New York Mortgage Trust's (NYMT) CEO Steven Mumma on Q2 2018 Results - Earnings Call Transcript

New York Mortgage Trust, Inc. (NASDAQ:NYMT) Q2 2018 Results Earnings Conference Call August 3, 2018 9:00 AM ET

Executives

Steven Mumma - Chairman and CEO

Analysts

Douglas Harter - Credit Suisse

Eric Hagen - KBW

David Walrod - Jones Trading

Christopher Nolan - Ladenburg Thalmann

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust's Second Quarter 2018 Results Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. [Operator Instructions] This conference is being recorded on Friday, August 03, 2018.

A press release with New York Mortgage Trust's second quarter 2018 results was released yesterday. The press release is available on the company's website at www.nymtrust.com. Additionally, we are hosting a live webcast for 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, maybe deemed forward-looking statements within the meanings 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.

Steven Mumma

Thank you, Operator, and good morning everyone and thank you for being on the call. The company delivered GAAP net income of $0.21 per common share and had comprehensive income of $0.15 per common share for the quarter ended June 30, 2018. Our book value per common share was $5.76, a decrease of $0.03 or less than 1% from the previous quarter, resulting in an economic return of 2.9% for the quarter and a 5.3% annualized economic return for the six months ended June 30, 2018.

Our multifamily portfolio continued to be the significant contributor to our earnings during the quarter, with both interest income and unrealized gains increasing from the prior quarter. The company opportunistically raised $74 million in common equity through its at-the-market equity offering program resulting in $0.03 accretion to the overall book value.

As the company has grown in recent years, we've taken steps to internalize the management of our various investment portfolios. In May 2016 we acquired our external manager for our multifamily credit investments. In December 2017 we took over our agency IO strategy which had been externally managed and most recently we've begun the process to internalize our distressed residential loan activity.

This decision is in part of an effort to expand our capabilities in self managing, sourcing and creating single-family residential credit assets. Since June we have added 10 investment professionals to our single-family residential credit team and anticipate this team growing to 15 to 20 professionals.

In connection with this internalization we provided Headlands, our current external manager and notice that we do not intend to renew the management agreement which will expire on June 30, 2019. Headlands has been a valued and trusted partner and advisor to us since 2010 and we are grateful for their many contributions to the company's growth.

In reviewing our quarterly performance for the period ended June 30, 2018, we had net income attributable common stockholders of $23.8 million or $0.21 per common share and comprehensive income to common stockholders of $17.2 million or $0.15 per common share. We had net interest income of $17.5 million and the portfolio net interest margin of 239 basis points. We declared a second quarter dividend of $0.20 per common share that was paid on July 26.

We issued 12.1 million shares of common stock resulting in net proceeds of $73.8 million. We originated a purchase of approximately $106 million of credit assets during the quarter including both multifamily and residential assets. As of June 30, we had 82% of our capital invested in credit related strategies including 55% or $557 million in capital in our multifamily strategy and 27% or $272 million in capital in our distressed residential loan strategy.

We had total invested assets of approximately $2.6 billion unchanged from the previous quarter. We continue to maintain a conservative leverage ratio with callable debt leverage to equity at 1.4 times in total debt leverage to equity of 1.6 times, again unchanged from the previous quarter.

We generated net interest income of $17.5 million and portfolio net margin of 239 basis points for the quarter ended June 30, 2018 as compared to net interest income of $19.8 million and a portfolio net interest margin of 286 basis points for the previous quarter which ended March 31, 2018. The $2.3 million decrease in net interest income in the second quarter was primarily due to our distressed residential loan portfolio which was largely attributable to changes in expected cash flows resulting from greater loan sale activity in the second quarter as compared to the first quarter of 2018.

Prepayment fees in our fixed rate portfolio remained largely unchanged 5.9% during the second quarter versus 5.4% during the first quarter which represents the agency fixed portfolio represents the majority of our agency portfolio. Our agency owned portfolio prepayment fees however did increase from 16.3% from 10.2%. We only have $79 million in that portfolio and we do not intend to add to this position given the current interest rate environment.

