New York Mortgage Trust Inc (NYMT) 2019 Q1 法說會逐字稿

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

Welcome to the New York Mortgage Trust First Quarter 2019 Results Conference Call.

(Operator Instructions) This conference is being recorded on Tuesday, May 7, 2019.

A press release with New York Mortgage Trust first quarter 2019 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 can be accessed in the Events and 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, from time to time in the company's filings with the Securities and Exchange Commission.

Now at this time, I would like to introduce your host, Steve Mumma, Chairman and Chief Executive Officer.

Please begin, sir.

Thank you, operator.

Good morning, everyone, and thank you for being on the call.

Jason Serrano, our President, will also be speaking this morning.

The company delivered a solid start for the year, posting GAAP basic earnings per share of $0.22, and comprehensive earnings per share of $0.29 for the first quarter.

Our book value per common share ended at $5.75, a 1.8% increase from the end of the previous quarter, resulting in a total economic return for the quarter of 5.3% or 21.2% on an annualized basis.

Company expanded both net interest income and net interest margin in the first quarter, generating 26.6 -- generating $26.2 million of net interest income, a single quarter record for the company at -- and a 20% increase over the prior quarter, and net interest margin of 240 basis points, an improvement of 10 basis points over the prior quarter.

The company completed 2 accretive common equity offerings during the first quarter, raising approximately $185 million, and increasing the company's common equity market capitalization to approximately $1.1 billion.

The company efficiently deployed these capital proceeds into credit assets, adding $433 million in the quarter, bringing our total investment portfolio to $3.8 billion.

Consistent with our investment objectives, we opportunistically sold 2 early acquisition multifamily first loss securities, neither of which was wholly owned by the company, resulting in a realized gain of $16.8 million, and a net gain to the company of $3.1 million.

As of March 31, 2019, we had over 88% of our capital invested in credit-related strategies, almost spread equally between our multifamily and residential loan credit strategies.

We have total invested assets of approximately $3.8 billion, and total capital, including common and preferred stock, of $1.4 billion, both up 45% from March 31, 2018.

Our callable debt-to-equity leverage ratio was 1.6x, and our total debt-to-equity leverage ratio was approximately 1.8x, and continue to be conservatively managed.

Company's earnings not only benefited from the spread tightening during the quarter, but we're also spurred by the impact for the full quarter of the company's $944 million fourth quarter credit investments, much of which was funded in December.

I would like now to introduce Jason Serrano, our newly appointed President, a person with an extensive successful career and more importantly, a great addition to our team.

Jason?

Thanks, Steve, and good morning.

After listening to Steve for many quarters, it's please to be -- I'm pleased to be on this side of the table today.

As I stated earlier in a press release, I'm truly excited and honored to be part of the New York Mortgage Trust family, and immediately look forward to building on the firm's great success, further developing the plot from here at NYMT in order to closely monitor opportunities across the residential credit spectrum, and identify outsized return to this mark was a priority with my hire, along with a number of folks recently brought onboard.

Today's credit market is extremely competitive against a broader economy that we believe is showing signs of slowing, Thus it's imperative to compete on different dimensions rather than simply providing the highest market price to buy assets.

Instead, we search for value in subsectors where we see limited competition due to a variety of factors.

We depend on our deep sourcing network developed over 2 decades to seek areas with high credit or operational complexity that limits market competition.

To execute this plan, we need large investments, notably in human capital, data ideation and technology of the company.

With a multi-dimensional approach, we can lower barrier to entry in certain niche markets while also seeking new or developing asset classes for additional return in order to help avoid stretching for yield and sacrifice downside protection.

With this plan, I'm also -- I am pleased to say that we began to internalize all third-party-managed residential loan holdings.

We expect this transition to be fully completed by the end of this second quarter, which will help to reduce the overall management cost.

Also in a quarter, which is typically a slower period for the residential credit markets, we invested in $433 million of assets, comprised of $172 million multifamily and $261 million single-family residential credit, adding to the $194 million purchase in this fourth quarter of 2018.

