New York Mortgage Trust, Inc. (NASDAQ:NYMT) Q4 2023 Earnings Call Transcript
New York Mortgage Trust, Inc. (NASDAQ:NYMT) Q4 2023 Earnings Call Transcript February 22, 2024
New York Mortgage Trust, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and thank you for standing by and welcome to the New York Mortgage Trust Fourth Quarter 2023 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, February 22, 2024. I'd now like to turn the call over to Christy Moussalem, Investor Relations. Please go ahead.
Christy Moussalem: Thank you all for joining New York Mortgage Trust's fourth quarter 2023 earnings call. A press release and supplemental financial presentation with New York Mortgage Trust fourth quarter 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 and Presentation section of the company's website. At this time, management would like me to inform you that certain statements may 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 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 go ahead.
Jason Serrano: Thanks, Christie. Welcome to New York Mortgage Trust fourth quarter earnings call. Also joining me is our President, Nick Ma and our CFO, Kristine Nario. After the Fed Chair surprised dovish commentary late in the fourth quarter, much relief was immediately provided to the market in the form of lower medium term rates. However, the market gave back much as a relief after the latest key footprint [ph], which was more than a two standardization event from market expectations, with these generations, economists continued to update models with forecast to predict the likelihood and timing of a soft landing or recession. Curiously under extreme unbalanced sector gains in the US equity markets, the bait rages on about the ability of the US economy to innovate its way through the hangover of a debt-fuelled expansion.
Our task is to determine how to prudently allocate capital against the potential long term investment risk posed by slowing this economy. Our planning for this cycle is vastly completed last year. Now in 2024, we look forward to building the company's earnings base, given a portfolio reshaped with lower credit risk and asset duration. A goal for today is to explain this evolution and why we believe our balance sheet is prime for growth through a dislocated market. We believe this cycle can provide significant value to the company, not just over 2024, but the remainder of the decade. For success, our team will need to reach deep into the multiple decades of investment experience in sourcing, valuation and asset management execution. We are excited about the opportunity ahead of us.
Starting with fourth quarter activity noted on Page 4 of our Q4 supplemental, the company generated earnings per share of $0.35 or $0.37 on an underappreciated basis. Adjusted book value per share ended the quarter at $12.66 or down 2.09%. After $0.20 dividend, quarterly adjusted economic return was negative 54 basis points. Book value gains from our single family portfolio was largely offset by valuation reductions to our multi-family joint venture equity portfolio. After further dispositions, unrealized losses and reclassifications of certain properties to held and used in the quarter, we have approximately $35 million remaining of capital allocated to JV multi-family equity that we intend to sell in the near term. Christine and Nick will provide additional details on this point a bit later.
In setting up 2024, we enhanced our purchasing power by renewing and increasing warehouse line capacity to $2.2 billion, provided $1.6 billion of undrawn financing as of the fourth quarter. Additionally, to enhance liquidity, we issued our third BPL securitization in early January, consistent with past deals issued by NYMT, the $225 billion securitization teams, a revolver for future BPL acquisitions. Page 8 of our supplemental shows two important graphs that help shape our market view, starting with the US deficit spending, which may have had a role in delaying economic contraction 2023. The CBO recently reported that the US budget deficit is expected to total $1.6 trillion in 2024. Over the next 10 years, the budget gap will grow another $1 trillion.
Remarkably, interest expenses are expected to total over $1 trillion in this year alone. The consequence of high Treasury issuance to fund U.S. deficit spending could result in stubbornly high long-term rates, even in the case Yellen continues to utilize a high allocation of short-term bills to fund the budget shortfall. To meet the liquidity needs of the U.S. government, global investment allocation to U.S. treasuries could be diverted from other sectors and tenors within those sectors. In this scenario, the CRE space is particularly vulnerable. Fresh liquidity is required to recapitalize $2.8 trillion of debt maturing over the next four years, half of which is held by banks. Banks' ability to offer CRE refinancing packages on one hand, while fending off CRE loss reserves on the other is likely to further restrict lending in the market.
The opportunity available for permanent capital vehicles with access to liquidity is great. For over a decade, our team has experienced generating opportunities in the multifamily bridge loan sector, coupled with extensive asset management experience, New York Mortgage Trust platform can opportunistically navigate through the CRE dislocation on multiple fronts. We see a spillover effect constraining residential loan markets as well. Bridge loans and alternative financing for single-family residential properties used for investment purposes is likely to be transformed into a new generation of lending. After $3.5 billion of residential bridge loans invested to date, our team has the experience to capitalize on the opportunity. As previously documented, our approach to enhance company liquidity began in March 2022.
