New York Mortgage Trust Inc (NYMT) 2018 Q3 法說會逐字稿

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

Welcome to the New York Mortgage Trust Third Quarter 2018 Results Conference Call.

(Operator Instructions)

This conference is being recorded on Tuesday, November 6, 2018.

A press release with New York Mortgage Trust's third 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 today.

Included in our 8-K filing yesterday after the market close was our earnings press release for the company's third quarter results.

The company has delivered a solid third quarter with GAAP earnings of $0.21 per common share, unchanged from the 3 months ending June 30, 2018 and a book value of $5.72, down $0.04 from the previous quarter.

The company has delivered a 2.8% economic return for the quarter and a 7.1% annualized economic return for the 9 months ended September 30, 2018.

Company raised a total of $101.2 million in common equity during the quarter at an average net price of $6.02 or approximately 4% accretive to our June 30, 2018, book value.

The company's net interest margin improved 16 basis points to 255 basis points from the previous quarter.

The improvement is largely attributable to our continued focus on credit-sensitive assets in both residential and multifamily, adding $161.5 million during the quarter.

The company continued to see improved valuations for multifamily assets, with our multifamily CMBS securities contributing $12.3 million in unrealized gains during the quarter.

The company also benefited from a $3.6 million recovery in one of our multifamily joint venture equity investments, which we had previously written down.

The company sold distressed loans for total proceeds of $30.1 million in the quarter and anticipates more sales in the fourth quarter.

The previously announced internalization of the single-family residential credit strategy progressed nicely during the quarter with the addition of 11 employees, bringing the total number of new hires year-to-date to 12 employees.

We continue to work towards a mutual early termination of our external management agreement and anticipate a final transition strategy for those services by the end of the year.

The following are highlights from our third quarter performance.

We had net income attributable to common stockholders of $28 million or $0.21 per common share and compressive income to common stockholders of $18.2 million or $0.14 per common share.

We earned net interest income of $19.6 million and had a portfolio net interest margin of 255 basis points.

We had a book value per common share of $5.72 at September 30, 2018, a decrease of less than 1% from June 30, 2018.

We declared a third quarter dividend of $0.20 per common share that was paid on October 26, 2018.

We issued 14.375 million shares of common stock through our underwritten public offering and 2.4 million shares of common stock under our at-the-market equity offering program or ATM, resulting in total net proceeds to the company of approximately $101.2 million.

We acquired residential and multifamily credit assets totaling $161.5 million and sold residential mortgage loans, including distressed residential mortgage loans, for aggregate proceeds of approximately $30.1 million.

As of September 30, we had over 85% of our capital invested in credit-related strategies, including $633 million in capital on our multifamily strategy and $336 million in capital on our distressed residential loan strategy.

We had total invested assets of $2.6 billion and total capital, including common and preferred stock, of $1.1 billion.

Our callable debt-to-equity leverage ratio was 1.2x and our total debt-to-equity leverage ratio was 1.4x and continues to be conservatively managed.

We generated net interest income of $19.6 million and a portfolio net margin of 255 basis points for the quarter ended September 30, 2018 as compared to net interest income of $17.5 million and a portfolio net margin of 239 basis points for the quarter ended June 30, 2018.

$2.1 million increase in net interest income in the third quarter was primarily due to an increase of $1.4 million from our multifamily strategy and an increase of $1.2 million from our distressed residential loan portfolio, which was partially offset by a decrease of $600,000 from our agency portfolio.

Prepayments fees in our agency fixed-rate portfolio, which is 93% of our agency portfolio, was 7.3% CPR for the current quarter versus 5.9% CPR for the previous quarter.

Our agency arm prepayment fees decreased slightly to 14.6% from 16.3% but still remain elevated.

Our exposure to agencies continues to decrease as we continue to build out our credit investment strategies.

For the fourth quarter -- for the quarter ended September 30, 2018, we recognized other income of $24.3 million and the main components were as follows: Unrealized gains of $12.3 million on our consolidated K-Series investments due to continued tightening credit spreads as compared to the previous quarter; total net gains of $2.4 million from the residential mortgage loan sales; $3.6 million from the valuation recovery from the joint venture equity investment and $1.2 million in income from other equity investments; and a $2.3 million unrealized gain from our interest rate swaps accounted for as trading instruments.

For the quarter ended September 30, 2018, the company had $7 million in general and administrative expenses as compared to $6.1 million the previous quarter.

The increase of $0.9 million was primarily related to the increase in salary and benefits due to the increased employee headcount as part of the internalization of our single-family residential credit strategy.

