Q3 2023 New York Mortgage Trust Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, and thank you for standing by and welcome to the New York Mortgage Trust third quarter 2023 results Conference call.
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Slowing the presentation the conference will be opened for questions.
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This conference is being worked on.
Thursday November 2nd 2023.
I would now like to turn the call over to Kristy loose a lot of Investor relations.
Good morning, and thank you all for joining New York mortgage Trust's third quarter 2023 earnings call.
With me on today's call are Jason Serrano, Chief Executive Officer, Nick Mall President.
Chief Financial Officer.
A press release and supplemental financial presentation, with New York mortgage Trust's third quarter 2023 results.
Yesterday.
Both the press release and supplemental financial presentation are available on the company's website.
Ww.
Dot com.
Additionally, we are hosting a live webcast of todays call, which you can access in the events and presentations section.
Right.
At this time management would like me.
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.
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.
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 go ahead.
Thanks, Christy Good morning, welcome to New York mortgage Trust's third quarter earnings call.
We have been discussing our seismic market shift that's been underway. Since early 2022, the impact is likely to be far reaching given historic rate moves and Kirby versions.
In anticipation of heavy treasury issuance calendar and continued higher for longer than I've heard it from the fed the market witnessed record short positions added in the futures and options market by hedge funds likely causing a curve to flatten in recent weeks home affordability is now at the worst point since the 19 seventies and yet earlier. This week <unk> August HPA show an increase of one.
1% month over month, which is the fifth straight month increase low inventory of properties for sale or keeping home by supporting the near term. This trend will continue to keep rental demand strong, particularly in the southern markets, where migration is still elevated.
Mean reversion to long term housing portability would require deflating home prices lowering mortgage rates and increasing incomes given that we are likely at the end of a growth cycle, a combination of lower home prices and lower mortgage rates are more likely hence we see that growing our credit portfolio by being a liquidity provider in this market seems to be a highly.
Unattractive proposition at this time.
Now to briefly highlight company's quarterly results, which Christine will cover in detail the impact of rate volatility clearly eroded investor confidence in the quarter and we are not immune to this reaction.
Our adjusted book value declined by 971% in third quarter as a result of lower asset value and impairments, particularly within our multifamily joint venture equity portfolio. Despite.
Despite improvements we are seeing to our topline revenue for our multifamily properties on balance sheet today, and generally a large cash working buyers in the market, there's little urgency being exhibit to transact at this time buyers are waiting for interest rates, that's the ability to lock in equity returns and on the flip side, we don't see any evidence of property sale.
<unk> at the wider cap rates, either not surprisingly 2023 property transaction behind that is 72% below last year and will likely stay depressed in the near term.
With limited recourse leverage we utilized through the year and excess liquidity generated we were able to safely more than double our agency portfolio in the quarter and take advantage of technical pressure, which pushed secondary market agency spreads, it's one of the widest levels ever.
Looking at page eight our defensive posture as a result of signs that the economy is an inflection point recent consumer data shows that mounting stress at a time when the economy seems to be functioning well GDP.
GDP rose at annual rate of four 9% in the third quarter. The increase was driven by strong consumer demand, which accounted for more than half the GDP increase consumer spending as measured by expenditures increased 4% in the third quarter from 80 basis points in the second quarter consumers seem to enjoy a bit of a spending splurge at the end of the summer.
With heavier Taylor discounts.
The outlook for continued consumer growth support economic expansion looks unlikely and.
In fact, when digging deeper into the inputs Q3, GDP had poor quality results.
As you can see on page eight.
Consumer spending was fueled by more debt, which is nearly 1.3, Chilean or 20% higher than pre COVID-19 levels on this point for the first time ever more than 50% of all U S. Credit card holders are rolling debt by making minimum payments rather than paying off balances and according to the bank rate. This is happening at a time where credit cards.
<unk> recently hit a record high of 28, 3%.
Furthermore, while tapping our credit cards U S consumers seem to have burned through excess statements as well the drawdown of savings as a percentage of disposable income.
From five 3% in May two.
Three 4% in September one would have to look back 10 years ago to see such a change.
With this low savings rate at 50% of historical average.
The ability to use credit to spend is looking more unlikely.
Change in credit availability has recently become much harder than anytime over the past 20 years.
With headwinds the U S consumer the trend of discretionary spending is likely to contract in Q4.
Due to how consumption was generated we did not find the GDP print.
To be impressive, which reinforces our portfolios managed strategy.
However, third quarter GDP does lineup with similar trends related to to contraction in task as a 5% GDP print is quite common in the last two quarters before the onset of a recession historically we.