We committed to curtailing investment activity, particularly in medium to long-duration credit risk in favor of a portfolio rebalancing to provide enhanced flexibility. In early 2023, we continued to prioritize increased liquidity over balance sheet growth in consideration of a potential slowing U.S. economy and increased market credit concerns. Later in 2023, we recognized a recession call was premature. Nevertheless, we remained concerned about a strain in market liquidity. Thus, we increased our portfolio exposure to agency RMBS to stabilize portfolio interest income. We are pleased to report that company adjusted interest income increased 22% quarter-over-quarter to $72.5 million. At the start of the fourth quarter, we added agency RMBS at attractive spreads.
We also continue to add short-duration high-coupon residential property bridge loans, reversing a sequential quarter portfolio decline. With recent improvement to securitization market funding, we expect to meaningfully add detailed bridge loans throughout the year. With $431 million of dry powder available, not including capital allocated to the liquid agency RMBS sector, our balance sheet is structured for growth. We will continue to utilize a patient approach for portfolio growth. We believe this path will yield superior results not only this year, but has the potential to enhance results in the years ahead as trillions of dollars of maturing commercial real estate debt is sorted out. At this time, I will pass the call over to Kristine for additional comments on our financial results and then to Nick for portfolio manager discussion.
Kristine?
Kristine Nario: Thank you, Jason. Good morning. Today, I will focus my commentary on the main drivers of fourth quarter financial results. Our financial snapshot on Slide 12 covers key portfolio metrics for the quarter and Slide 26 summarizes the financial results for the quarter. As Jason just covered, the company had undepreciated earnings per share of $0.37 in the fourth quarter as compared to undepreciated loss per share of $1.02 in the third quarter. Our earnings were impacted primarily by valuation improvements on our residential loan and bond portfolios, which resulted in $1.69 per share of unrealized gains recognized during the quarter. These gains were offset by a recognition of $0.38 per share of losses on certain multifamily real estate assets held by JV Equity Investments and Disposal Group held for sale due to a decrease in the estimated fair value less cost to sell of the real estate assets and the reclassification of certain of our joint venture equity investments in multifamily properties from held for sale to held in use that I will discuss further.
We experienced solid momentum in our portfolio acquisitions over the past three quarters after significantly reducing our investment activity for most of 2022, increasing our investment portfolio on a net basis by approximately $0.4 billion and $1.3 billion during the fourth quarter in the year, respectively, ending at $5.1 billion as of December 31. This was the primary driver of the increase in our interest income and adjusted interest income contribution for the quarter. Net interest income was relatively flat in the fourth quarter, contributing $16.8 million or $0.19 per share, while our adjusted net interest income, a non-GAAP financial measure, increased to $23.5 million from $20.7 million in the third quarter. Our quarterly adjusted interest income increased by $13.2 million, primarily as a result of the $674 million in investments made in agency RMBS and higher yielding short duration BPL bridge loans during the quarter.
The increase in adjusted interest income was partially offset by a $10.4 million increase in adjusted interest expense due to the financing of investments made during the quarter. Our interest rate swaps continue to benefit our portfolio, reducing our adjusted interest expense during the quarter. Overall, the operations of our consolidated multifamily joint venture properties contributed a net loss of $0.08 per share during the quarter. Since investing in this asset class, we have disposed off six multifamily joint venture properties, four of which occurred in the second quarter of this year and one in the current quarter. This resulted in a decrease in overall net loss from real estate during the quarter. As mentioned earlier, we recognize $34.4 million or $0.38 per share of losses related to the following.
First, an $18.3 million or $0.20 per share loss from impairment charges in real estate, due primarily to lower net operating income estimates, resulting in lower property valuations as compared to our carrying costs of multifamily properties held for sale. And second, a $16.2 million or $0.18 per share loss related to reclassification of nine multifamily properties from held for sale to held in use as of December 31, as they no longer met the criteria to be held for sale in conformity with GAAP. The reclassification of the real estate assets from held for sale to held in use was at the lower of fair value or carrying amount before the real estate assets were classified as held for sale, adjusted for a depreciation and amortization expense that would have been recognized had the real estate assets been continuously classified as held in use.
This changed our plan of sale on these JV investments and multifamily properties, but due to unfavorable market conditions and a lack of transactional activity in the multifamily market, that negatively impacted our ability to secure a reasonable buyer and completely exit our investment in these giant ventures. We continue to market for sale our JV equity investments in five multifamily properties, but we can provide no assurance of the timing or success of our ultimate exit from these investments. As mentioned earlier, fair value changes related to our investment portfolio continue to have significant impact on our earnings. During the quarter, we recognized $152.9 million or $1.69 per share of unrealized gains due to higher asset prices on our residential loan and bond portfolios.