Additionally, we created healthy and diverse pipeline of new investments opportunities that we expect to fund over the second quarter of this year.

As I mentioned earlier, we expect the common to continue to slow down, however, with low interest rates, historically low rental and vacancy rates, housing and inventory levels at historical lows and not to mention, improving demand metrics, we believe selective investments in residential credit across multifamily and single-family provides an excellent opportunity to invest capital and build on record quarterly earnings results at least in this first quarter.

With that, I'll pass it back to you, Steve.

Thank you, thank you.

Jason will be available for questions at the end of the presentation.

So let's go through our earnings performance for the first quarter.

We have $38.2 million in GAAP net income and $51.3 million in comprehensive net income.

We generated net interest income of $26.2 million, an increase of 20% from the prior quarter, and a portfolio net margin of 240 basis points for the quarter, an increase of 10 basis points from the prior quarter.

Our average earning assets totaled $3.3 billion for the quarter, an increase of $571 million from the previous quarter and was the main driver for the 20% increase in net interest margin.

We would expect average earnings assets in the second quarter to increase by approximately 15%, further increasing our total net interest margin.

We had $1 billion in agency securities, with $158 million in equity allocated to the strategy.

This investment is not a core focus for the company, but does provide liquidity and rapid invested allocation needs.

We continue to have significant contributions to our net income away from our net interest margin.

We recognize other income of proxy $31 million for the quarter, including realized gains of $16.8 million on the sale of 2 first loss multifamily investments.

The realized gains were offset by a corresponding unrealized gain reversal included in our comprehensive income resulting in a net overall gain for the company of $3.1 million.

We had total net gains of $11 million from our distressed, and other residential loans held at fair value, which was comprised of $7.9 million of unrealized gains and $3.1 million of realized gains during the period.

We had unrealized loss of $14.6 million from our interest rate swaps accounted for as trading instruments.

This was as a result of the interest rate rally during the quarter.

We had unrealized gain of $9.4 million on a consolidated K-Series investments, driven primarily by tightening credit spreads and also in the second -- and secondary, the rallying interest rates.

We had a loss on extinguishment of debt of $2.9 million, which was related to the repayment of outstanding notes from our 2012 multifamily CMBS resecuritization.

By calling these notes, we eliminated debt -- that cost approximately 10% freed up approximately $127 million in collateral, of which we saw the portion for approximately $57 million that resulted in a net gain to the company of $3.1 million.

The other category and our other income totaled $7.7 million, and is mostly related to our multifamily businesses, including $3.7 million in unrealized gains on joint venture equity investments, a $2.8 million gain on redemption of a preferred equity investment and a required consolidated variable interest entity recognized a $1.6 million gain from the sale of a multifamily apartment controlled by us.

This gain is offset by expenses and a noncontrolling interest that after giving effect resulted in net gain to the company of only $41,000

For the quarter ended March 31, 2009 (sic) [2019] the company had $8.9 million in general and administrative expenses as compared to $9.6 million the previous quarter.

The decrease is primarily related to a decrease in management fees as the company is in the process of exiting the external management of certain of our distressed residential loans.

We would anticipate no more management fees after the second quarter.

In March 2019, we declared a $0.20 per share dividend on our common stock, our ninth quarter in a row at this level.

Over the course of the last 9 months, our residential multifamily teams collectively have acquired more than $1.5 billion in credit investments.

Moreover, we have raised more than $450 million in common equity over the past year, substantially all of which was deployed in a timely manner with minimal long-term drag on our operating performance.

We believe the company is well positioned to be a market leader in multifamily and residential credit investing.

With improved access to capital markets, a relatively conservative profile of approximately 2x leverage in our capital base and an investment team that continues to find and deliver value to our shareholders.

We appreciate your continued support.

Our 10-Q will be filed on or about May 10 of this week with the SEC, it will be available thereafter on our website.

