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

(Operator Instructions)

This conference is being recorded on Friday, February 22, 2019.

A press release with New York Mortgage Trust's fourth quarter and full year 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 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 today.

For the fourth quarter, the company had GAAP earnings per share of $0.02 and comprehensive earnings per share of $0.11.

But more importantly, our book value was $5.65, down just 1% from the previous quarter.

For the year, the company generated GAAP earnings per share of $0.62.

The company's ability to maintain a stable book value in the face of difficult market conditions for much of the year, particularly in the latter half of the fourth quarter, helped the company deliver an economic return of 2.3% for the quarter and 7.5% for the year, tall results despite the challenging operating environment.

Fourth quarter results were largely impacted by the year-end spread widening, much of which has reversed since December.

The company completed a capital raise of approximately $85 million of common equity in November 2018, bringing total capital raised during the year to approximately $260 million, all of which was done accretive to book value.

2018 was a transformational year for the company.

We moved to internalize our last externally managed business, our residential distressed credit, adding a team of professionals that not only covers distressed residential credit, but increases our capabilities across many other residential credit opportunities.

In January 2019, the company hired Jason Serrano as our President.

Jason has extensive experience in all aspects of residential investing and his leadership, ability and vision are welcome additions to our firm.

For the year, the company expanded its investment portfolio by 33% to $3.5 billion and its capital base by 21% to $1.2 billion, originating or acquiring over $1.3 million (sic) [$1.3 billion] in predominantly credit-focused assets, including $360 million in multifamily credit and $885 million in residential credit, a single year record for the company.

For the fourth quarter ended December 31, 2018, the company earned net income attributable to common stockholders of $3.7 million or $0.02 per common share and comprehensive income to common stockholders of $16.9 million or $0.11 per common share.

We had net interest income of $21.9 million and portfolio net interest margin of 230 basis points.

Multifamily net margin for the quarter was 585 basis points while the residential credit margin was 35 basis points.

The low margin in residential credit was largely attributable to the significant growth in the fourth quarter where most of the loans settled in late December and the company did not get the full benefit of ownership through interest collections.

In addition, we increased the borrowing line substantially during the quarter, including adding a new lender, which required fees and expenses prior to financing of the loan that are included into our interest expense without the corresponding interest income.

We anticipate a pickup in dollar net margin for the first quarter of 2019 as we get the full quarter benefit of the assets purchased late in the fourth quarter.

We declared a fourth quarter dividend of $0.20 per common share that was paid on January 25, 2019.

We acquired assets totaling $944 million including distressed residential loans totaling $483 million, other residential mortgage loans totaling $88 million, non-agency RMBS securities totaling $120 million and finally multifamily credit assets totaling $255 million.

For the 12 months ended December 31, 2018, the company earned net interest income attributable to common stockholders of $79.2 million or $0.62 per share and a comprehensive income to common stockholders of $51.5 million or $0.40 per common share.

We earned net interest income of $78.7 million, a 36% increase from the prior year.

We had a portfolio net margin of 253 basis points, down 20 basis points from the prior year.

As we increase our residential credit portfolio, you should expect the net margin to decrease in basis points but increase in dollar net margin.

We declared total dividends for 2018 of $0.80 per common share.

We issued an aggregate of 28.75 million shares through 2 public offerings at an average offering price of $6.14.

We also issued 14.6 million shares of common stock under at-the-market equity offering program at an average price of $6.19, resulting in total net proceeds to the company of $260 million.

We acquired credit assets for the year totaling $1.2 billion including distressed residential mortgage loans of almost $500 million, other residential mortgage loans of $192 million, non-agency RMBS totaling $196 million and CMBS securities totaling $249 million and direct preferred equity investments in owners of multifamily properties of $113 million.

All of the fourth quarter purchase activity that I spoke about earlier was done by our new credit residential team, which is already now showing benefits to the company from internalization.

The company ended the year with $3.5 million in portfolio assets, an increase of 33% from the previous year.

We had 52.5% of our equity in multifamily with the remainder in residential credit assets and other residential assets.

The company continues to manage through a very conservative 2.0x debt to equity leverage.

Longer term, you should expect that debt ratio to increase, approaching 2.5x to 3.0x as we add lower margin investments at higher leverage ratios.