These gains were partially offset by a $0.71 per share in losses recognized in our derivative instruments, primarily consisting of interest rate swaps and caps and $0.27 per share in realized losses related to the sale of non-agency RMBS and CMBS and losses incurred on foreclosed properties during the quarter. We had total G&A expenses of $11.7 million, which remained relatively flat as compared to the third quarter. We had portfolio operating expenses of $6.1 million, which increased primarily due to legal fees incurred related to the asset management of our BPL bridge portfolio. Adjusted book value per share ended at $12.66, down 2% from September 30. The main drivers of our adjusted book value change was a $0.35 in basic income per share, a reduction of $0.20 per share related to our declared dividend, a reduction of $0.07 per share primarily due to the removal of cumulative depreciation and amortization add-backs, attributable to consolidated multifamily properties for which impairment was recognized during the quarter and negative $0.39 per share change in estimated fair value of reliability.
As of quarter end, the company's recourse leverage ratio and portfolio recourse leverage ratio increased to 1.6 times and 1.5 times respectively from 1.3 times and 1.2 times respectively as of September 30. While our financing leverage remains low, relative to historic levels, we would expect our leverage to move higher as we expand our holdings of high liquid agency RMBS. Our portfolio recourse leverage on our credit book is up slightly at 0.4 times when compared to 0.3 times for the previous quarter. Currently, 58% of our debt is subject to market-to-market margin calls, of which 45% is collateralized by agency RMBS and 13% collateralized by residential credit assets. The remaining 42% of our debt as of December 31 has no exposure to collateral repricing by our counterparties and as Jason mentioned earlier, we completed a revolving business-purpose loan securitization last month.
Consequently, this securitization reduced debt subject to mark-to-market risk from 58% to 55% and our recourse leverage ratio and portfolio recourse leverage ratio to 1.5 times and 1.4 times respectively. We paid a $0.20 per common share dividend down from $0.30 in the prior quarter. We continue to 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 for capital gains that can be generated from our investment portfolio. We remain committed to maintaining an attractive current yield for our shareholders and we believe that the current dividend provides excess liquidity for reinvestment in a more attractive price market. I will now turn it over to Nick to go over the market and strategy update.
Nick?
Nick Ma: Thanks, Kristine. Good morning, everyone. In the quarter, we witnessed a key moment in the shift of the market sentiment. This follows the pivot in the Fed stance on future monetary policy. Through Q4, we experienced dramatic moves in interest rates, with five-year treasuries turning up to 5% in October, then sharply reversing course to end the year at 3.9%. The Fed's restrictive policy has made further inroads in subduing inflation with economic data in the quarter, pointing to the continued moderation of inflationary pressures. Fed Chair Powell's remarks in December further highlighted that the FOMC is now taking a more balanced approach to tackling inflation and managing economic risks. The market reacted positively with tightening spreads across asset classes alongside a falling interest rate curve.
Over the course of the last year, NYMT has refocused on growing the balance sheet to achieve more consistent earnings. This was a shift in strategy, given several prior quarters of minimal investment activity. We were initially concerned of heightened credit risks under the Fed's restrictive interest rate regime. Through 2023, we grew our portfolio such that we can generate more consistent income, while also maintaining liquidity for future opportunities. Over the quarter, we invested in $674 million of assets, primarily concentrated in $416 million of agency RMBS and $232 million of BPL bridge loans. The pace of agency RMBS purchases has slowed from last quarter's $946 million as we curved our buying in response to the decline in yields in the latter half of the quarter.
Current coupon mortgage spreads to interpolated five-year and 10-year treasuries started the quarter in the high 170s, reached a quarterly peak in October in the high 180s, then trended down to the end of the year in the high 130s. 77% of our agency purchases in the quarter was prior to the near-term peak of rates on October 19. In BPL bridge, we have made further progress to boost the volume of asset acquisitions with three quarters of consecutive growth. In 2023, we have grown our agency RMBS from zero to almost $2 billion of market value. We took advantage of the historically wide spreads in the sector that persisted throughout the year, driven by high interest rate volatility and tepid incremental demand from banks and money managers. In particular, we sought to build a portfolio of higher coupon-specified pools under this favourable return environment.
Quarter-over-quarter, the agency RMBS portfolio grew by approximately 30% on a market value basis. The average coupon of our spec pools continues to rise, increasing from 5.73% to 5.85% this quarter, driven by purchases primarily concentrated in 6.5% coupon bonds. Leverage in the strategy declined to 6.7 times as of yearend, down from 8.5 times in the prior quarter. The declining leverage ratio was due to price increases in the agency bonds amid lower yields and the slowdown of acquisitions in the latter half of the quarter. Given the available capital and the ability to scale up leverage in the portfolio, we still have capacity to meaningfully expand our agency RMBS exposure. We look to increase the portfolio's allocation to agencies under the current market environment, with the high spreads still presenting a compelling risk-adjusted return.
