New York Mortgage Trust Inc (NYMT) 2018 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 2018 Results Conference Call.

(Operator Instructions).

This conference is being recorded on Friday, August 3, 2018.

A press release of New York Mortgage Trust's second quarter 2018 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 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, and good morning, everyone, and thank you for being on the call.

The company delivered GAAP net income of $0.21 per common share, and had comprehensive income of $0.15 per common share for the quarter ending June 30, 2018.

Our book value per common share was $5.78 -- $5.76, a decrease of $0.03 or less than 1% from the previous quarter, resulting in an economic return of 2.9% for the quarter and a 5.3% annualized economic return for the 6 months ended June 30, 2018.

Our multifamily portfolio continued to be the significant contributor to our earnings during the quarter with both interest income and unrealized gains increasing from the prior quarter.

The company opportunistically raised $74 million in common equity through its at-the-market equity offering program, resulting in $0.03 accretion to the overall book value.

As the company has grown in recent years, we've taken steps to internalize the management of our various investment portfolios.

In May of 2016, we acquired our external manager for our multifamily credit investments.

In December 2017, we took over our Agency IO strategy, which had been externally managed and most recently we have begun the process to internalize our distressed residential loan activity.

This decision is in part of an effort to expand our capabilities in self managing, sourcing and creating single-family residential credit assets.

Since June, we have added 10 investment professionals to our single-family residential credit team and anticipate this team growing to 15 to 20 professionals.

In connection with this internalization, we provided Headlands, our current external manager, a notice that we do not intend to renew the management agreement, which will expire on June 30, 2019.

Headlands has been a valued and trusted partner and adviser to us since 2010, and we are grateful for their many contributions to the company's growth.

In reviewing our quarterly performance for the period ended June 30, 2018, we had net income attributable to common stockholders of $23.8 million or $0.21 per common share and comprehensive income to common stockholders of $17.2 million or $0.15 per common share.

We had net interest income of $17.5 million and a portfolio net interest margin of 239 basis points.

We declared a second quarter dividend of $0.20 per common share that was paid on July 26.

We issued 12.1 million shares of common stock, resulting in net proceeds of $73.8 million.

We originated or purchased approximately $106 million of credit assets during the quarter, including both multifamily and residential assets.

As of June 30, we had 82% of our capital invested in credit-related strategies, including 55% or $557 million in capital in our multifamily strategy and 27% or $272 million in capital in our distressed residential loan strategy.

We had total invested assets of approximately $2.6 billion, unchanged from the previous quarter.

We continue to maintain a conservative leverage ratio with callable debt leverage to equity at 1.4x and total debt leverage to equity at 1.6x, again, unchanged from the previous quarter.

We generated net interest income, as I said before, of $17.5 million and a portfolio net margin of 239 basis points for the quarter ended June 30, 2018, as compared to net interest income of $19.8 million, and a portfolio net interest margin of 286 basis points for the previous quarter, which ended March 31, 2018.

The $2.3 million decrease in net interest income in the second quarter was primarily due to our distressed residential loan portfolio, which was largely attributable to changes in expected cash flows resulting from greater loan sale activity in the second quarter as compared to the first quarter of 2018.

Prepayments fees in our fixed-rate portfolio remain largely unchanged, 5.9% during the second quarter versus 5.4% during the first quarter, which represents -- the agency fixed portfolio represents the majority of our agency portfolio.

Our agency ARM portfolio prepayment fees, however, did increase to 16.3% from 10.2%.

We only have $79 million in that portfolio, and we do not intend to add to this position, given the current interest rate environment.

For the quarter ended June 30, 2018, we recognized other income of $20 million as compared other income of $21 million for the quarter ended March 31, 2018.

The change was mainly comprised of the following: an increase in net unrealized gains and multifamily loans and debt held in securitizations trusts of $4.5 million, the result of which was continued spread tightening during the quarter.

We had an increase in realized gains on residential mortgage loans, including distressed residential mortgage loans of $3.1 million.

We had very limited sales during the previous quarter.

We had an increase in realized loss on investment securities and related hedges of $0.5 million resulted from the liquidation of our Agency IO portfolio.

And we had an increase in unrealized losses of $3.8 million related to our interest rate swaps, which are accounted for as trading instruments.

We had a decrease in other income of $3.8 million comprised of 2 components really, one is, a net $1.1 million impairment loss that we recognized during the second quarter related to a real estate development project, as well as a $2.3 million gain that was recognized in the first quarter, which was related to a multifamily property that we had taken over previously.

For the quarter ended June 30, 2018, the company had $6.1 million in general and administrative expenses as compared to $5.5 million the previous quarter.

The increase was almost solely due to the annual equity compensation awards paid to our Board of Directors that is awarded during the second quarter at our Annual Meeting and expensed during the quarter.

We believe that the internalization of our credit investment functions, including both multifamily and single-family residential, as well as an increased investment professional team will strengthen the company's ability to identify and secure future investment opportunities that benefit our shareholders over the long term.

We will continue to focus on book value stability while maintaining attractive dividends.

We appreciate your continued support and look forward to discussing our second quarter results -- our third quarter results in the future.

