New York Mortgage Trust Inc (NYMT) 2022 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 2022 Results Conference Call. (Operator Instructions) This conference is being recorded on Wednesday, May 4, 2022.

A press release and supplemental financial presentation with New York Mortgage Trust's First Quarter 2020 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 company's filings with the Securities and Exchange Commission.

Now at this time, I would like to introduce Jason Serrano, CEO and President. Jason, Please go ahead.

Thank you very much. Welcome to our 2022 first quarter call. I'm joined here in the room by Kristine Nario, who'll be touching on our financial results. I'll be speaking from our supplemental that's available on our website, starting on Page 7.

After a turbulent period with Fed wrestling with inflation by taking an aggressive stance on rate increases, fixed income market suffered a significant setback, which drove our undepreciated book value down by 6%. After a declared dividend of $0.10 a share, providing 11% yield at the share price at quarter end, we finished the quarter with 80 basis points of total rate of return. Despite a setback on our portfolio and asset pricing, we were able to grow our book by a record amount primarily in short-duration, high-coupon residential investor loans.

Given the high rate of redemption activity of the 1.5 year maturity loan, we increased our portfolio by $645 million in the quarter, nearly doubling last quarter's portfolio growth. Also, we were active early in the securitization space and was able to lock in, in a rated loan securitization against our longer-duration RPL and Scratch & Dent loans with a 2.3% weighted average cost of funds. Additionally, we locked in our second revolver bridge loan securitization at a 4.1% weighted average cost of funds. Both deals provide for double-digit equity returns.

In the case of the BPL deal, we can now add additional investor bridge loans in our pipeline with loan payoffs in the portfolio for 3 years. We prepared for these deals over the holidays at year-end, which enable us to quickly get these deals to the market in the quarter. We are pleased with the execution here.

Lastly, we also redeemed $138 million 6.25% [converts] at par. Last year, we issued a 5.75% senior unsecured note in anticipation of this redemption, which ultimately lowered our bond debt cost by 50 basis points. Given our focus of non-recourse, non-mark-to-market financing structures, we are still well below 1x leverage and expect to continue with this low rate of utilization of recourse leverage.

At this time, I'll pass it over to our CFO, Kristine, to provide more details on our financial results. Kristine?

Thank you, Jason. Good morning, everyone, and thank you again for being on the call. In discussing the financial results for the quarter, I will be using some of the information from the quarterly comparative financial information section included in Slides 25 to 35 of the supplemental presentation.

I want to start off on Slide 11 to reiterate what Jason mentioned earlier. In the first quarter of 2022, we funded the acquisition and origination of $985 million of investments, a record quarter for the company, which included $828 million and $157 million in single-family and multifamily investments, respectively. On a net basis, investments increased by approximately $645 million during the quarter, with prepayments and redemptions fueled by repayments received on our short duration loan book. This acquisition activity follows on the heels of a very active fourth quarter of 2021 when we added $325 million of investments on a net basis.

Our financial snapshot on Slide 9 covers key portfolio metrics on a quarter-over-quarter comparison. The company had GAAP loss per share of $0.22 and undepreciated loss per share of $0.17. GAAP book value was $4.36 and undepreciated book value ended at $4.45, down 6% from the previous quarter. Notably, despite the decline in undepreciated book value, our net interest margin for the first quarter was 3.87%, an increase of 24 basis points from the previous quarter.

Our portfolio yield on average interest-earning assets was 6.80%, a quarterly improvement of 23 basis points. The increase was largely attributable to our continued investment in higher-yielding business-purpose bridge loans. Our funding costs improved slightly, ending at 2.93%, largely due to the 2 loan securitizations that we completed early in the quarter that were issued at a lower cost. The company's recourse leverage ratio and portfolio recourse leverage ratio remained low at 0.5x and 0.4x.

Slide 10 details our financial results, and Slide 26 details the components of net interest income. We had portfolio interest income of $52.5 million, an increase of $7 million as compared to the previous quarter. Our continued investment in residential loans, particularly higher-yielding business purpose loans, contributed to the $6.8 million increase in single-family interest income, partially offset by a $0.5 million decrease in multifamily interest income due to redemptions of our mezzanine lending investments accounted for as loans.

