Q4 2019 Earnings Call
Good morning, ladies and gentlemen, and thank you for standing by welcome to the New York Mortgage Trust fourth quarter and full year 2019 results conference call.
During today's presentation, all parties will be in listen only mode.
Following the presentation the conference will be open for questions.
If you have a question. Please press the star followed by the one on your Touchtone phone.
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This conference is being recorded on Tuesday February 25th 2020.
A press release and supplemental financial presentation, with New York Mortgage Trust fourth quarter and for your 2019 results was released yesterday.
The press release and supplemental financial presentation are available on the company's website at www Dot and why Amtrust Dot 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.
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 meaning of the private Securities Litigation Reform Act of 1995.
Although New York Mortgage Trust believes the expectations reflected in any forward looking statements are based on reasonable assumptions. It can give no assurance that its expectations will be attained.
Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release.
And from time to time in the Companys filings with the Securities and Exchange Commission.
Oh this time it would like to introduce Steve Smith, Chairman and CEO, Steve. Please go ahead.
Thank you operator.
Good morning, everyone and thank you for being on the call Jason Surmont or President will also be speaking this morning.
For the first time, we'll be using a supplemental financial presentation to assist in delivering a quarterly and full year results.
We hope this will better enhance your understanding of our financial results. Im also give you better clarity into our investment strategies as well as roll market perception.
Last night, we issued a press release, which include quarterly and full year financial summary, information as well as our consolidated balance sheet and statements of operations.
In addition, we posted on our website or supplemental financial presentation information, a Jason I will be using during this presentation.
I will be speaking to the Companys overview in financial summary, specs in well, Jason will be speaking to the market strategy in 2020 development section.
2019 was a monumental year for the company.
Nearly doubling in size in both our market capitalization in investment portfolio.
Our steady and disciplined execution of our credit focus investment strategy.
Resulted in solid financial results not only for this quarter, but the entire year.
For the fourth quarter. The company generated 20 cents per share in GAAP earnings at 21 cents per share a comprehensive earnings.
For the full year, the company or 65 cents per share and GAAP earnings and 87 cents per share a comprehensive burnings.
Oh, that's when the backdrop of completing six common equity capital raises during the year.
We delivered a 3.6% economic return for the quarter in a 16.5% economic return for the year. It over the last three years, we've averaged 12% economic return meeting our primary goal to deliver stable economic return to our shareholders.
Looking to the overview section beginning on slide six.
We had $5.4 billion in investment portfolio, and a 2.3 billion dollar market capitalization as of December 31st 2019.
80% of our investment portfolio was focused on credit spread is about 20% with focus on agency strategy.
We had 55 professionals employee costs three offices and today, we're approaching 60 professionals all focused on our core investment strategy.
We continue to build our technology through hiring and infrastructure upgrades, which we believe we'll continue to give us competitive advantage in sourcing our investments.
Our primary focus is to investment thesis today single family credit, which represents 49% ABR investment portfolio and multifamily credit, which represents 30% of our investment portfolio as of yearend.
We believe our credit investments allow for both interest income in capital gain opportunities from improved general in specific credit market conditions and not rely solely on net margin, which typically involves increased direct leverage should generate returns.
Our credit strategies, a lot less flow now right leverage where our total debt. The leverage ratio was 1.5 times at year end well within our stated risk tolerance of two to two and a half times.
We believe our credit standards are the key reason why we've been able to deliver consistent attractive economic returns, while maintaining a stable book violent book value industry low leverage.
Looking to a resources and capabilities our strength line finding opportunities in our markets more specifically the 11 trillion dollars single family residential market and the three trillion dollar multifamily market.
Causing our experience investment teams with deep rooted market experience, coupled with our technology focus data analyzed analyzing we believe that we can continue to identify investments that will meet our expected return.
Now, let's go over more detail of our financial results, which begin on slide 11.
In addition included in Slide 26 to 32 years, our quarterly comparative financial information section that a walk I will also use and eating on this discussion.
For the fourth quarter the company, a basic and diluted GAAP earnings per share of 20 cents, a comprehensive runnings per share of 21 cents.
We declared a fourth quarter dividend of 20 cents, our 12 in a row.
Our investment portfolio totaled 5.5 $5.4 billion with an average fourth quarter net margin of 290 basis points or 2.9%.
An increase of 50 basis points from the previous period.
Large part of the improvement on a net margin for the quarter was attributable to the reduction in our debt costs of 42 basis points.
Where we experienced improved pricing from our debt providers as well as a 25 basis point reduction in fed fund, which occurred in October 2019.
Company ended the quarter was a total debt leverage a one point time 1.5 times as we continue to focus on strategies of credit and not external leverage.
Looking that's what slide 12, you can see that we raised over $1 billion into nine 2019 through common preferred an ATM activities.
We purchased $1 billion in $2.4 billion, new investments for the fourth quarter and full year respectively.
Included in the yearly purchase was $1.6 million in single family credit investments and $482 million the multifamily credit.
Jason will speak later about our 2020 investment portfolio and I'm, sorry, 2020, but some pipeline as it continues to build.