We recognize that our previous goal to shrink our credit portfolio maintained asset acquisitions at a minimal pace brings forth a different set of risks, particularly reinvestment risk to the extent, we are and we have misread potential signals for credit contraction.
We also recognize we're on the we're an outlier for the hybrid credit reach with this downsizing strategy.
Do not had bunch company here. However, if we have read this correctly and we believe we have.
You should have begin to see signs of economic contraction in near term likely in the first half of 2024.
50 basis points decline in tenure and the tenure is the average move after tightening cycle as a flight to safety trend emerges by investors.
From our portfolio manager decisions staying up in quality and not taking on new leveraged credit is prudent.
In this stage, we will continue to proceed cautiously and focus on investments that will outperform in a downturn.
Pointing to our focus with in the non credit space at this time on page nine we explained objectives that have been consistent for over a year in the near term the focus on curbing tail risk with respect to our book value by winding down our short dated portfolio and picking our spots to sell real property opportunistically.
Our goal is to keep liquidity high and patiently wait for a period of sustained market dislocation. We believe strong asset management capability that will be required to unlock value. This is our strength and we are excited to leverage our skill set.
On the right side of page nine we show the company's repositioning timeline, we are well documented this transition of reducing pipelines downsizing our portfolio by 20% in 2022.
And now $1 billion of credit asset reduction year over year.
Recently, we were in a unique position to start rebuilding our agency MBS portfolio, which we find very accretive.
These higher coupons as you started the year with zero exposure.
<unk> will provide more color on this important point, we are seeking higher returns from lending opportunities as we are beginning to see special situations recalculated assets and to acquire portfolios of deeply discounted senior loans.
As discussed last quarter, a consequence of our defensive posture is that we elected not to replace asset coupons that are paying off from our portfolio. Thus also reducing company earnings as clearly shown on the bottom right of page 10, the Companys adjusted interest income precipitously decline in the second half of 2022.
However, recent allocations to high coupon Ags agency MBS represented.
And the legend within our other investments increased adjusted interest income by 15% in the quarter to $59 $2 million.
We still have more work to do here and are finding large opportunities within the agency market trading at historical wide levels in the secondary market with $500 million in dry powder equaling, 41% of company market capitalization as of 930. We believe we are well positioned for income growth. We're excited about this approach we can meet our goal to grow income while also staying.
Liquidity protected in the downturn at this time I will pass the call over to Christine to provide more details about our Q3 financial results Kristine.
Thank you Jason Good morning, and my comments today I will focus my commentary on the main drivers of third quarter financial results, our financial snapshot on slide 12 covers key portfolio metrics for the quarter on slide 26 summarizes the financial results for the quarter. The company had unappreciated loss per share.
One dollar.
Two cents in the third quarter as compared to unappreciated loss per share of 38 cents in the second quarter. We had net interest income of $16 8 million contribution of <unk> 19 per share up from 17 cents per share in the second quarter, our quarterly adjusted interest income increased to $59 2 million.
In the third quarter from $51 6 million in the second quarter. The increase is a result of the $946 million investment made in agency MBS during the quarter, which offset the decrease in interest income related to continued runoff of higher yielding short duration PPL bridge loans.
The increase in adjusted interest income was offset by $3 6 million increase in adjusted interest expense due to the financing of purchases of agency MBS during the quarter offset by the net interest manifesto for in the money swaps overall, the operations of our consolidated multifamily JV prop.
<unk> contributed a net loss of <unk> <unk> per share during the quarter since.
Since investing in this asset class, we have disposed of five multifamily joint venture properties four of which incur occur in the second quarter. This resulted in a decrease in both real estate income and expenses by $2 4 million and $2 3 million respectively. During the quarter.
Also during the quarter, we recognized $44 2 million or <unk> 49 per share of impairment charges on real estate due primarily to widening in cap rate, resulting in lower property valuations as compared to our carrying costs on seven out of the 13 consolidated multifamily properties held for sale.
One of our multifamily joint venture properties is currently subject to a purchase sale agreement that we have been active in marketing our interests and the remaining 14 properties.
Although we can provide no assurance of the timing or success of our ultimate exit from these investments. We continue to believe that we can rotate this portfolio over time to more attractive investments through well navigated disposition process.
The fair value changes related to our investment portfolio continued to have a significant impact on our earnings during the quarter, we recognized $61 3 million or <unk> <unk> per share of unrealized losses due to lower asset prices on our residential loans and bond portfolio, partially offset by 23 per share in gains recognized on our <unk>.
