New York Mortgage Trust Inc (NYMT) 2017 Q4 法說會逐字稿

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

Welcome to the New York Mortgage Trust Fourth Quarter and Full Year 2017 Results Conference Call.

(Operator Instructions)

This conference is being recorded on Wednesday, February 21, 2018.

A press release with the New York Mortgage Trust fourth quarter and full year 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 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 thanks for being on the call.

Included in our 8-K filing yesterday was our earnings press release for 2017 fourth quarter and full year results.

The company has delivered net income of $0.22 per common share and comprehensive income of $0.19 per common share for the fourth quarter.

Our book value per common share was $6, down less than 1% from the previous quarter.

We delivered a 2.5% economic return for the fourth quarter and a 10.9% economic return for the entire year.

We continue to benefit from credit spread tightening in our multifamily portfolio during the quarter as well as solid execution in our distressed residential portfolio.

The improved changes in credit spreads increased the valuation in our multifamily CMBS by $13.7 million for the quarter, while our distressed residential loan strategy generated $6.2 million of realized gains on sales for the quarter, bringing the distressed residential loan portfolio's realized gain contribution for the year to $28 million, up $11.3 million from the previous year.

In October, the company completed a $135 million offering of its Series D Preferred Stock, which we believe will be accretive to our common stockholders.

We invested approximately $52.3 million of the offering's proceeds in structured multifamily property investments, with the remaining balance invested in our Agency RMBS security strategy.

Company purchased its second Freddie Mac K first loss security for approximately $36.7 million in October, bringing our 2017 total investments in this strategy to over $100 million.

The company continued to add to its investment in the second lien program during the quarter, adding approximately $11.3 million of new loans, bringing total outstandings to over $50 million at year-end.

As mortgage rates continue to rise, we would expect this volume to increase further.

I would like to now go over some quarterly and yearly highlights for the company.

For the quarter ended December 31, 2017, we had net income attributable to common stockholders of $24.6 million or $0.22 per share basic and a comprehensive income to common stockholders of $21 million or $0.19 per share.

We had net interest income of $15 million and portfolio net margin of 239 basis points.

We sold distressed residential loans for aggregate proceeds of approximately $37.6 million, which resulted in a net gain -- which resulted in a net realized gain before income taxes of approximately $6.2 million.

We invested $789 million in our Agency-fixed rate RMBS securities.

We declared fourth quarter dividend of $0.20 per common share, which was paid on January 25, 2018.

For the 12 months ended December 31, 2017, the company had net income attributable to common stockholders of $76.3 million or $0.68 per share basic.

We had net interest income of $58 million and a portfolio net margin of 273 basis points versus 293 basis points for the prior year.

We declared aggregate 2017 dividend of $0.80 per common share.

In January 2017, we issued $138 million of 5-year convertible notes resulting in net proceeds of approximately $127 million.

We purchased Freddie Mac multifamily CMBS securities including the 2 first loss PO securities for an aggregate gross purchase price of over $170 million.

We funded a total of $60 million of preferred equity investments in owners of multifamily properties.

We also sold distressed residential loans for aggregate proceeds of approximately $180 million, resulting in a net realized gains before income and taxes (sic) [income taxes] of approximately $28 million.

As of December 31, we had over 80% of our capital invested in credit-related strategies, including 49%, or $475 million, in capital in our multifamily strategy and 29%, or $286 million, in capital in our distressed residential loan strategy, with the balance invested in our second lien and legacy securitizations.

We continue to focus on credit in 2017 as we believe these types of assets will deliver more stable returns over current economic industry environments.

We added to our Agency strategy during the quarter to fully deploy the capital we raised in October from our preferred offering.

We intend to transition this capital to one of our credit strategies when opportunities present themselves.

Our total invested assets increased to $2.6 million for the year.

We continue to maintain a conservative leverage ratio of 1.5x our callable leveraged equity and 1.8x of total debt to equity.