Interest expense in our portfolio increased by $5.2 million primarily due to increased utilization of our financing arrangements, which would include securitization and non-mark-to-market repurchase agreements. The cash generated from these financing activities can be redeployed into our targeted assets, which will generate additional earnings for the company.

Total net interest income, which includes interest expense related to our corporate debt and mortgages payable on real estate, decreased to $29.9 million as compared to the previous quarter. The increase in portfolio net interest income of $1.8 million was offset by the increase in nonportfolio-related interest expenses of $2.7 million.

The increase in nonportfolio-related interest expenses can be attributed to the increase in interest expense related to our mortgages payable on real estate by $5.1 million from the previous quarter as a result of the full quarter impact of the multifamily JV investments consolidated in the previous quarter, as well as additional multifamily JV investments entered into and consolidated in the current quarter. This was partially offset by a decrease of $2.4 million in expense related to the company's convertible notes, which were fully redeemed in January.

We had noninterest-related losses totaling $46.8 million, mostly from net unrealized losses of $83.7 million as a result of increases in rates and credit spread widening in the first quarter. This loss was partially offset by a $3.8 million of net realized gains from residential loan prepayment activity and non-agency RMBS sales, a $5.7 million of preferred return generated by our mezzanine lending investments accounted for as equity, and $1.8 million of other income primarily comprised of redemption premiums recognized from early repayment of mezzanine lending investments during the quarter.

In addition, we also generated $25.6 million of income from real estate. This income is related to multifamily apartment properties in which the company has equity investments in, in the form of preferred equity or joint venture equity.

As mentioned in prior quarters, because of certain control provisions, we consolidate these properties in our financial statements in accordance with GAAP. These properties also incurred interest expense and other expenses of $7.2 million and $48 million, respectively. The expenses incurred by these properties during the quarter is primarily related to depreciation expense and amortization of lease intangibles totaling $35.6 million.

After reflecting the share in the losses to the minority partners of $14.9 million in total, these multifamily apartment properties incurred a GAAP net loss of $14.7 million for the quarter. But excluding the company's share in depreciation and lease intangible amortization expenses, these multifamily apartment properties generated $5.5 million of undepreciated earnings.

As detailed on Slide 29, both income from and expenses related to real estate increased in the first quarter, and this is primarily related to the full-quarter impact of multifamily JV investments made in the previous quarter, as well as additional multifamily joint venture investments made during the quarter, which required consolidation in our financial statements.

We had total G&A expenses of $14.5 million, which increased compared to the previous quarter due to increase in commission, salary and stock-based comp. We had portfolio operating expenses of $9.5 million, which increased primarily due to the growth of our investment portfolio.

Jason will now go over the market and strategy update. Jason?

Thank you, Kristine. [I was] speaking from Page 13. For a quick update to the market and where we see opportunity, in the BPL bridge space, the U.S. housing market continues to have [stubborn] low inventory for sale. [Lo-mo] units is 50% below historical averages. With the mortgage rate approaching 6%, the market will be closely looking for the evidence of supply side increases.

While we don't expect another year-over-year print of 20% to national home price appreciation, we do expect price to be range-bound in the lower single-digit area. With this backdrop, we continue to see heightened demand to bring recently updated home interiors to market. Cash flows from short-duration loans provides excellent risk-adjusted returns in the market.

Now switching over to Scratch & Dent space. With higher rates bringing lower origination profitability, in fact, 21% lower year-over-year and 61% and from peak profits in 2020, we are seeing originators reach back to more seasoned Scratch & Dent loans as one way to increase cash liquidity.

With increased volumes in the Scratch & Dent market, larger price discounts are available. We are being selective here as mortgage rates are not quite settled. We feel the best deals are yet to come and excited about the opportunity in the near future.

Switching over to multifamily, we continue to see heavy migrations to lower cost markets whereby employment opportunities, weather and taxes are better. Rental demand is strong as we experienced 8% year-over-year rental increases on our properties. Year-over-year property values are higher alongside investor (inaudible), providing a strong market supporting our $671 million book.

