New York Mortgage [NYMT] Conference call transcript for 2023 q1
2023-05-04 11:20:22
Fiscal: 2023 q1
Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust First Quarter 2023 Financial Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. [Operator Instructions] This conference is being recorded on Thursday, May 04, 2023. A press release and supplemental financial presentation with New York Mortgage Trust's first 2023 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 the 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 Jason Serrano, Chief Executive Officer. Jason, please take it away.
Jason Serrano: Thank you, operator. Good morning, everybody. Thank you for joining our first quarter 2023 earnings call. On the call with me today is Nick Mah, President and Kristine Nario, Chief Financial Officer. I'll begin by providing some market information and briefly touch on the first quarter performance before passing the call to Christine, who will discuss our quarter results in more detail. Nick will then discuss an update to our portfolio and market opportunity. The first quarter was a challenging environment, as you saw the real beginnings of a risk-off mentality after regional banks entered a type of liquidity vortex related to their deposits. Distortions to zero interest rates are on full display here. Left with a material portion of fixed rate assets or at below fed funds rate, some regional banks are caught in liquidity crunch. Liquidity is locked up in these assets and push into the distant future. We recently witnessed three of the four largest banks failures in US history. Total assets of the deposits are approximately $550 billion compared to a total in 2008 of $365 billion. Regional bank deposits. Issues seem far from over, provisions taken on CRE loans particularly office are still to come. These events have accelerated what we see as an end stage to the growth cycle. There are many market signals that show a recession is near. Last quarter we showed a graph related to quarter-over-quarter change to lending standards, which were on the rise, and this was noted before the regional bank liquidity issues. On Page seven of our presentation, we highlighted the obvious fact that the entire yield curve is inverted, but the not so obvious fact is that the months of inversion are now beyond or very close to when recessions were previously triggered. Whether you look at the trends or M2, money supply growth or which is negative 4.11% [ph] which is the lowest grade progression or manufacturing ISM Index or variety of other leading historic leading indicators, this is likely the most advertised recession in US history. No two recessions are the same, and we do not see US housing leading the decline in this downturn. In fact, we believe US housing, including multi-family assets class will outperform in this market. On the right side of the Page seven, we discussed how the previous 2000 themes of the great financial crisis are simply not relevant today. Mainly the US mortgage is predominantly fixed rate and underwritten with higher lending standards than 2007. Mortgage payment shocks are not an issue like it was at that time after the fed's aggressive rate hikes. Also, the incentive for homeowners to walk away from their mortgage and rent across the street, which was common theme in 2007 is an option that is out of the money for today's homeowner. Besides the vast home equity that has been built up, the chief cost of housing given zero interest rate policy offered a few years back makes this move uncompelling. The supply side of the housing remains stubbornly low, less than $1 million units for our on sale in the United States or less than three months of supply. This is a comfortable area to keep HPA range bound. This is primarily due to a locked market where sellers do not want to lose their low cost of financing, but also may have issues finding replacement housing. On the other side, new home buyers are delaying purchase plans with borrowing costs above 5.5% and little inventory to choose from. However, we know that the housing market is not insulated from higher loan default risk. Wage loss due to layoffs as an example, will push delinquencies higher. For the US housing credit market, the loss given default should be -- should prove to what to be a somewhat stable parameter to underwrite, much different than 2007. We believe these factors will contribute to a favorable secondary market opportunity for distressed investors in US housing. Given the persistent regional bank liquidity problems and recessionary concerns, we believe the opportunity will open up this year and add to attractive risk adjusted returns in a dislocated market. With two decades of residential housing investments and loan and property level asset managed experience in both single-family, multi-family, we are well equipped to unlock value in this market. In fact, on Page seven, we show that we have been preparing for the economic downturn for over a year. This is a timeline we presented about a year ago, which has correctly illustrated the market transmission mechanism from a performing market with excess liquidity to what we believe will end in dislocation. After the first fed hike in March, 2022, we set plans to sharply reduce our investment pipeline, which was running at $1 billion per quarter. In Q3 2022, asset acquisitions totalled only $118 million and have stayed quite low