The company increased its overall exposure to credit assets by approximately $1 billion during the year, most of which was done in the fourth quarter.

The company's fourth quarter earnings were negatively impacted by the increase in spreads across several asset classes, including both our agency RMBS portfolio, as well as our new issue, non-agency RMBS and CMBS securities.

In our opinion, much of this spread widening was directly related to the illiquidity in new issue buyers at the end of the year, which now seems to have completely reversed starting this year.

Given recent Fed statements and their change in interest rate outlook, the forward-looking investment horizon should be more favorable for the company.

However, the Fed views on the economy took a significant change in direction in a very short period.

So we will remain diligent as always when proceeding forward with our investment strategy.

Again, I'll go through some more detail on the fourth quarter.

We had $3.7 million in net income of $0.02 per share as compared to $28 million or $0.21 per share for the previous quarter.

We had net interest margin of $21.1 million, an increase of $2.3 million or 12% from the previous quarter ending September 30, 2018.

Our other income for the fourth quarter was $1.2 million, down $23.1 million from the previous quarter.

Our other income category has typically been a significant contributor to our net income overall.

However, this quarter was impacted significantly by the spread volatility that incurred late in the fourth quarter where we realized a $15.5 million loss primarily related to our interest rate hedges, which were not offset completely by gains in our investment portfolio.

We had minimal income contributions from our loan sales activity, as the process of transitioning our distressed residential loan business from our external manager to the company, and would anticipate sales activity for 2019.

General and administrative expenses for the quarter were $9.6 million versus $7 million the previous quarter, an increase of $2.6 million.

The increase is primarily due to a $2.1 million prepaid incentive fee write-off related to the non-renewal of our external management agreement.

Our operating expenses were $4.5 million for the quarter, an increase of $1.6 million from the previous quarter.

The primary reason is attributable to the growth in our residential credit purchases, which was related to the $689 million of loan purchases that occurred in the fourth quarter.

I'm very excited about the year ahead.

We have never been stronger in our investment capabilities.

The company is 38 professionals strong, focusing both on residential multifamily investment opportunities.

We have approximately $900 million in new investments in the fourth quarter, most of which was funded in December and will start to contribute to earnings in a meaningful way in the first quarter of 2019.

We raised approximately $84 million of common equity in January 2019, bringing the company's common stock market capitalization to over $1 billion.

We believe the company is well positioned to capitalize on its recent success and expand its credit-focused investment portfolio.

We will continue to focus on book value preservation while delivering long, stable dividends to our shareholders.

Our 10-K will be filed on or about Thursday, February 28, with the SEC and will be available on our website thereafter.

Operator, please open the call for questions.

(Operator Instructions) Our first question comes from Doug Harter with Credit Suisse.

Can you talk about the pace of deployment of the January capital raise?

Kind of what looked attractive, when those assets are likely to be added and start contributing to spread income.

Thanks for the question.

Actually, when you think about our fourth quarter pipeline of $900 million, we were -- we raised the capital in early November.

We fully deployed all that capital.

We were probably invested plus as we came to the end of the year.

We anticipated having an opportunity to raise more capital in January and we're acquiring assets and looking into January to get that stuff invested as soon as possible.

So I would say the majority of those assets have been -- the majority of that capital raise has been fully deployed into the credit assets.

We tried to take advantage of some of the spread widening and as I had mentioned, as we sit here today, most of the spread widening in the new issue CMBS and the new issue non-agency RMBS is back to levels that were seen more like November than in December.

So we tried to take advantage of it as best we could.

Great.

And then I guess if you could talk through -- you mentioned kind of the trade-off as the portfolio mix changes between kind of spread and leverage.

I guess if you could sort of talk through the magnitude of those changes and what the ROEs look like kind of pre and post those changes.

That's right.

Look, I think when we look at our -- and the purpose of having a diversified portfolio is trying to take advantage at the best opportunities at any given time.

And so both when we look at residential and multifamily, we have an ROE target in mind.

So regardless of investment we're doing, we don't see a negative impact on something that we're doing.

What I was mentioning was if you look at our spread in multifamily that's about 585 basis points.

