New York Mortgage Trust Inc (NYMT) 2019 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 2019 Results Conference Call.

(Operator Instructions) This conference is being recorded on Tuesday, February 25, 2020.

A press release and supplemental financial presentation with New York Mortgage Trust's fourth quarter and full year 2019 results was released yesterday.

Both the press release and supplemental financial presentation are available on the company's website at www.nymtrust.com.

Additionally, we are hosting a live webcast of today's call, which you can access in the Events & Presentations section of the company's website.

At this time, management would like me to inform you that certain statements made during the conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although New York Mortgage Trust believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained.

Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release and from time to time in the company's filings with the Securities and Exchange Commission.

Now at this time, I would like to introduce Steve Mumma, Chairman and CEO.

Steve, please go ahead.

Thank you, operator.

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

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

For the first time, we'll be using a supplemental financial presentation to assist in delivering our quarterly and full year results.

We hope this will better enhance your understanding of our financial results and will also give you better clarity into our investment strategies as well as our overall market perception.

Last night, we issued a press release, which include quarter and full year financial summary information as well as our consolidated balance sheet and statements of operations.

In addition, we posted on our website our supplemental financial presentation information that Jason and I will be using during this presentation.

I will be speaking to the company's overview and financial summary section, while Jason will be speaking to the market strategy and 2020 development sections.

2019 was a monumental year for the company, nearly doubling in size in both our market capitalization and investment portfolio.

Our steady and disciplined execution of our credit-focused investment strategy resulted in solid financial results, not only for this quarter but the entire year.

For the fourth quarter, the company generated $0.20 per share in GAAP earnings and $0.21 per share in comprehensive earnings.

For the full year, the company earned $0.65 per share in GAAP earnings and $0.87 per share in comprehensive earnings.

All of this in the backdrop of completing 6 common equity capital raises during the year.

We delivered a 3.6% economic return for the quarter and a 16.5% economic return for the year.

And over the last 3 years, we've averaged 12% economic return, meeting our primary goal to deliver stable economic return to our shareholders.

Looking to the overview section, beginning on Slide 6. We had $5.4 billion in investment portfolio and a $2.3 billion market capitalization as of December 31, 2019.

80% of our investment portfolio is focused on credit strategies, while 20% was focused on an agency strategy.

We had 55 professionals employed across 3 offices.

And today, we are approaching 60 professionals, all focused on our core investment strategies.

We continue to build our technology through hiring and infrastructure upgrades, which we believe will continue to give us competitive advantage in sourcing our investments.

Our primary focus is 2 investment theses today: single-family credit, which represents 49% of our investment portfolio; and multifamily credit, which represents 30% of our investment portfolio as of year-end.

We believe our credit investments allow for both interest income and capital gain opportunities from improved general and specific credit market conditions, and that relies solely on net margin, which typically involves increased direct leverage to generate returns.

Our credit strategies rely less on outright leverage, where our total debt-to-leverage ratio was 1.5x at year-end, well within our stated risk tolerance of 2 to 2.5x.

We believe our credit strategies are the key reason why we've been able to deliver consistent, attractive economic returns while maintaining a stable book value and industry low leverage.

Looking to our resources and capabilities.

Our strengths lie in finding opportunities in our markets, more specifically, the $11 trillion single-family residential market and the $3 trillion multifamily market.

Utilizing our experienced investment teams with deep-rooted market experience, coupled with our technology-focused data analyzing, we believe that we can continue to identify investments that will meet our expected returns.

Now let's go over more detail of our financial results, which begin on Slide 11.

In addition, included in Slides 26 through 32 is our quarterly comparative financial information section that I will also use in aiding on this discussion.

For the fourth quarter, the company had basic and diluted GAAP earnings per share of $0.20 and comprehensive earnings per share of $0.21.

We declared a fourth quarter dividend of $0.20, our 12th in a row.

Our investment portfolio totaled 5.5 -- $5.4 billion with an average fourth quarter net margin of 290 basis points or 2.9%, an increase of 50 basis points from the previous period.

Large part of the improvement in our net margin for the quarter was attributable to the reduction in our debt cost of 42 basis points, where we experienced improved pricing from our debt providers as well as a 25 basis point reduction in Fed funds, which occurred in October 2019.

The company ended the quarter with a total debt leverage of 1.5x as we continued to focus on strategies of credit and not external leverage.

Looking to Slide 12.

You can see that we raised over $1 billion in 2019 through common preferred and ATM activities.

We purchased $1 billion and $2.4 billion of new investments for the fourth quarter and full year, respectively.

Included in the yearly purchases was $1.6 billion in single-family credit investments and $482 million in multifamily credit investments.

Jason will speak later about our 2020 investment portfolio -- I'm sorry, 2020 investment pipeline as it continues to build.

We had fourth quarter total GAAP net income to common stockholders of $55.3 million for the quarter and $144.8 million for the year.

We had comprehensive earnings for the fourth quarter and full year of $58.5 million and $192.1 million, respectively.