Operator, now if you could please open up for questions.

Jason and I will be available to answer any questions investors may have.

(Operator Instructions) Our first question comes from Eric Hagen of KBW.

For the opening comments, what kind of -- can you just shed some light on the kinds of technology investments that you're making?

Sure.

So what's lacking in the mortgage market generally speaking is automations and analytics that can basically go through the entire spectrum of mortgage investment assets that are out there, including the entire residential mortgage market, outstanding loans of about $10 trillion dollars.

So what we have done and continue to do is take data, aggregate that data so we can sift through the market and reverse inquiry into the loan pools or bonds that we find fitting for our investment opportunities.

So it's more a form of using -- harnessing technology with having data to basically assess the market as a whole.

That's excellent.

Well, that's great.

And how should we think about the pace of loan sales going forward, either in the form of distressed residential or in the commercial credit segment, just assuming that credit spreads remain kind of at their fairly tight range right now?

Yes, I would say, the 2 securities that we sold in multifamily, Eric, were first loss securities.

They were one of the first 3 that we have purchased back in 2011.

So they had less time to go to maturity.

We sold it at a very aggressive -- we thought at a very aggressive yield.

We own less than 100% of both those, so we spend a lot of time in asset management that we just felt like we -- it made more sense for the party that owned the majority of those investments to own them in their entirety because we had a shared control agreement with them.

And so they -- I think by then combining it into their total investment, they create more liquidity for them, removed an asset that we spend an [indiscernible] amount of time on relative to the economic value that we -- that generated for us, so we thought it was time to exit those strategy.

So we're not openly looking to sell assets out of the multifamily portfolio.

They're either being prepaid away from us or opportunistically, if we get a reverse inquiry, as in a very aggressive yield level on a particular asset, we obviously will consider that.

As it relates to our loan business, we have about $1 billion of loans across distressed and newly originated.

I think in every quarter, we're going to have some amount of loans that we're going to be putting out for sale.

Primarily, a large portion of those loans will be distressed.

The strategy involves buying discounted loans that we're trying to asset-manage and create value.

And to capture that value, you want to monetize it by doing sales.

So you would expect -- I would expect to sell between $100 million and $150 million of loans a quarter as we go into the future.

At the same time, as we're selling loans, we're also trying to accumulate probably $250 million to $300 million of loans a quarter.

So that's the goal.

We may not always hit it every quarter, but that's clearly the goal.

And as we have complete control now of all the loans in our portfolio, the timing of the sales will be up to us, and I think that will be more predictable in terms of generating sales periodically through the quarters.

And I'll also add that sales could also include just organic recovery of the assets as well, whether it's a refinancing program through the portfolio or working through securitizations of the pool as well.

So it could be organically as well as selling to the broader market.

That's helpful color.

One more for me, if you don't mind.

What does the supply outlook look like for the RPL, NPL market this year?

What are current yields you're seeing in that market, I guess, in both kind of nodes of the market?

And how much leverage are you guys comfortable using, specifically, I guess, in the NPL space?

Right.

So first, I'd like to define what RPL -- the definition of RPL, I think market uses very different terminology for an RPL loan depending on who your really speaking to.

So what we focus on are loans that have recently had some kind of payment issues and are -- we believe can be corrected through better servicing and more affordable loans.

So in that case, we call that sub-performing loans where it's not truly a reperforming loan at this point in time, but a loan that we expect to be reperforming in near term.

So to that end, the broader market, we're expecting about $50 billion to $60 billion supply.

That would include NPLs and RPLs just on loans.

However, we don't -- we're focusing on as a subsector of that asset class where we can bring a borrower to a stated -- to a permit loan and look to either securitize or monetize over time.

So to that end, returns that we're seeing in this market, we believe can generate double-digit returns on the asset class based on a projection of being able to get -- take the borrower to a performing loan obligation and then -- and look to sell to where the liquidity in the market is, where it becomes a reperforming loan, where the loan is contracted current for 12 months.