We had fourth quarter total GAAP net income to common stock holders. This 55.3 main for the quarter and 144.8 million for the year.
Comprehensive running through the fourth quarter and full year of 58.5 million in 192.1 billion respectively.
During the 12 months ended December 31st 2019 company completed six common equity raise raises raising a total of over $800 million. As result of these raises the company created 20 mine million dollars, an accretive capital, adding to our economic return in helping offset any potential earnings drag from the timing of the deployment of our new capital.
As depicted on slide 13, or comprehensive earnings in accretive capital exceeded the dividends paid in dollars by over $30 million reinforcing the importance of accretive capital raising.
Looking to slide 13 for the quarter in December 31st 2019 company at $44 million a net interest income.
12 billion dollar increase from the previous quarter was 38% increase.
Our net margin for the fourth quarter of 2019 was up over 100% when compared to the fourth quarter of 2018.
Both quarter over quarter in year over year increases were largely due to increased average ending balances from the deployment of our capital ways.
Net margins improve both quarter over quarter and year over year as credit strategies done resulted in higher yielding assets.
In addition, our debt costs decrease over time during the year due to both fed activity of lowering the base rates as well as improve borrowing costs on our credit assets from our direct lenders.
Non interest income continues to be a significant <unk> contributed to the company's result, adding $33.6 million for the quarter in $99.4 million for the full year 2019.
As we've mentioned many times. This is a key component to the success of our firm.
Generating gains in fees from in credit investing along with net margins and not solely relying on <unk> direct leverage and interest net margin.
Our Gina expenses totaling $9.3 million for the quarter, an increase of $1 million from the previous quarter largely due to headcount additions in the related expenses and increased investments in information technology.
The company Cully completed its internalization that may of 2019 any management fee expense for the firm.
In 2019, amazement <unk> expenses totaled $1.2 million for the year down from 5.4 million the previous year.
Total DNA for the fourth quarter of 2019 was essentially flat to the fourth quarter of 2018.
With that investment portfolio of almost twice the size.
Validating our decision to internalize and improving our expense ratio leverage as we grow the company.
Compensation expense was approximately $6 million for the fourth quarter, and we would expect that number to be between six man and six unhappy in dollars per quarter as we go forward into 2020.
Our Genie expense for the quarter was 3.2 main and we'll probably run around three to 3.5 billion per quarter, bringing total GE in a two around $9 million to $10 million per quarter on a go forward basis.
Slide 14 illustrates the successful execution of our investment strategy.
We're outperformance in this case by over 100% over the last nine years versus a Bloomberg mortgage feed indexes.
To be leads to better company valuations or premium to book value, which allows the company to issue accretive capital given the company more investment opportunities better cost of debt and capital and better expense leverage all resulting in consistent dividend and stable book value to our shareholders.
I'd like to handle the presentation as Jay said as he will continue to speak about our investments right.
Good morning, Thanks, Dave I'm going to start by look going through some idling some broader market conditions on page 16, U.S. Ecom expanded at 2.3% 2019, supporting the lowest unemployment print in 50 years at 3.5%, but after a bit of volatility in 10 year ended the year, Mark we lower at 1.92%, which puts pressure on mortgages.
Rates.
Which we saw a 75 basis points to reduction in the fixed rate coupon.
Now I'd be remiss, if I didnt point out that the very recent risk off mentality that emerge due to the potential impact. Your current virus has pushed the tenure below 1.4% as of last night, which should touched 30 year fixed rate mortgage coupon all time lows.
Lets me, 3.4%, which we briefly experienced in 2012 again in summer 2016.
Often overlooked data in a single family housing market is the U.S. homeowners mortgage debt service as a percent of income it's at the slowest points since the established track by the fed in early 19 eighties.
This is solid fundamental indicator for the strength of U.S. housing in multifamily where construction has been a bit more robust.
Occupancy rates were stabilized cash flowing properties was at 95% the latest quarter, which is equal to long term equally and trends.
With this fact, another positive leading indicators, we expect multifamily credit to outperform especially in secondary tertiary markets across the South East South South East and South U.S.
Now turning to page 17, starting with this strategy updates.
As highlighted earlier in your mortgage trust is core operating model centers around efficiency and flexibility.
The company adopt a total return approach and targeted investments that will add additional value to our existing portfolio by broadening our sources of income through recurring gains. The company will continue to drive earnings while reducing expenses levels on a relative basis. Therefore, the company will continue to focus on new niche subsectors to drive toward returns and mitigate against potential.
Volatility associated with our leverage.
On page 18, the the slide aired delineate our strategies.
As stated we have two markets that we provide in that provides a nice balance to diversify between single family multifamily.
Both asset classes, we follow similar it doesn't promise.
And utilize a deep fundamental approach to uncover absolute value them all markets.
Thanks impair the insights to explain this pricing securitization markets were similar assets are pledged and support issued notes.
Underwriting distressed performing loans residents are credit allows us to reverse engineer securitization markets for better relative value.