During the 12 months ended December 31, 2019, the company completed 6 common equity raises, raising a total of over $800 million.

As a result of these raises, the company created $29 million in accretive capital, adding to our economic return and helping offset any potential earnings drag from the timing of the deployment of our new capital.

As depicted on Slide 13, our comprehensive earnings and accretive capital exceeded the dividends paid in dollars by over $30 million, reinforcing the importance of accretive capital raising.

Looking to Slide 13.

For the quarter ended December 31, 2019, the company had $44 million in net interest income, a $12 million increase from the previous quarter or a 38% increase.

Our net margin for the fourth quarter of 2019 was up over 100% when compared to the fourth quarter of 2018.

Both quarter-over-quarter and year-over-year increases were largely due to increased average earning balances from the deployment of our capital raises.

Net margins improved both quarter-over-quarter and year-over-year as credit strategies then resulted in higher-yielding assets.

In addition, our debt costs decreased over time during the year due to both Fed activity of lowering the base rates as well as improved borrowing costs on our credit assets from our direct lenders.

Noninterest income continues to be a significant contributor to the company's results, adding $33.6 million for the quarter and $99.4 million for the full year 2019.

As we have mentioned many times, this is a key component of the success of our firm, generating gains in fees from credit investing, along with net margins, and not solely relying on direct leverage and interest net margin.

Our G&A expenses totaled $9.3 million for the quarter, an increase of $1 million from the previous quarter, largely due to headcount additions and the related expenses and increased investments in information technology.

The company completed its internalization in May of 2019, ending management fee expense for the firm.

In 2019, the management fee expenses totaled $1.2 million for the year, down from $5.4 million the previous year.

Total G&A for the fourth quarter of 2019 was essentially flat to the fourth quarter of 2018 but with an investment portfolio of almost twice the size, validating our decision to internalize and improving our expense ratio leverage as we grow the company.

Compensation expense was approximately $6 million for the fourth quarter, and we would expect that number to be between $6 million and $6.5 million per quarter as we go forward into 2020.

Our G&A expense for the quarter was $3.2 million, and will probably run around $3 million to $3.5 million per quarter, bringing total G&A to around $9 million to $10 million per quarter on a go-forward basis.

Slide 14 illustrates the successful execution of our investment strategy, where outperformance, in this case, by over 100% over the last 9 years versus the Bloomberg Mortgage REIT Index, ultimately leads to better company valuations or premium to book value, which allows the company to issue accretive capital, giving the company more investment opportunities, better cost of debt and capital and better expense leverage, all resulting in consistent dividend and stable book value to our shareholders.

Now I'd like to hand over the presentation to Jason.

He will continue to speak about our investment strategy.

Good morning.

Thanks, Steve.

I'm going to start by going through some highlights and broader market conditions on Page 16.

The U.S. economy expanded at 2.3% in 2019, supporting the lowest unemployment print in 50 years at 3.5%, but after a bit of volatility in 10-year, ended the year markedly lower at 1.92%, which puts pressure on mortgage rates, which we saw a 75 basis points reduction in the fixed rate coupon.

Now I'd be remiss if I didn't point out that the very recent risk-off mentality that has emerged due to the potential impact of coronavirus has pushed the 10-year below 1.4% as of last night, which should test 30-year fixed rate mortgage coupons to all-time lows of approximately 3.4%, which we briefly experienced in 2012 again and in the summer of 2016.

Often overlooked data in the single-family housing market is the U.S. homeowners' mortgage debt service as a percent of income.

It's at its lowest point since the stat was tracked by the Fed in early 1980s.

This is a solid fundamental indicator for the strength of U.S. housing.

In multifamily, where construction has been a bit more robust, occupancy rates for stabilized cash-flowing properties was at 95% in the latest quarter, which is equal to long-term equilibrium trends.

With this fact and other positive key leading indicators, we expect multifamily credit to outperform, especially in secondary and tertiary markets across the South East and South U.S.

Now turning to Page 17, starting with strategy updates.

As highlighted earlier, New York Mortgage Trust, its core operating model centers around efficiency and flexibility.

The company adopts a total return approach and targets investments that will add additional value to our existing portfolio.

By broadening our source of income through recurring gains, the company will continue to drive earnings while reducing expenses levels on a relative basis.

Therefore, the company will continue to focus on new niche subsectors to drive total returns and mitigate against potential volatility associated with higher leverage.

On Page 18, the slide here delineates our strategies.

As stated, we have 2 markets that we provide -- that provides a nice balance to diversify between single-family and multifamily.

In both asset classes, we follow a similar investment premise and utilize a deep fundamental approach to uncover absolute value in loan markets.

We then compare the insights to exploit niche pricing in securitization markets where similar assets are pledged and support issued notes.

Underwriting distressed performing loans and residential credit allows us to reverse engineer securitization markets for better relative value and supports thoughts of convexity risk in the single-family agency markets.

Likewise, underwriting asset management credit related to preferred and mezz loan in multifamily origination provides deep insight to that market and loan securitization activities issued by the GSEs.