Thank you.

Our 10-Q will be filed on or about Tuesday, August 7, with the SEC and will be available on our website thereafter.

Operator, would you please open up for questions?

(Operator Instructions) And our first question comes from Doug Harter with Crédit Suisse.

Steve, can you maybe just talk about the transition to internalizing the credit assets?

Is there any termination fee with Headlands?

And just as we think about the interim period, where you are adding employees, is there going to kind of be extra cost for the next year or so?

Yes, the way the agreement reads, Doug, is that we have to give them a 180-day notice.

They will continue to get paid in the portfolio through the period of maturity of the contract of June 30, to the extent the portfolio is outstanding.

They'll continue to manage the portfolio they've done historically, which will include sales of the portfolio.

We are in the process of trying to negotiate with a possibility of exiting earlier.

But per the terms of the agreement, they absolutely have the right to stay on through June 30.

There is no termination fee.

However if there is some type of early exit agreement, there would obviously be some kind of payment for them to leave earlier because they would be foregoing future revenues.

We don't anticipate -- there will be some duplication of costs, however, the team that we brought on board is already in the process of accumulating assets, so we don't see that as a significant deterrent in the overall performance of the company.

We are not only going to bring in -- we're not only going to internalize the distressed portfolio, but we're also increasing our capabilities in new origination, as well as looking at other asset classes in the residential credit space that we have not had at the time and/or the expertise in-house to do so.

So what I would anticipate going forward is a much more diverse portfolio of investments that we're going to be making it residential credit that's going to offset those expenses as we bring these people on.

And our next question comes from Eric Hagen with KBW.

For the $12 million of unrealized gains on multifamily loans, is there a way for you to tease apart for us just what the fair value change was on those loans related to roll down from the yield curve?

And how much was due to actual yield spread tightening?

Yes, sure.

I mean, almost all of it is yield spread tightening, Eric, to be honest with you.

I mean, the rates relative -- these are 7- to 10-year assets.

They are 10-year assets when we buy them and the average maturity date now of the portfolio is around 7 years.

If you look at the rate change during the quarter, which was not -- 10 to 15 basis points, really the majority of that realized gains is related to spread tightening.

We continue to see increased participation in people investing in these asset class.

We saw -- we bought 2 bonds -- we bought 2 first-class pieces in '17, we actually saw a drop off in '17 in participation.

Since we've come into 2018 and continue to see that throughout the -- through '18 is increased participation, again.

I think, it's just a question of where people are looking at yields and where they are looking at taking -- looking to invest in credit.

And that's driven up these yields in this asset class.

And unfortunately for us, it's a great problem to have because it tightens the value of the portfolio that we hold, it makes it difficult to accumulate more of this portfolio, which we continue to like and continue to try to participate.

Right.

Right.

And then the $12.6 million of unrealized gains on just general investment securities, can you just remind us what's included in that bucket?

Yes.

And really, a lot of that is related to the unwind of the IO strategy.

So we had taken -- so when you mark through the income statement, when you sell something and it becomes realized, you have a transition from unrealized to realized.

So you end up having a realized loss, but then you have a reversal of an unrealized loss, which also is a realized -- unrealized gain during the period.

That's really what the majority of that is.

And then the other component of it's related to interest rate swaps.

But it's really more of an unwind of the IO strategy more than actual activity going on that's new (multiple speakers).

So we're completely out of the IO strategy now.

So you won't see that type of noise that we used to have historically with this transition between realized and unrealized.

I think going forward in the capital gains in the realized activity line item, it will truly be represented by activities going on in the period.

Got it.

You answered my follow-up question to that.

And then it looks like the capital raised during the quarter was used at least in part to delever the portfolio.

Was that just more of a timing issue with when the raise occurred?

Or was it -- or do you really kind of plan on relevering that (multiple speakers) the portfolio?

Right, look I think, we've used the proceeds to buy credit assets, but we can obviously get leverage on some of those credit assets, so we have -- we will continue to expand the portfolio.

We're in the process of acquiring new assets constantly.

And so we have some expectations of some larger purchases during the upcoming quarter, and we are always looking at the best way to finance those portfolios.

Right now, we run a fairly conservative leverage ratio of 1.6.

We have capacity to go up probably to 2.4 to 2.8x if we wanted to fully lever the portfolio.

So it's a matter of opportunistic investing and what we think is available to us at the time.

Got it.

One last one for me, Steve.

What's the notional amount of swaps that you have hedged in the agency portfolio right now?

It's $395 million, Eric.

And so when we look at the -- when we hedge our portfolio, we're not just looking to hedge the agency portfolio.

We look at the overall dynamics of the entire investment portfolio.

So while we are -- so we take into consideration what our credit spreads are going to do on our assets.

What our agency book is going to do.

So the interest rate swaps, which are all long-dated swaps, the intention of the swaps is really to mitigate duration movement of the portfolio and not so much protect the spread on a day-to-day basis.

So I think if you at the focus of our company, and if you look at the change in our book value and our economic return over the last several years, one of the things we try to do is minimize the economic impact of book value changes in the portfolio.