Supports thoughts of convexity risk in in the single family Agency markets, Likewise underwriting asset management credit related to prefer to Mezz loan in multifamily origination provide keeps insight to that market and loan securitization activities issued by the geographies.
Additionally, as as identified relative value.
In the multifamily guaranteed bonds, which offered better risk return characteristics than agency RMBS in our view.
Thus our approach to capturing value to quickly identify opportunities between loan securitizations and between single family multifamily.
Turning to page 19.
This describes our focus in the single family credit space, where we have 50% close to 50% of our investment portfolio allocated overall, we see double digit returns.
Within the discount assets and Reggie loans and compelling relative value return plays and singles that families securitization markets now starting with distressed loans, we continue to build.
The success of converting NPL or sub performing loans in the performing loans.
With Ford and $23 million invest in 2019, and 197 million coming from the fourth quarter, including a $1.3 billion employee purchase was stable finance term financing that is actually included in the Skouries line item here and we can do you find attractive opportunities and space more on this point in just a minute.
In performing loans.
The focus is primarily scratch and dent and juicy kick out strategies, where originators mistakenly create a loan origination defect, which has recently rejected by the disease.
We serve as a price discount liquidity provider to originators for loans with process oriented ours as originator originators ramped up refinances due to lower rates more defects have the opportunity to be created which is our opportunity.
Lastly, given credit underwriting capability and distressed and performing loans, we can quickly move indentified value and seek miss pricings across a single family securitization capital structures.
Sure, we rarely see efficient pricing on whole loan portfolios and securitization relative basis.
In this mark the some of the parts really equals the whole.
Turning over page 20, just want to give you a little bit deeper dive and we're doing in single family credit space, particularly the distressed loans.
Oh.
This drives a bit nuance Ross, where as a background millions of loans were evaluated for a modification.
Not properly structured after the financial crisis banks continue to divest these noncore assets where capability to manage significantly diminished.
With over executive experience analyzing modified loan redeposit behavior and implementation of corrective loan servicing strategies. We target loans are currently integrator of repayment was solid equity position supporting alone.
Consistent bar repayment leads the securitization options and decreases financing costs.
Or bulk sale opportunities to monetize unrealized gains is also available to us.
We target loans with relative high LTV high value.
Which provides downside protection.
Fixed cost to service loans, we also target low leverage so as you see in this table on the right or average LTV is 76%.
That downside protection helps us upon at loan default.
Interest incentives to refinance which tends to shorten duration via prepayment helps when you buy loans that have 100 basis points water coupon. The current prevailing mortgages, which is 4.76% which is our average coupon.
And borrowers credit scores that are currently at 584 on average our portfolio have room to improve with consistent mortgage payments.
In nine months, we're able to quintuple the loans paying six months or more contributing which contribute to a 4% gain price gain on our holdings.
This gain coupled with interest income provides for an attractive total return or way, which we intend to build on.
[noise], sorry over page 21, and switching over the multifamily space.
Where we have allocate 30% of total investments the securities here leads the investment focus with 1.1 point.
The over billion dollars multi value the market value as a 12 31.
Which 824 million represents equity interest in Freddie Mac K series multifamily program I'll talk more about that in a minute.
We're also focused providing direct preferred or mezz loans to similar properties within these deals at Georgia is six point of carrying values that have not as a coupon over 11% we have source very attractive assets for the company after considering the origination fees received.
You find great risk return dynamics down in credit located in the southeast part of the United States, where rental unit demand is elevated due to job growth affordability and lower taxes.
On page 22, I want to give you a deeper dive on what we need by K series multifamily scares Asians.
It starts off with a.
With the deals that are basically issued by Freddie Mac, who guarantee the senior tranche of these transitions.
Since the program has been launched less than one basis point of total program losses on loans have been incurred through 12 31 2019 performance has been remarkably stable.
And this is due to the fact that you are looking at loans with 70.5% LTV.
Located in markets that have strong rental demand growth.
The investments that we focus in this space isn't the class D or the first last tranche, which is typically 7.5% of the deal.
Here, we actually have control rights that exists with us as holder of those notes and the company is able to inspect properties review management budgets and transfer servicing appoint new servicing.
Now we are differentiated in the strategy that we have strong minute strong asset managed capability with over 20 years experience and this over the last five years, we've actually evaluated 1200 properties.
And.
He has conducted 650 onsite inspections.
Data technology helps us mine proprietary data analytics for valuation.
And there are some Bart bears entering this market we have to be qualified by Freddie Mac to participate in the equity program.
Our competitive edge here is that we were an early moves in the space Indentified isn't as an opportunity.
Early in the lifecycle these deals.
Now looking over to the right and the capital structure again, holding the class D. Note. This is a very excellent.
Opportunity to generate double digit returns, that's well credit enhance against the that lower LTV assets.
Also with the capability to protect our investment through art.
Our control rights this helps mitigate downside risk.
[noise] flipping in just the physician over the page 23 on the agency space.
Now the discussion here on the agencies markets includes both agency RMBS and CMBS.