since. We have remained steadfast in our defensive posture in order to be a meaningful offensive player in a down -- in a down market. We believe the income potential in this new cycle will exceed earnings or capital over the past year if it was fully redeployed. Simply said, we believe the opportunity cost of holding cash over the past 12 months was extraordinary low. We are confident the investment opportunity will be highly attractive and sizable to create significant long-term value for the company. On Page nine, we show one of the outcomes as a result of this portfolio management strategy. On the right side, the graph shows a portfolio size over the past five quarters. In late 2020, we targeted bridge loans because we were attracted to high coupon, low LTV and short duration. In the second quarter of 2022, we reached a peak of business purpose loans, despite multiple opportunities to continue growing the portfolio to increase our income over the past year, we continued to follow the plan to run off the short dated portfolio. Consequently, the company's interest income declined from peak in second quarter of 2022 of $69 million to $57 million the first quarter of this year, a decline of 17%. As illustrated the lack of BPL reinvestment accounted for nearly all the interest income decline. Our plan was to create $0.5 billion of dry power to be able to meaningfully participate in a downturn. The diagram on the bottom left illustrates this point. The $552 million of excess liquidity equates to 42% of our market capitalization as of quarter end. We are also prepared with $1.4 billion of borrowing capacity with warehouse facilities that are currently in place. The company is primed to be liquidity provider in a downturn to grow earnings over a longer time horizon. On Page 10, we summarize our quarterly performance and activity. As discussed earlier, we prioritize book value protection, which consequently lowered quarterly interest to income due to the lower investment activity. As such, the company generated comprehensive earnings of $0.12 per share in the first quarter. Adjusted book value was negative 3% quarter-over-quarter, and after our previously declared $0.40 dividend, the company's quarterly economic return on adjusted book value was negative 0.5%. Part of our strategy to keep competitive advantages was to hold to hold G&A at a low level. We want the flexibility to transition between primary and secondary markets within the sector seamlessly. The lack of compelling risk adjusted returns offered in today's market, we did use some of the capital to repurchase securitization debt, common shares and for the first time preferred stock in the first quarter. As discussed in previous quarters, we are in the process of monetizing our common equity interest and multi-family properties held on balance sheet. As updated and note here, we have six properties in the some stage of advanced sale process. Total investments amount related to these properties is $62 million. At this time, I'd like to pass the call to Christine to provide more financial color and then to Nick to discuss our portfolio update and strategy. Kristine?
Kristine Nario: Thank you, Jason. Good morning. In my comments today, I will focus my commentary on main drivers of first quarter financial results. Our financial snapshot on Slide 12 covers key portfolio metrics for the quarter and Slide 23 summarizes the financial results for the quarter. The company had undepreciated earnings per share of $0.14 in the first quarter as compared to undepreciated loss per share of $0.50 in the fourth quarter. The fair value changes related to our investment portfolio continued to have significant impact on our earnings and during the quarter, we recognized $0.31 per share of unrealized gain primarily due to improved pricing on our residential loans and bond portfolio. We had net interest income of $17.8 million, a contribution of $0.20 per share down from $0.24 per share in the fourth quarter. The decrease can be attributed to a combination of a few factors. First, a decrease in average interest earning assets due to portfolio runoff in our short duration BPL bridge loans, as well as our conscious decision to be selective in pursuing investments in our targeted assets, which Jason covered earlier. Second, overall yield on our interest earning assets decrease also due to portfolio runoff of higher yielding BPL bridge loans and uptick in maturity related delinquencies, primarily in our BPL bridge portfolio. Additionally, financing costs in our investment portfolio increased primarily due to pay downs and repurchases of our lower cost securitizations and due to increases in interest rates related to our repurchase agreements. Although we've experienced an increase in these material-related delinquencies, we believe that through active management and our ability to work with borrower to find a reasonable exit plan, we would be able to recoup our delinquent interest on these loans at payoff, which has been our experience historically. In the first quarter, we had non-interest related income of $66.8 million or $0.73 per share. As previously discussed, prices and a majority of the assets in our investment portfolio increase during the quarter and contributed $0.31 per share in income. In addition, our consolidated multi-family JV properties contributed $0.46 per share in income, an increase from $0.44 per share in the