But the leverage on that portfolio is going to be much lower than on our residential portfolio where the average spread is probably closer to, when you're talking about loans, the net spread is closer to 120 basis points to 150 basis points.

So if we're -- to throw an example out there, if we're trying to generate a 12% net ROE, we can lever some of our multifamily stuff at less than a half a turn.

We're going to require an 8x leverage on a residential portfolio to generate the same kind of return.

So while the overall ROE is unchanged, the net margin in terms of basis points is going to decrease, the dollar net margin that's going to be generated.

Because as we go into more residential credit investing, especially newly originated residential credit, you're buying assets above PAR, which has less opportunity for capital gains and most of the return is coming from that margin recapture.

And so that will change the dynamics of the company.

I would anticipate as we go into '19, an increasing percentage of our earnings being driven from that margin as we go through the year.

Our next question comes from Christopher Nolan with Ladenburg Thalmann.

As a follow-up to Doug's question, is the focus on the residential that you mentioned mostly on agency RMBS or something else?

No, it's mostly on credit security.

So in the fourth quarter, we added over $600 million of distressed residential credit.

Those are loans that -- we focus on the RPL world, which are loans that are making payments.

They're not MPL securities.

So we're buying those loans at a discount to PAR with the anticipation of improving their credit status, which will then lead to increase in value.

Of the whole period, those kind of assets are going to be less than going into newly originated credit loan type securities.

Those assets are being acquired to be accumulated and eventually securitized where we would hold the bottom part of the credit stack and sell the top part of the credit stack, looking to generate the low double-digit ROE returns, 12% to 13%.

Okay.

So these are performing residential loans and you're sort of becoming more, a little bit more of a commercial REIT?

Yes -- look, we're going to focus -- on the multifamily, we're looking at -- we're investing in direct lending in the multifamily properties or credit securities related to multifamily securitizations.

And on the residential side, we're either participating in the credit side of the business either through distressed residential loans, which we have been active with historically.

But we've also increased our effort towards participating in some of the newly originated product.

And that can take on many forms.

I mean currently, we've purchased some 2-year-old fees and originated loans that are post 2008 under the guise of more non-QM like underwriting standards.

Those are loans that we're looking at.

And if the spreads allow, we will continue to invest in that market.

Okay.

And would most of these be securitized and then sold off?

Or would you retain them?

We would securitize.

I mean ultimately, we would securitize.

We would accumulate up to $300 million to $500 million, do a securitization and more than likely, you're going to sell off the top 88% to 90% of the securities, and keep the bottom 10% to 12%.

Final question, what's the source of these deals?

Look -- between already the relationships New York Mortgage Trust had and the team that we've added to the company over the past 8 months, we have vast relationships across originators, small banks that we use to accumulate assets, either buying closed loans in portfolio as a total portfolio or buying loans on a flow basis with originators that we've established guidelines with that they underwrite to very specific guidelines that we put in place.

Our next question comes from Stephen Laws with Raymond James.

Following up on Christopher's question, can you talk about the securitization market, what type of execution you think you can get and how the volatility or dislocation late in the fourth quarter impacted that?

And then also just in general on the financing side with your warehouse facilities or other financing line, do you think there's any opportunity to push down pricing on that or you think that you've already got kind of the lowest financing rate that you're going to be able to get on these type of assets?

Look, the -- multiple questions there.

I'll address the first one around securitization.

Clearly, in the fourth quarter, there was some dislocation late in the fourth quarter, I would say.

I would say the CLO/corporate market started to leak wider in October and into November.

I don't really think our markets, and I consider our markets the CMBS and the non-agency RMBS securitization world, didn't really start to leak significantly wider until December.

And again, I think that was a dearth of participation, not specific to any kind of performance of underlying assets.

We were and have been prepared to participate in the non-QM flow business really all of 2018.

For much of 2018, the summer and the third quarter, we felt like spreads have gotten pretty significantly tight relative to other asset alternatives, and we're not that aggressive in buying or accumulating loans.

As the fourth quarter proceeded on, we felt like towards the end of the fourth quarter, most importantly in late November and December, spreads started to widen to the point where we felt like it made sense to now start stepping into the market.

And we have been more active in those types of markets today.

