New York Mortgage Trust, Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Feb 2021

[Operator:]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust Fourth Quarter and Full Year 2020 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. . This conference is being recorded on Thursday, February 25th, 2021. A press release and supplemental financial presentation with New York Mortgage Trust fourth quarter and full year 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 and presentations section of the company's website.

[Steve Mumma:]

Thank you, Operator. Good morning, everyone and thanks for being on the call. Jason Serrano, our President, will be speaking to our investment portfolio strategy today, and Kristine Nario, our CFO will be speaking in more detail about the fourth quarter results. We'll all be speaking to our supplemental financial presentation that was released yesterday after the market closed and is available on our website. We will allow questions following the conclusion of the presentation. Company had a solid fourth quarter results, delivering $0.19 GAAP earnings per share and $0.20 comprehensive earnings per share. As of December 31st, 2020, the company's book value for common share was $4.71, up 3% from the prior quarter, resulting in economic return of 5% for the quarter. During the fourth quarter, the company was able to build on positive momentum from the prior two quarters, executing longer term financing through a residential securitization and expanding its investment pipeline to its highest level since March, 2020. Past year was a difficult and challenging time for our Company, as well as many other mortgage REITs. Over a three-week span in March, we experienced unprecedented liquidity constraints on many of our credit asset classes as a direct result of the market disruption caused by the COVID-19 pandemic. These constraints across markets created a valuation gap that further drove down values, in many cases, disconnected from the fundamentals of the underlying assets, and generated historic levels of margin calls from our financing counterparties. Through the coordinated effort of our investment professionals, we were able to reposition the portfolio and stabilize the balance sheet, but not before incurring sizeable losses.

[Kristine Nario:]

Thank you, Steve. 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 21 to 28 of the presentation. Slide 10 summarizes our activity in the fourth quarter. We purchased residential loans for approximately $320 million, Agency RMBS for approximately, $139 million and closed on $31 million of multifamily loan investments. We had net income of $70 million and comprehensive income of $83 million attributable to our common stockholders. Our book value ended at $471, an increase of 3% from the third quarter. Slide 11 details our financial results. We had net interest income of $26 million, an increase of $0.4 million from the previous quarter. Our interest income increased by $1 million primarily due to increase investment in higher yielding business purpose loans, offset by a $0.6 million increase in interest expense, which can be attributed to higher borrowing costs in the fourth quarter associated with a non mark-to-market repurchase agreement and non recourse securitization transactions that we entered to finance our residential loans. We had non-interest income of $67.3 million, mostly from net unrealized gains of $52.5 million due to improve pricing on our residential loans, multifamily loans and investments securities, and $12.1 million of income generated from our multifamily and residential equity investments. We had total G&A of $9.7 million, a decrease of approximately $0.5 million from the previous quarter. The decrease can be attributed to reductions in annual incentive compensation as the company did not achieve its annual quantitative performance targets. We would expect our G&A expenses to be between $11 million to $11.5 million per quarter going forward. We had operating expenses of $3.5 million during the quarter primarily related to our investing activities and residential loans and direct multifamily lending. The graph on slide 11 illustrates the change in our book value from December 31, 2019.

[Jason Serrano:]

Thank you, Kristine. Now turning to page 13. After last year's funding reset that began in late March, we fundamentally restructured how we build our asset pipeline, and how we utilize our unrestricted cash. Prior to Q1, 2020, we've targeted income generation opportunities with our unrestricted cash through bond markets, which were quite liquid. After assessing collateral risk, we felt the spread generated from these holdings was attractive. However, when the repo markets froze up in March, we required rapidly reduced borrowings against some of these positions. At this time, we use repo funding opportunistically, as we still carried over $1.6 billion of unencumbered assets on our balance sheet. Our approach to protect against unexpected volatility in any associated margin calls was to post collateral or similar assets to meet any deficits. To our surprise, and the overall market, we experienced a period where posting additional collateral along with additional cash was no longer accepted. It was a cash-only market at the time. This was highly unusual and not seen even during the peak of the housing crisis. Without the confidence to continue rolling the financing on our security book, we focused on a full rotation into residential and multifamily loan program The beginning of Q2 was a wait and see approach on the pandemics development and governmental response to the crisis. But as shown in Q2, our loan investment activity nearly dropped to zero as the market was resetting from a period of significant distress. At this time, many market participants focused on recapitalisation funding plans which provided us an opportunity to foster new long term sourcing relationships without high pressure of competition in tow. In late Q2, we began to lock up attractive sourcing arrangements in both business purpose loans and multi-family direct origination.. Due to underwriting timelines, to close these loans, the fruit of this flavor became visible with investment growth witnessed in the fourth quarter.