Additionally and as identified relative value in the multifamily guaranteed bonds, which offer better risk return characteristics than agency RMBS, in our view.

Thus, our approach to capturing value is to quickly identify opportunities between loan securitizations and between single-family and multifamily.

Turning to Page 19.

This describes our focus in the single-family credit space, where we have 50% -- close to 50% of our investment portfolio allocated.

Overall, we see double-digit returns within the discount assets and resi loans and compelling relative value return plays in single-family securitization markets.

Now starting with distressed loans.

We continue to build on success of converting NPL or sub-performing loans into performing loans.

With $423 million invested in 2019 and $197 million coming from the fourth quarter, including a $1.3 billion portfolio purchase with stable term financing that is actually included in the securities line item herein, we continue to find attractive opportunities in this space.

More on this point in just a minute.

In performing loans, the focus is primarily in scratch and dent and GSE kick-out strategies where originators mistakenly create a loan origination defect, which is rejected by the GSEs.

We serve as a price discount liquidity provider to originators for loans with process-oriented errors.

As originators ramped up refinances due to lower rates, more defects have the opportunity to be created, which is our opportunity.

Lastly, given credit underwriting capability and distress in performing loans, we can quickly move and identify value and seek mispricings across the single-family securitization capital structures.

Here, we rarely see efficient pricing on whole loan portfolios and securitization on a relative basis.

In this market, the sum of the parts rarely equals the whole.

Turning over to Page 20.

I just want to give you a little bit deeper dive in what we're doing in the single-family credit space, particularly related to distressed loans.

This drives a bit nuance for us where, as a background, millions of loans were evaluated for a modification, were not properly restructured after the financial crisis.

Banks continue to divest these noncore assets where capability to manage is significantly diminished.

With over a decade of experience analyzing modified loan re-default behavior and implementation of corrective loan servicing strategies, we target loans that are currently in a gray area of repayment with solid equity position supporting the loan.

Consistent borrower repayment leads to securitization options and decreases financing costs or bulk sale opportunities that monetize unrealized gains is also available to us.

We target loans with relative high LTV, high value, which provide downside protection, fixed cost to service loans.

We also target low leverage.

So as you can see in this table on the right, our average LTV is 76%.

That downside protection helps us upon a loan default.

Interest incentives to refinance, which tends to shorten duration via prepayment, helps when you buy loans that have a 100 basis points wider coupon than current prevailing mortgages such as 4.76%, which is our average coupon.

And borrowers' credit scores that are currently at 584 on average in our portfolio have room to improve with consistent mortgage payments.

In 9 months, we were able to quintuple the loans paying 6 months or more, by contributing -- which contributed to a 4% gain -- price gain on our holdings.

This gain, coupled with interest income, provides for an attractive total return ROA, which we intend to build on.

Turning over to Page 21 and switching over to the multifamily space, where we allocated 30% of total investments.

The securities here leads the investment focus with 1 point -- with over $1 billion market value as of 12/31, of which $824 million represents equity interest in Freddie Mac K-Series multifamily program.

I'll talk more about that in a minute.

We are also focused providing direct preferred or mezz loans to similar properties within these deals.

At $286 million of carrying value that has a coupon over 11%, we have sourced very attractive assets for the company after considering origination fees received.

We find great risk return dynamics down in credit located in the South/South East part of the United States, where rental unit demand is elevated due to job growth, affordability and lower taxes.

On Page 22, I want to give you a deeper dive on what we mean by K-Series multifamily securitizations.

It starts off with the deals that are basically issued by Freddie Mac, who guarantee the senior tranche of the securitizations.

Since the program has been launched, less than 1 basis point of total program losses on loans have been incurred through 12/31/2019.

The performance has been remarkably stable, and this is due to the fact that you are looking at loans with 70.5% LTV located in markets that have strong rental demand growth.

The investments that we focus in this space is in the Class D or the first loss tranche, which is typically 7.5% of the deal.

Here, we actually have control rights that exist with us as holder of those notes.

And the company is able to inspect properties, review management budgets and transfer service and appoint new servicing.

Now we're differentiated in the strategy in that we have strong asset management capability with over 20 years of experience.

And this -- over the last 5 years, we've actually evaluated 1,200 properties and have conducted 650 on-site inspections.

Data technology helps us mine proprietary data analytics for valuation.

And there are some barriers to entry in this market.

We have to be qualified by Freddie Mac to participate in the equity program.

Our competitive advantage here is that we were an early mover in the space and identified it as an opportunity early in life cycle of these deals.

Now looking over to the right and the capital structure, again, holding the Class D note.

This is a very excellent opportunity to generate double-digit returns that's well credit enhanced against the lower LTV assets.

Also, with the capability to protect our investment through our control rights, this helps mitigate downside risk.

Flipping the presentation over to Page 23 on the agency space.

Now the discussion here on agencies markets includes both Agency RMBS and CMBS.

