New York Mortgage Trust Inc (NYMT) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust Third Quarter 2017 Results Conference Call. (Operator Instructions)

This conference is being recorded on Friday, November 3, 2017. A press release with New York Mortgage Trust third 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 on 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, which are not historical, may be deemed forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Although New York Mortgage Trust believes 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. Included in our 8-K filing yesterday was our earnings press release for the 2017 third quarter results. Company had its best quarter of the year with basic earnings of $0.22 per share and comprehensive earnings of $0.23 per share. Our book value per common share was $6.05, up $0.03 from the previous quarter. We delivered a 3.8% economic return for the third quarter and 11.3% annualized economic return for the first 9 months of the year.

Our success for the quarter is directly attributable to the continued improvements in the credit markets from the second quarter, with credit spreads in many of our markets tightening to levels not seen since before the financial crisis. Considering this run up in valuations, we elected to opportunistically sell approximately $42 million in CMBS securities, a number of which we require -- we acquired in the last 12 months for a realized gain of approximately $4.9 million.

In addition to the sale of these securities, the company also exited 3 multifamily joint ventures for total proceeds of approximately $26 million, realizing income of $3.7 million for the period and $6.4 million over the life of these investments.

The company's distressed loan portfolio also contributed to the company's results for the quarter with loan sales generating a pretax gain of $7.3 million. Company reinvested a substantial portion of the net sales proceeds generated during the quarter to acquire or fund additional credit investments, including $44 million in residential loans and $35 million in preferred equity investments.

On October 13, the company issued $135 million of its 8% Series D Preferred Stock, which will lower our overall cost of long-term capital. The company has invested approximately $63 million of proceeds into multifamily investments, including $37 million in the first loss Freddie Mac K-Series securitization, making this investment the second Freddie Mac first loss security acquired by the company in 2017. The remaining funds will be invested in our Agency MBS strategy.

For the quarter ending December -- September 30, 2017, we had basic net income attributable to common stockholders of $24.6 million or $0.22 per share and comprehensive income to common stockholders of $25.5 million or $0.23 per share. Our net interest income was $13.3 million and our portfolio net margin was 281 basis points. Book value per common share was $6.05. We sold distressed residential loans for aggregate proceeds of $65.2 million, which resulted in net realized gain before income taxes of approximately $7.3 million. We also received proceeds of approximately $41.5 million on sales of CMBS securities, realizing a gain of approximately $4.9 million.

We received proceeds of $25.7 million from the redemption of 3 joint venture investments, realizing income of $3.7 million for the period. We also received $6.2 million in proceeds for the payoff of a mezzanine loan, realizing income of approximately $1.3 million from an early prepayment fee.

We declared third quarter dividend of $0.20 per common share that was paid on October 25, 2017. So we generated net interest income of $13.3 million and a portfolio net margin of 281 basis points for the quarter ended September 30, 2017, as compared to net interest income of $15.7 million and a portfolio net margin of 312 basis points for the previous quarter.

The decrease in both net interest income and net margin was primarily driven by a decrease in net interest income of approximately $2.7 million from our distressed residential portfolio, which also was the largest representative of the decrease in average interest assets during the period. From a CPR standpoint, our CPRs were largely unchanged for the portfolio with -- coming in at 14.9% during the September quarter versus 14.7% in the previous quarter. As we go forward, we anticipate a larger contribution from that margin -- from our net margin than capital gains given the current market environment.

For the quarter ended September 30, 2017, we recognized other income of $24.9 million as compared to other income of $8.2 million in the quarter ended June 30, 2017. The increase in other income of $16.7 million was primarily driven to the increase in distressed residential loans of $4.3 million, an increase in other income of $4.6 million, which is primarily due from the joint ventures as well as the payoff of the mezzanine loan and an increase in gain on sale of investment securities and related hedges, primarily due to our sale of CMBS securities during the quarter.

Our total G&A expenses for the third quarter were approximately $5.6 million as compared to total G&A expenses of approximately $5 million from the previous quarter. The increase in general and administrative expenses can primarily be attributable to the incentive fees related to the sales activities. Total operating expenses for the third quarter were $5.4 million as compared to $6.6 million for the second quarter of 2017. However, $3.1 million of the operating expense is related to 2 multifamily properties that we were required to consolidate for accounting purposes and are not direct expenses of the company.

In total, when including all the revenue expenses related to these 2 properties, for the period, the actual contribution was a positive $400,000 to the company. The remaining operating expenses of $2.2 million are related to our distressed loan activity, which were largely unchanged from the previous quarter.