[Steve Mumma:]

Thanks, Jason. Operator, you can open it up for questions, please. Thank you.

[Operator:]

First question comes from Bose George with KBW.

[Bose George:]

Hey, guys, good morning. First just on book value. Are there unrealized losses that we think about in terms of further book value recoveries? And also just any comment just on book value according to-date? Thanks.

[Steve Mumma:]

Yes. I mean, clearly, first question -- first part of the question, unrealized losses, we certainly have some securities that still are underwater relative to the March 31 price, which we think we will continue to recover. Those amounts are probably in a neighborhood of $0.10 to $0.15 per share. And then the -- as it relates to the current book value, we've had a pretty significant backup in rates. We don't have a tremendous amount of direct exposure to that rate from a leverage standpoint. So our credit assets, we've seen significant spread tightening in the first couple months. So we would expect our book value to be up 1% to 2% right now, relative to where the market is.

[Bose George:]

Okay, great. And then just in terms of the earnings power of the portfolio. Can you just talk about, where do you think that currently stands? And where that goes as you continue to optimize your funding?

[Steve Mumma:]

That's right. I mean, look, our total portfolio size still has a lot of room to grow, given the current capital we have on the balance sheet. So as we do continue to play out securitizations. We continue to think that we will drive our -- we're going to continue to try to drive the net margin in what we would consider reoccurring revenues, which would include some aspects of income outside of the net margin, because many of the mezzanine loans in multi-family that we have are accounted for as equity investments for accounting. And so, we'd like to think that that earnings power is going to grow substantially above our current dividend rate is today. But the portfolio needs has -- we can grow our portfolio another $700 million to $800 million in size without putting tremendous pressure on the capital structure of the company.

[Bose George:]

Okay, great. That's helpful. Thanks.

[Operator:]

Your next question comes from Eric Hagen was BTIG.

[Eric Hagen:]

Hey, good morning, guys. Lots of different business purpose loans out there. It sounds like fix and flip is what you're targeting. Can you give us some color on the proprietary pipeline that you mentioned? Like, where are you guys sourcing loans from and what are you paying for them? And then on the two securitizations, you expect to complete? Can you say which types of loans do you expect to finance there?

[Steve Mumma:]

Yes. So, on the first question on business purpose loans, yes, we're focused on the fix-and-flip strategy. We like the short duration of these assets, and the pickup on HPA for the contractors to convert these loans -- to pay off our loans at maturity. We have been -- there been a number of originators in the market that were supported by market participants that no longer was funding their strategies, because of the COVID stress and stress on their balance sheets and liquidity. In that time period, we were able to foster relationships with these counterparties, these originators that needed funding programs and new funding programs. So we were able to carve really either flow agreements or bulk purchases with these organizations. And the market did kind of reset at that time as well with lower LTVs and better experienced contractors that would be funded. So we saw an excellent opportunity to move in there and pick up market share. Where before it was a well-banked market, plenty of liquidity and lots of demand and originators at that time, really had a hard time feeding the demand that was there. So as that fell off, it created a nice gap for us to move in and pick up loans over the course of 2020 at attractive levels. You mentioned on costs, this is a -- for new fundings, new loan originations, it's a par market. The coupon or the servicing fee is mainly stripped off and paid over the life of the loan to align the duration of that loan with the investor. So they typically are kind of par execution for new loan origination.

[Eric Hagen:]

Great. Helpful color. How about the securitizations that you guys plan on doing? I think you mentioned two deals. One that you expect to complete before the end of the year or the quarter?

[Jason Serrano:]

Yes. We have about a $0.5 billion circle for securitizations and that's growing. We had a very active first two months of the year as I described earlier. And we are evaluating both rated securitization and unrated in the RPL space, and a securitization related to our BPL strategy as well. The BPL securitization will be quite a little bit different than what's done in the RPL space as it’s a shorter duration loan and having to be able to recycle the cash in the securitization would be a nice feature to add. And those types of things we're working on at the moment.

[Eric Hagen:]

Got it? Thanks. And then a couple more. Can you discuss the maturity schedule of the commercial loans? And then on the scratch and dent. Are those loans delinquent and sub-performing? or have they been disqualified from the agency channel for some other reason?

[Steve Mumma:]

Yes. The commercial loans which were all multi-family loan originations, mezzanine or pref or loan originations, those are typically structured -- the structure is 10 years. And in the case of scratch and dent, we are buying -- we think are technically -- loans that were technically dropped off of origination warehouse facilities because of some technical event that could be related to a notice period that the borrower was supposed to receive on their current coupon if it would have changed and items like that. We typically do not fund more loans at that fall out, because of heightened consumer risk or because of a valuation change on the asset itself. So we're focused on more of the nuanced origination criteria that the GSEs require and fallouts related to that.