As it relates to getting financing on those particular asset classes, no question, in 2018, a lot more availability of financing came into the marketplace, which allowed us to improve pricing not only on our existing lines that will benefit going into 2019, but the line that we added late in the fourth quarter of 2018 will have significant improvement in pricing on a myriad of asset classes that we're currently financing.

So we're getting better repo rates as it relates to loans.

We're getting better repo rates as it relates to securities and we're getting longer terms as it relates to securities on many new asset classes that we weren't getting historically.

And looking at the expense side, just to make sure I wrote this down correctly, did you say $2.6 million of expenses in the fourth quarter related to the, I guess, the non-renewal of the management agreement?

$2.1 million.

It was a $2.6 million increase; $2.1 million was related to that.

The other $500,000 was primarily related to the increase in salaries as we continue to add staff.

And so I think if you look historically at the company's management fee plus compensation, I think as we go into 2019, the compensation line will look more like the combination of those 2 lines.

So I would anticipate with the addition of the new president in January, the compensation line is going to increase and go forward into this year, somewhere between $4.5 million and $4.85 million as we stand here today.

That was actually going to be my next question but just an add onto that.

From a headcount level, you still have significant headcount you'd like to add?

You feel like you're pretty close to fully staffed?

Where do you see this?

We're at 38 professionals.

If you think about internalizing the distressed residential loan, we've brought on 2 new servicers that we're going to oversee internally.

I would anticipate us adding -- I mean we're definitely complete in terms of senior people.

As it adds to additional staffing to support the senior people, there's probably another 2 to 5 people that we're going to add.

With the existing business that we have, as go and try to increase some of the business and multifamily, we'll probably add a couple staff there, but again, they'll be more junior in nature and not senior in nature.

And our next question comes from Eric Hagen with KBW.

The new repo facility, the $750 million, can you just give us the terms of that financing?

Typically, we wouldn't talk about those specific in terms of actual dollar costs, Eric.

But what I will say is the line allows us to put almost every type of residential loan that we would borrow, that we would invest in.

So it gives us a tremendous amount of flexibility to accumulate loans and be able to finance them very efficiently and very quickly.

I will say that the cost of this line is significantly less than the line that we were running in 2018.

And that's not so much a factor that they just have -- it's really more of a factor of what the marketplace has transitioned to.

We were getting improved pricing throughout '18 with our previous lender, but I think several new entrants into the marketplace the latter part of '18 has forced increase competition, which has benefited people like ourselves in terms of getting more advantageous rates, which not only includes lower cost of funding, but improved advanced rates also, which will help our ROEs.

Got it.

And how long is the line outstanding for?

When does it effectively roll over or mature?

It's 1 year.

It's a 1-year line that will renew annually.

The cost of -- there's a cost to do a 2-year line and we just, given the amount of availability out there in the marketplace, we didn't think at this point it was worth paying for.

Can you just give us a sense for your unencumbered assets?

What's the number there that we should be thinking about just generally?

It doesn't have to be specific.

We disclosed it in the face of the balance sheet.

Hold on one second.

We show that our unencumbered assets are -- it's about $300 million in securities and we have over $100 plus million of loans at least that are not on a line.

We have a securitization that's got a significant amount of collateral tied up into it that's due to probably -- we'll have to consider thinking about calling that deal in early 2019.

So that will release some collateral [to] finance.

So we have some availability to finance.

Great.

And then on the CMBS side, can you just give us the cumulative default rate that we should kind of think about with respect to those loans over time?

The ones that are currently in the portfolio, that is.

Yes, I mean, look, the way we run the portfolio, if you're talking about the first loss pieces of the Freddie K deal that we have $14 billion of exposure.

And I think we have 3 that are under watch right now over the last 7 or 6 years that we've been invested in this product.

I think we've suffered less than a couple hundred thousand dollars of outright losses.

So we don't really run a default rate on a portfolio.

We run loss scenarios on specific assets and those are assets that we are actively involved with working out if a workout is needed.

As it relates to our direct lending and our preferred, again, we're not really running a default rate scenario.

We really have not lost significant money on any of our assets.

We've gone through 2 workouts with no loss.

And really, we do that with -- our whole lending practice is focused around minimizing those losses.