The graph at the bottom helps show the exposure which was halved from 40% to 20% over the last 2 years, and we have found better return dynamics in the Agency CMBS markets.

The focus of new incremental allocations in this space benefits us from steering away from negative convexity risk that is present in the Agency RMBS market.

This is an issue that has definitely hurt valuations in the Agency RMBS space, which, with lower rates actually benefits us in the Agency CMBS space with little ability of prepayment activity on the underlying portfolio where debt is generally defeased.

With Agency CMBS, we're able to [immunize] negative convexity risk, which continues to impair the Agency RMBS market.

Now turning over to 2020, starting on Page 25.

We have been active in 2020 with 2 accretive raises, bringing the company $512 million of new capital, which generated $20 million accretive capital.

Raises were opportunistic in that we sourced a significant pipeline opportunity so far in Q1 2020, with new investments slated in K-Series equity, multifamily direct lending and residential loans, which are seeing high inflows for the company.

We're also expected to look more carefully at MSRs as the better first entry points are developing in the market given lower rates.

Construction lending to middle-market apartments, where we see total delivery costs for new construction below secondary market value is the same in place property, looks compelling.

Lastly, we are expected to continue to benefit from lower financing costs that we now have in place, which is expected to further reduce -- are expected to further reduce our costs with a new home loan facility that we're planning to implement and roll out in the first quarter as well as a planned securitization to access more accretive financing within our distressed loan book.

In 2020, the company is well positioned to continue its mission of delivering exceptional shareholder value by delivering consistent dividend payments and maintaining stable book value.

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

Thanks, Jason.

Operator, you can open it up for questions now if you'd like.

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

Congrats on a really solid year.

Just a few questions on the Series K segment.

Just how many loans make up that segment now?

And how much time is left on the loans until they mature?

And just one more on that, just what's the weighted average coupon paid by the borrower on those loans?

Yes.

I think the typical deal is between 50 and 75 loans, Eric, between $1 billion to $1.5 billion in total size.

The program that we participate in generally is a 10-year program.

We have a couple of 15-year programs.

And those aren't refinanceable.

So they are 10-year pieces of paper.

And so they're going to scale down from 10-year, and so we've been buying them since 2012.

So we had one that just matured off in January of this year.

The next expected maturity is not until next year, and then they sort of ladder out through the next 10 years.

The coupons right now, I think the program is in the low 3s for 10-year fixed rate paper.

So -- and they can get up to an 80% LTV on a property, so it's very advantageous for the property owners.

The FHFA has come out and given them a $100 billion pipeline go forward over the next 5 quarters.

The first of those 5 quarters was the fourth quarter of '19.

And through this year, they have a run rate of a total of $100 billion over 5 quarters, so $20 billion a quarter.

So there's a lot of opportunity there.

As Jason said, we're slated to take down a couple of those in the first quarter or in the first 4 months of the year.

So we continue to think that it's a very attractive investment for the company.

Got it.

Yes.

Your detail on when the maturities kind of ladder out was helpful.

And then on the distressed side, when you guys are bringing loans current, what kinds of modifications are you offering in order to bring them current?

Yes.

So the loans that we're looking at are loans that generally were originated prior to the financial crisis that have been sitting on banks' balance sheets for quite some time and gone through -- made a few different kind of modification programs related to the government modification programs.

So when we look at these loans with low LTVs, borrower is definitely aligned with our interest and continue making payments supporting the loan.

Some modifications that we're looking at here are typically looking at deferments of past due payments of a couple of months.

That could be in the form of capitalizing the coupon so the borrower doesn't have to come out of pocket.

Generally, what we see is a borrower misses a payment, misses the second payment and can't make up 3 payments to come current.

So they're looking for relief of simply being able to just make one payment and provide the loan current.

So the deferment through a capitalization is typically the route we would take in those cases, and it's -- we can do that given the LTV that's supporting the loan.

Got it.

I know it's just 1 day's worth of market activity, but I have to ask since you probably received the take from your dealers on yesterday's activity at this point.

But was there any widening in credit spreads yesterday?

And can you just kind of remind us what a widening in spreads would mean for New York Mortgage Trust?

Yes.

Look, I mean, if you -- that market was furious yesterday, to say the least.

I mean we're getting at all-time lows in the 10-year treasury.

You have the [SP] conference going on right now.

There's a huge amount of Wall Street people and buy-side people out at the conference.

We actually didn't see a tremendous amount of trading activity.

I think if somebody was going to do a new issue yesterday, clearly, they pulled it.

So we don't know where spreads -- how far they've changed to date.

One of the reasons why we focus on Agency CMBS and not Agency RMBS is that we were concerned and are concerned that rates could go lower than higher anyway.

And so, clearly, that's where we're headed.

So I don't know yet.

I mean, look, we're in a credit strategy.

If credit spreads widen, that's currently going to -- would hurt the valuation of our securities in a vacuum.

But if spreads -- 10-year treasury goes down 30 basis points and credit spreads widen 30, we're flat.