We will continue to focus on credit assets in both multifamily and residential assets. But given the intense competition and tight credit markets, we invested our excess liquidity in the Agency MBS strategy, primarily focusing on 30-year fixed-rate and would expect that to represent a larger percentage of the investment portfolio as we go into year-end. The company, like everyone else, will continue to diligently monitor the activities in Washington, including the new tax proposals just released yesterday.

The impact from the newly announced Fed Chairman, which was also released yesterday as well as other geopolitical events that seem to be never-ending in -- both in our country and around the world. We continue to believe that our portfolio is well positioned to adapt to these changing markets and economic environments and look forward to speaking to you in the future.

We thank you for your continued support. And operator, we'd like to open up for questions.

(Operator Instructions) And our first question is from the line of Eric Hagen of KBW.

Forgive me if you've said this in the past, and I just missed on our previous earnings call or something. But the $6.9 million that you guys reported in other income, I was just wondering what that -- what makes up that line item? It's the last point mentioned in other income.

Yes, in other income, in previous quarters, it was really the mark-to-mark. It was 2 things really. Mostly, mark-to-market on activities that our JV equity investments, as we account for them in the equity method. In this particular quarter, as we exited 3 of those investments, you've had some realized gains being generated in that category. Also in this period, we had a $1.3 million gain from an early repayment of a preferred loan, which we have penalties built into those loans from an early repayments aspect -- standpoint. So those activities have been there, Eric, they just not had been as insignificant as this quarter. It just so happened now over the life of the JVs of those particular 3 JVs, we've had about $3 million of unrealized gains, but that was really spread out over a 2-year period. So it was probably insignificant relative to the amount that was impacted in this particular quarter.

I understand. Okay, great. And then what was the yield that you guys -- and the net spread that you guys put on the new CMBS piece following the quarter-end? And what's been your leverage since quarter end?

Yes. So we don't typically talk about the actual yields in those first loss pieces, the expectation of that yield. And if you've followed us for many years, which most of you guys have, you know we -- you know that we've entered the market around 12% and higher on a gross yield basis on those types of investments, and we exited the market in '13 when they below those announcements. So we've entered back in the market in 2017. So our expectation would be the return on those assets would be somewhere in the high 11s to high 12 percentage return on a first loss unlevered basis piece. We do get leverage on those particular assets today, and we would typically leverage those maybe on a 40% to 50% basis on advanced rate over the portfolio, and 100% of those are currently levered. As we've gone past here -- as we've got into the fourth quarter, and we raised that money from the preferreds, we have, as I said, invested about $60 million in credit assets and the rest of that has gone into MBS. So our portfolio leverage today is something less than 2x. I would expect the portfolio leverage going into the fourth quarter is probably 3.5 to 4x, which is really going to be skewed by the increase in the MBS strategy, which gets levered about 7x to cash.

Yes. That's helpful information. And then it looks like you guys bought some additional residential loans during the quarter. Are those distressed or reperforming? Can you just give us a sense for the collateral? What's the yield? And can you remind us is that on the credit line with Deutsche?

Yes, sure. The -- it is on the credit line with Deutsche. And those loans are all distressed loans and representing various types of reperforming and distressed loans. None of them are NPL, or nonperforming loans. They are all in some process of some kind of credit issue in general. We also buy loans that have been newly originated and kicked out, which is a small subset of what we're doing. But those loans that we're buying are typically reperforming loans in areas that we think we have an expertise and can improve those loans going forward.

So the yield on your distressed loans at the end of last quarter was 4.37%, is it higher? Do you put those new loans on at a higher or lower rate?

Yes. And unfortunately, the yield for the quarter -- and one thing that we've changed going forward and we talked -- you can see this on our financials. There's a new line in our balance sheet and there's a new line in our income statement. We're going to start to account for the distressed loans using fair market value instead of distressed credit. One of the drawbacks of distressed credit is when you have some turnover activities through sales, you generate these accounting entries that are somewhat -- I don't want to -- they're difficult to understand in some cases. For example, in this particular quarter, our yield was 4.13% from the assets. However, we collected cash of about 6%. But because of the way for distressed residential credit accounting, we ended up generating some of that income that gets recorded on the loans in the month in which we're selling those loans, gets shifted to gain as opposed to interest income, that is just the way that we've elected back when we chose to do that according methodology. You also notice that we had a positive number in our recovery for loan loss, which is also attributable to this distressed residential credit accounting. So we think going forward, as we buy new loans, we're going to account for them in fair market. So we will use level yield on a yield basis to generate the net margin, and then we'll mark-to-market those loans as we go from month to month. And then as we sell those loans, you would reverse it as unrealized gain or losses versus realized gain or losses. So I think that will give us a more stable net margin quarter-to-quarter than dealing with the sales activities in distressed portfolio using the distressed credit accounting methodology.