So the returns in that market, again -- well, the returns, as I stated earlier, are double-digit levered returns, but the leverage we're looking to deploy is roughly anywhere from 75% to 85% advance rate on the loan, and then we have optionality to securitize down the line if we see fit.

And Eric, from a supply standpoint, just to give you a sense.

I mean when including banks, agencies and other sellers in the first quarter, I mean, we saw well over $10 billion of sales transactions out in the marketplace.

So if you think about us trying to accumulate $250 million to $350 million loans a quarter, we try to be very selective in the loans that we're looking at to acquire.

And to -- what -- to further Jason's point, we don't really focus on NPL loans.

We're looking at loans that generate cash flows and we're looking at ways to monetize those cash flows over a period of time on a levered basis that results in a double-digit total rate of return.

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

I guess, first to start off with Steve, it was an active quarter raising capital.

You did 2 deals, January and February, and I'm not sure if you're active with your ATM during the quarter, haven't had a chance to look in the [Q] yet.

But can you maybe talk about how we should think about the quarter?

I mean, the financial results looks -- look very good versus my estimates.

How fully deployed were you during the quarter?

Were there pockets when you were underutilizing your capital base just given the multiple capital raises?

Can you talk about the efficiency of your capital deployment during the first quarter?

Yes, sure.

So I mean, I think, the best indication and the easiest indication is if you look at where we ended at the end of the period in total assets -- total portfolio assets of $3.8 billion.

And then if you look at our average earnings assets for the quarter of $3.2 billion, that sort of gives you an indication that, that capital raised at the end of February, we were deploying it into capital, mostly funding in March.

So the benefit of that capital deployment was partially felt in the first quarter, but mostly, you're going to see the benefit of that in the second quarter.

And that's why I said that we would expect at a minimum, an increase of about 15% on net margin in terms of dollars just for the pure fact of getting the full benefit of being fully invested for that quarter.

So anytime we raise capital, there is a delay.

I mean we try to have a pretty aggressive pipeline of investing.

And so we're raising capital, I would say, partially into already pre-allocated commitments to one extent.

And so we if raise $100 million, we'd probably have at least 50% that's spoken for in terms of commitments that we can buy assets on and then with a good idea of what we're going to put the rest of it in a timely basis.

Great.

That's helpful color.

Thinking about the agency assets, I know you mentioned, you used it for liquidity.

I know it's only about, I believe, around 12% of the firm's capital allocated to the Agency MBS, but certainly, returns on that asset class aren't as attractive as they were even 6 months ago.

And the curve's flatten there.

We're seeing that come through in your portfolio.

Net interest margin on the Agency RMBS.

Will you operate that portfolio with -- any differently now in the current flatter curve environment.

How much risk are you taking there?

I assume not much given the narrow spread.

I assume you've got a lot of hedges in place.

But can you talk a little bit more about those assets and that part of the portfolio in this environment when returns are pretty low for that asset class?

Yes, and look, the one thing when we go to disclose our various investments, it's somewhat misleading because -- misleading in a sense that when we look at our portfolio, we think about it in total.

While we look at each silo as an investment, we're looking at the total rate of return of the portfolio.

And so when you look at these silos, you come to the conclusion that we're only leveraging the agency around 6x, and so that return looks very low.

And so the way out of it is -- the way out of it is we look across the entire company.

So having that portfolio lower levered least collateral available to meet margin calls, that may otherwise come from other asset categories.

And so holistically, I'm really focusing on the total column of what the company is doing.

And so let's focus on individual silos but more focus on the total rate return and the contribution each silo does have.

But the agency portfolio looks like it's underdelivering primarily just because we've lower levered that return because we're putting leverage in other places where we want to get the less liquid stuff out, a longer-term financing arrangement, and gives us more flexibility to agency portfolio.