For the quarter ended June 30, 2018 we recognized other income of $20 million as compared to other income of $21 million for the quarter ended March 31, 2018. The change was mainly comprised of the following; an increase in net unrealized gains and multifamily loans and debt held at the securitization trust of $4.5 million the result of which was continued spread tightening during the quarter.

We had an increase in realized gains on residential mortgage loans including distressed residential mortgage loans of $3.1 million. We had very limited sales during the previous quarter. We had an increase in realized loss on investments securities due to related hedges of $0.5 million resulted from the liquidation of our agency IO portfolio. And we had an increase in unrealized losses of $3.8 million related to our interest rate swaps which are accounted for as trading instruments.

We had a decrease in other income of $3.8 million comprised of two components really, one is a net $1.1 million impairment loss that we've recognized during the second quarter related to a real estate development project, as well as a $2.3 million gain that was recognized in the first quarter which was related to multifamily property that we had taken over previously.

For the quarter ended June 30, 2018, the company had $6.1 million in general and administrative expenses as compared to $5.5 million dollars in the previous quarter. the increase was almost solely due to the annual equity compensation awards paid to our Board of Directors that is awarded during the second quarter at our Annual Meeting and expense during the quarter. We believe that the internalization of our credit investment functions, including both multifamily and single-family residential, as well as an increased investment professional team will strengthen the company's ability to identify and secure future investment opportunities that benefit our shareholders over the long-term.

We will continue to focus on book value stability while maintaining attractive dividends. We appreciate your continued support and look forward to discussing our third quarter results in the future. Thank you. Our 10-Q will be filed on or about Tuesday, August 7, with the SEC. It will be available on our website thereafter.

Operator, would you please open up for questions?

Question-and-Answer Session

Operator

Certainly. [Operator Instructions] And our first question comes from Doug Harter with Credit Suisse. Your line is now open.

Douglas Harter

Thanks. Steve, if you could just talk about the transition to internalizing the credit assets, is there any termination fee with Headlands and just as we think about the interim period where you are adding employees is there going to kind of be extra costs for the next year or so?

Steven Mumma

Yes, the way the agreement reads Doug, is that we have to give them 180-day notice. They will continue to get paid in the portfolio through the period of maturity of the contract of June 30, to the extent the portfolio is outstanding, they will continue to manage the portfolio. They've done historically which will include sales of the portfolio. We are in the process of trying to negotiate with a possibility of exiting earlier, but per the terms of the agreement they absolutely have the right to stay on to June 30.

There is no termination fee; however, if there is some type of early exit agreement there would obviously be some kind of payment for them to leave earlier because they would be forgoing future revenues. We don’t anticipate – there will be some duplication of costs however the team that we've brought on board is already in the process of accumulating assets, so we don’t see that as a significant return in the overall performance of the company.

We are not only going to bring in – we're not only going to internalize the distressed portfolio, but we're also increasing our capabilities in new originations as well as looking at other asset classes in the residential credit space and we have not had the time and/or the expertise in how to do so. So what I would anticipate going forward is a much more diverse portfolio of investments that we're going to be making in residential credit, that's going to offset those expenses as we bring these people on.

Douglas Harter

Thank you. That is helpful.

Steven Mumma

Great, thank you.

Operator

Thank you. And our next question comes from Eric Hagen with KBW. Your line is now open.

Eric Hagen

Good morning, Steve. For the $12 million of unrealized gains and multifamily loans is there a way for you to tease apart for us just what the fair value change was on those loans related to roll down from the yield curve and how much was due to actually yield spread tightening? Thanks.

Steven Mumma

Yes sure. I mean almost all of it is yield spread, so I think Erick to be honest with you, I mean the rates relatively these seven to 10-year assets. The 10-year assets, when we buy them, and the average maturity date now of the portfolio is around seven years. If you think about the rate change during the quarter which was 10 to 15 basis points, really the majority of that realized gains is related to spread tightening.

We continue to see increased participation and people investing in these asset class. We saw – we bought two bonds, we bought two [indiscernible] pieces in 2017, we actually saw a drop off in 2017 of participation. Since we've come into the 2018 and continue to see that through 2018 is increased participation again and I think it is just a question of where people are looking at yields or where they looking at taking it, looking to invest in credit and that's driven up these yields in these asset class.