So we don't see it rolling into the actual credit performance, and that's really what we base our investment decision on.

And the mark-to-market is we've had a tremendous amount of advantage in that because rates have rallied and spreads have tightened over the last, generally, 3 years.

So we are prepared for that to change, and we think we'll benefit from that over time.

I'll also add that to the extent that borrowers -- that rates do stay at this level for some meaningful amount of time, we wouldn't expect to see a pickup prepayment activity in the market, and that's obviously starting to happen.

We're very focused on trying to avail ourselves the opportunities where prepayment activity actually supports a higher valuation.

So the fact that we buy discounted assets across the board in the single-family space with borrowers that are continually paying would create a faster accretion to par and shorten the duration of the asset, which is helpful with any kind of recession that may be looming.

And also, in the securitization asset classes, prepayment activity will also shorten the bond durations, which will help us delever out of those transactions sooner than later.

So we're cognizant of lower rate environments and have been basically putting assets to work in a space that could take advantage of that over time.

Our next question comes from Stephen Laws with Raymond James.

First off, Steve and Jason, thanks for the supplement.

I think that was very helpful to have during the prepared remarks, and I liked the information there.

So thank you for providing that.

Steve, you've grown a lot year-to-date, $500 million in capital raised.

Can you talk about -- I know you touched on the investment pipeline.

I think you mentioned some K-Series deals you expect to do in the next few months.

Any update on how much of that $500 million has been deployed?

Or how we should think about first half earnings given the additional $83 million of shares and the time it may take to deploy the new capital?

Can you give us some color on the investment pipeline that's closed year-to-date?

Yes.

Look, I mean, when we go out and raise capital, there's 2 reasons why we do it.

One, and most importantly, we have uses for the capital.

And two, opportunistically, we want to make sure we take advantage of the marketplace.

And so the second capital raise really falls into that category, where we saw a very strong week of issuance from one of our competitors, both in common and preferred.

We felt like there was significant demand for our stocks, which we did our largest raise at the tightest spread in February that we've ever done in the company's history.

And so we saw a building pipeline and feel confident that we can get this stuff invested over the next 3 to 4 months.

And so we always anticipate, and that's why we talk about accretive capital, that there's going to be a potential drag on the current quarter's earnings.

We've been fortunate in 2019 that the market activity and the assets that we purchased delivered tremendous earnings for the company.

And so you didn't really feel any of that drag.

Jason mentioned, in those 2 capital raises, we had $20 million of accretive capital already that will help support the book value if there is any earnings drag.

So in terms of exactly how the earnings are going to fall out right now, especially with the move that happened yesterday and continues this morning possibly, it's unclear because there is a large part of our portfolio that's mark-to-market, that's going to drive a lot of that swing, Stephen.

But I think fundamentally, we would not be raising capital if we didn't expect to get that stuff invested within 2 to 3 months as a general rule.

Great.

That's helpful.

That's helpful.

And I know in the past, you've commented that you don't raise capital unless you expect north of 12% ROEs on the new investments.

Is that still consistent with where we should expect money to go to work off these recent raises?

No, look, our target is 12%.

That's what we're trying to target.

And so I think as we get into a lot of these credit assets that Jason talked about is we want something that not only gives us an opportunity to earn that margin but gives us an opportunity to have capital gains, which will get us to 12%.

Right.

Switching sides to the financing.

Saw the significant benefit there, the margin at 290.

I guess, first off, is that sustainable versus kind of the historical range that's been mentioned, like 200 to 260?

And on the financing side, you've talked about it in the past as well about potentially taking advantage of the low forward rates to add some duration there.

I know you mentioned the securitization, which would do exactly that.

How big of an opportunity is that?

And how much incremental financing costs are associated with that relative to the short-term financing costs?

Yes.

So we have the capability of moving to the securitization market with the current portfolio that we have.

And we have been waiting and trying to time the market correctly with respect to rates in the market.

Now we're buyers of both loans and securities.

We buy the securities of other issuers with same -- similar assets.

And the reason why we've been a buyer of those assets, because we expected spread -- credit spreads to continue tightening, which they have.

And so, therefore, with that in mind in reviewing those portfolios, we are now seeing a near-term opportunity in a particular segment of distressed loan sector to actually conduct securitization and take advantage of those tighter spreads.

Typically, your cost savings -- your costs are -- given where we are today before the last rate move yesterday, we're about the same.

You can pick up a little bit more leverage in the actual securitization market than you can in repo.

And we have not needed go to that point given we're comfortable with our current leverage, lower leverage that's producing our double-digit returns.

But to the extent that we can accrete our assets and take advantage of cheaper financing, which is available once the loans in the distressed space become more or less 12 months current, when you aggregate portfolio about $350 million to $400 million, you want to start considering taking that to the market.

So the -- today, the securitization market is providing the best liquidity we've seen post crisis, with our securitization spreads tightening in basically to all-time tights that we've seen post crisis as well.

So that's going to be a first mover for us in that space, and we'll continue going through that and evaluating the securitization market for term financing throughout the year.