[Steve Mumma:]

And just further to scratch and dent, they're generally performing. They're almost all performing when we buy them.

[Jason Serrano:]

Yes. They're separately performing loans a year within a year of origination. And it's really a function of timing between when it was originated, when the scratch and dent item was noted, and the financing facility to hold that loan under an agency delivery.

[Eric Hagen:]

Got it. So more documentation related issues, not related to delinquency. Got it. Thank you guys so much. Appreciate it.

[Operator:]

Your next question comes from Christopher Nolan with Ladenburg Thalmann.

[Christopher Nolan:]

Hey guys. On the dividend for 2021 given that your mortgage rate, should we assume that the dividend payout will go up? Go up, I should say?

[Steve Mumma:]

We continue to generate a large part of earnings from unrealized. It's obviously not distributable -- required distributable income. I mean, we will monitor a dividend and as we drive the portfolio size up and look at the what we would consider -- reoccurring revenue stream, that's really what will dictate the dividend pay rate. But -- so that's really what will dictate. We don't really comment about what we're going to do with the dividend going forward in the future in absolute terms.

[Christopher Nolan:]

Okay. And then, I didn't see in the deck, but how much dry powder, balance sheet dry powder do you think you have now?

[Jason Serrano:]

Yes. I mean, there's roughly $300 million of cash on our balance sheet as of -- and I'm speaking as of the Q4. We have vast amounts of activity that's happened in the first two months. I don't want to comment on directly. But as of the end of the fourth quarter, roughly $293 million. We just spoke about a securitization of upwards about $500 million. That would free up some cash there. Most of those assets are unencumbered. I mentioned, we have over $1 billion of unencumbered loans and assets on our balance sheet. So when you think about dry powder, the way we think about it is our unrestricted cash and financing ranges that we believe are prudent to execute that go with our liquidity plan as a company. So we see upwards of over a $1 billion of kind of that dry powder to execute into the portfolios.

[Christopher Nolan:]

Great. And then the follow up on Eric's question on the BPL loans. Are those loans made to the originators? Are they sort of selling off their loan production to you guys?

[Jason Serrano:]

Yes. The originators are originally to distribute kind of model. They -- we're funding loans that they're originating directly for contractors and local markets that are either flipping houses or buying up portfolios for rental purposes, which is a trend that we see increasing. So it would be for both those purposes.

[Steve Mumma:]

We're buying closed loans.

[Christopher Nolan:]

Yes. I cover fix and flip originator in my coverage. And the yield on those loans are closer to 12%, plus around 4% of fees and so forth. And you're getting an average coupon, roughly 6%, 7% or so?

[Jason Serrano:]

Yes. The market is -- there's a couple of ways fix-and-flip loans originated in a couple of different paths. Without going into the specific -- very specific levels on what you're seeing at the 12% range, we can certainly structure a loan at a 15% coupon. And it would be more risk and higher risk of default. One of the things that we do to manage the risk on fix-and-flip is to focus on the amount of work is required to actually go through the transitional plan for that contractor. And in that area, we'll focused on loans are generally about 10% to 15% type of cost, add to the purchase price to then transition into a sale or to a rental. We don't want to take a lot of construction risk in this space, given the timelines that we've established for the opportunity. Now, if the fix-and-flip market is not a market that you want to -- that would be ban for -- into perpetuity, but there are definitely pockets in the market where it makes sense to look at these types of --these 12-month type of bridge loan arrangements, and we're currently there. So, for that reason, we are -- we're very cognizant of the potential extension risks due to construction. Construction, as we all know, we've all had experiences where it actually takes a little longer than suggested. And on top of that the cost of labor and other related materials with houses also then has gone up quite a bit in the last year. So for those reasons, we kind of try to keep it tight to a quick turnaround with operators that have vast amounts of experience in these markets. And also, we also constrain ourselves to certain markets, where we see that migration of demand helping out -- helping to foster the execution. So yes, there's a variety of fix and flip loans you can acquire in the market, and we're focused on a shorter duration part of that market.

[Christopher Nolan:]

Final question on the fix and flip, what sort of return does a contractor have to generate with your loan in order to make breakeven?