The graph at the bottom helps shows exposure, which was have from 40% to 20% over the last few years.
And we found better return dynamics.
In the agency CMBS markets.
The focus of new incremental allocations in this space.
Benefits us from.
Steering away from negative convexity risk that's present in the agency RMBS market. This is a an issue that's been that has.
Definitely hurt valuations in the our agency RMBS space.
Which with lower rates actually benefits Us agency CMBS space with little ability of prepayment activity on the underlying portfolio where to.
We're debt is generally defeased.
With agency CMBS, we're able to immunize negative convexity risk, which continues impair the agency RMBS market.
Now turning over to 2020, starting on page 25.
We have been active in 2020 with two accretive raises bringing the company Vibrance 112 million of new capital, which generated 20 million accretive capital.
Raises we're opportunistic in that we sourced a significant pipeline opportunity. So far in Q1 2020 with new investments laid in K series equity multifamily direct lending and residential loans, which are seeing height inflows for the company.
We are also expected to look more carefully at emmis ours as it better first energy plants are developing in the market given where rates.
Construction lending the middle market performance, where we see total delivery costs.
For new construction below 70 market values the same in place property.
Looks compelling lastly, we are expected continued to benefit from lower financing costs.
That we now have in place, which is expected to to further reduce our were expected to further reduce our costs within new hormone facility that we're playing to implant and rollout in first quarter as well as a plant securitization to access more creative financing within our distressed loan book in 2020 of the company is well positioned to continue its mission delivering except.
Total shareholder value by delivering consistent dividend payments and training stable book value.
With that I'll pass it back Steve.
Thanks, Jason.
Operator, you can open up for questions now if you'd like.
As a reminder, ladies and gentlemen to ask a question you will need to press Star then one on your telephone keypad to withdraw your question press the pound Keith.
Our first question comes from the line of Air taken with KBW. Your line is now open.
Hey, Thanks, Good morning, guys, congrats on a really solid year.
A few a few questions on the series K segment, just how many loans make up that that segment now and how much time is left on the loans until then mature.
And just one more on that just what what's the weighted average coupon paid by the bar on those loans.
Yeah, I think the typical deals between 50, and 75 loans, Eric between one being the one and a half in total size.
The program that we participate in generally is the 10 year program. We have a couple of 15 year programs and those aren't refinanced the boat so their tenure pieces of paper.
And so they're going to scale down from 10 year and so we've been buying them. Since 2012. So we had one that just matured off in January this year. The next exit and expect the maturities not till next year and then they sort of ladder out to the next 10 years.
The coupons right now I think that program is in a low threes for 10 year fixed rate papers, so and they can get up to an 80% LTV on a property. So it's very advantageous for the property owners.
The FHLB phase come out given him a 100 billion dollar pipeline go forward over the next five quarters first of those five quarters was a fourth quarter of 19 and through this year. They have a run rate of a total of 100 billion over five quarters or 20 billion a quarter.
So.
A lot of opportunity there were a Jason said, we are slated to take down a couple of those in the first quarter or in the first four months of the year.
So we continue to think that it's a very attractive investment for the company.
Got it yes, you're detail on on when the maturities kind of ladder out was was helpful. Thank you and then on the just on the distressed side.
You guys are bringing loans current what kinds of modifications are you offering in order to Britain.
Correct.
Yes, so the loans that were looking at our harvest loans are generally were originated prior to the financial crisis doesn't sitting on banks balance sheets for quite some time and gone through maybe a few different kind of modification programs related to the government modification programs. So we look at these loans with low ltvs borrower has stuff.
When aligned well with our our interest Inc. and continue making payments is supporting other alone. So modifications that we're looking at here.
Are typically looking at deferments of past due payments of a couple of months.
That could be in the foremost capitalize in the coupon.
So the bar doesn't have to come out of pocket generally what we see as a bar misses a payment.
This is the second payment and can't make up three payments to come current so they're looking for relief or simply.
Being able to just make one payment and provide the loan current so the deferment to a capitalization is typically.
The route we would take in those cases and that's what we can do that given the LTV that's on supporting long.
Got it and I know, it's just one days worth of market activity, but I have to ask once you've probably received the take from your dealers on yesterday's activity at this point, but was there any widening credit spreads yesterday.
Can you just kind of remind us what.
A widening in spreads would mean for New York Mortgage Trust.
Yeah look I mean, the fees it let me let market was.
Furious yesterday to say the lease I mean, we're getting hit all time lows and a 10 year treasury.
He has to be conference going on right now, there's a huge amount of wall Street people and buy side people out there is a conference we actually didn't see a tremendous amount of trading activity I think if somebody was going to do a new issue, yes. They clearly they pulled it so we don't know where spreads how far they've changed today one of the reasons why we.
Focus on agency CMBS and not agency RMBS is that where we were concerned there are concerned that rates could go lower than higher anyway, and so clearly that's where we're headed so I don't know yet I mean look we're worried and credit strategy, if if if credit spreads widen.