Great.

Lastly, just can you touch on competition for the first loss pieces for the K-Series?

I know there's others that look at those as well.

And maybe can you talk about how yields are today on those leases versus a year ago and just the competition there?

Yes.

There's no question there's competition for those securities.

We've been an active participant with Freddie Mac since day 1. I think that they appreciate investors who participate that have multifamily knowledge, not only in securities but in actual property management and the understanding how those markets work and work out knowledge, which we do have, which I think gives us some advantage in the participation.

But it's competitive, and yields continue to come in.

I mean it was unclear how they'll react to what's going on in the marketplace today.

But I would say, in general, they're probably in 50 basis points from a year ago.

Our next question comes from Christopher Nolan with Ladenburg Thalmann.

On the investment pipeline -- and by the way, the presentation is very helpful.

On the investment pipeline, nothing about agency investments.

Should we look at the MSRs for replacing the agency investments over time?

Yes.

I mean I'd like to separate a little bit here.

On the agency side, we use as kind of an incubator for new opportunities in this space to the extent we're raising cash, and we have settlements, particularly in loans that take 60 days to close, 45 days to close.

We could look at the -- particularly the Agency CMBS space as a place to earn some return on our cash.

That's typically how we've been looking at that space.

Now switching over to the MSR market, we're looking at it as both as an investment opportunity and as a hedging tool.

Currently, the space provides around a 7%-ish return.

And that's an income-producing asset that also could be used for hedging purposes.

So to the extent that we look at MSRs, we'd also look to take off some of our swap position as it basically provides us with that protection.

And we also are looking at it with respect to creating a program where we can select some loan pools that are available out there with some JVs that we were creating to find, we think, better risk return cash flows in the MSR space.

When you're bidding on small pools in the market, you can do that.

So we've looked at the MSR space for quite some time now.

We have not seen compelling pricing that we've been interested in moving forward.

Now obviously, given the rate move we've seen just yesterday, it obviously looks more attractive.

And that's going to basically start really increasing our focus into the space.

Jason, do you think the MSRs, if you guys go into it more, is it -- will it create some volatility to your earnings?

The MSR is definitely a more volatile asset.

But to the extent where -- the percentages that we're looking to invest here is going to be basically nonmaterial to the total portfolio size.

Now here, it's -- we're looking to incrementally add MSRs as a separate strategy, but by no means it will be a core strategy in the long term.

Great.

Final question.

Funding costs for distressed mortgages, they were down quarter-over-quarter.

Anything new there?

Or is that simply just modeling?

Yes.

Look, a big part of it was rate -- the rate move in the space, Fed rate reductions, which moved LIBOR down.

To the extent we have short-term financing, that obviously moves that lower.

About 25 basis points has -- came from the rate reductions related to spread tightening in financings.

We've continuously reevaluated the financing that we have and have put new financing in place.

Particularly in the last quarter, we restructured a large $1 billion facility and was able to obtain north of 35 basis points tightening of spreads in that particular facility.

We're rolling out a new facility in, hopefully, the next 60 days where we're looking to see basically close to a 40 basis point reduction from our current facility in some performing loan assets.

So the high level there is that the banks continue to provide financing where it's getting a little bit more competitive out there.

And we're seeing spread tightening in this market, particularly because the securitization market is that liquid where there's less risk that a bank is going to be taking a distressed loan pool that is intended to go to the securitization market given where financing spreads are there.

So we're seeing more competitive action in the repo markets and whole loan facilities, which has been the primary reduction that we've seen across our financing.

Our next question comes from Jason Stewart with JonesTrading.

With regard to the credit -- the mortgage credit portfolio on the single-family side and prepayments, clearly, these borrowers aren't going into agency.

I'm wondering how much the rate move relative to the liquidity in the secondary market is driving your expectation for increased prepayments.

And maybe what else needs to happen for that to become a more fluent step for those borrowers to refi?

Right.

So the prepayment is more of an optionality that we've embedded in these loans.

The expectation is that a very small number of loans will actually prepay over the life of the -- on an annualized basis over the pools.

But -- however, given that where the FICO score is today and continue credit rebuilding, and particularly, if the borrower had a foreclosure filing, the agencies allow borrowers to refinance after a certain period of time, typically over around 2 years of consecutive payments.

And there's other programs available today in the non-agency space where the borrower can refinance.

Given the fact that the borrowers have a 70%-ish LTV, it definitely gives them optionality to move into the space where 80% LTV is the standard and obviously in agencies, and in non-agency channels, you're seeing it pushed up to 90% LTV.

So prepayments often comes in the form of paying off the actual debt in a home sale to recapture some of that equity.

If you remember, the duration of these loans are about -- the maturity of these loans -- so the origination of these loans were over 10 years ago, and typically, borrowers that have been 10 years plus in their home are -- the tenure of which they expect to live in that home starts decreasing.

So a lot of prepayments that we do expect to see a model comes from the form of the borrower having a life event and moving into a new home with a -- basically to pay off a loan, which comes in the form of, to us, as a refinance -- sorry, as a prepayment.