fourth quarter as properties continue to implement business plans to drive rents and occupancy higher. We are required from an accounting perspective to carry our multi-family real estate assets and our health for sale at lower cost or market value. We perform our valuations for the quarter and determined that two out of the 19 multi-family properties held for sale had lower property valuations as compared to our carrying costs, resulting in an impairment loss of $10.3 million during the quarter. Total, general, administrative and operating expenses amounted to $70.4 million for the quarter up slightly from $68.2 million in the previous quarter, primarily due to an increase in interest expense and mortgages payable on consolidate real estate due to change in base rates, partially offset by reduced portfolio operating expenses due to residential loan portfolio runoff and minimal purchase activity. As Jason mentioned earlier, adjusted book value per share ended at 15.41% down 3.02% from December and translated to a negative 0.50% economic return on adjusted book value during the quarter. As of quarter end, the company's recourse leverage ratio and portfolio recourse leverage ratio increased slightly to 0.40 times and 0.32 times respectively from 0.33 times and 0.25 times respectively as of December 31. While our average financing leverage still remains low, the slight increase in the quarter is primarily due to the financing of newly acquired agency RMBS. We continue with our effort to enhance our debt structure by placing greater emphasis on longer term and non-mark-to-market financing arrangements. Currently only 20% of our debt is subject to mark-to-market margin calls and remaining 80% have no exposure to collateral repricing of our counterparties. In addition, as you can see on Slide 13, we have a $100 million of unsecured fixed debt due in 2026 and $45 million of subordinated bonds due in 2035. The maturity profile of our corporate debt allows us to have more flexibility by avoiding cash holdbacks related to near term bond maturities. In addition, while longer term and non-mark-to-market financings may per a greater expense relative to repurchase agreement financing, that exposes to mark-to-market risk, we believe that over time this waiting towards these type of financings better allow us to manage our liquidity and reduce exposure in dislocated markets. We paid a $0.40 per common share dividend, which was unchanged from the prior quarter, and we evaluate our dividend policy each quarter and look at the 12 month to 18 month projection of not only our net interest income, but also realize our capital gains that can be generated from our investment portfolio. And with that, I will now turn it over to Nick to go over the market and strategy update. Nick.
Nick Mah: Thank you Kristine, and good morning, everyone. As Jason expanded on, we are still navigating a challenging investing environment. We are reminded that regional bank failures are still a concern, which has shifted the technical dynamics of banks being buyers to likely net sellers of mortgage risk and all this happening prior to a potentially more distressed environment in the horizon. The portfolio activity over the last few quarters has been reflective of our views on the market, which is that on balance, we prefer the preservation of our liquidity and leverage today for the deployment into more compelling investment opportunities in the future. We believe our portfolio and available capital is well positioned for what is to come. Relating to our purchases, our first quarter, 2023 acquisitions of $219 million are still meaningfully lower than our fastest pace of acquisitions that we experience at the peak in the second quarter of 2022. This quarter's activity is, however, almost double last quarter's lower base of investment volume of $106 million. The slight pickup in aggregate investments was partially driven by our opportunistically investing in $107 million of agency MBS, given the spread winding we witnessed in February and March. We mentioned in the prior earnings call, that investing in agencies is something that we would consider given the non-credit nature of the asset class. This is further bolstered by its relative liquidity and historical outperformance during recessions. We will continue to selectively deploy in this asset class over the coming quarters as we await more attractive opportunities in residential and multi-family investments. Across all of our core credit strategies, you will also know that our pipeline of activity has marginally increased quarter-over-quarter. We continue to engage our sourcing channels both new and old to prepare for normalization to an increased investment pace in the future. The portfolio's prepayments and redemptions have continued to be higher than our pace of acquisitions. This has the net effect of the reduction of our overall portfolio size. However, that gap is shrinking with only $70 million delta and portfolio declines should taper off in the coming quarters. We believe the overall portfolio is well situated today. Despite the market turmoil that we saw in the first quarter driven by the region regional bank crisis, our credit portfolio evaluations improved. The LTV profiles of our book in the 60s provide a strong buffer amidst potential home price declines in the future as our borrowers have a sizable amount of built up equity. On a corporate