I mean, look, if you -- they run a 100 CPY on multifamily as it relates to IOs in a particular securitization, I think that would -- any kind of default number that you would throw in a Freddie K program or a Fannie Mae program today would probably overstate losses historically.

So we really -- just to fall back to actual experience, and that's why we have a team of 7 people looking at all the assets and all the deals that we're involved with as well as all the direct lending.

And we are very involved with any property that starts to underperform.

And our next question comes from David Walrod with JonesTrading.

Just to kind of piggyback on that, in regards to -- your loan loss provision was about $2.5 million this quarter.

Is there anything there to flesh out?

You mean from the expense side?

Yes.

That number is part of our distressed credit accounting methodology where you go in and when you have turnover in a portfolio, it generates -- it assigns the change in cash flows and it assigns the change in cash flows into 3 categories -- interest income, gain on sale -- gain and loss on sale, and loan loss reserve.

That's not really specifically related to anything other than that accounting adjustment.

In June of 2017, we made the election to transition from a distressed credit accounting methodology to fair value.

So as that portfolio winds down, which is the portfolio that's primarily managed by our external manager, at the end of the year, there's about $300 million in loans in there.

So all the loans that we purchased will be under fair value.

I would anticipate that number getting lower as we exit those legacy-deferred credit.

We did not take any actual reserves for any of the portfolios, both multifamily or residential, during the quarter.

Okay.

Great.

And then can you talk about what you're seeing in the agency market and if you're looking to deploy any capital there?

The agency trade for us, I mean while you look at the numbers from an outright return on equity, it looks very favorable.

If you do a combination of cash and TBAs, the model would tell you that it would generate a low double digit between 12% and 14%.

What the problem with the model doesn't tell you is the volatility that ROE is difficult to manage.

And I think you can sort of appreciate that when you look at the volatility of book values in the fourth quarter.

I would say the majority of that volatility is centered around the agency strategy.

And so while it delivers a stable net margin, it does not deliver a stable book value, which we focus on a lot is preservation of book value.

So as long as we can continue to generate ROEs with our credit portfolio, we like where we sit today in the credit risk profile.

Look, if the curve steepens and we feel like the interest rate market is going to be more directional, we may change that viewpoint and add more agency securities.

But as we sit here today, the intention is to continue to focus on credit assets.

And our next question comes from Mark DeVries with Barclays.

I had a follow-up on your response to the last question.

How would you expect your credit assets to perform relative to agencies in a recession?

That's always the million-dollar question, right.

I think you've got to define what the recession scenario is.

I mean if it's 2008, clearly, you're going to have some pricing pressure on spreads.

If you look at the actual performance of the portfolio of Freddie Mac and Fannie Mae in 2008, it was outstanding.

But again, when we go into these investments, we're not really running a default rate.

We're underwriting every single asset and every single deal that we get involved with.

And so we're looking at exposure to deals.

There's no question there will be markets that come under pressure.

We look at where our risk point is.

And so the first loss, Freddie K, our attachment is somewhere around 68% to 69

Would we suffer in a 2008 crisis?

Yes, I think we would suffer from price widening for sure.

Outright losses I think would be -- I think there would possibly be some.

I don't think they would be significant but I think when we got into this credit strategy, it was always with the intention of not trying to buy the market and guess on default rates.

It was more of a specific asset review, which we think gives us better clarity and better risk profiles in a down market.

And then I believe you indicated you would expect as we go into 2019 to see increasing income from net margin.

Was hoping you could quantify that, give us a sense maybe of how much your kind of dividend coverage from spread income might improve over the year.

I know the frustration with many analysts is our dividend coverage with the spread income.

We try to offset that with stability of book value.

We were up $2 million or 12% from fourth quarter -- third quarter to fourth quarter.

The fourth quarter didn't show literally, of the $900 million we had in the fourth quarter, $7 million of the $100 plus million settled in the last half of December.

So I would expect a significant increase in net margin in the first quarter.

So I think by the time we get to the end of the year 2019, the contribution is probably going to be between 65% and 80% of net margin would be my guess as we sit here today.

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

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

Thank you, operator, and thank you, everyone, for being on the call.

We appreciate it and we appreciate your support to the company.

We look forward to speaking about our first quarter in May.

Thank you very much.

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.