We generated net income for the quarter of -- net interest income for the quarter of $15 million and had a portfolio net margin of 239 basis points as compared to net income of $13.3 million and a portfolio net margin of 281 basis points for the previous quarter ended September 30, 2017.

The $1.7 million increase in net interest income in the fourth quarter was primarily driven by an increase in average interest-earning assets from our purchase of Agency RMBS securities as well as the increased purchases of our multifamily securities and loans.

As we increased allocation to our Agency strategy during the quarter, which is more highly leveraged in the overall portfolio, this had the effect of decreasing the overall net spread of the portfolio but also resulted in increased net margin income.

Approximately 27 basis points of the decrease in our net margin for the quarter was due to our distressed residential loan strategy and, more specifically, our distressed credit accounting methodology, which required a reclass of $1.5 million from interest income for the quarter to loan loss credit recovery.

We also exited our IO strategy at the end of this year and have reallocated the majority of the capital dedicated to that strategy to other investments.

Over the last 18 months, the IO strategy had difficulty contributing positive results, as CPRs remain elevated, asset yields were lower and short-term funding costs were increasing.

Going forward, we expect our net interest income will represent an increasing portion of the overall net income for the company.

For the quarter ended December 31, 2017, we recognized other income of $25.2 million as compared to $24.9 million in the quarter ended September 30, essentially flat.

However, the sources of that income were different.

The component changes of the sources are as follows: We had an increase in net unrealized gains in our multifamily loans and debt held in securitizations of $11.3 million.

We had a decrease in realized gains on our investment securities and related hedges of $4.1 million due to reduced CMBS sales during the fourth quarter as compared to the third quarter.

We had a decrease in other income of $5.4 million as compared to the prior quarter, which was primarily due to gains that we recognized from redemptions and/or payoffs from several joint venture investments as well as the mezzanine loan.

We had no sales or redemptions in the fourth quarter.

For the quarter ended December 31, 2017, the company had $4.3 million in general and administrative expenses as compared to $5.6 million for the previous quarter.

$1.2 million of this decrease was related to the decreased incentive fees incurred for our external manager.

Salaries and other expenses were largely unchanged quarter-over-quarter.

Operating expenses for the quarter ending December 31 were $4.0 million as compared to $5.4 million for the previous quarter, a decrease of $1.4 million.

Expenses related to our distressed residential strategy decreased by approximately $161,000.

The remaining decrease was due to expenses related to our operating real estate activities, which we consolidate for accounting purposes, but we do not incur these expenses directly.

Included in the press release is a reconciliation of the consolidated activity for both income and expenses, the net of which is a positive income to the company of $398,000 for the quarter.

As I said before, the company ended the year with approximately 80% of its capital allocated to credit strategies.

As we head into 2018, we continue to focus on these strategies, including adding a non-QM first lien program in the first half of the year, which we believe, coupled with our second lien and direct multifamily lending programs, will bring higher-yielding, better-quality assets that we can currently -- than we can currently purchase in the marketplace today.

We believe the company is well positioned today with adequate liquidity and capital to continue to build on its credit strategy into 2018.

We appreciate your continued support and look forward to discussing future results with you.

And, operator, please open up the conference for questioning.

One more thing, our 10-K will be filed on or about Thursday, March 1, with the SEC and will be available on our website thereafter.

Okay, operator, now open for questions.

(Operator Instructions) Our first question comes from the line of Jessica Levi-Ribner from B. Riley.

This is Makenzy Brown actually, on for Jessica today.

So you announced plans today to begin a non-QM first lien program in the first half of this year.

I was just wondering if you could give us a little bit more color on that, how you're planning to aggregate the loans?

And maybe talk a little bit more about the opportunities for them that you see.

Sure.

We've been involved in around the non-QM program for 1.5 years, trying to figure out the best way to participate.

As we see the market continue to build up from a volume standpoint and see more active securitizations in those types of products, we've got more comfortable that there is going to be volume and there is liquidity with an outtake of a securitization.