Now turning to Page 14. I Today, our portfolio is over $4 billion, and we added nearly $1 billion of new investments to our balance sheet. As Kristine touched on earlier, we nearly doubled investment on a net basis or after pay-downs in sales from last quarter. $715 million of BPL loan investment sets a new high for a quarter.

As discussed on previous calls, we helped to bridge operational barriers with our origination partners. While this service requires more work on our side to settle and service loan pools, we are situated as a preferred partner, allowing new channels to be built without competitive pressures.

Turning to Page 15 on financing. We believe our debt structure today is at the strongest point in the company's history, evidenced by our activity in the quarter. We completed 2 securitizations by issuing $513 million of term debt at a weighted average cost of 3.07%. We took a patient approach to transition [unrecovered] loans to non-mark-to-market structures, which we believe will add value in subsequent quarters particularly as it relates to ongoing cash requirements, such as reserves for potential margin calls.

Turning to Page 16. As shown last quarter, we continue to believe these 3 graphs validate the success of our strategic plan launch in 2020. First, chart to the left, we focused on non-mark-to-market financing while also bringing down the overall cost to provide stable go-forward cash flow returns [to the] financing. In the second graph, the proceeds generated from these financings, particularly in unencumbered loan portfolios, drove cash balances higher. We timed the securitization with our portfolio growth to keep excess cash at manageable levels, which takes us to our last graph on asset rotation.

We were able to increase our portfolio yield to the highest level in nearly 10 years by rotating [out] securitization bond holdings and into higher return assets. With a short-duration book predominantly invested in bridge loans, we are excited about our ability to raise asset yields to improve EPS in the higher rate environment.

Turning to Page 17. The single-family overview illustrates this point where 63% of capital is allocated. As discussed earlier, we expect outperformance to continue in bridge loans. Thus, allocations to this sector will remain elevated in the near-term. We will continue to fund new loans into our 2 revolver structures, which provide an average funding cost of 3.3% fixed with a 8.5% average coupon that is rising. Given the origination trends, we expect solid equity returns to be generated here.

On BPL rental, we previously discussed launching this loan investment strategy at the end of last year, where we locked in 50% [forward] pipelines of originator in this space. We are actively adding to this portfolio and locking in high 6% note rates, which is vastly improved from the 4.81% in Q1. Our goal is to achieve 100 basis points NIM under securitization to pave the way for double-digit go-forward equity returns.

In the Scratch & Dent market, we are seeing increased loan pool offerings, which can be purchased at 10% plus discounts. Large pools originated a year ago that have note rates less than 3.75% are particularly illiquid. We feel prices may cheapen up here, so we are being very selective on new acquisitions for better opportunities.

Lastly, as a quick note, we added total portfolio leverage to this slide to pick up nonrecourse portfolio financing such as securitizations. The data point is most meaningful for our RPL portfolio, as we have 3 securitization outstanding and a total portfolio leverage of 6x versus recourse leverage of 0.2x. With this low cost of debt against a stable asset pool of 64% LTV, we can also generate equity returns. Unfortunately, we don't see opportunities to add exposure here in this market.

Turning to Page 18. Just as a backdrop on our BPL strategy, we are pleased on how our BPL portfolio has performed and improved new pipelines that we are seeing. Borrower credit profile is strong and experienced. We focus on transition plans that are not complicated to help manage [extension] risk of repayment. LTVs are low, and this is without considering the 20% national HPA pickup in the last 12 months. Today, we generate about $120 million to $150 million per quarter in payoffs in this book. Thus, with modestly higher note rates that are available in this market, we expect it to improve our interest income after the reinvestment.

Turning to Page 19. Now switching over to the multifamily portfolio, where we have 30% of our capital allocated, our portfolio is now weighted towards JV equity investments. The portfolio continues to exhibit solid performance with low LTV and high coverage ratios. We expect to produce 12 to 17 ROEs on this portfolio, as many of our properties produced elevated cash flows under high occupancy and improved rents. However, a mezzanine or JV investment has vastly different path to recognition of return, which I'm going to describe in some detail over the next few minutes.