Interest rate swaps and caps, we have total G&A expenses of $11 8 million, which decreased compared to the previous quarter due to a decrease in incentive compensation accrual and an annual board compensation made in the second quarter, we had portfolio operating expenses of $5 2 million, which decreased primarily due to reduced.
Servicing fees are declining BPL bridge.
After significantly curtailing our investment activity for most of 2022 and early in 2023, starting in the second quarter, we began stabilizing our investment portfolio holdings through greater investment activity and over the course of the past few quarters, we have experienced solid MAU.
Gentleman a portfolio acquisition activities, our investment portfolio increased by approximately $700 million on a net basis and ended at $4 7 million as of 930.
As Jason mentioned earlier adjusted book value per share ended at $12 93 down $9, 71% from June 30, and translated to a negative $7, 61% economic return on adjusted book value during the quarter.
The main drivers of adjusted book value change.
One dollar enforce basic.
Basic loss per share our declared dividend of <unk> 30 per share of negative <unk> 11 per share primarily due to removal of cumulative depreciation and amortization add backs attributable to consolidated multifamily properties for which impairment was recognized during the quarter.
As of quarter end, the company's recourse leverage ratio and portfolio leverage ratio increased to one three times and one two times, respectively from <unk> seven times and six times, respectively as of June 30.
Nancy leverage remains low relative to historic levels. The increase in the quarter is primarily due to the financing of newly acquired highly liquid agency RMS. Despite this our portfolio recourse leverage ratio under our credit book is unchanged from the previous quarter.
0.3 times.
Currently only 52% of our debt is subject to mark to market margin calls of which 40% is collateralized by agency RBS and 12% collateralized by residential credit assets.
Meaning 48% of our debt as of Sept September 30th has no exposure to collateral repricing by our Counterparties, Although we expect our leverage to move higher as we expand our agency MBS Holdings. We continue we intend to continue to focus on procuring longer term non mark to market financing arrangements for <unk>.
And parts of our credit portfolio.
Paid us 30 per common share dividend unchanged from the prior quarter, we continue to evaluate our dividend policy each quarter and look at the 12 to 18 months protection of not only interest income, but also realized capital gains that can be generated from our investment portfolio.
That said, we note that we expect underappreciated earnings per share to remain below the current dividend as we continue to retain excess liquidity into asset acquisitions over the next few months.
And with that I will now turn it over to Nick to the ortho market and strategy update.
Thank you Christine and good morning.
Over the past two quarters, we have begun to pivot from our defensive posture.
As the fed entered the final chapter of its hiking cycle, we start to reverse some of the portfolio run off that we have experienced to date.
While we acknowledge that there is still a considerable amount of uncertainty and volatility across markets and the odds of economic slowdown or further heightened by geopolitical conflict. We believe that we can prudently grow our portfolio and investments that have the potential to outperform.
For the long term.
We seek to expand our asset base, such that we can achieve a higher and more sustainable way of income generation.
We are however, staying cautious about the potential credit dislocations that may arise in the future.
We are being selective about where we invest and remain steadfast on asset management.
In the quarter, we substantially increased asset acquisitions purchasing $1 1 billion of assets with 946 million of those concentrated in agency MBS.
This activity was greater than last year's peak of acquisitions in the second quarter of 2022 before we slow down our investment pipeline.
Away from agencies are detailed bridge volumes have also grown at $179 million in the quarter from $100 million in the prior quarter.
The overall investment portfolio is now $4 7 billion as of the end of the third quarter up from $4 billion.
The conservative positioning that we undertook in 2020 to preserve liquidity and allow for capital return through portfolio Paydowns.
This has afforded us the ability to meaningfully scale up investment activity now with wider yields and spreads available in the market.
We continue to favor agency MBS with its historical widespread due to technical headwinds.
We are also focused on expanding our investments and BPL bridge, given its high yield and shorter duration.
Delving further into agency MBS.
As we mentioned earlier, we have managed to deploy a meaningful amount of capital in the quarter and agency MBS.
Spreads both in VB in OAS terms of post the wides of the year.
Defense resolve to keep interest rates higher for longer has manifested in a sharp rate move higher at the longer end with the yield curve steepening and gradually disinvesting.
The 10 year Treasury rate made a steady march higher towards 5% in the quarter. The market began to contemplate the bond supply impact of rising government interest costs and the sustainability of a worsening budget deficit.
This increase in interest rate volatility has weighed on agency MBS spreads the.
The technical backdrop is also challenging as it is hard to discern who the next marginal buyer of agency MBS will be.