And our next question is from the line of Doug Harter of Crédit Suisse.

Hoping you could -- you mentioned kind of where you expect leverage to go in the fourth quarter. Do you view that as the portfolio kind of being fully or adequately levered at that point? Or would there still be room as you find attractive opportunities to add leverage?

Yes. Look, Doug, I think one of the things we want -- one of the things as we've gone through historically over the last 3 years, we've typically remained under-invested to take advantage of credit opportunities, but given the activities of 2017 and specifically, really from August on where credit spreads have continued to tighten to levels that make it difficult for -- to invest in several of the strategies that we like. We're probably going to take some of that excess liquidity, invest it into the MBS strategy. We will probably -- we will put hedges on that will generate a good returns, but we'll also put the hedges on that will allow us to unwind some of those assets in the event we do see more opportunity in credit spreads widen back out. But we will take the leverage up to a higher level than we've had over the last 3 years, and it will be primarily in MBS strategy. And we will -- there'll be some dry powder left on the balance sheet, but a lot less than we've historically run with.

And as you're thinking about -- or what is the type of interest rate risk that you're willing to take in that -- in those investments if it's -- obviously, it's a -- you have the relative attractive performance today, but if you're somewhat also looking for the opportunity to rotate out of it, how are you balancing interest rate risk versus the Fed movement?

Sure, sure. I think that the types of hedges that would -- that we are putting on are longer in nature than typically that you would do on an MBS strategy. So I think we're more concerned with the duration aspect of interest rate risk than the short-term volatility of LIBOR. Clearly, that is something that we're focused on from a Fed movement standpoint. But I think we're most concerned with surprises in the longer duration aspect of that type of portfolio. And so we'll probably spend more money on hedging that aspect of the trade than spending more money on worrying about the day-to-day liability risk of the trade.

And our next question is from the line of Christopher Nolan of Ladenburg Thalmann.

Steve, just a clarification, should we expect in the fourth quarter for the interest rate sensitive environments, the Agency RMBS and so forth, to grow at a -- grow and for the credit investments decrease as you start to monetize those?

I would -- well, you will definitely see the MBS assets grow as a percent of total assets in the portfolio. You'll see the equity percentage go up as it relates to that portfolio, but that's mostly attributable to the increase from our preferred offering. In terms of actual credit assets, I hope that credit assets will continue to grow. We added a first loss security piece in the Freddie Mac K. We continue to lend in the mezzanine space and are focused on doing that and are working on several transactions in the fourth quarter that we hope will close. If the -- we will do incidental selling, as we always do. But I would hope to think that you'll see the credit assets stabilize, just not growing as fast as we'd like them to. And so the -- it would really be more of an aspect of the MBS going up in size as opposed to the credit assets going down in size.

Got you. And what -- how should we look at the maximum in terms of preferred equity you can carry on your balance sheet?

I think, right now, we're comfortable with the preferred equity today, where we are in terms of total. I think the -- we would look if we were going to raise capital in the future and if it was opportunistically there, we'd probably look to do another common raise at some point, but we have nothing in plan in the near horizon. But I think the relative size of the preferreds or a common is we're comfortable with, but I don't think we'd raise -- we would continue to raise preferreds here.

And our next question is from the line of Jessica Levi-Ribner of B. Riley FBR.

Most have been asked or answered. But if you could just talk a little bit about the competition you're seeing in the mezzanine space? What pricing is like in terms -- if you're seeing more competition on terms or pricing? And kind of just talking a little bit about that.

Yes, sure. There's several REITs, specifically, in our space, and you're talking about mezzanine lending, direct lending as opposed to investing in the first loss pieces of Freddie Mac I'm assuming, right? You're talking about loan lending, correct?

Exactly.

Yes. I mean, there's several REITs out there that complete in the space with us, Ladder, Starwood, Arbor and several other guys. We have competition from them. We have competition from several, especially, finance companies. We tend to focus on very specific types of properties and work with a lot of people that we've done multiple transactions with. In our particular space, we're not going in the space where it's $20 million -- where our typical loan is less than $20 million or not greater than $20 million, we think we have a little bit better advantage there. And we're willing to work with structures. I think that's one of the benefits we have as a company is that we're willing to take unusual structures and work with people and trying to get the transaction over the finish line. And that's -- those are the strong points that we see. But then we have a lot of competition. But specifically, from the REIT space to the ones that I mentioned, you have banks in some regard and other specialty finance companies.