Unfortunately for us it’s a great problem to have because it tightens the value of the portfolio that we hold, it makes it difficult to accumulate more of this portfolio which we continue to like and continue to try to participate.

Eric Hagen

Right, right, and then the $12.6 million of unrealized gains on just general investment securities, can you just remind us what's included in that bucket? Thanks.

Steven Mumma

Yes, really a lot of that's related to the unwind of the IO strategy, so we had taken, so when you mark through the income statement, when you sell something and it becomes realized you have a transition from unrealized to realized. So you end up having a realized loss but then you have a reversal of an unrealized assets [ph] which are then unrealized gain during the period, that's really what the majority of that is.

And then the other component of it is related to interest rate swaps, but it's really more of an unwinded IO strategy more than actual activity going on that's new. So we're simply out of the IO strategy now, so you won't see that type of noise that we used to have historically with this transition between realized and unrealized. I think going forward in the capital gains and the realized activity line item it will truly be represented by activities going on in the period.

Eric Hagen

Got it, thanks. You answered my followup question to that. And then it looks like the capital raise during the quarter was used at least in part to delever the portfolio was that just more of a timing issue with when the raise occurred or was it – or do you really kind of plan on re-levering that to leverage the portfolio?

Steven Mumma

Look I think, we've used the proceeds to buy credit assets, but we can obviously get leverage on some of those credit assets, so we have – we will continue to expand the portfolio. We're in the process of acquiring new assets know constantly, and so we have some expectations of some larger purchases during the upcoming quarter and we're always looking at the best way to finance those portfolios. Right now we run a fairly conservative leverage ratio of 1.6. We have capacity to go up probably the 2.4 to 2.8 times if we wanted to fully lever the portfolio. So it's a banner of opportunistic investing in what we think is available to us at the time.

Eric Hagen

Got it. One last one from me Steve. What's the notional amount of swaps that you have hedged in the agency portfolio right now?

Steven Mumma

Its $395 million Eric and so, when we look at the, when we hedge our portfolio, we're not just looking to hedge the agency portfolio, we look at the overall dynamics of the entire investment portfolio. So while we – so if we take into consideration what our credit spreads are going to do on our assets, what our agency book is going to do, so the interest rate swaps which are all along dated swaps, the intention of the swaps is really to mitigate duration movement of the portfolio and not so much protect the spread on a day-to-day basis. So I think if you look at the focus of our company and if you look at the change in our book value and our economic return over the last several years, one of the things we try to do is minimize the economic impact of book value changes in the portfolio and let's focus on the day-to-day net margin, although it is important. We like to protect the enterprise value more so than the day-to-day interest rate spread. They are both important, but I think the enterprise value is a key for us for long-term growth and that's really where we spend a lot of time looking at duration exposure as it relates to both our non-agency credit type activity and our credit - and our non-credit activity and our credit activity.

Eric Hagen

Got it, thank you, Steve, I appreciate it.

Steven Mumma

Sure.

Thank you. And next is David Walrod with Jones Trading. Your line is now open.

David Walrod

Good morning Steve.

Steven Mumma

Good morning, David.

David Walrod

I guess just a lot of my questions have been answered, but can you just talk about your outlook for asset sales in the second half of the year?

Steven Mumma

Yes, look we will continue to be selling distressed residential loans we anticipate at least once at the end of the third quarter if not two. We will probably look to if the spreads continue to tighten in some of our multifamily investments, we may consider selling some of those assets, but we're really in an asset accumulation mode as opposed to selling mode. We continue to originate second lien mortgages. We're going to increase our activity, we're bringing out this investment team and increase our activity in new rates and agents of other products.

And so as this team comes on board and we bid up these new products, you'll see some of the different assets coming on. But we don't have other than the distressed residential loan portfolio, the majority of the assets are in accumulation mode not in sell mode. We intentionally liquidated the agency IO portfolio. That was something that we wanted to get out of, and but those are really the asset classes we're focusing on selling.