Money managers, who have been supportive of the market are currently overweight the sector amidst a challenging quarter for fixed income returns.
We see the widespread from agencies as an opportunity and although the near term technicals may be choppy. We believe that this is a favorable entry point to attractive longer term returns our strategy within agency MBS remains consistent.
We seek to invest up in coupon, where we see a better spread and carry profile and we target low pay up spec pools for additional prepayment protection.
We have managed to increase our spec pool average coupon to five 7% from five 5% from the prior quarter because of the purchases of higher coupon assets.
Overall, the leverage of the agency book is eight five times up from the prior quarter of seven two times, primarily due to mark to market moves.
This is still within a comfortable range, where we would run the agency strategy as the credit book on the other side is under Levered at <unk> three times portfolio recourse leverage ratio.
We have the ability to rotate capital from our credit strategies and available cash to deploy into agencies, where we see roes in the high teens.
And detailed bridge, we have been onboarding additional originators to increase our gulfport volumes.
Our credit underwriting remains strict as we try to avoid the fringes of the credit box and seek out experienced sponsors with straightforward rehabilitation projects.
We also limit small balance multifamily large balance single family and ground up construction loans, all of which have less liquidity and finance ability in the market.
Given the short duration nature of these BPL bridge loans recent origination volume and coupons have not meaningfully impacted by the move in longer term rates.
The stability of the BPL breech profile amidst this recent volatility further highlights the attractive return potential for the asset class.
Relating to the asset management of the portfolio quarter over quarter. We are pleased to see the net decline in the dollar balance of outstanding delinquencies from $208 million to $202 million driven by additional resolutions and sales.
Our cumulative loss to date.
And this strategy is five basis points on $3 3 billion of historical BPL bridge fundings as of quarter end.
Cash collections of interest inclusive of ancillary income continues to be stable at a 95% average of scheduled interest.
The portfolio continues to pay down steadily as we expected, leaving only $884 million of UBB as of the end of the third quarter of 2023.
We hope to maintain and grow the level of detailed bridge from this point.
Pivoting now to our multifamily mezzanine book the.
The strong credit performance in our multifamily mezzanine portfolio has been consistent over the prior quarters.
There is still only one delinquent loan in the portfolio with that loan expecting to pay off without a loss.
Not only has the credit performance of these assets been stable the speed of the return of capital has been exemplary.
The payoff rate of the mezzanine portfolio, what's at 32% in 2022.
Annualized 35% in 2023, thus far.
These payoff rates are meaningfully higher than the average historical payoff rates through time of approximately 27%.
These elevated redemption rates are not surprising despite a more difficult financing environment.
The weighted average origination date of our mezzanine loan portfolio as the second quarter of 2021.
These are more seasoned loans that have accumulated property value increases over the passage of time.
Further buttressed by the completion or pending completion of their value add programs.
These assets are ripe for monetization or recapitalization to date with significant incentive for sponsors to tap into the equity growth embedded in these properties.
Moving on to our multifamily JV equity portfolio, we continue to make progress on the wind down of the overall portfolio.
We have a property among amounting to $5 million of invested capital.
<unk> this quarter.
Looking forward market forces may hinder the pace of future sales of JV equity positions.
With the recent rate moves senior financing rates are now pricing around 6.25% for 10 year agency debt.
A marked increase from sub 4% rates the market saw prior to 2022.
Higher financing costs have exerted pressure on cap rates with cap rates moving out by approximately 25 basis points in the third quarter.
However, there are some positive tailwind for our portfolio.
On a macro level the cost of home ownership is 50% more expensive than renting today.
And as more consumers are priced out of home ownership the demand for multifamily rentals will be robust for the foreseeable future.
Furthermore, we continued to deliver on Capex plans that have the potential to improve occupancies at higher rental rates. So the longer timeframes of sales should be offset by NOI growth.
Overall, we have completed approximately 65% of the budgeted capex plans relating to the disposable disposal group properties and we'll continue to make progress on this alongside our continued sale efforts I will now pass it back to Jason for his closing remarks.
Thanks, Nick.
Using this time to strengthen our sourcing pipelines in target areas, where we expect to see opportunity for example in primary markets with bridge lending and asset recapitalization and within the second loan market, where we anticipate price discounts.
We are well positioned for this opportunity to unlock value with our market leading asset management team.
Now at this time I will pass the call over to the operator for Investor Q&A.
Thank you.
This time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced.
So withdraw your question. Please press star one one again.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Bose George of Kb Debbie Your line is now open.