And less focus on the day-to-day net margin, although it is important; we like to protect the enterprise value more so than the day-to-day interest rate spread.

They're both important.

But I think, the enterprise value is the key for us for long-term growth.

And that's really where we spend a lot of time looking at duration exposure, as it relates to both our non-agency credit type activity and our credit -- and our non-credit activity and our credit activity.

And next is David Walrod with JonesTrading.

I guess, just lot of my questions have been answered.

But can you just talk about your outlook for asset sales in the second half of the year?

Yes.

Look, we will continue to be selling distressed residential loans.

We anticipate at least 1 sale in the end of third quarter, if not 2. We will probably look to, if spreads continue to tighten in some of our multifamily investments, we may consider selling some of those assets.

But we're really in an asset accumulation mode as opposed to selling mode.

We continue to originate second lien mortgages.

We're going to increase our activity with bringing on its investment team and increasing our activity in new originations of other products.

And so as this team comes onboard and we bid out these new products, you'll see some different assets coming on.

But we don't have -- other than the distressed residential loan portfolio the majority of the assets are in accumulation mode, not in sell mode.

We were -- we intentionally liquidated the Agency IO portfolio, that was something that we wanted to get out of and -- but those are really the asset classes we are focusing on selling.

Great.

Can you, I guess, give us an update on the second lien mortgage portfolio and kind of how large it has gotten and how it is performing?

Sure.

As of June 30, we're about $72 million in funded assets.

Again, it's unfortunate, not the size that we'd like to be.

We're about $80 million today.

The growth has slowed down.

We are getting pressure from some of the originators because of the competition in the home equity lines available now in the marketplace, at lesser rates from banks.

So that is the difficult part of it to continue to be competitive in.

However, our existing portfolio is outstanding with over a 7% coupon at a very low dollar price, very high FICOs in the 5 30s in LTVs, CLTV, which is the first and the second in the low 80s.

So it's been an excellent portfolio, it's just been frustrating in accumulating.

We will continue to try to accumulate it.

It's just there is a tremendous amount of competition from banks for that home equity mortgage that's tough for us to compete with.

And next is Christopher Nolan with Ladenburg Thalmann.

Steve, your comments seem to indicate that cumulating credit-sensitive assets remains a challenge, so something that you mentioned on the first quarter call.

Was this a catalyst for the internalization of the distressed portfolio?

No, the internalization was really a couple fold.

One was not only internalizing the distressed residential because the company has grown to the size now that we think the scale for the company size is more beneficial than having an external Manager do it.

And not that they weren't doing a good job.

We just felt like to get better franchise value going forward for the company, it was better to control all aspects of all our activities.

So that Asset Management group that we are now building out internally is part of this investment team that we've hired, is going to allow us to not only look at distressed residential loans from an Asset Management standpoint, but other new issues that we're going to originate in and/or assets that we're going to acquire so they will be complementary.

And then, new origination we feel going forward is where we are going to get the best benefit.

Clearly the space is getting -- there is several participants in some of the activities that we're looking at.

But we do think the non-QM space now has developed to a point where you get good execution through securitizations as well as good participation from originators that it's a much more fluid market, that there is going to be room for more participants.

And then, we feel that over the next 1 to 2 years that this market will continue to grow and we'll continue to be a more active participant in that space.

There's other residential assets that are around origination that aren't 30-year mortgages that we may participate in that we're looking at as well as other multifamily type investment activities that we may participate in.

So this team, while it is part of the internalization of distressed residential, is going to increase our capabilities of a much greater asset class than just distressed residential.

My follow-up is -- focusing on credit-sensitive investments.

Is the focus there really just going to be a function as long as the outlook for the economy remains strong?

Absolutely.

Look in our multifamily space in particular where we've talked about spreads tightening, there's clearly markets across the country today that we do not actively participate in because we think the market has gotten ahead of itself.

And so every investment that we make as it relates to a direct investment in multifamily, it's really a combination of what is a very -- the particulars within a very specific geographic location, and not so much macroeconomies.

But absolutely, we are focused on the overall economy.

And where we sit today, while we still have to digest what the tariffs are going to do to the economy, we just printed a fairly significant GDP in the second quarter, there's some suggestions that the third quarter is going to be very strong.

I mean, long-term, we think the economy is not going to be gangbusters, but we don't think it's going into a recession either.

So we feel pretty good about our credit spot today, but that is something that obviously when you are investing in credit that you have to be careful with.

And is the plan to increase your capital allocation to credit or just simply grow -- raise more equity via the ATM and then (multiple speakers)?

I think it's a combination of both, Chris.

I think, it's a -- increase -- to the extent there's opportunities that make sense on a risk-adjusted basis we will continue to focus on credit.

And we'll continue to raise capital opportunistically when the opportunities are there for us, absolutely.

And at this time, I'm showing no questions in queue.

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

Thank you, Tiffany.

And thank you, everyone, for being on the call.

I appreciate it.

We look forward to talking about our third quarter and talking about some of the new activities that we'll have in place, by the time we get to the third quarter call.

Thank you, again.

Have a good day.

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

This concludes the program, you may now disconnect.

Everyone, have a great day.