New York Mortgage Trust Inc (NYMT) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by.

Welcome to the New York Mortgage Trust Second Quarter 2017 Results Conference Call.

(Operator Instructions)

This conference is being recorded today on Friday, August 4, 2017.

A press release with the New York Mortgage Trust second quarter 2017 results was released yesterday.

The press release is available on the company's website at www.nymtrust.com.

Additionally, we are hosting a live webcast of today's call, which you can access in the Events & Presentations section of the company's website.

At this time, management would like me to inform you that certain statements made during the conference call which are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although New York Mortgage Trust believes that the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained.

Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release and from time to time in the company's filings with the Securities and Exchange Commission.

Now at this time, I would like to introduce Steve Mumma, Chairman and CEO.

Steve, please go ahead.

Thank you, operator.

Good morning, everyone, and thank you for being on the call.

Kevin Donlon, our President and Senior Executive heading up the Multifamily business, will also be on the call and will be available to answer questions at the end of the presentation.

Included in our 8-K filing yesterday was our earnings press release for the 2017 second quarter results.

The company delivered a 2.3% economic return for the second quarter and a 9.5% annualized economic return for the first 6 months of the year.

The company had GAAP earnings of $0.10 per share and comprehensive earnings of $0.13 per share for the second quarter.

The company's net interest margin improved to 312 basis points from 270 basis points in the first quarter, largely due to improved net margin in our distressed residential loan portfolio and increased average earning assets in our CMBS multifamily portfolio.

The credit markets continued to improve in the second quarter, with spreads in several markets tightening to levels not seen in many years.

This has benefited our current residential multifamily portfolios, both in our security investments as well as our direct lending.

We expect to profitably exit several multifamily JV equity investments that were made over the last 2 years in the third quarter of this year.

We will continue to participate in the Freddie Mac K Series multifamily program and expect an additional opportunity to invest in first-loss securities in 2017.

Our portfolio margin will benefit in the third quarter from the $26.3 million preferred equity investment we closed in July.

This investment will have -- has an expected return of over 12%.

While the consummation of these types of credit investments continue to involve significant lead times, they remain an attractive use of capital that we will continue to focus on.

For the quarter ending June 30, we had net income attributable to common stockholders of $11.1 million or $0.10 per common share and comprehensive income to common stockholders of $14.9 million or $0.13 per common share.

We had net interest income of $15.7 million and a portfolio net interest margin of 312 basis points as compared to $13.9 million in net interest margin (sic) [net interest income] and 270 basis points of -- for the first quarter of 2017.

The book value per common share was $6.02 at June 30, 2017, down 1% from the previous quarter, while still delivering an economic return of 2.3% for the quarter.

We declared a second quarter dividend of $0.20 per common share that was paid July 25, 2017.

For the quarter ended June 30, 2017, we reported net income attributable to common stockholders of $11.1 million as compared to $16 million in the first quarter ended March 31, 2017.

The $4.9 million decrease is primarily due to lower gains from our decreased sales activity in our distressed residential loan portfolio, partially offset by an increase in net interest margin and the recovery of incentive fees related to this strategy.

We generated net interest income of $15.7 million in the second quarter as compared to net interest income of $13.9 million in the first quarter.

This increase in net interest income of $1.8 million was primarily driven by an increase in net interest income of $1.3 million from our multifamily portfolio due to an increase in average earning assets in multifamily CMBS securities, resulting from the purchases that were funded at the end of the first quarter, thereby having the full impact of this investment during the entirety of the second quarter.

An increase in net interest income of approximately $1.4 million from our distressed residential portfolio due to an increase in asset yields for these assets during the quarter.

This was offset by a decrease in net interest income of approximately $400,000 from our Agency IO portfolio, related to lower asset yields resulting from increased prepayment speeds and the increase in LIBOR rates during the period.

For the quarter ended June 30, 2017, we recognized other income of $8.2 million as compared to other income of $16.7 million for the quarter ending March 31, 2017.

The decrease in other income of $8.5 million is primarily due to a decrease in realized gains on distressed residential loans of $9.6 million, resulting from decreased sales activity.

The decrease in net income contribution from our distressed portfolio was approximately $4.5 million after giving effect for both the increase in net interest margin and the reversal of incentive fees expense for the quarter.

We expect improved contributions from the distressed portfolio throughout the remainder of the year.

The other income section also includes $2.3 million related to our -- to 2 preferred equity investments, which were deemed -- which we redeemed to have control rights as of March 31, 2017 and, in accordance with GAAP, are required to consolidate the multifamily properties for financial statement presentation purposes.

In addition, our financial statements also include $4.4 million in other expenses as well as the reversal of $2.5 million related to noncontrolling interests, both related to these properties.