Currently going to would hurt the valuation of our securities in a vacuum, but if spreads tenure treasury goes down 30 basis points in credit spreads widened 30 were flat so.
No we don't see it rolling into the actual credit performance and that's really what we base our investment decision on and the Mark to market is you know we've had a tremendous amount advantage in that because rates have rallied in spreads have tightened over the last generally three years, though.
We are prepared for that to change and we think you know were will benefit from that overtime.
Ill say that the extent that bars that rates do stay at this level for for some meaningful amount of time, we wouldn't expect to see it pick up prepayment activity in the market.
Thats, obviously starting to happen.
We're very focused on trying to valor self opportunities where prepayment activity actually the supports higher valuation. So the fact that we buy discounted assets across the board and single family space.
And with borrowers that are control continually paying.
You know would create a faster accretion to par and shorten the duration of the asset which is helpful with.
Any kind of recession that maybe looming.
And also in the securitization asset classes prepayment activity will also shorten the bond durations, which will help us.
Delight, rather those transactions sooner than later, so we're cognizant of lower rate environments and have been basically putting assets. The work in this space that could take advantage of that overtime.
Right those are great answer thank you very much.
Our next question comes from Stephen Laws with Raymond James Your line is now open.
Hi, good morning.
First of all Stephen Jason Thanks for the supplement thanks that was very helpful to have during the prepared remarks and I like the information there. So thank you for providing that.
Well, Steve you brought a lot year to date.
500 million capital raise can you talk about it you touched on investment pipeline I think you mentioned some K series deals you expected due in the next.
Few months.
Any update on how much of that 500 million is been deployed or how we should think about first half.
Earnings given the the additional 83 million of shares and the time it may take to deploy the new capital can you can you give us some color on the investment pipeline is closed year to date.
Yes look I mean, when we go out and raise capital. There's two reasons why we do one and most importantly, we have uses for the capital and to Opportunistically, we want to make sure we take advantage in the marketplace and so the second capital raise really falls into that category, where we saw very strong a week of issuance from one of our competitors.
Both in common and preferred.
We felt like there was significant demand for our stock, which we did our largest raise at the tightest spread in February that we've ever done the company's history and so we saw a building pipeline and feel confident that we can get the stuff invested over the next three to four months and so.
We always anticipate and that's why we talk about accretive capital that there's going to be a potential drag on the current quarter's earnings we've been fortunate in 2019 that.
The market activity in the assets that we purchased delivered tremendous earnings for the company and so you didnt really feel any that drag.
Jason mentioned the in those two capital raises we had $20 million of accretive capital already that will help support the book value. If there is in the earnings drag. So in terms of exactly how the earnings are going to fall out right now, especially with the move and happened yesterday and it continues at this morning, possibly.
It's unclear because there is a large part of our portfolio Thats Mark to market that is going to drive a lot of that swings, David but I think fundamentally we would not be raising capital. If we didn't expect to get that stuff invested within two to three months.
As a great that's helpful.
Poland I know in the past you've commented that.
Capital unless you north of 12 borrow equal new investments is that still consistent with where we should expect money go to work with recent rate.
No I look our target is 12%, that's where we're trying to target and so I think as we get into the all of these credit assets that Jason talked about is.
We will be one something that not only gives us an opportunity to earn that margin, but gives us an opportunity to have capital gains, which will get us a 12%.
Great.
Switching sides the financing.
Sold saw the significant benefits there the margin at 290.
First off is that sustainable versus kind of the historical range. You. You know that's been mentioned about like 200 to 60.
And on the financing side, you talked about it in the past as well about potentially.
Taking advantage the low forward rates that some duration. There I know you mentioned the securitization, which would do exactly that you know how big of an opportunity is that it.
How much incremental financing costs are associated with that relative to the short term financing costs.
Yes, so we have.
We have the capability of moving to a securitization market with the current portfolio that we have and we have been waiting and trying to time to market correctly with respect to rates in the market now were buyers of both loans securities. We buy the securities of other issuers would seem some are assets and the reason why have you been a buyer those assets because we expected spread it our credit spreads continue Titan, which they have.
Okay.
And so therefore, you know with that in mind and under what in reviewing those portfolios. We're now seeing a near term opportunity in a particular segment of distress loans, but sector to actually dr. securitization.
And take advantage of those tighter spreads.
It typically your cost savings your costs are given where we are today before the last rate move.
Yesterday were about the same you can pick up a little bit more leverage in the actual securitization market then can repo and we have not need to go to that point, given we're comfortable with our current leverage lower leverage that's producing a our double digit returns.
But the extent that we can create our assets and take advantage of of cheaper financing which is available.
Once the loans and the distrust space become more or less 12 months, a current when youve RV portfolio about 350 million to 40 million you want to start considering taking that to the market. So the today the securitization market is providing.
Best liquidity, we've seen post crisis with with our securitization spreads tightening and basically to all time tight they've seen post crisis as well.
So that's going to be of our first mover for us in that space and will continue going through that.
Awaiting the securitization market for term financing throughout the year.