And so like we did with our second lien program, we developed our own guidelines.

We will work with originators to originate that product for us, but we will be purchasing the closed loan.

We have no intention of building out our own mortgage company.

And so very similar to our second lien program.

We'll have dedicated guidelines for the non-QM program, and we'll start -- we already have several relationships with originators, and it's just a matter of getting those up and running.

We have adequate financing lines in place to finance the loans when we start closing them.

But we look to do that and get that thing up and running in this first half as we said before.

Great.

And then just one more for us.

Wondering if you could talk a little bit about the type of competition and pricing that you're seeing in the market right now as far as the mezzanine space goes?

If you could just give a little bit of color on that.

Sure.

The mezzanine is a commercial space.

I mean, clearly almost in all credit markets, there is a tremendous competition.

We funded $60 million of mezzanine and preferred equity investments in 2017.

And that's -- we're really very diligent on the properties that we lend to and the type of market that we participate in.

We typically are lending to markets at $10 million and less.

So we're not competing for the larger loan balances, which are far more competitive.

But nonetheless, it is very competitive, and we have several people dedicated to sourcing these loans.

We have a lot of very good relationships through sponsors of multifamily property purchases.

That's -- some of that's through relationships we give through our first loss investments that we have with Freddie Mac as well as over time the multifamily groups' relationships with that particular industry.

But it's really a nationwide target audience of the majority of our loans, which have generally been in the South or Southeast or West.

A lot of the bigger markets, it's very difficult to participate in because they're just so aggressively priced for us that it doesn't make sense from a return standpoint to try to compete in markets such as New York, San Francisco, LA, Chicago, in general.

Our next question comes from the line of Douglas Harter from Crédit Suisse.

This is actually Josh Bolton on for Doug.

Given how tight credit spreads are trading and expectations of possible Agency widening as the Fed continues to unwind, is it fair to say that we could see capital allocation to Agency creep up throughout the year?

We're kind of similarly looking at opportunities in all the investment strategies that we have.

I think in the Agency strategy, I mean, the 1 difficulty you have in that, while it looks like it may be more opportunistically favorable if spreads widen, the basis widens down here, you're still dealing with a fairly volatile interest rate market right now, that's -- it's directional.

So we need to get a sense of where we -- where this thing settles out.

I mean, clearly, it looks like we're marching through to 3% without a stop.

The question is does it go -- is it range bound between 2.75% and 3.25% or is it something higher.

And so I think that's something we'll take a breath and look at.

But we did add some Agency in the fourth quarter.

We put some hedges on, anticipating a market move.

It was a pretty hefty market move.

And so we'll see how that plays out over time.

But we always are monitoring all our opportunities.

I mean, we like the credit strategy.

We think it's a little bit more manageable in the current environment than an Agency strategy.

And so that's where our main focus is.

Unfortunately, to invest large amounts of money in a short amount of time, the Agency RMBS strategy is really the only strategy right now to do that competitively.

Great.

Yes, that makes sense.

And then just thinking about the interest rate volatility that we've seen this year.

Can you give us a year-to-date book value update?

We don't typically do that.

I know some REITs publish a book value on a monthly basis, but we do not.

It's fair to say that the Agency book is going to take on some pressure given the price action of the RMBS, but we do have hedges against that.

But it's also one of the things that we try to do and have done historically when you think about our company's portfolio allocation.

And we've seen this, as the credit spreads have continued to tighten in the first quarter.

So we would anticipate some of the portfolio deterioration of the Agency book would be offset by improved credit spreads in our CMBS book.

So that's worked historically for us.

It appears that it continues to work in the first quarter.

But from an exact amount, we would not speak to that today.

Our next question comes from the line of David Walrod from JonesTrading.

Couple of things.

I guess, you obviously raised capital earlier in the quarter.

Can you talk about how quickly you were able to deploy that?

And any sort of drag that it may have had on results in the fourth quarter?

Yes.