Turning to Page 20. First, our focus in multifamily is in secondary tertiary markets, primarily in the South and Southeast, which is a continuation of our strategies from previous quarters. Class B- through Class A garden through mid-rise that contained 200 to 400 units at average rents of about $1,250 is what we're focused on.

We look for properties where a solid business plan can be conducted across acquisition, renovation, asset management and disposition. We target a transition plan, which typically includes updated interior units or common areas due to deferred maintenance and/or poor management. We generally find slightly improved local competitive product offering more amenities at higher price points. Thus, we look to offer tenants good value at a desirable location, particularly with the rent raises that have been experienced in these markets.

Now turning to Page 21 on the cash flows, starting with mezzanine. We fit in the mezzanine just below the senior loan up to a 90%, 95% LTV before transition and 80%, 85% after the effect of the transition plan. We structured a coupon 11%, 12% and collect an origination fee on this product. Payments are structured as a component of [Harpay] and [PIC] to support asset transition plan.

After transition is complete, we are typically paid off in either a sale of the property or a recapitalization. The loan is subject to minimum return rules of 1.3x to 1.5x loan amount at payoff. This is fairly straightforward in this table.

Turning to Page 22 on the JV side, the JV equity contains a lot of noise in reporting. We are bottom of the capital stack in a common equity position shared by our sponsor, who is the operating partner at a 75%/25% split, or up to a 95%/5% split. We target a 13% to 17% total return after collecting asset management fees of about 50 basis points to 100 basis points of rent collections and work with partners under a promote arrangement, which creates great alignment between us and our sponsor.

We receive and report in our financials rents less costs and consolidated property level of debt expenses typically from a senior mortgage loan. Additionally, and according to GAAP, we fully depreciate the property on a straight-line basis over a 30-year period and book expenses related to amortization of lease intangibles, also a noncash GAAP measure. Consequently, both GAAP measures lower our property's original value in each period until the asset is sold. These expenses do reduce our earnings on a GAAP basis until the property is sold. Thus, the balance of earnings is booked in the tail end of the investment. However, we do see opportunities to pull forward projected returns under new disposition plans, which is currently being evaluated.

Turning to Page 23. In summary, we have built a significant channel to deploy our cash generated organically through portfolio cash flows. Shortening the duration under loan investments has cleared a channel to reinvest to raise the company's earnings. We want to remain flexible in doing so, as we expect the ability to be flexible, will provide certain key advantages. Our goal is to demonstrate this advantage to you over the coming quarters.

At this time, I'd like to pass the call back to our operator for questions. Thank you.

(Operator Instructions) Our first question comes from the line of Doug Harter of Credit Suisse.

I was hoping you could talk about the opportunity you see to continue to access securitization financing, given the volatility in that market and how you see total portfolio leverage, total portfolio size continuing to trend.

Obviously, securitization financing is more expensive, and there's a lot of seasoned loans are being cleared in the securitization market off warehouse lines, which is producing higher issuance in the calendar.

We completed our securitization on our RPL pool and some Scratch & Dent loans at the early part of the year. We really have little financing needs as it relates to that part of the book as we're not adding to RPLs in the foreseeable future. As it relates to our growth in our portfolio, it's within the bridge loan space. And in that area, we are doing combination of securitizations, which we've completed 2, and have revolver structures against those for payoffs. I discussed the $150 million-ish of payoffs that we get on our portfolio to reinvest that cash, which we'll be doing, and financing it in the form of those 2 securitizations as well as non-mark-to-market, nonrecourse repo structures as well, which we completed and closed in the quarter. So we feel we're set there on the financing side as it relates to securitization.

And the only other space that securitization does come up is the DSCR channel. These are loans to investors that are renting homes. In that case, we just started our acquisition process. We are seeing an ability to raise coupons pretty dramatically given the rate changes in the market and the demand that continues to come spilling in from the rental investors in the market. So in that space, we do have a both non-mark-to-market market and mark-to-market structures for repo with 1-year terms with evergreen structures, as well.