We expect the increase to be offset by a decrease in base management and incentive fees upon expiration of our external management agreement.

As we enter the fourth quarter of 2018, our pipeline for new investments is strong, with over $390 million in purchases or commitments to purchase credit assets, including securities and loans.

We believe the addition of our new team of residential credit professionals, together with our existing team, has us well positioned for 2019.

We have delivered an annualized 7.1% economic return and a 12% annualized total rate of return through September 30, 2018, while in a very difficult interest rate environment to our stockholders.

We believe our credit investment strategy is our best opportunity to continue to deliver a combination of stable book values and attractive dividends as we go into the fourth quarter and 2019.

We appreciate your continued support.

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

Operator, now, can you please open for questions?

(Operator Instructions)

And our first question comes from Doug Harter with Crédit Suisse.

Can you talk about where you are today with the deployment of the capital?

I know you referenced the pipeline of credit investments.

Is there additional capital to be deployed once those close?

Yes.

Look, we have a pretty strong pipeline going into the fourth quarter.

A lot of the stuff, as you know, when you're buying loans, takes longer than securities.

And so we will have the -- all the capital that we raised in the third quarter deployed early in the fourth quarter as well as we have access to other ways to finance some of our assets or increase some of the leverage in the company but are always looking for opportunistic ways to increase the capital base of the company as well as grow the portfolio.

And then, can you talk about kind of what the spread experience has been on the K-Series bond so far in the fourth quarter?

And how that might kind of impact the realized and unrealized gains line?

Sure.

There is no question in the new issue market, some of the rated bond spreads have widened.

And I wouldn't say widened significantly, have widened 5 to 10 basis points recently.

Our expectation there is really more of amount of the supply-demand that's coming to the market.

The new issue market has been quite heavy so far in October and November, and we saw little backup in spreads.

The first loss piece that we own though is the security that trades.

While it trades spread related, it is a supply and demand oriented security, and we've seen quite a bit of secondary trading in the third quarter in those particular securities, which has resulted in a tightening of spreads.

And so we continue to monitor that first loss instrument as a great investment for the company.

And we'll anticipate that asset continuing to perform very well into the fourth quarter.

And I guess, where do you see yields on that instrument, on those types of instruments today?

We don't really disclose the yields overall on an individual instrument.

I would say the instruments, in general, have come in significantly to when we started investing in those.

Our initial investments in those securities were in the mid to high teens.

And I would say the investments now are closer to the low double digits or very high single digits in some cases, depending on which vintage, 5, 7 or 10 years.

And our next question comes from Mark DeVries of Barclays.

It's just Ellis on for Mark here.

Just wanted to quickly follow up on the -- just the K-Series comments you guys had.

Can you just kind of talk about -- I guess, there was the $12.3 million in gains this quarter, and kind of how we think about that run rate going forward, if you guys could just talk about that?

Yes.

I mean, look, if you think about the -- if you think about our K-Series position, which totals about a little less than $600 million today, you talked about assets that have very long durations.

So it doesn't take much of a yield tightening to add a significant amount of values to those assets.

And so our asset life across our portfolio, we have been buying them since 2012, but we continue to add to the position.

So the average life across the entire portfolio is probably approximately 6.5 to 7 years.

So while we have seen significant tightening on some of the vintages, the 5 years and in, we saw several bonds trade in the third quarter at very aggressive yields, which had a significant impact to some of the values of the securities in our portfolio.

You don't see a lot of secondary trading in those instruments.

So we are -- now that the program has gotten, it's starting to develop into a really robust program in terms of number of issues outstanding and several different types of players in the market, you're starting to see more frequent exchange of the securities.

So it allows holders of the securities to get a better sense of the secondary market valuations.

And I think that's where you're seeing some improvement in the mark-to-markets of those securities recently.

Prior to really this year, the majority of the evaluation was really based on new issue activity, and to the extent that we participated in it or active in bidding in that process, that's where we are getting the majority of our information prior to 2018.

Okay.

That's really helpful.

And can you just talk about some -- maybe that sort of $390 million you guys disclosed for 4Q.

Is -- can you talk about the allocation there between the different kinds of credit assets you're looking at, kind of what between the resi and multifamily?

You know what, what we can -- what I really can say is about $135 million of it is securities and about $250 million to $260 million of it is residential loans, loans or multifamily mezz loans.

I don't want to get more specific than that.

Some of those are commitments to purchase, and we're in the process of doing due diligence and closing.

We anticipate closing all of that stuff, all those items that we've talked about, but until we physically close them all, we'd rather not be specific, in general, and be more general.

