in that aggregation period. So post-securitization, as Nick just, you know, hit on, I think you can kind of run that risk retention, if you will, or the retained subordinates at about one turn. And then again, depending where we are in ramping on the loan side, that'll be the arithmetic to look at the overall corporate leverage, so.
Okay. Okay, great. Thanks.
Thank you. As a reminder, that is star one to ask a question. Our next question will come from Matthew Erdner with JonesTrading . Your line is open.
Hey, guys. Thanks for taking the question. So whole volume was real strong in the third quarter. Do you guys have any expectations, just given the seasonality, what we should expect in terms of securitizations going forward through the winter?
Yes. Good afternoon. So when we think about, you know, block volumes in this environment, more and more and more seasonality is a component of that. We like to think that interest rates have had their full impact on volumes, and that's been widely reported by the MBA and others. So when you extrapolate that, you know, the expectation is from a seasonality standpoint, we're probably, you know, block volumes will decrease commensurate with the industry as a whole. That being said, we have a healthy pipeline for deals, you know, going into the end of the year and early next year.
Great, thanks. And then just as a follow-up to that, could you guys comment on the dividend for the fourth quarter? You know, the $0.08 interim there, and then, you know, how should we think about that for 2024? Is it gonna be a full reevaluation, or just the assumption that it's going back to $0.18 after the deal closes? Thanks.
Yeah. Yeah, I mean, I think, I think our EAD continues, like, quarter over quarter to, to kind of grow into that, and then, we'll look at the impact of the G&A savings, you know, into 2024. So, so we'll reevaluate it over time. But, you know, we're seeing progress in terms of the portfolio shifting more and more into that, you know, post-securitization leverage or financing. And, and I think that's what's driving the EAD, you know, up towards 18 versus going the other way due to, you know, delevering like you might be seeing in the agency REITs, et cetera.
All right. Thank you. There are no further questions in the queue at this time, so I'd like to turn the floor back over to our speakers for any additional or closing remarks.
Thank you to everyone for joining us, for your questions. We very much appreciate it. Look forward to speaking with you again, in the new year.
Thank you, everyone. This does conclude today's call, and we appreciate your participation. You may disconnect at any time.