So we don't really look -- it is a drag when you look at the total return of the portfolio, but we also think it's a necessary component when you're running certain types of investments in our multifamily and residential.

Great.

And then I guess it's a lot less drag of having a lot of cash too, so...

Let me -- yes, that's right.

Last question, Steve, operating expenses.

Have things normalized now?

How do we think about G&A from a full quarter run rate?

It seems like you've got the head count where you want it and internalization largely completed.

So any thoughts around how G&A moves from here?

I believe it's around $12.5 million for the first quarter.

Yes, and so when you look at the G&A -- well, actually G&A is not $12.5 million, that's including all the other expenses.

But if I think about the G&A, we're talking about $8.9 million of what I consider really G&A.

So you would anticipate the management fees to decrease in the second quarter and go away by the third quarter.

I think the salary benefits is probably about the right run rate.

We've added -- we have a total of 45 employees in the company today, almost double from a year ago.

That goes to the point of Jason's commented about the commitment we've made with technology, the increase in investment professionals we've added by internalizing the RPL business.

We've expanded -- or going to expand our accounting and finance group to take -- to help through load on the increased business activities.

But I would expect from a -- at least from a percentage of capital, it will be decreasing over time as we try to increase our capital base opportunistically.

And I don't see significant increases in expenses from -- we won't have the same kind of employee growth this year as we had the last 12 months, for sure.

So I would expect this run rate minus the [$7.23 million], so you're talking somewhere around $8 million a quarter and -- what I would consider G&A.

The other expenses, we have the $3 million related to loans, we're in a loan business, and it costs money to be in that business, and that's just part of the total return of that business.

It is reported as an expense, but we look at that more as a business line expense.

And then the other item in the expense category, the $482,000 related to our consolidated variable entities, that's because of the control that we took over 1 multifamily property.

I think that property will be gone in the second quarter, so that will drop off of there.

They're really not expenses of the company, and we have a very little exposure to those expenses.

It's just something from an accounting requirement, where we have to put them on the face of the financials.

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

Steve.

Jason, in your comments earlier, you indicated that the economy was slowing.

How does that sort of influence the strategy for the company?

Certainly, when we look at the credit markets, we're looking for investments, we're looking for assets that provide downside protection in a market slowdown.

So one of the ways of doing that is protecting yourself on the total type of leverage you're taking on the asset.

So there's financial leverage and there's operational leverage, so limiting both sides is helpful with that kind of expectation.

So in that case, looking at loans that have lower LTVs or entering into financing agents, multifamily with lower LTVs as well as looking to take the financial leverage to lower levels than market peers as well.

So when you look across our book, our leverage that we have outstanding on our various positions is lower than I think market overall and our peers, and that's one of the functions of -- we expected -- one of the results expecting slowdowns and seeing it in some of the numbers.

But looking at -- taking both those into consideration is where you'll really -- we benefited in a market slowdown.

And then follow-up question on leverage for NYMT.

In last quarter, I recall Steve saying that you expect a leverage to increase to about 2.5 to 3x on an adjusted debt-to-equity basis, as I recall, is that still holding or is there an update to that?

That's right.

I mean look our target is 2.5, 3x.

We're sitting at 2x right now, Chris.

We've added capital -- we've added equity capital.

So as we add that equity capital, it just makes it that much harder to increase that leverage ratio, and so we'll continue opportunistically to add investments, so we can run -- we can increase our portfolio from 3.6 to 4.5 and still be with -- well within our tolerance of leverage ratios and well within safety realms that we would operate the company in.

And Steve, your stock price on a price-to-book basis is sort of roughly seems about 7%, 8% above.

Where do we look in terms of incremental equity raises going forward?

Any sort of changes in strategy?

Or are you guys still going to be opportunistic as you were in past quarters?

No.

Look, I think we look at what's available in the marketplace from an investment.

What do we think -- what kind of returns we can get on those investments?

And if those line up properly and our stock is trading at a point where it makes sense to do an accretive raise, that's something we will consider and always consider.