Look, we got the majority of deployed in October from a commitment standpoint, but a lot of the Agency portfolio ended up not settling until November.

So you'll definitely see an increase in interest income from the fully funded portfolio for the fourth quarter in the first quarter.

You'll get that benefit.

So there was a little bit of drag there.

We wanted to raise capital.

We felt like there was a good -- there was a chance that rate environment would become somewhat hostile for REITs, which, in fact, it has.

And so the pricing of the REIT stocks have gone in the direction we would not have preferred to go in.

So we're happy that we raised the capital in October.

Like we said in the call, we would have preferred to invest the majority of that in credit.

It's just difficult getting the right types of credit assets on the books at the yields that we want to have for those particular products.

So we think we entered the Agency market in a decent spread.

We hedged it.

We think it'll generate some nice income for the portfolio.

But you're going to be subject to some of the mark-to-market issues in the marketplace that you see with the Agency strategy.

It still represents a small portion of the overall capital of the company.

So we're comfortable with that.

And if you look at the overall leverage of the company, we're still less than 2x the leverage towards our capital.

So while it will have an impact, we don't think it will be a significant impact.

Okay.

And then you mentioned that net interest income will be a larger portion of your earnings.

I guess, can you talk about your outlook for asset sales in the first quarter and, I guess, just overall in 2018?

Yes.

Look, we have an active distressed residential portfolio.

We were net sellers in 2017, primarily because on the buy side, it was a very competitive buying market.

We're seeing some of that relief in the first quarter of 2018, possibly.

We're actively pursuing a couple pools of loans right now.

We will continue to sell those loans actively throughout the year like we did in 2017, where we had significant sales each quarter.

We've opportunistically sold some CMBS securities away from our first loss.

We bought some other securities in 2017 that we did very well with and continue to do well with.

So we'll sell those on a ongoing basis.

Mezzanine loans, we're not active sellers of that.

We originate them.

We have gotten some redemptions as the properties turn over.

And we had -- we sold 3, we got out of 3 JV investments in 2017.

We have 3 remaining.

We are not actively pursuing JV investments anymore.

I would anticipate exiting one of those investments in the first half of the year, at least, that we're working on.

And the other 2, it's -- I don't know at this point.

But those are something that we feel very good about where we are in the JV investments and would anticipate those over time leaving the company.

But we're always going to be active sellers.

The comment about the net margin as we've increased the Agency portfolio and continue to build out the loan portfolio, both in second liens and non-QM and mezzanine loans, I think you'll see more of a longer-term, less turnover portfolio, but it will start generating more interest income.

So I think it's more predictable for the analyst world also.

(Operator Instructions) Our next question comes from the line of Christopher Nolan from Ladenburg Thalmann.

You commented not actively pursuing more JV investments.

Can you elaborate why?

Sure.

We started investing in the JVs several years ago, and really that was 2015.

We tried to do a separate mortgage REIT that was going to have a combination of JV equity investments and mezzanine lending.

And we ended up not getting that out into the marketplace.

And so the JV investments, while they're a good total rate of return investments, they don't generate a lot of current income.

And so that's, for what we are today and the types of income we're generating, it just does not fit as well.

And it takes a very particular expertise, a little bit more handholding than we typically would like to do the way we're set up now, we were going in a different direction a couple of years ago.

And so that's the primary reason.

We are participating down the credit stack with our mezzanine and preferred equity.

The LTVs of those will take us down to -- or up to 90%, 92%.

So while we're not in the bottom stack of the equity, we are in a pretty significant position of the capital stack and a lot of the rights we have in our lending gives us control of the property in certain situations, which we use for protection for us.

Got you.

And then right now your allocation to credit is roughly 78%, down from roughly 90% since I recall previous quarters.

Where should we expect the allocation in credit to sort of settle out eventually, back to 90%?

And so that allocation gets a little tricky because as we -- if you look at the dollars in assets spent on that, it's really -- it moves around by our funding of those particular types of assets.