Great Lastly, just can you touched on competition for the first of all pieces for the K series on others. Other others that look at those as well and maybe can you talk about how yields are today on those leases versus a year ago and just the competition there.
Yeah. There's no question just competition for those those securities.
We've been an active participant with with Freddie Mac since day one.
I think that they appreciate investors, who who participate the have multifamily knowledge not only in securities, but an actual property management and the understanding how those markets work and workout knowledge, which we do have a which has it gives us some advantage in the participation, but its competitive in yields continue to.
Come in I mean.
It was unclear how that will react to what's going on in the marketplace today, but you know I would say in general there probably in 50 basis points from year ago.
Yep Yep, Okay, great well that's helpful. Steve Jason appreciate comments from both of you. Thank you.
Sure. Thanks, Thanks, David.
Our next question comes from Christopher Nolan with Ladenburg Thalmann. Your line is now open.
Hey, guys on the investment pipeline and by the way that the presentations very helpful on the investment pipeline.
Nothing about agency investments should we look at the MSR sort of replacing the agency investments over time.
Yes, I mean, I'd I'd like to separate it little bit here on the agency side, you know, we use as kind of an incubator for new opportunities in this space extent, we're raising cash and we have settlements, particularly on loans that take 60 days to close which I disclosed we could look at the in particular the agency CMBS space as it plays to earn so.
Return on our cash that's typically how we've been looking at that space.
Now switching on the MSR market no. We're looking at as both as an investment opportunity.
And as a hedging tool.
Currently the space provides around 70%.
Return.
And Thats you know in income producing asset Thats also could be used for.
For hedging purposes, so to extent that we look at MSR as we'd also look to take off some our swap position.
As it basically we don't provide us with that protection.
And we're also looking at it with respect to creating a program where we can select in some some loan pools that are available out there with some sort of jvs that we were creating a defined we think better risk return objectives.
Better risk return cash flows and the MSR space when you're bidding on small pools and market you can do that so we have a we've looked at the MSR space for quite some time now we have not seen compelling pricing.
That we've been interested in moving forward now obviously given the rate move we've seen just yesterday ops it looks more attractive and that's going to basically start really increasing our focus into the space. Jason do you think the MSR. So if you guys go into it more is it will.
Create some volatility to your earnings.
The MSR is definitely a more volatile asset, but the extent were the percentages that we're looking to invest here is going to be basically not material to total portfolio size now here. It's we're looking to incrementally add MSR as you know as a.
Separate strategy, but by no means it will be a core strategy in the long term.
Final question funding cost for distress mortgages, they were down quarter over quarter.
Any anything.
New there or is that simply just modeling.
Yes look you then a big part of it was rate.
The rate move in this in the space fed rate reductions, which moved.
Fiber down that's extent, we have no short term financing that obviously moves that lower about 25 basis points has came came from a rate reductions related really to spread.
Turning in financings, we've continuously reevaluated the.
The financing that we have and have put new financing in place, particularly in the last quarter. We Oh, we restructured a large willing to offer silly and it was able to teen north of 35 basis point tightening of spreads in that particular facility. We're rolling out a new facility and hopefully next six days, we're looking to see basically close of.
80 basis point reduction from our current facility.
In some performing loan assets.
So.
The high level there is that the the banks continue to provide financing.
Where is getting a little bit more competitive out there and we're seeing spread tightening in this market, particularly because the securitization market is that liquid were.
There is less risk that a that a bank is going to take on taking a.
Distressed loan pool that isn't tend to go to the securitization market given we're financing spreads are there so you're seeing more competitive competitive action in the and the repo markets and whole loan facilities, which has been the primary reduction on that we've seen across our financing.
That's it for me next quarter.
Thanks, Thanks, Chris.
Our next question comes from Jason Stewart with Jones trading your line is now open.
Thanks, Good morning.
With regard to the the credit the mortgage credit portfolio on the single family side and prepayments.
Clearly these borrowers aren't going into agency.
I'm wondering how much the rate move relative to the liquidity in the secondary market is driving that your expectation for increase prepayments and maybe what else needs to happen for that to become a more fluent.
Step for those borrowers to to refile.
Right. So the the prepayment ops is more of an optionality that we've embedded in these loans.
The with the expectation is that a very small number of loans will actually pre pay over the life of the.
Annualized basis over the pools, but however, given that we're the FICO score is today and continue credit rebuilding.
Particularly if the bar had a foreclosure filing.
The agencies allow bars to refinance after certain period of time typically over around two years of consecutive payments.
And as other programs available today in the non agency space, where the bar can refinance.
Yes.
Given the fact is the bars have a 70 ish percentish LTV.
You definitely gives them optionality to move into.
To the space Radio LTV is a standard and obviously agencies and Nic channels, you're seeing it pushed up to the 90 LTV.
So prepayments often comes in the form of paying off the actual debt to homesale recapture some of that equity. If you remember the duration of these loans are about the maturity. These loans are so there was none of these loans were over 10 years ago.
And typically bars that Ben tenures Pos in their home or.