Good morning.
What's the pace at which you could deploy capital into agencies and how would you characterize your capital Thats available for investment there should we look at the $220 million in cash or is there some kind of more holistic way to think about what's available.
Yes, I think that's this is Mike by the way I think Thats, a fair way to take a look at it clearly we have an ability to access additional capital that we can deploy to this strategy.
We are also mindful about the leverage of the entire enterprise and given that we are under Levered in general we do have room to move on that front as well, we see agency MBS is offering one of the best risk adjusted returns, especially given our views of potential slowdown.
Across the fixed income space. So from our perspective, we intend to continue to scale into the strategy now with that said there has been some recent volatility.
And we are looking for mortgage rates have moved pretty significantly higher.
So we're also waiting for some new production coupons to come into.
It's coming to spec pool form. So we are we are going to continue to invest in this space. We are going to continue to scale up I would say that going into the fourth quarter. The pace may not be as S.
Much as what we invested in the third quarter, but nonetheless, we do expect to continue to grow grow in this space.
Great Great. Thanks, that's helpful and then the multifamily JV portfolio that Youre working on disposing whats the.
The earnings contribution of that should we just look at that real estate income and expense line or are there sort of other pieces that we need to think about it as well.
Hey, its Christine so there is in our financial statements. The net loss from real estate, but that is really based on operations of.
Our real estate portfolio.
Did mentioned impairment.
We recorded during the quarter. So that's part of the income thats being generated by our lots being generated by that portfolio.
Okay, but it was also thinking more about that.
To the extent that.
Does it get dispose the equity get freed up.
Sort of the incremental earnings contribution.
Is there a way to think about what the current kind of ROE run rate ROE on the equity in the JV is in.
The benefit is that gets recycled into higher returning.
Investments.
Yes, that's exactly right. This is Jason we're thinking along the same line rotation of these assets as well as other assets that are that are yielding below where we think we can deploy and earn within the agency space. So yes. We believe there will be additional EPS contribution from rotation of that multi.
Selling a portfolio, which is I think if you look at it around a 5% type of kind of annualized return until the Capex program starts really.
Taking.
Allowing the rental rates to increase.
And the.
The occupancy rate has been around 90% on average.
That's a combination of some that have done well in the mid nineties and others that are in the <unk>.
Kind of mid to high 80% range and Thats a function of the Capex taking.
Taking units offline and then having to redeploy through the releasing so as that happens we do expect to earn high.
Higher just carry on those assets, but.
The point is well taken that.
We do expect.
To rotate that into higher yielding agency asset class.
Okay. That's helpful. Thank you.
Thank you as a reminder to ask a question you will need to press star one one on your telephone.
Draw. Your question. Please press star one again.
Please standby for our next question.
Our next question comes from the line of Matthew <unk> of Jones trading your line is now open.
Hey, good morning, guys and thanks for taking the question in terms of capital deployment. What do you see is giving you the best return on capital right now is at MBS.
So obviously built a good position there.
Share repurchases or possibly some distressed opportunities down the road.
Sure.
This is Nick we see a lot of value in the agency MBS strategy. We think that this is opportune time that.
What may not persist for forever, but we want to be able to deploy into this space.
Relating to other uses other uses of capital within credit. We do we do believe that there is a potential for more credit distress more delinquencies and more changes in expectation in terms of overall losses across across the credit spectrum, so because of that delving headfirst into credit.
Is not something we would do at this juncture.
That said, though we do not mind participating in certain asset classes, such as PPO approach, which offers shorter duration type profiles.
Got you that's helpful and then on the MBS I believe the current leverage right now is $8 five as of quarter end, where do you ideally want to run that portfolio in terms of leverage and then how high are you guys willing to take it.
Thanks.
Sure. So eight five is in the.
<unk> a multiples is in terms of leverage is a very comfortable level for us and really we're looking at it from the context of just the overall portfolio in general we are under Levered and we are we have unencumbered assets available cash and also cash that was freed up from divestitures of other assets and because of that we do.
My running the agency strategy with a little bit more leverage in the context of just the overall leverage profile of the firm. So the eight times, we feel comfortable there.
And we do expect that to be probably the level that we're going to be running at somewhere between eight times to nine times for the time being.
Thank you.
Thank you.
I would now like to pass back to Jason Serrano for closing remarks.
Yes. Thank you for joining today's earnings call. We look forward to speaking with you on our fourth quarter earnings early next year have a great day.
Thank you. This now does conclude today's call.
You may now disconnect. Thank you.
Okay.
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Okay.
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