Additionally, the asset class has also an added benefit of having outperformed in periods of economic downturn. BPL bridge is a core asset class for us due to its high return and short tenor profile. The short tenor of the portfolio allows for flexibility to redeploy the return capital into BPL bridge or other investments, depending on market conditions. From a credit perspective, the BPL bridge portfolio continues to perform to expectation. Over the past few quarters, the level of delinquency in BPL bridge has moderated to 20%, and life-to-date cumulative losses in the strategy is under 10 basis points. In the past, the shrinking BPL bridge portfolio balanced due to our reduction in investment activity, contributed to the high delinquency numbers on a percentage basis.
Under the heightened acquisition pace where the portfolio is growing quarter-over-quarter, this delinquency effect should be muted. For our current acquisition pipeline, we note that the credit profile of new purchases has improved versus the existing portfolio. In particular, we try to avoid niche subsectors within BPL bridge, such as ground-up construction or small balance multifamily. These are segments of the market that have experienced constraints given the retrenchment of regional bank lending and therefore an increased risk of future credit dislocation. Furthermore, both ground-up and small balance multifamily present increased default management challenges if delinquencies rise. Our purchases in the quarter consists of only 3% ground-up construction loans versus the portfolio average of 13%.
We did not purchase any multifamily-backed bridge loans in Q4. The credit profile of our purchases, both historically and today, remain strong, with borrower credit scores above 700 FICO, loan-to-after-repair value ratios, or LTARVs, in the mid-60s, and loan-to-cost ratios, or LTCs, in the low 70s. We aim to continue growing our purchases in BPL bridge in the coming quarters. In January 2024, NYMT also executed on its third BPL bridge securitization. This two-year revolving structure will be beneficial for the funding of existing and future purchases of BPL bridge. On the heels of tightening rates and spreads in the fourth quarter, there has been a flurry of activity in the non-agency securitization market. Issuers are trying to capitalize on better deal execution than what was available for most of 2023.
An additional noteworthy point is that the first-ever investment-grade-rated bridge securitization came to market in 2024, which will be an important evolution in the structure to fund these assets. Rated transactions should provide better financing costs relative to the historical unrated structures. NYMT's BPL bridge purchase program fits very well with the tighter credit box necessary for a rated transaction. Rated deals have more punitive structural treatment of ground-up construction due to its correlation with higher rehab requirements. It is also restrictive on multifamily bridge loans. As I alluded to before, we have already been reducing exposure to these loans already. We plan to be an issuer of these rated deals in the future. On multifamily mezzanine lending, 2023 continues the historical strong performance of this asset class.
The payoff rate of the portfolio has accelerated in 2023 at 37% compared to 32% in 2022. This is also higher than the historical annual payoff rate of 28%. The expectation for the portfolio is that this payoff rate should continue to remain high, primarily driven by the seasoning of the portfolio at 29 months and the 83% LTV at origination. Occupancy rates of the portfolio today have also been strong at 90%. Given that we significantly reduce our purchases since 2022, our portfolio has more years of locked-in rental growth at lower property acquisition entry points. This translates to additional equity buffer for the borrower and further alignment with NYMT's mezzanine position. We believe that the sponsors in our portfolio are in a position to monetize these assets today, fueling paydowns in the portfolio.
Contrast this with later vintage originations in the market, we have limited exposure to originations from 2022 onwards as Fed rate increases took center stage. There has been upward pressure on cap rates and market shifts, causing certain pro forma projections on NOI to be unachievable. On multifamily JV equity, we do not expect any future equity funding of new positions within this asset class, as our efforts are focused on the asset management and sale of the existing portfolio. We have made progress on the wind-down of these assets that began in Q3 of 2022. So far, we have completed the sale or resolution of six of the original 20 properties, leaving 14 remaining properties as of the end of the year. In the quarter, as Kristine noted, we have moved nine of the remaining 14 assets to held and used.
The market for the sale of these properties have become more challenging, as the pending forward supply in new multifamily properties has contributed to slowing rent growth. Increased operating expenses, taxes and insurance have also impacted overall property NOI. These factors along with the interest rate volatility and an uncertain path for future cap rates result in a wider bid-ask spread in the market. We find it more productive for our asset management team to complete any beneficial value-add programs on these properties to maintain or bolster occupancy for an improved NOI profile in the future. I'll now turn the call back to Jason.
Nick Ma: Thanks, Nick. The company is focused on opportunities in a market undergoing a structural landscape change. Balance sheet growth is expected to continue with agency securities, short-term bridge loans, and structured derivatives. In this new environment, success may be achieved through organic creation liquidity, tactical asset management and prudent liability management. At this time, I'd like to open the call for questions. Thank you.
See also Top 20 Fastest Growing Industries in the Next 5 Years: Predictions and 30 Safest Countries In the World in 2024.
To continue reading the Q&A session, please click here.