And our next question comes from Eric Hagen with KBW.

Another follow-up on just the unrealized gains.

I hope it's not a -- any way, I know that a portion of that -- of those unrealized gains certainly seemed to help kind of pay the dividend potentially, and Can you just talk about how you monetize the value of those unrealized gains in order to pay that dividend?

Sure.

No, look, and I think when you look at our company's performance this year, last year and over the last 5 years, I think one of the frustrations that's been from all the analysts that our spread income does not cover our dividend.

And while we've said many times that our investment thesis is not purely to generate spread income, it's to generate total rate of return, which includes capital gains.

Now as we go through and markup our Freddie K-Series bonds, which we have sold historically on occasion, but the way we do monetize those unrealized gains is, we are able to finance those assets and we are able to get many types of financing.

Five years ago, it was only through securitization.

Today, it's through securitizations, either via Re-REMIC or just straight up 3-year or 5-year fixed term securitizations on a repo format.

We can also get short-term repos from banks and long-term repos from banks that can go out to 2 years.

So we have a lot of different opportunities to borrow money against those assets, which is really no different than every asset -- other asset class in a REIT balance sheet.

We are all borrowing money against them.

And so what we're trying to do is not only generate earnings through spread, but unrealized gains as well as realized gains.

We are selling out our distressed loans.

So the distressed loans have a little bit higher velocity in realizing than our multifamily because we continue to see value improvement in those assets, and that's why we don't sell them.

So that's -- and that's how we get the money, Eric.

I mean, it's really not a matter of we need to generate realized cash to pay for the dividend.

I get frustrated when some people have a spread income that covers their dividend, which is great, but they give it all back in book value deterioration because of lack of hedging or mismatch in hedging.

And so we try to focus, and I think we've said this many times on the call, not only as spread income as part of the component, but the total rate of return of our economic book value.

So we want to sustain the franchise value of the company going forward to pay the dividend.

What we don't want to do is deteriorate the franchise value and put extreme pressure on it to maintain the dividend, which we have so far been able to do this year with a 7.1% positive economic return.

That's very helpful clarity.

And your economic return certainly has been very strong.

On the expense front, do you expect there will be any cost savings from fully managing that credit portfolio in-house.

And I know that when that portfolio is externally managed, there was an incentive fee.

Will that be preserved under the in-house format?

No.

I mean, the in-house employees will be all part of the compensation program of the company, similar to every other employee, and we have various programs depending on level.

So there will be a performance-based bonus that everybody, all key executives, are under but that is largely attributable to the performance of the company and our specific assets.

But we do expect -- we don't expect savings.

What we do expect to have is a more robust investment team at about the same cost.

So I think what you'll see is, while our expenses won't decrease, we don't anticipate them increasing tremendously.

What we do expect to have is more opportunities in other asset classes to invest with, with this investment team.

And I think what -- part of that is, if you look at the robust pipeline in the fourth quarter, I would anticipate that number to grow as we continue to add employees, and we are going to continue to add other types of credit assets in both residential and multifamily.

Got it.

Great.

And then one on leverage, if you don't mind.

I know the leverage is low, and that's certainly positive.

But what were your unencumbered assets at the end of the quarter?

Or just even roughly?

Let's see.

Hold on a second, I can tell you.

I mean, if you look at our securities positions, we have 800 -- we have about $900 million pledged versus $1.3 billion.

We have a significant amount of borrowing capacity against a couple of asset classes that we have historically not borrowed against.

We have $260 million approximately -- or $230 million of mezzanine loans in our multifamily that we are currently looking at ways to finance that book.

We have a underlevered distressed residential portfolio that we have a securitization outstanding, that we'll probably call at some time.

It's due to get hit its 3-year period in March of 2019.

So the expectation would be we'd do something about that.

So we have some additional capital release from those securitizations.

And what we have seen in the marketplace is you've seen more parties come into the marketplace willing to lend money against increased assets.

And I spoke previous to your question about financing in the first loss Freddie K bonds.

We probably have 15 different counterparties willing to lend against that today, when 5 years ago, we had none.

We have maturities from 30 days to 2 years from large banks, a very stable financing available for those asset classes at advance rates, much higher than we were doing even 3 years ago.

So while we run, that we -- we look at our leverage ratio and understand the types of assets that we have on our balance sheet and liquidity around those assets.

So it's not really comparative for us to an agency-only REIT.

I mean, we would never be 8x leverage with our company, but I do think we can safely run our company at -- in a 1.8 to 2.2x leverage, depending on the components of the assets, right?