But with lower rates and a non-agency market that has become very competitive, we're seeing more credit availability to borrowers with distressed FICO scores, which should be more of an option for us to accrete to par faster than waiting for the borrower to pay for 12 to 24 consecutive months.

Okay.

That's helpful.

And then one more on the MSR strategy.

It didn't sound like there would be a corresponding increase in other investments like agency.

Is there any other component to that strategy as you build out the potential for the MSR book-to-bill?

Yes.

This -- again, we're not looking to pair the asset with the Agency RMBS as a paired strategy.

We have lots of fixed rate duration exposure on our balance sheet.

Adding MSRs will help reduce some of that duration and also give us more efficient means of hedging versus swaps, which has a basis risk mismatch.

And it's been typically a very difficult way to hedge mortgage interest rate risk at this point.

So we just see it as a better match to our credit book and fixed rate exposure with also being more accretive than swaps.

So again, we look at it as a good return potential that has the secondary benefit of hedge protection.

Our next question comes from Craig Hannah with Palm Beach Capital.

Great year last year.

I noticed that second quarter earnings last year weren't that good, and you got better and better during the year.

Can you sort of talk to the environment, Q1 this year as opposed to that?

Is there something dramatically different that we can look to see Q1 of this year going to be better?

I'm just looking for a trend here.

Look, I think the problem with Q1 this year is what happened yesterday, right?

And so the market -- while the treasury market rate in the stock market has reacted significantly, we don't really know the fallout into the credit markets.

What are the world economies going to be doing, it's all speculation to this point.

So it's really trying to figure out what credit spreads are going to do.

I think, fundamentally, we're very comfortable of our exposure to all our credit assets.

But we don't know -- we don't have an opinion where spreads are going to go as of yet.

And in our opinion, if spreads were to widen out because of this event, more than likely, we'd probably increase our exposure, taking it as an opportunity and not a long-term lasting issue.

But we're just now evaluating that, so it's hard to really comment on what we think the quarter is going to look like given the significant rate move that's happened in the last 24 hours.

Yes.

I understand it's really difficult.

And I noticed that last year, you did 6 common stock raises, and it looks like you deployed them well and it helped during the year.

Could we expect a similar environment this year?

Or would you expect that you'd accelerate common stock issuance?

Look, we've raised $500 million to date in common equity.

I think, opportunistically, we're always looking to increase the company size as long as we can deploy the capital, protect the book value and keep the dividend as consistent as possible.

So if we can meet that criteria, I think we will continue to look to raise capital, but there's going to be a point in time where we don't think we can do it and we'll probably take a step back, where the market gets into a situation where we can't go out.

Like today's market would be very difficult to raise capital in.

Sure.

So I see your book value is about $5.76.

Is it fair to assume that if you can raise common stock issuance at, I think, one was $6.9 and one was $6.15 --?

$6.13.

Yes.

Yes, 13.

Does that -- in general, from an investor standpoint, does that always sort of lean more strongly towards issuing more common stock if you can issue it higher than the current book value?

I just think in general, if you look at the REIT industry, the vast majority of people that are raising capital are trading at a premium to book value, and the people that are trading to a discount to book value don't raise capital.

So I mean that is the correlation there.

But in terms of the exact distance that you're above book value, I think that's a company-by-company decision.

Our next question comes from Matthew Howlett with Nomura.

I really appreciate the supplement.

First, FHLB membership, that was put out, request for comment.

You guys once had it, I think it was Indianapolis.

Can you comment on -- to the prospects?

And will (multiple speakers)?

Yes.

I mean, I think every REIT is going to participate in the response to the FHLB in terms of membership interest.

I mean, clearly, that's a game changer for the REITs.

To get stable funding from a government entity is a significant benefit for us.

And I think most REITs would be willing to come under some kind of regulatory oversight to get access to that kind of funding.

So I mean, look, we're all trying to -- we were all -- many of us were in and some are still able to stay in for the 5-year period.

But it would be hugely beneficial, and we're watching it very closely.

There's a lot of moving parts to this -- to these issues.

And so we'll have to try to figure out how that falls out.

But we are watching closely, no question.

Good.

We'll continue to follow details on that.

On the -- in the Freddie K, I think Fannie did a similar -- their version of the K, and you participated in the third quarter.

Any sort of -- how that -- any sort of post mortem of how that went and whether Fannie would continue their version of their K-Series on their multifamily?

Yes.

Their version of multifamily credit risk is more -- is similar to the residential program where they're laying off strips of risk.

With the Freddie Mac side, you actually -- having rights down to the actual property, physical property itself.

In the Fannie Mae's case, you're just -- you're buying a bond that's exposed to a level of risk, but you don't really have any touch point back to the property itself for workout potential.

So it's a really completely different transaction.

So I think Fannie Mae was very successful in laying off their portion of risk.

It's just a different transaction than the Freddie K program.

Because in the K, you guys have the right to be placed as special servicer and all that.