And in that space, we do believe, with respect to the fact that we have just started the acquisition process, that we could blend in higher coupons to generate 100 basis points of NIM on a future securitization. That would be in the form of, let's call it, a $500 million deal, where we're pulling down about $50 million of equity in that transaction. So it's not a lot of issuance from NYMT in the go-forward future.

And then, last quarter, the Board put in place a share repurchase authorization. Can you just talk about how you and the Board are thinking about utilizing that?

Yes. We put it in place last quarter. We're evaluating it alongside of our share price with respect to opportunities and cash needs. That's something that is discussed on a quarterly basis, and we'll continue evaluating the opportunity there to purchase shares.

The next question comes from the line of Bose George of KBW.

Actually, when I try and calculate sort of an operating number for this quarter, and if I pull out that $83.7 million unrealized gain, is that a way to do it so then that would be, like, $19.5 million, so $0.05-ish of operating earnings?

You could look at it that way, yes. It will be $0.05 backing out unrealized losses.

And part of the reason we went through and described closely the JV opportunity; we have, we believe, delayed recognition of gains in that book in that it produces roughly anywhere to a $5 to $6 billion kind of annualized return. But we do expect north of 15% return on that book. So the difference in there is just the choppiness of how that return will be recognized in the fact of a sale. That's part of the reason why our EPS is a bit lower in that we switched our book to focus on JVs in the early part of last year. And we recognized that book wouldn't have a linear level kind of yield accounting. We hold it at acquisition price, minus depreciation and amortization, and would recognize the gain at point of sale. And we feel very strongly there that there are gains to be had, and we're evaluating an approach to this position related to some of those assets.

And then can I just get a book value quarter-to-date, just an update?

Yes. Looking at the markets, we believe we're roughly down 2.5% to 3% as of this week on book value.

We have the next question comes from the line of Jason Stewart of JonesTrading.

Could you give us an update on the $45 million SFR rental properties that you bought and sort of where you think that strategy goes?

Yes. That is a new strategy that we have started deploying. It's related to assets that have rental rates that are fixed and adjust with government pricing levels. We feel that, in a downturn market, this is an asset that will outperform and has kind of been forgotten about from a lot of the SFR rental investors in the market. So we've been accumulating assets that have these rents that are very much guaranteed by the housing authority. And it's a small portfolio. We're looking for opportunities to continue growing and do expect to do so in the coming quarters.

Any idea of sort of geographic location, or maybe you could give us a price point for the homes?

Yes. So I mean, the strategy here is that we're not focusing necessarily on the markets with the strongest HPA. In fact, we're going quite the opposite way. We're looking at markets where HPA has not been as prevalent and where you do not have to pay today's price to counteract or to take in account some HPA or rental rate increases that the market is seeing. So our markets are typically in markets with flattish, even with the positive 20% HPA market we've seen, call it anywhere from 5% to 10% HPA markets where we can buy high cap rates and not necessarily pay for HPA.

So it's a different type of strategy where HPA has been a big part of the SFR investment landscape. We're focused on the annualized returns on a cash flow basis and giving up the HPA upside by not going into those markets that's presented with a lot of HPA recently.

And then, could you just give us some help on who's operating that portfolio, the third party internal? Any color there?

Yes. I mean, the acquisitions are made on our side. We have hired property managers to work through the assets. We are likely not going to be in 20 to 30 different markets. We're focused on probably closer to 10 to 15. And we have operators with boots on the ground in those markets to work through our assets and asset manage.

We have the next question comes from the line of Christopher Nolan of Ladenburg Thalmann.

Kristine, the increase in multifamily interest expenses that you discussed earlier, can you give a little color on that, why it jumped so much?

If you remember, we described a transaction in the fourth quarter wherein we consolidated a chunk of multifamily investments, and that happened really latter part of December. So if you look at fourth quarter, there's barely any P&L pickup in terms of interest expense and rental revenue as it relates to those JV consolidations. And so, in the first quarter, you'll see the full-quarter impact there, Chris.

And a follow up on Bose's question in terms of the operating EPS. I mean, it seems the comprehensive EPS and the [undeprecated] EPS seemed not to fully capture what the earnings is relative to supporting the common dividend. Should we expect some sort of new EPS measure which excludes unrealized gains, losses, and excludes noncash charges from the real estate JVs?