If we go more securities, the leverage will be higher.

If we go more mezzanine loans, the leverage will be lower.

And then you would have a margin or a ratio in between depending on the components of the balance sheet.

And our next question comes from Christopher Nolan with Ladenburg Thalmann.

The higher net interest margin in the quarter, could you give a little detail around that.

It wasn't quite clear to me in your comments what was driving that?

Yes.

Look, the -- as it relates to the multifamily, that was largely attributable to increased earning asset balances.

So we added another Freddie K first loss piece.

So that is a low double-digit yielding piece of security, so that obviously contributes nicely to the net margin.

And just in general, as the overall Freddie K portfolio continues to increase from accretion, that is a larger interest-bearing balance, so that's going to generate a higher yielding margin relative to the rest of the balance sheet.

And then as it relates to distressed residential loans, a lot of that interest margin has been very noisy because of the accounting of distressed credit, which we're reducing that position and doing fair market value.

But we had a better experience rate in collections on the underlying loans that generated a higher yield for the quarter.

And did the higher NIM include the $3.6 million recovery?

It did not.

That is in other income.

Great.

Follow-up question is, given that your business model is sort of levered towards a growing economy, which benefits credit-sensitive investments and given your comment sort of indicates that you're adding assets in residential -- distressed residential multifamily and so forth, at what point do you start pulling back?

At what point do you realize that we might be at the top of the cycle or if you have any comments around that?

Well, no, absolutely.

I mean, look, that's the number one question, obviously, when you're running a credit balance sheet.

And as it relates to our -- if you look at some of the specific things that we do, and so when we are in the Freddie K program, those are generally securitizations that are represented from a broad swap of the United States, largely centered around the large MSA areas of the country.

But there is a -- 30% of those portfolios are across the entire country.

So across -- we probably now have over 1,200 multifamily properties that we're looking at or reviewing the underwriting.

So we get a pretty good look into a lot of different MSAs.

And then when we make specific mezzanine loan financing, we are looking at individual properties.

So there is particular MSAs that we don't like to direct lend into because we think that it's overpriced or has been overbuilt.

So we are doing those elective decisions.

Distressed residential loans is a little different because you talk about assets that are 10 years old.

So you do have some, what we hope is, some HPA protection in those assets, but we are clearly looking at the credit underwriting of any new residential credit asset that we're putting on.

I think we have a very selective portfolio criteria when we're adding non-QM loans to our portfolio.

And that's one of the reasons why it's not growing as fast as we like it to grow because some of the competition has lowered the credit criteria in accumulated loans, and we're not willing to do that in some sectors.

So we do monitor it, we do look at it, we look at the cash flows on individual multifamily properties across all our properties, K deals and otherwise, and looking how those things are changing.

And so far everything looks very strong, rent growths are strong, occupancy rates are high.

You do have selective markets that are or have particular issues in particular asset classes or have issues that we look at or try to avoid, but we continue to still feel very good about the economy as we sit here today.

But no question, there will be some point at some time in the cycle where you're going to start to think that the curve starts to steep in and you may have better opportunities into the agency trade.

And that's something we'll look to, to shift out, eventually, if we have to.

But we are not -- the portfolio is designed that right now we are 50-50 resi, multifamily; it could be 60-40 multifamily, resi; but it also could be 30-70 multifamily, resi, if we thought that's where the environment was going.

And is it fair to say that given that your increased focus on K-Series and so forth is increasing your asset sensitivity i.e., making your balance sheet benefit more from higher long-term rates?

I don't know.

I mean, look, the higher long-term rates from a yield perspective put pressure on the current assets that we own.

Higher rates on an incremental investment basis, if the spreads are widening, is better for all of us.

It just depends how you get to the higher rates.

Like a flat curve that raises doesn't really do us a whole lot of good other than raise our cost of financing.

It gives us a higher asset yield, but if our liabilities raise as fast as our asset yields, you don't really accomplish a whole lot.

It's really the relationship of the spread of the asset we are investing to the ability to finance it and our cost of capital.

And our next question comes from Stephen Laws with Raymond James.

A number have been covered already.

But just kind of wanted to touch base on portfolio mix versus the need for new capital and leverage, and again, you've hit on a couple of these things.

But you sold some loans during the quarter, your press release commented that you anticipate more sales in the fourth quarter.

How do you identify the assets you're selling?

What's the decision-making process for some of those that you decide to monetize and recycle capital as opposed to utilize new capital or higher leverage or your ATM program as you think about growing the portfolio and shifting the mix as we move forward?

Yes.