[Jason Serrano:]

The contract -- there's two types of loans that were -- two types of business plans that we lend to. One is, a turn around flip of the house. The other is a more of a cap rate model where it's a rental play. And at times, that changes over the course of the loan where the rental play becomes more formidable, given cap rate compression and ability to sell a rented house in a market with vast amounts of quantity of cash that is looking to carve portfolios of rentals in certain markets. So these contractors are feeding both sides, and also feeding the fact that there's a lot of housing construction in these markets, where this is a new upgraded product that's there, that would be typically sold to a new housing buyer. So when we look at both the return that we're focused on for the contractor, its a bit different depending on the business plan. But depending on which market you're looking at. You can see cap rates in the 5% area, and also, as relates to the flip, they're definitely looking at teens return of opportunities. And again, if it's a flip that is more of a just bought cheap and more of a superficial type of improvement. Our focus is really on what the value of the home is. What the potential opportunity for that sale is more so then the contractors earnings. We're aligned with them. In the fact that we only fund low LTV loans, but with real cash contribution, we don't focus on refinance fix and flip loans. These are purchase loans for the most part only. And in that area, our alignment comes from that perspective, the cash that they have into the particular house.

[Christopher Nolan:]

Okay. Thank you for taking my questions.

[Steve Mumma:]

Thanks, Chris.

[Operator:]

Next question comes from Jason Stewart with Jones Trading.

[Jason Stewart:]

Hey. Good morning. Thank you. Steve, if we could just go back to your comments on the mid-teens ROE. Should we think about that split between net income spread or net spread as we do in the multifamily? It's two-thirds, one-third. And I want to leave the legacy investments out and sort of think about it on a go forward basis?

[Steve Mumma:]

So that the two-thirds, one third is asset allocation, right. And really, that's because we're putting a lot of -- we're putting more leverage than a lot of leverage on the residential side securitization. The majority of our multifamily assets today are mezzanine loans, that we don't put financing on or secured financing on today. So that asset balance will be a little different than the equity balance. But as we build out our pipeline, certainly our target return on anything that we're putting on the books is between 10% and 12%. And so when we look at those returns, it's a balance of -- in the residential side, it's a combination of the asset with leverage. On the multi-family side, it's generally the coupon on the loan and the opportunities of how long we think that loan is going to be outstanding. And what other kinds of upside incentives we have on this particular lending model.

[Jason Serrano:]

I think it's important to note that in the single-family strategy with particularly the assets, we're looking to leverage in the RPL strategy. We're buying these loans obviously at a discount. They are loans that have been paying for few months or have been delinquent for a few months. And our goal is to create those loans up. So the first cycle of return in that opportunity is the accretion value we get from -- the benefit we get from the borrowers becoming consistent payers, which obviously has been a strategy. That's a focus, where we've had 46% of the borrowers that when we purchased them were current. And as of 12/31, our borrowers were 62% current. The value increase we received from there from 90-94 is that first set of return opportunity. Once the borrower goes to a current status, there's a Phase 2, which is which is what we spoke of just earlier. The Phase 2 is taking those loans to a rated securitization market. And when we do that, we believe that these securitization equity returns are 15% plus on our portfolio. So, we have basically book value creation in the first stage. And then more of a carry, excess cash flow stream on the NIM play on the RPL securitization. Just to be clear. Multifamily, just to be clear, is an unleveraged strategy with respect to our direct originations.

[Jason Stewart:]

Okay. So strategy, asset aside, leverage aside, is there a minimum cash on cash return hurdle? Or is it because the duration is so short that you look at this as a total return play, and there's no minimum cash on cash hurdle?

[Jason Serrano:]

Yes. We don't focus on a particular IRR target for any portfolio, it's all risk adjusted, obviously. We will look at assets that have a carry of less than 10%, but had a total growth opportunity greater than 10%. That is the RPL strategy. And there's other asset classes where such as multi-family where it's unlevered double-digit type of return. And that is more of a coupon, cash flow stream play. So, it depends on what strategy you're referring to. But, we look at both. And we do have -- there was questions earlier about recovery from the March declines. Part of our book value growth also is, which we've had consistently, over the last few years is a function of the fact that we buy assets at a discount and accrete those assets through time. So our expectation is that we will continue to having book value increases due to the fact that we were buying these assets at discounts and using a operational strategy to extract value of those assets.

[Jason Stewart:]

Great. Thanks for taking the question.

[Steve Mumma:]

Thanks Jason.

[Operator:]

And I'm showing no further questions at this time. I would now like to turn the conference back to Steve Mumma, Chairman and CEO.

[Steve Mumma:]

Thank you, operator. And thank you everyone for being on the call today. We look forward to discussing our first quarter as we continue to build the company and the portfolio. Have a good day. Thanks everyone.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.