And so I think that we will constantly look to put money to work in credit assets.

Unless we feel comfortable that the Agency strategy, if we're at a point in the marketplace where we think we can put that strategy on and comfortably hedge the interest rate parameters that we think the market is going to be in over the next 12 months, we'll continue to focus on credit strategy.

And I would say we would accumulate as much credit as we possibly can that fits our criteria.

The hard part is fitting our criteria.

It's a combination of price, yield and credit quality and that takes time to find those 3 characteristics to close either loans and/or investments.

And our next question comes from the line of Eric Hagen from KBW.

I'm joining a little late, so I apologize if some of my questions have already been answered.

But can you just give us a sense for the difference in spread between the distressed loans sold during the quarter and how that compares to the spreads that are remaining in the portfolio now?

Sure.

Yes, I think, we -- when we sell loans in the distressed pool, we're trying to -- we're not trying to disrupt the overall feel of the pool.

So it's typically a combination of, I would say, lower-yielding assets, but better performing and maybe higher-yielding assets and less performing.

So if you look at the overall cash yield of the portfolio when we file the 10-K, you'll see that the cash yield is largely unchanged.

It's just really a constant turnover.

Now what -- it does introduce some complexities to this accounting methodology of distressed credit, and in June of last year, we elected for any -- new purchases after June 30 to be fair value.

And we think fair value is a better way to account for the activities in this portfolio.

The distressed credit portfolio has a lot of complexities to it.

And as you change over the pool -- pools of loans you've done the accounting for, you end up getting these reclasses between interest income and credit recoveries or credit impairments that are difficult to predict sometimes.

And so we think over time, Eric, it will be better to do the fair value, but the overall pool looks the same, feels the same.

I would say, in general, we try to keep a particular look at the pool that we hold and maintain, but the intention is not to hold any loans long term.

I mean, the intention is to turnover this portfolio because we do need to generate turnover to generate overall returns for the portfolio as the cost of funds have gone up, it's become more difficult to generate net margin and -- but the net gains have benefited because credit spreads have tightened.

And then just continuing on the point of the distressed loans, the fair value of the loans that you sold during the quarter?

And how that fair value compares to your cost basis?

Is that representative of what's left in the portfolio?

Yes.

A lot of the -- so for the loans that are in our distressed credit accounting, which is the majority of the loans that we currently have, we have a significant -- or a decent portion of deferred -- what's called deferred balances.

And in the distressed credit, we don't recognize the deferred balances as part of the cost basis.

However, when we sell -- we don’t want recognize them until we realize them.

And so when we sell those loans, you end up recovering a large parts of the deferred balances, which helps contribute to the increasing gain.

So those are difficult to -- historically, we've taken the position of not to fair value those when we book the loan.

As we go into -- as we went into 2017, because the market has become much more defined in terms of value as it relates to distressed loans, the deferred balances are recognized in the marketplace readily.

And therefore, it's easier to get that fair value balance for them going.

And so as we purchased loans that have deferred balances that we're paying for, we're also including those deferred balance as part of the fair value on the fair value loan portfolio.

And most of what you're selling or what you have sold recently has been from the carrying value account and not the fair value account?

That's right.

And it's not -- there is loans going out of fair value, but the fair value represents, I'm saying this off the top of my head, but it's -- whatever the percentage is on the balance sheet, it is -- we have $330 million of carrying value and $87 million of fair value, of which $50 million is second lien.

So $30 million of that is -- $37 million of it is really -- is the distressed loan.

So it's less than -- it's a little over 10%.

So there is some fair value loans being sold, but they represent a very small portion of the portfolio that's being sold.

And I'm showing no further questions.

I would now like to turn the call back to Steve Mumma, Chairman and CEO, for any closing remarks.

Thank you, everyone, for being on the call.

As always, we appreciate your support for the company.

We look forward to speaking to you about the first quarter, and thank you very much.

Have a good day.

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

This concludes today's program.

And you may all disconnect.

Everyone, have a great day.