The net effect of all this is approximately $400,000 in income, which is the actual interest we earned during the period on our preferred equity investments on these properties.

Our total G&A expenses for the second quarter were approximately $5 million, down $3 million from the first quarter.

The reduction is primarily due to the incentive fee reversal from the first quarter related to the distressed residential loans.

While competition for certain credit assets continues to be crowded, our diverse portfolio of investment allows us to seek other attractive opportunities and monetize previous investment decisions.

Given the prevailing market conditions for the sourcing of new investments and credit assets, we are also considering new investments in noncredit assets that we believe will compensate us appropriately for the risk associated with them.

We continue to believe that our portfolio is well positioned to adapt to the changing market and economic conditions as we go forward into this year and to next.

We continue to thank you for your support and look forward to answering your questions.

Our 10-Q will be filed on or about Wednesday, August 9, with the SEC and will be available on our website thereafter.

Operator, if you want to go ahead and open it up for questions for Kevin and I. Thank you.

(Operator Instructions) Our first question is from Doug Harter of Crédit Suisse.

Can you just expand a little bit about what some of the noncredit assets that you might be exploring?

Sure, sure, Doug.

Yes, look, we have said over the last several quarters that we're going to be reducing our exposure in agency-like securities, Agency MBS.

With the credit spreads tightening, a lot of the investment security, CUSIP securities, specifically in some of the BBB and NPL/RPL securities that we were very active in, in the end of '16 and the beginning of this year.

Some of the opportunities in the 30-year Agency MBS present one of the better earning asset capabilities as we sit here today.

And so we're looking at possibly increasing some of that exposure in the third quarter while we continue to roll out investing in some of the other credit assets.

Longer term, we would preferably like to have more credit assets on our balance sheet.

It's just been a more lengthy time period in sourcing some of those assets.

And then on -- while you have been delivering a positive economic return, can you talk about how you're thinking about -- or the board is thinking about the dividend policies since GAAP earnings hasn't covered the dividend for quite some time?

Sure.

One of the things that we've always said is that it's important to us to maintain a positive economic return.

And while we understand part of that return is coming from the dividend payout, we're also aware of the impact it has on our book value.

When we set the dividend policy, we're looking at what we think the portfolio can contribute over a longer period of time, not quarter-to-quarter.

And while we have underearned our dividend over the last several quarters, we do continue to have a portfolio that we think we have substantial gains in.

And as we start to harvest those gains, we'll start to see a pickup in earnings.

To the extent that we will continually review our ability to invest and keep investing in our portfolio to drive earnings upward is one of the reasons why we're looking at some other investment opportunities, because of the delay in getting some of these credit assets on our books.

Our next question is from Eric Hagen of KBW.

I guess it was a couple of quarters ago that you guided us to using higher leverage in the portfolio and outside of using potentially higher leverage with Agency MBS investments or something similar.

On the credit side, is raising leverage something that you've considered?

Can you kind of update us on your thoughts on that, generally?

No, sure.

Look, we've said many times we're underlevered.

Look, we're running a little -- we're running at $1.9 billion in assets.

And to the extent that we were going to be increasing the portfolio of credit assets, we have room to go up to $2.2 billion to $2.3 billion without additional capital needs.

That would be adding about a half a turn of leverage to the portfolio.

To the extent that we would go into some type of non-agency risk, such as an MBS security, obviously, those would have higher amounts of leverage on them.

But when we were speaking historically over the last couple of quarters, it's really around our credit assets.

And we have been involved in several large transactions that we're looking at and continue to look at, and they just take time to get invested on.

But if they come to fruition, they'll be nice additions to our portfolio that you'll see the credit leverage going up in the future.

Got it.

All right, that's helpful.

Look, tight credit spreads is clearly among the themes again this quarter.

I think you used the word crowded in your opening remarks to describe the environment.

So I'm curious, are you seeing any pickup in competition for your core assets like multifamily and distressed loans from new participants that haven't traditionally been investors in those asset classes?

No, I think, without question, when you look at the security -- the CUSIP market, specifically the NPL/RPL, both non-rated and rated; and the CMBS world, both private and agency, you clearly have an increase of participation from noncore mortgage people that are looking for yields that they can't derive in other parts of the market.

And that is, you're seeing spreads come in several hundred basis points over a 6-month period or over a 9-month period, which just typically, you don't -- you have not seen historically without the appropriate credit improvement.

It's 100% driven by technical factors, not fundamental factors.

How do you respond to that, there being new investors in the asset class that might not have the sophistication of someone who's been investing in it historically?

No.

I think you have to look at where you think there is value in those assets, and that's where you enter the market and purchase those assets.