The tenure of which they expect to live in that homes starts decreasing so a lot about prepayments. We do expect to see in models comes from a form of the bar, having life event and moving.
Into a new home.
With a basket pay off of loan which comes in the form of to us as refinance sorry, as a prepayment but with lower rates.
And a non agency market that has become very competitive.
We're seeing more credibility to bars with distressed FICO scores.
Which should be more of an option for us took to accrete to par faster than waiting for the bar to pay for 12 to 24 consecutive months.
Okay. That's helpful. Thanks, and then one more on the MSR strategy. It didn't sound like there'd be a corresponding increase in other investments like agency.
Is there is there any other component to that strategy.
As you build out the potential for the MSR book to Bill.
Yes. This again, we're not looking to pair the asset with agency RMBS as a as a parent strategy.
We have lots of fixed rate duration exposure on our balance sheet.
Adding amistar will help reduce some of that duration.
And also give us more efficient means of of hedging versus swaps, which has a basis risk mismatch and spent.
Typically a very very difficult way to hedge mortgage.
Interest rate risk at this point, so we just see it as it as a better matched to our credit book interest rate exposure.
With also being more creative and then swaps so again.
We look at as a good return potential.
That has the secondary benefit of hedge protection.
Got it thank you.
Our next question comes from Craig, Canada with Palm Beach Capital. Your line is now open.
Good morning, guys, great year last year.
I noticed that.
Second quarter earnings last year good.
You got better and better during the year.
Sort of talk to the environment Q1, this year as opposed to that is there something dramatically different that.
We can look to see.
Q1 of this year again to be better I'm.
Just looking for trend here.
Look I think the problem with Q1. This year is what happened yesterday right and so the market while the treasury market rate in the stock market has reacted significantly we don't really know the fall out into the credits markets where.
What are the world economy is going to be doing it's all speculation to this point. So it's really tried to figure out what credit spreads are going to do I think fundamentally we're very comfortable or our exposure to all our credit assets.
But we don't know we don't have an opinion, where spreads are going to go as of yet.
And in our opinion of spreads were to widen out because of this event more than likely would probably increase our exposure thinking as an opportunity. Another long term lasting issue, but we're just now evaluating that so it's hard to really comment on what we think the quarters going to look like given the significant rate moves its happened a lot of 24 hours.
Yeah, I understand it's really vehicle and I noticed that last year, you did six common stock raises and it looks like you've deployed them well and that helped during the year could we expect a similar environment. This year or would you expect you to accelerate common stock issuance.
Look we've raised $500 million to date in common equity I think opportunistically, we're always looking to two we increased the company size as long as we can deploy the capital predict the book value and keep the dividends as consistent as possible. So if we can meet that criteria.
I think we will continue to look to raise capital, but there's going to be a point in time, where we don't think we can do it and we'll probably take a step back where the market gets into a situation where we can't go out like today's market would be the very difficult to raise capital.
Sure. So I see your book values about 576.
Is it fair to assume that if you can raise.
Common stock.
I think one was six nine and one was.
Six Fifteensix 13, yes, there is that in general from an investor standpoint.
Does that always.
Sort of lean more strongly towards issuing more common stock if you can issue at higher than the current book value.
I just think in general if you look at the read industry. You know nine the vast majority people that are raising capital are trading at a premium to book value and the people that are trading to a discount to book they don't raise capital. So I mean that is a correlation there but in terms of the exact distance that you're above book value I think thats a company by comes.
And decision.
Okay, great. Thanks, so much again great year.
Thank you.
Our next question comes from Matthew Howlett with Nomura. Your line is now open.
Hey, guys that thanks for taking my question really appreciate the sample.
First that FHLB membership that's that was put out request for comment you guys. Once had it particularly Indianapolis can you comment on its right to the prospects.
And we'll see I mean, I think every read is going to participate in response to the FHLB in terms of membership interest I mean, clearly that's a game changer for the right.
To get stable funding from a government entity is a significant benefit for us.
And I think most recently, we were willing to come under some kind of regulatory oversight.
To get access to that kind of funding. So I mean look we're all trying to we were all many of us RIN and some are still able to stay in for the five year period, but it would be hugely beneficial we watched very closely it was a lot of moving parts to this to these issues.
And so we'll have to try to figure out how that falls out, but we are watching closely no question.
Got it will continue to follow up yes details on that.
Well the free Kate I think Fannie did a similar.
Their version of the K and you participated in that sort of core any sort of how that any sort of a post mortem on how to Atlanta, whether fans continue their version of their K series multifamily.
Yes. They version of the multifamily credit risk is more is similar to the residential program, where they are laying off strips of risk where the mall with Freddie Mac side do you actually having right down to the actual property physical property itself in a Fannie Mae's case, you're just your bay, you're buying a bond that's.
Exposed to a level of risk.
But you don't really have any touch point back to the property itself for workout, but potential. So it's a really completely different transaction. So I think Fannie Mae was very successful and laying off their portion of risk is this a different transactions in the Freddie K program.
Because in the K you guys have the right to place, especially riser and all that.