David Walrod

Great, can you, I guess give us an update on the second lien mortgage portfolio and kind of how large it’s gotten and how it’s performing?

Steven Mumma

So as of June 30, we're about $72 million in funded assets, again you know it's unfortunately not the size that we'd like to be. We're about $80 million today. The growth has slowed down. We are getting pressure from some of the originators because of the competition in the home equity lines available now in the marketplace and lesser rates from banks. So that is a difficult part of it to continue to be competitive in.

However, our existing portfolio is outstanding with over a 7% coupon at a very low dollar price, very high FICOs and very you know FICOs in the 530s in LTVs, the CL.TV which is the first and the second and the low 80s. So it's been an excellent portfolio, it's just been frustrating in accumulating. We will continue to try to accumulate it. There is a tremendous amount of competition from banks for that home equity mortgage that's tough for us to compete with.

David Walrod

Okay, great thank you.

Steven Mumma

Sure, thanks David.

Operator

Thank you. And next is Christopher Nolan with Ladenburg Thalmann. Your line is open.

Christopher Nolan

Steve, your comments seemed to indicate that accumulating credit sensitive assets remains a challenge, so something that you mention on the first quarter call, was this a catalyst for the internalization for the distressed portfolio?

Steven Mumma

The internalization was really a couple fold. One was not only internalizing the distressed residential because the company has grown to a size now that we think the scale for the company size is more beneficial than having an external manager do it, and not that they weren’t doing a good job. We just felt like to get better franchise value going forward for the company it was better to control all aspects of all our activities.

So that asset management group that we're now building out internally is part of this investment team that we've hired, is going to allow us to not only look at the distressed residential loans from an asset management standpoint, but other new issues that we're going to originate in and/or assets that we're going to acquire so it will be complementary.

And then, new origination we feel going forward is where we're going to get the best benefit. Clearly the space is getting, there are several participants and some of the activities that we're looking at. But we do think the non-[indiscernible] space now has developed to a point where you get good execution through securitizations as well as good participation from originators that it's a much more fluid market. That there is going to be room for more participants and then we feel that over the next one to two years that this market will continue to grow and will continue, will continue to be a more active participant in that space.

There's other residential assets that are around originations that aren’t 30-year mortgages that we may participate in, that we're looking at, as well as other multifamily type investment activities that we may participate in. So this team, while it is part of the internalization of distressed residential, is going to increase our capabilities of a much greater asset class than just distressed residential.

Christopher Nolan

Great, my follow up is, focusing on credit sensitive investments, is the focus there really just going to be a function as long as the outlook for the economy remained strong?

Steven Mumma

Absolutely, look in our multifamily space in particular where we've talked about spreads tightening, there's clearly markets across the country today that we do not actively participate in because we think the market has gotten ahead of itself. And so, every investment that we make as it relates to a direct investment in multifamily, it's really a combination of what is a very – the particulars within a very specific geographic location and not so much macro economies, but absolutely we're focused on the overall economy.

And where we sit today, while we still have to digest what the tariffs are going to do to the economy, you know, we've printed a fairly significant GDP in the second quarter, there are some suggestions that the third quarter is going to be very strong. I mean long-term we think the economy is not going to be gangbusters, but we don't think it is going into a recession either. So we feel pretty good about our credit spot today, but that is something that obviously and when you're investing in credit, you have to be careful with, yes.

Christopher Nolan

And is the plan to increase your capital allocation of credit or just simply grow - raise more equity be it the ATM and then…?

Steven Mumma

I think it's a combination of both Chris. I think it’s increase to the extent there's opportunities that make sense on a risk adjusted basis we will continue to focus on credit and we'll continue to raise capital opportunistically when the opportunities are there for us, absolutely.

Christopher Nolan

Great, thanks for taking my questions.

Steven Mumma

Thank you.

Operator

And at this time, I'm showing no questions in queue. I’d like to turn the call back over to Steve Mumma for further remarks.

Steven Mumma

Thank you, Tiffany. And thank you everyone for being on the call. I appreciate it. We look forward to talking about our third quarter and talking about some of the new activities that we'll have a placed by the time we get to the third quarter call. Thank you again. Have a good day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.