level, we continue to maintain low portfolio recourse leverage ratios across our entire credit portfolio. The recent new additions to our investments would be our agency positions. We have recently been more focused on higher than current coupon spec pools where we are targeting low pay up stories for prepayment protection. We have the benefit of being able to construct the portfolio from scratch, which has allowed us to avoid lower coupon bonds, which now face additional technical selling pressures from FDIC bank selling. Higher coupon agency bonds also help balance the convexity profile of the overall residential portfolio, where more of our seasoned assets have a potential for price appreciation, but may not generate as much NIM. Our largest exposure in residential credit is our BPL bridge loans, which we continue to cautiously deploy capital through a more conservative credit buy box. We see value in the short duration and the high coupon nature of the product. We have noted in the past that we continue to be active in the asset management of the BPL bridge portfolio, especially guiding the assets to resolution in a timely manner. The portfolio has declined from its peak of $1.7 billion in the second quarter of 2022 to $1.1 billion today, mostly through organic resolutions. With the curtailing and purchasing activity, our existing portfolio is seasoned about 14 months on average. So we have experienced and will continue to face increasing maturity related delinquencies. Our asset management team alongside our third party servicers and asset managers, continue to work with borrowers to a responsible exit plan and to the extent that an extension is required to charge the borrowers the fees necessary to align them with our cost of continuing to hold on to the asset on our balance sheet. From a market standpoint, the time to resolution for bridge loans has increased for a couple of factors. First, the market for refinancing of these borrowers into other loan products is smaller than in the past, with tighter underwriting standards constraining the market. Also, borrowers are also having to align their original profitability assumptions in their projects amidst a less than -- a less a buoyant home price backdrop. All in all, we do feel comfortable with the credit profile of our BPL portfolio given that the LTV ratios and the progress of the projects in our book. Losses in our BPL bridge portfolio to date continue to be less than one basis point across the $2.9 billion of bridge loan purchase we've made today. Delinquencies across other parts of our residential book has declined quarter-over-quarter and still remain low. On the multi-family side, we are focused on selectively expanding our pipeline on the multi-family mezzanine loan program and on liquidating our joint venture equity portfolio. We remain focused on finding avenues for the disposition of those assets. On the multi-family mez portfolio, we are constructive on the credit of our existing portfolio and for further investment in this space. First of all, the demographic trends have been positive in the areas that we primarily invest in, namely the south and southeast. This can be seen through an 11% rental growth rate in 2022, with an additional 3% growth rate in the first quarter of 2023. This creates a positive valuation trend on the collateral underlying our mez loans and helps offset operating cost increases that may have arisen through inflation. The performance of the portfolio is fantastic with only one delinquency that is expected to pay off in the near future. Unlike the BPL bridge refinancing market, the multi-family mez financing market is relatively robust. For our stabilized properties, senior agency loans are still available with competitive rates in the mid 5%. Agencies also offer supplemental loans that can in certain circumstances where our LTV positioning has improved, refinance our mez loans out. For our non-stabilized assets such as our properties under construction, there is a natural outlet to refinance to a more efficient capital structure after stabilization. Overall, our mezzanine portfolio prepaid at a 32% rate last year, and we expect the heightened prepayment activity to continue into 2023 despite a slower Q1. I will now turn it back to Jason for any closing remarks.
Jason Serrano: Thank you, Nick. Success in this new environment may be achieved through organic creation of liquidity, tactical asset management, and prudent liability management for book value protection. And as a REIT, we are particularly excited about our excess quitting advantages, permanent capital can have an a dislocated market. So with that, I'll pass it back to the operator for questions.
Operator: [Operator instructions] Our first question will come from Doug Harter of Credit Suisse. Doug, please go ahead.
Operator: [Operator instructions] And our next question comes from Matthew Hullett, B Riley. Matthew, please go ahead.
Operator: And our next question will come from Eric Hagen with BTIG. Go ahead, Eric.
Operator: Thank you for your questions. I would now like to turn it over to Jason Serrano, CEO for our closing remarks. Go ahead, Jason.
Jason Serrano: Yeah, thank you for your time today. We look forward to speaking with you on our second quarterly earnings call. Have a great day.
Operator: Thank you for your participation in today's conference. This concludes the program. You may now disconnect.