Well, we did show undepreciated earnings, which already backs out depreciation and amortization as it relates to these consolidations. But I think how we view the company is more from a book value perspective, which you should consider mark-to-market changes, and I don't foresee and something we have to evaluate, obviously, going forward if we were to show another metric of backing out any unrealized gains or losses in the future.

Another component to our earnings is we've always had 2 components, right? The first is our interest income. The second is gains recognized from realizations of assets either bought at discounts or that have appreciated. That has been a part of our story for the last 2 years. In that case, we have one particular strategy, obviously, within the multifamily sector that we do not recognize gains of appreciation for 28 out of 30 of our assets that we have in the balance sheet.

So when we look at our earnings and support earnings for our dividend, we look at 3 things: our current interest income, our ability to generate additional returns on the assets that have more of a medium-term back-ended profitability proposition, and the third is we have been able to increase our asset growth and portfolio growth through unencumbered assets that we've been financing. And we're doing 2 things there. We're putting more loans to market at higher coupons, and we're also able to reinvest the assets that we have in our balance sheet at higher coupons, as well.

So we do expect, as relates the interest income component, to increase due to the fact that we are able to rotate our short-duration book into higher coupon assets relatively quickly. And we also do expect to put more assets to work in the cash that we have generated from some of the unencumbered financings.

(Operator Instructions) We have the next question comes from the line of Eric Hagen of BTIG.

Just a follow-up on the Scratch & Dent. Can you talk about the modification that's being given to the borrowers there, in most cases? What kind of mortgage rate or term are they getting relative to what they had? And then, I think you also mentioned holding liquidity to meet margin calls. I mean, at this point, would you say the potential for a margin call is more likely to come from the mark-to-market? Or is it more sensitive to the kind of haircut or advance rate as the debt rolls over? Or is it both?

Yes, I'll start with that question. My comment on the cash flow or margin goal, that's something that we believe is more of a limited situation to us given the securitizations that we've completed. So the point was that we can be more active with our cash because we don't have to hold back excess cash related to potential margin calls on mark-to-market lines. Our focus, as you see in our financing graph, we've focused on non-mark-to-market and securitization financings.

So back in 2020, that was obviously quite the opposite, where the financing was mostly focused on mark-to-market financing, short-term [EPO]. So we believe we can be more efficient with our cash, given that we do not have to hold back for potential risk there, obviously as much as we did in 2020. And we're also excited about the ability to put that cash to work in the higher coupon assets.

As it relates to your second question, so the Scratch & Dent portfolio that we buy is our loans that are current and have made payments since origination on the loan for the super-majority portion of the portfolio, very limited cases where borrower has failed to make a payment. And the reason why we're able to get this loan at a discount is because the originator had a origination deficit that was caught by Fannie and Freddie, typically, which is typically a reporting issue or another measure that wasn't accounted for.

So if the borrowers need to receive their coupon and debt service payment by a certain day, and that day has been delayed [and returned], then that loan is not deliverable to the GSEs, as an example. So that's loan disclosure language that needs to be received at a certain time. We typically see that as issues. We are able to buy these loans, which we believe have technical origination issues. But the GSEs have very tight restrictions on all these measures for Q1. And therefore, we're able to buy those on to discount.

So it's not in the form of modifications that we're buying, and that's the Scratch & Dent. That's a different type of loan that we're not involved in from the new origination perspective.

And on the mark-to-market component, wasn't referring so much to the current mark-to-market, but can you address the change in haircut or the potential for loan warehouse haircuts to change as debt rolls over?

Yes. I mean, we obviously in our mark-to-market lines, which are limited, there has been some margin calls. We were obviously able to meet all those. And it is a very small piece of our puzzle right now. So to comment on what haircuts are across the market is I don't think it would be relevant for us, given the low exposure we have to that sector.

I am now showing no further question at this time. I would now like to turn the conference back to Mr. Jason Serrano, CEO and President. Sir?

Yes. Thank you all for joining the call, and we look forward to our second quarter 2022 discussion. Have a great day.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.