Look, I think if you look across our portfolios, there's really different life cycles for all the assets that we own, right?

The mezzanine loan program has a different life cycle than a distressed loan program.

The distressed loans, I would say, are probably the shortest duration asset from a life cycle holding period.

The intention is to buy the asset, to do some kind of credit improvement with the borrower, figure out a solution, get the borrower paying more consistent payments, which increases the value of the loan, and then to sell the loan.

And really your total rate of return from that loan is not so much driven by the net margin but driven by the net margin plus the capital gains when you exit the loan.

And so we'd like to think that the holding periods of those loans are 24 to 36 months, and so as you are selling those loans, you're trying to cycle into new loans.

The pricing of those loans that we are selling have obviously gone up in price, but the cost to buy new loans has also gone up.

And so we looked in the non-QM market.

Now, the non-QM is totally different where you're going to do a securitization and you're really making a longer-term credit play on those assets.

So that's a little bit longer holding cycle.

So the Freddie K program, while their 10-year assets are most of the assets that we invest in, the expectation is, right now, we've held most of them, we've sold a couple of them, and so we continue to look at the collateral in the Freddie K deals relative to where we think they're going perform long term versus what the market will pay us and do an analysis whether it's worth holding or selling.

So to date, we've held most of those assets.

There is no really fine line on those periods.

And as it relates to capital, it's really a matter of where we can enter the capital market and determine raise in capital.

I mean, we're constantly looking at our common equity base relative to our expense ratio, the costs of other types of capital, both in preferred and convert.

And then looking at what we can do with financing the underlying portfolio that's currently not financed and what are those options and how does that impact the overall liquidity of the company.

So it's not a simple equation.

There is a lot of moving parts, and then it's opportunistically what can we invest in the marketplace with that capital and how quickly can we get invested.

I appreciate the color on that, Steve.

Thinking about -- maybe a follow-up on the dividend question earlier.

Are there any significant differences from the GAAP number you report versus taxable income, either positive or negative, that we need to take into consideration when thinking about the earnings power the company's posting versus the dividend?

No.

Look, I mean, I think, yes, there is differences to the extent that you have unrealized gains in your GAAP earnings.

Your taxable income typically does not count unrealized activity as a taxable distribution requirement.

So to date, this -- I mean, last year, I think about 60% of our dividend was taxable.

And you have to go back and look at the source, I don't have all the numbers in front of me.

But I would say, in general, we are looking at our tax distribution, but we're really trying to generate -- we are really looking at the overall performance of the company and trying to maintain a competitive dividend in the marketplace, which allows us to continue to grow our business and grow the capital base of the company.

Great.

That's helpful.

And then one last quick question.

You commented earlier on, the expenses probably won't change materially as you run through the internalization process?

At least, I think I'm paraphrasing it correctly there.

But are there any onetime expenses we need to consider around the internalization of the management structure?

Or is that not going to take place?

We are still in the process of trying to come to a resolution.

I mean, the existing contract allows them to go to June 30 of next year.

We are trying to come to an agreement to have an earlier exit, and I think we will have an agreement.

And so I don't -- I'd like not to comment about whether it will be obtained or not.

At this point, we are still in the process of discussing how that exit looks and what it looks like.

(Operator Instructions) .

Our next question comes from David Walrod with JonesTrading.

Could you talk about the impact that prepays had on your portfolio this quarter and how you're looking at that going into the fourth quarter?

Yes.

The fixed-rate -- I mean, the fixed-rate portfolio in the ARM portfolio is now less than $1 billion.

It doesn't contribute a significant amount of that margin to company, although it does contribute something.

Our fixed rates went from 5.9% to 7.3%.

There is a slight uptick in amortization expense, but nothing that was a significant driver to decreasing the return of the portfolio.

And the ARM portfolio was $72 million.

So even -- ours actually dropped 1.5%, but still not a significant dollar amount that really changed the outcome of the net spread of those assets.

We do anticipate continuing to decrease that exposure, while we don't like -- while the -- the opportunity looks decent for investing into the agency security portfolio, no question on that.

The thing concerns us is the convexity risk at the moment of interest rates and the hedging cost of doing that.

And so, so far we like the return aspects of some of the credit assets for investing relative to the agency.

But we continue to monitor it, and it's not to say that in the future if the curve steepens a little bit or you get a sense where the short-term rates are going to finally stop raising, we may go back into that investment.

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

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

Thank you, operator, and thank you, everyone, for participating in the call.

I appreciate it.

We look forward to talking about the fourth quarter and things that we're doing in 2019 when we talk next in February.

Thank you very much.

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.