We have overseeing races special servicer in indicates a friend to me because of Fannie Mae program is more of an insurance program, where the originated participates in a loss along with Fannie Mae and because wouldn't Fannie Mae sold their deal there really selling their part of the risk not the originator part of the risk. So the originators still holds that risk. So there really the ones that are looked.
The property themselves not the person who's participating in the Fannie Mae risk.
Got it okay.
Then my last question. So were bigger picture question. How do you just you got a lock on the carpet smoke tremendously different businesses.
Internalized now fully internalized now.
How do we think it hasn't 20 in terms of priority how do you prioritize different things you're doing Jason you mentioned sort of these new subsectors and.
Hi give away too much of what's going on but talk about how to what do you got a power and cash in 2020, yet and they just ask it that way.
All right. So the privatization comes from where we where the markets moving where the opportunity is we don't have a snow is slated schedule of what we need to buy and percentage basis per rep per asset class.
You know that's fallen out now were 9% the assets and single family, 30% issuer in multifamily we can see that change of the course of the or were not wedded to particular allocation percent. It's all based on opportunity.
And flows.
So from that perspective, we're going to react to the market.
And given that we're buying loan pools and evaluating loan pools on both sides of the equation on single and multifamily.
We have great kind of feedback loop mechanisms that provide into modeling to look for where new niche markets may prop up and for that reason that we're seeing opportunity and and some construction lending in the south southeast part of the United States, which has been a component result of.
Boots on the ground.
Inspections, and underwrite that we've seen let's go thats going on that market.
So we're more opportunistic in that view and that we're looking for the best.
Most to the best risk adjusted returns that we can find them as market.
But we're also very conscious of downside protection. So we're not going to chase I simply because of return. We're we're looking for that the component that actually provides downside and when you look at multifamily or single family you are seeing or you should see a trend thats familiar which is the around 70 ish LTV kind of coupon that we had in both sides the equation, which is.
Is not by chance were definitely focused on that side, given where we are in the credit cycle. So.
Yeah, I can't speak to any any.
20% that we're going to hit but.
The team.
Gets together weekly and we talk about the opportunities between multifamily and single family and we look at relative value and absolute I tunes sectors and between our traders.
And on that now you have a direct and Thats your direct lending business on a multi families had to continues to grow that.
How does the outlook on that and that end.
Yes, so from that end, we're providing second second lien interest in these multifamily properties typically three $5 million range.
These are 150, plus the 300 unit properties.
We're seeing lots of activity and in purchases of that space, especially in the markets already mentioned the south southeast you have many investors that are coming from.
The.
The northeast physically in Europe market that are moving down to that market given rent control laws and just availability of opportunity.
So we're expecting to see more turnover of of deals, which then presents more lending opportunities to new buyers of assets.
And so we're expecting actually see.
Record kind of volume for us in that space. This year, which is very helpful. We love the asset in the coupon in the downside protection, we have under controls that we are built into the infrastructure. So it's something that we actually are are prioritizing.
Great. Thanks, guys.
Thanks, Matt.
As a reminder, ladies and gentlemen that is star then one if you'd like to ask a question at this time.
Our next question comes from the line of Derek Hewett with Bank of America. Your line is now open.
Good morning, everyone and I also want to reiterate that the supplement was extremely helpful. Sell so thank you for that.
Most of my questions were already addressed but.
Could you talk a little bit about what was driving the small 21 basis point decline in the asset yield on the single family book and then I think more importantly, even nearly 120 basis point growth in multifamily.
Yet in the single family because a lot of that activity is driven around cash collections.
A lot of the loans are not on accrual basis, there on cash and so you get some volatility in the earnings asset yield quarter to quarter, just because the timing of cash collections. So that it's that's probably the most difficult asset class that we have going forward in terms of tracking the yield because of that and that's when we look at that transaction.
And we look at those that particular transaction, it's more of a total rate of return.
And then I think on new the comment about the increase in yield on the multifamily side. It's a combination of a couple of things just the mix of loans that we added during the quarter of meds versus the lower yielding assets as well as we had we had one Freddie K security that was coming to maturity and when we typically.
But the accounting yield on our securities we.
Account for a potential loss in the deal and as we get closer to the majority maturity, we have better clarity what that losses can look like if at all and then we will we will change the accounting yield so you'll get a benefited the properties performing better. So some of that is related to that particular case, but in general the yield went up because we added more assets relative.
Them to the rest of the asset class and higher yielding assets.
The margin.
Okay, great. Thank you.
I'm showing no further questions in queue at this time I'd like to turn the call back to Steve for closing remarks.
Thanks, operator, two things I'd like to say, one clearly everybody likes the the supplemental information pack, we put together we have a dedicated investor relations person might need to.
His informations on a press release that was last night.
Put out she was instrumental in putting that together.
So we do youve any questions about that or about the company. Please direct them towards Mari.
And our 10-K will be filed on or about February 20 to this weekend available on our website thereafter.
Thanks, everyone for the participation we look forward to talking about our first quarter earnings in a couple of months.
Thanks, ladies.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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