(Operator Instructions) Our next question comes from Matt Howlett of Nomura.

Steve and Jason.

Just a little more -- on the $432 million, I know you bought some RPLs or sub-performing loans.

Can you maybe just talk about a little bit more color on what each bucket consisted of?

And what's the tradeoff right now in terms of returns.

I mean it sounds like the multifamily is more securities and residential loans.

And on the residential side, how much of it is now part of the second lien program, fix and flip?

And maybe talk a little other programs like that or new asset classes that you're moving into?

Well, I'll start with the latter part of your question.

We're looking opportunistically across entire credit markets.

There is not an area that we say we have to invest in.

If we look at a pool of assets, whether it's in second lien fix and flip or non-QM, we're -- there is no requirement to invest in.

We don't have to fulfill a mandate of adding assets through our book for an operational business model that we need to continue running.

So we are moving in and out of these markets where we see fit and where we see the opportunity, so there's no desire to go on one sector versus another.

We do and have, through our -- again, as I said earlier, 20 years experience in sourcing.

We have access to just about every part of this market, and we do see flows across the spectrum.

But there's no one area that we're kind of overallocating because we see a kind of beta return opportunity there.

Yes, so that basically is what we're kind of looking at across the Board.

When you look at $261 million and look in our current run rate of assets, which we purchased in the first quarter, we did very little on second lien production, so that market is becoming harder where rates have come down and [key locks] and more aggressive first lien offerings have been available from non-QM lenders to the market.

And so that was primarily portfolios purchased in the sub-performing loan space as well as new origination that failed some kind of Fannie-Freddie criteria that we bought at discounts.

Yes.

And further, if you think about the returns on a 2 different asset classes, I mean, the return rules is the same when we think about it.

You just get to it differently, right?

In multifamily, you're really making a credit investment on newly originated loans, where in a residential, we may be making investments on something that was newly originated.

But many times, it's something that has either some kind of credit issue with it.

And to the extent that it has that, then we're looking at a transaction where we have to do some form of asset manage to improve it.

In the residential space, we're probably adding 6, 7x leverage versus [indiscernible] investment whereas in the multifamily space, we're maybe adding 2 to 3x leverage on a certain portion of those assets.

In some cases, there's no leverage.

Right.

And then the bigger-picture question, just -- this is sort of a new era for New York Mortgage Trust to me.

You fully internalize that in the second quarter, strategically, how do we think about the company going forward?

You make investments in more operating-style companies, we continue to build a team.

Just bigger picture, is there a next stage in the evolution of the company?

Yes.

Look, I think we're 45 professional strong today.

We built -- we've doubled the capacity from almost capital, assets and human resources.

I think we will always look at opportunistically at new businesses models.

I don't think we would focus on an origination platform to purchase just given the history of the company.

However, there is other businesses that we would consider and are looking at, and they may not be something that we're currently aligned with.

So I think it's prudent on management to always look at every possible option from investing.

And I think historically where New York Mortgage Trust has done very well is invest in areas where the people aren't looking.

And so we will continue to do that.

And now we have more professionals available to the company to allow us to look under more stones.

And I'll also add that given the origination bonds have come down despite the lower rates in today's market, there's no shortage of opportunities for us to buy or look into originators or even service providers.

When you're an asset aggregator you have the driver's seat for a lot of these institutions or companies that are -- that need your volume to survive.

So to that end -- it would not be prudent at this point to walk into one of those entities given that we actually are able to acquire and attract assets across the entire market.

So when you're in a -- when you own an originator or service provider, you pretty much now become pigeonholed into that particular entity.

So we like the fact that we can go and source assets from the markets [whole] because the market doesn't perceive us as a competitor in their space.

Thank you.

And at this time, there are no further questions.

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

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

We look forward to speaking about our second quarter earnings in August.

Have a great day.

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

You may now disconnect.

Everyone, have a wonderful day.