That's right.

We have overseeing rights as a special servicer in the case of Fannie Mae, because the Fannie Mae program is more of an insurance program where the originator participates in a loss along with Fannie Mae, and because when Fannie Mae sold their deal, they're really selling their part of the risk, not the originator part of the risk.

So the originator still holds that risk.

So they're really the ones that are looking to the property themselves, not the person who is participating in the Fannie Mae risk.

Got it.

Okay.

And then my last question is sort of a bigger picture question.

How do you --- you've got a lot going on in the conference, you [spoke] tremendously on all these different businesses.

You're internalized now, fully internalized now.

How do we think of 2020 in terms of priorities?

How do you prioritize the different things you're doing?

Jason, you mentioned some of these new subsectors.

I know you don't want to probably give away too much of what's going on, but talk about how -- what are you going to prioritize in 2020?

And maybe I'll just ask it that way.

All right.

So the prioritization comes from where the market is moving, where the opportunity is.

We don't have a slated schedule of what we need to buy on a percentage basis per asset class.

It's falling out.

Now we're at 49% of the assets in single family, 30% issuer in multifamily.

We can see that change over the course of the year.

We're not wedded to a particular allocation percent.

It's all based on opportunity and flows.

So from that perspective, we're going to react to the market.

And given that we're buying loan pools and evaluating loan pools on both sides of the equation, single-family, multifamily, we have great kind of feedback loop mechanisms that provide into modeling to look for where new niche markets may pop up.

And for that reason, we're seeing opportunity in some construction lending in the South/Southeast part of the United States, which has been a component, a result of our boots on the ground, inspections and underwriting that we've seen that's going on in that market.

So we're more opportunistic in that view in that we're looking for the best -- most -- the best risk-adjusted returns that we can find in the [most] market.

But we're also very cognizant of downside protection.

So we're not going to chase assets simply because of return.

We're looking for that -- the component that actually provides downside.

And when you look at multifamily or single-family, you're seeing -- you should see a trend that's familiar, which is the around 70-ish LTV kind of coupon that we had in both sides of the equation, which is not by chance.

And we're definitely focused on that side given where we are in the credit cycle.

So I can't speak to any percent that we're going to hit, but the team gets together weekly, and we talk about the opportunities between multifamily and single-family.

And we look at relative value and absolute value between the sectors and between our traders.

And on that note, you have a direct, and that's your direct lending business on the multifamily side that continues to grow.

Is that -- how does the outlook on that end?

Yes.

So from that end, we're providing second lien interest in these multifamily properties, typically in the $35 million range.

These are 150-plus to 300-unit properties.

We're seeing lots of activity in purchases of that space, especially in the markets I already mentioned, the South/Southeast.

You have many investors that are coming from the Northeast, particularly New York market that are moving down to that market given rent control laws and just availability of opportunity.

So we're expecting to see more turnover of deals, which then presents more lending opportunities to new buyers of assets.

And so we're expecting actually to see record kind of volume for us in that space this year, which is very helpful.

We love the asset and the coupon and the downside protection we have and the controls that were built into the structure, so it's something that we actually are prioritizing.

(Operator Instructions) Our next question comes from the line of Derek Hewett with Bank of America.

And I also want to reiterate that the supplement was extremely helpful.

Most of my questions were already addressed.

But could you talk a little bit about what was driving the small 21 basis point decline in the asset yield on the single-family book, and then I think more importantly, the nearly 120 basis point growth in multifamily?

Yes.

In the single-family, because a lot of that activity is driven around cash collections, a lot of the loans are not on accrual basis.

They're on cash.

And so you get some volatility in the earnings of the asset yield quarter-to-quarter just because of the timing of cash collections.

So that -- that's probably the most difficult asset class that we have going forward in terms of tracking the yield because of that, and that's when we look at that transaction.

When we look at those -- that particular transaction, it's more of a total rate of return.

And then I think on the comment about the increase in yield on the multifamily side, it's a combination of a couple of things, just the mix of loans that we added during the quarter of mezz versus lower-yielding assets as well as we had one Freddie K security that was coming to maturity.

And when we typically book the accounting yield on our securities, we account for a potential loss in the deal.

And as we get closer to the maturity, we have better clarity of what that loss is going to look like, if at all.

And then we will change the accounting yield.

So you'll get a benefit if the property is performing better.

So some of that is related to that particular case.

But in general, the yield went up because we added more assets relative to the rest of the asset class and higher-yielding assets at the margin.

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

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

Thanks, operator.

Two things I'd like to say.

One, clearly, everybody likes the supplemental information pack we put together.

We have a dedicated Investor Relations person, Mari Nitta, whose information is on the press release that was last night put out.

She was instrumental in putting that together.

So any questions about that or about the company, please direct them towards Mari.

And our 10-K will be filed on or about February 28 this week and available on our website thereafter.

Thanks, everyone, for the participation.

We look forward to talking about our first quarter earnings in a couple of months.

Thanks, operator.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.