And I think when you think the value has left those assets, you probably look to reduce that exposure and move on to some other asset class, where you feel like you have better control of the direction that can go in.

(Operator Instructions) Our next question is from Jessica Levi-Ribner of FBR.

Most of my questions have been asked and answered.

But can you talk a little bit about the opportunities that you're seeing in the multifamily space?

Sure.

We -- look, we continue to be a direct lender in mezzanine debt and preferred equity investments.

That business, we had budgeted to add approximately $100 million in assets this year.

We had a slow start in the first 6 months, but it's started to pick up.

We funded the $26 million in July.

It looks like our pipeline is starting to pick up as we go into the third quarter.

We're looking -- we're working on a couple of larger transactions that we knew going into them would take time to work out, and it's not 100% certainty that they're going to close, but we are continuing to work on several projects.

That's something that we like a lot and continue to like.

There's specific property risk which we're comfortable with taking.

One of the reasons why we had this consolidation on the financial statements of 2 properties is that, in the event that a property starts to go outside of our guidelines, we can step in and alleviate those issues or try to alleviate those issues and get our money back and move on [through] another property, which we are doing.

And that's something that we focus on.

We continue to be active in the Freddie Mac program and the first-loss securities.

And we -- and so that's really the focus in multifamily.

That's where we see the opportunities.

And what kind of competition are you seeing these days?

Look, you'll always have competition.

There's a lot of people lending into the space.

We'd like to think that we have an expertise in the very particular type of asset that gives us some competitive advantages.

Our typical size is generally less than $20 million.

This last one we funded was $26 million, which was our largest.

But that's where we think our expertise lies.

We spend a lot of time in underwriting and due diligence, and we feel confident with that, that we can come to the market with smart people and close transactions that some people otherwise wouldn't consider.

Kevin, if you want to -- Jessica, hold on 1 second.

Kevin, would you like to answer some more on that?

No, well said.

Our next question is from [Christopher Nolan] of Ladenburg Thalmann.

Should we expect an increased exposure to multifamily investments given your comments that you're working on some larger transactions?

Yes, I think absolutely.

I mean, I think today, as you sit, we have -- I think the opportunities there are very good for the company.

They're nice, stable and we feel like they're longer term-duration assets that allow us to build a stable portfolio.

So we absolutely would continue to invest assets in that category.

Again, when we're a direct lender, the advantage of being a direct lender as opposed to buying a CUSIP security, you've done some significant underwriting on the individual property.

So while you'll see reports around the country that there's overheating in some of the multifamily, I'd like to think that the markets that we participate in, on the specific property, we feel that we have -- that the positive advantages of the property outweighs the negatives.

And for the exits in multifamily joint ventures that you mentioned earlier in your comments, can you give a little detail on that?

Is this a question of valuations in the market just reaching to level you think makes [sense]?

Yes.

Kevin, you want to answer that?

Sure.

Some of these joint ventures we entered into 2 to 3 years ago, we've seen a lot of run-up in multifamily values over the last 3 years.

I think it's been a real positive for the vast majority of our portfolio because we're mostly in credit and fixed income.

So the quality of our collateral has improved.

For some of the assets we're looking to exit, it's gone from decisions with our partners to exit now to cases where we've had reverse inquiry at prices that we didn't underwrite or think we'd achieve when we made the investment.

And it just feels like a good time to exit some of those investments and put the money back into new joint ventures or new preferred equity or new Freddie Mac K Series.

Our next question is from David Walrod of JonesTrading.

Just you mentioned the sale of the multifamily JVs.

Is there any other asset sales we should be thinking about in the latter part of this year, just as far as like distressed residential or anything like that?

Yes.

Look, as it relates to -- again, we would -- we continue to expect the distressed residential portfolio to contribute -- increased contribution in the second half of the year.

And we have a sale that's scheduled to close next month -- or this month actually.

It's in August.

And we're teeing up another sale that's looking to close sometime in October, early November.

So we anticipate selling that portfolio.

And I think we've stated multiple times the thought would be that we would be liquidating about 30% to 35% of the portfolio on an annual basis and trying to add 30% to 30% of the portfolio on an annual basis.

And -- so we would expect sales there.

The JV sales are more opportunistic.

As Kevin said, one was a reverse inquiry.

One was a planned sale by the partners.

But we do have other JV investments that clearly we are looking at and the partners are looking at, at what's the right time to exit those strategies.

And that concludes our Q&A session for today.

I'd like to turn the call back over to Steve Mumma for any further remarks.

Thank you, everyone, for being on the call.

We look forward to talking about our third quarter results in November.

Have a good rest of the summer.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude today's program, and you may all disconnect.

Everyone, have a great day.