(Operator Instructions) And our next question comes from the line of David Walrod of JonesTrading.

Obviously, you had a lot of asset sales this quarter. Can you give us some thoughts about the fourth quarter in asset sales?

Yes. Look, I mean, again, it's more of a -- in several of the sales that we exit -- well, the JVs were really part of a larger transaction that we just benefited from, it was actually the equity holders that triggered those sales. And those are investments that when we got into them, our anticipated hold period was about the period that we've held them. We have 3 JVs left, and I would anticipate over the next 12 months, we'll probably going to exit all those also. As it relates to the CMBS securities, it was a situation in early August when we saw spreads gap into levels that we had not seen all year, and we had an opportunity to sell some of the bonds that we thought had reached a level that probably wasn't a whole lot upside, so we elected to sell them. But it's really more watching what the market's doing and to the extent that we feel like we can get at a level that we haven't seen historically, and we have the places to go, then we'll do it. But we don't have -- the only asset class we try to have a planned program of selling is our distressed loan portfolio. So we do have a sales schedule for that. We do anticipate that closing in the fourth quarter. That will be around $45 million to $50 million, typical to what we've done this quarter. And hopefully, this year, the one thing all the analysts have noticed is that we've been much more routine on selling our distressed residential portfolio, which has been a frustration historically. But I think now we have a process in place that allows us to get into the market on a routine basis to make those sales. But outside of those sales on a routine basis, the other ones are absolutely opportunistically driven transactions.

Okay. And then on the Agency MBS portfolio, are you looking at specified pools? Are you looking at using the TBA market, like what sort of securities are we looking at?

Look, I think, the combination of specified pools and TBAs is the right strategy that to do in here. And you're going to put it -- you're going to fund it with 30-day repo and leverage it with interest rate swaps and other derivative products, and you want that to generate a 12% to 13% hedge yield for the portfolios is our expectation. But yes, that's exactly what we'll be doing. Now look, it's one of the few markets where you have some supply that comes into the market on a routine basis. And while you have lots of competition, the market's deep enough that the yields don't get impacted as it has -- as we've seen in some of the CMBS activity and RPL activity that we used to traffic in.

And we do have a follow-up question from the line of Eric Hagen of KBW.

I think a lot of investors and analysts typically look towards you guys to -- as a vehicle to capitalize on certain niche opportunities, and you've talked about that in the past. Can you just give us an update on some of the things that you might be looking at? Or even some of the things that you potentially passed on that have -- or maybe looked interesting at one point in time?

Yes. Look, I mean, we -- to your point, over the last 5 years, we've been in and out of many segments. I mean, beginning of the year, we were probably $250 million into RPL securities. We're down to $100 million, just because between the calls and where the yields are, at the beginning of the year, they're in the high 5s, and today, they're in 4 handles on the A2s and 3% flat on the A1s, when we were talking 4.25% on the A1s and 6% on the A2s late last year. So we like that market, we just don't think it works for us today. We've looked at several different markets, the rent-to-owns -- the rental market, the housing rental market we think is a great space, just not a great space to generate a double yield for our kind of business model. So we've passed on that. We've looked at lending to new homebuilding that is going into the rental market or new homebuilding that's going out to sale, outright sale as a pseudo flipper loan, if you will. And that's something we've passed on to date so far: One, because we don't think we can get critical mass that; and two, we're not overly excited about single exposure in a single geographic area on some of those activities. We try to continue to look for ways to diversify risk in a particular type of market. We still like direct lending in the multifamily. Even though you read reports that multifamily is overheated, in general, there is markets, clearly, that are overheated, that we avoid, but we like specific markets around the country and that we will continue to push for that. We like the residential space. We continue to like the non-QM space, we just can't figure out a way to participate where it makes sense for us. We haven't given up on that. We like our second lien program. We continue to lend in that. It's approaching $50 million finally. It's a great portfolio. It's done fantastic. It's just small and as long as long-term rates continue to be where they are, it's difficult to get that thing moving, but we are starting to see some traction. But we continue to look at ideas. We probably have 5 to 6 presentations a quarter of significant presentations, of strategies that we just haven't found one that fits our needs and fits our investor needs and risk tolerance. But it's not for lack of trying, I can assure you.

And I'm showing no further questions at this time. I'd like to turn the conference back to Steve Mumma for any closing remarks.

Thank you, operator. Just want to let everyone know that our 10-Q will be filed on or about Tuesday, November 7 with the SEC and will be available on our website thereafter. Thank you, again, for the questions and support. We appreciate that. We look forward to talking about our fourth quarter and the year for 2017 as well as what we expect to do in 2018. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everybody, have a great day.