New York Mortgage Trust Q3 2024 Earnings Call Transcript

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October 31, 2024

Key Takeaways

  • Reported Q3 EPS of $0.36, driven by a strategic rotation into high‐coupon, short‐duration credit loans and Agency RMBS to build recurring interest income.
  • Expanded portfolio by $1 billion (17%) quarter-over-quarter to $6.9 billion, with adjusted interest income up 39% year-to-date and liquidity of $408 million enabling further capital deployment.
  • Disposed of six multifamily assets for net proceeds of $347 million and $13.6 million in gains, reducing quarterly earnings drag by an expected $1–1.5 million going forward.
  • Adjusted book value per share declined 1.4% to $10.87, and recourse leverage increased to 2.6x from 2.1x due to additional financing in Agency RMBS.
  • Completed six securitizations in 2024, cutting effective funding costs by up to 112 basis points and positioning net interest income for greater stability.
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Earnings Conference Call
New York Mortgage Trust Q3 2024
00:00 / 00:00

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Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust Third Quarter 2024 Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. If you have a question, please press the star followed by one one on your touch-tone phone. If you would like to withdraw your question, please press star one one again. If you are using speaker equipment, we do ask that you please lift the handset before making your selection. This conference is being recorded on Thursday, October 31st, 2024. I would now like to turn the call over to Kristi Mussallem, Investor Relations. Please go ahead.

Kristi Mussallem
Kristi Mussallem
Head of Investor Relations at New York Mortgage Trust

Good morning, and thank you all for joining New York Mortgage Trust Third Quarter 2024 Earnings Call. A press release and supplemental financial presentation with New York Mortgage Trust Third Quarter 2024 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 made during the conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although New York Mortgage Trust believes the expectations reflected in these forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained.

Kristi Mussallem
Kristi Mussallem
Head of Investor Relations at New York Mortgage Trust

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
Jason Serrano
CEO at New York Mortgage Trust

Hi, good morning. Thank you for joining New York Mortgage Trust Third Quarter Earnings Call. Joining me today is Nick Ma, President, and Kristine Nario-Eng, CFO. The company reported sharply higher levels of income in the third quarter, with earnings per share at $0.36. The improved earnings were a result of a portfolio plan, which began over a year ago. The internal view was to build a consistent foundation of recurring earnings through interest income versus the previous strategy of relying on the monetization of total returns to support a dividend. Thus, we began decreasing exposure to assets that contained either no carry or very low level of current interest, primarily found within our multifamily portfolio, and rotated that capital into high-coupon, short-duration credit loans and Agency RMBS at wider spreads.

Jason Serrano
Jason Serrano
CEO at New York Mortgage Trust

With this activity, we believe we could obtain the dual benefit of meeting equity return targets set for our capital while also maintaining the flexibility for future capital mobilization. Said simply, we wanted to retain option value of raising our earnings power through the higher return opportunities in the event of subsequent market dislocation. As we stated previously, we are concerned about a slowing U.S. economy and the consequences it may bring to certain sectors that we monitor. Last quarter, we shared a graph of record high U.S. consumer debt against a depressed consumer savings rate. Today, on page eight of our supplemental, we show a similar predicament, but on a much larger scale. The federal government is running a large primary deficit despite very low unemployment, which is historically a rare event. Ultimately, we are concerned about persistently high U.S.

Jason Serrano
Jason Serrano
CEO at New York Mortgage Trust

Debt levels and its potential to crowd out private market trades. With that said, the market is performing extremely well today. There's plenty of liquidity within the warehouse financing and securitization markets. Nick will further discuss our activity here of meeting our leverage objectives to minimize recourse mark-to-market financing risk with credit investments. On page nine, we show some important developments related to our balance sheet growth. We increased our portfolio by $1 billion, or 17%, from last quarter. Stepping back, the company's portfolio grew over one-third year to date. Admittedly, we were underinvested earlier in the year and consequently did not achieve our earnings potential. With 20 years of buy-side experience in these markets, our management team was in touch with large opportunities throughout the year to accelerate growth.

Jason Serrano
Jason Serrano
CEO at New York Mortgage Trust

However, we felt it was extremely important to maintain the course of a deliberate approach to balance sheet growth by prioritizing investments containing fundamentally stable income and did not veer from our objective. Despite a measured pace of capital deployment each quarter, we have finally seen the momentum of the cumulative impact to our growth. We had over $100 million of adjusted interest income in the third quarter, a 39% year-to-date increase, and a 22% year-to-date increase to adjusted net interest income. Notably, we accomplished substantial portfolio growth without depleting our excess liquidity. At the end of the third quarter, we had $408 million, or $6 million more than that of the first quarter of this year. With strong levels of liquidity, we see tremendous opportunity for the company to build on quarterly earnings, particularly without having near-term corporate debt maturities to contend with.

Jason Serrano
Jason Serrano
CEO at New York Mortgage Trust

We are excited about extracting full earnings potential of our capital by continuing to rotate assets, particularly from future expected redemptions received on nearly $300 million in our multifamily mezzanine lending book. Lastly, I wanted to wrap up my comments by discussing company book value. While Kristine will comment on the details of the relatively flat quarterly move, I wanted to highlight the composition of our book, particularly against a 9/30 trading market cap, which is shown on page 10 of the supplemental. To start, our balance sheet is very different from recent past and contains a solid foundation to build off of. At the end of the third quarter, $5.80 per share is attributed to cash and capital allocated to the agency RMBS trades.

Jason Serrano
Jason Serrano
CEO at New York Mortgage Trust

We believe that a capital allocation of approximately 25%-35% for the company in the Agency sector in the near term will provide downside support to our market cap from potential broader market dislocation. Additionally, $3.22 per share is attributed to BPL bridge loans that is now mostly term finance in efficient securitizations. As Nick will show, performance has been excellent, providing a steady source of recurring income to the company. After that, we show a total of $0.21 per share attributed to the multifamily JV equity book. This strategy has been the primary source of previous book value volatility. However, after recent dispositions, which Kristine will discuss, $19 million remaining exposure is immaterial to the company today. Finally, the remainder of our asset-less corporate financings is $1.64 per share.

Jason Serrano
Jason Serrano
CEO at New York Mortgage Trust

An additional $1.55 per share above book value can be potentially gained after consideration of our asset holdings maturing at par. By maintaining a medium to long-term view to shareholder value, we believe we are well positioned for growth in 2025, supported by a strong balance sheet and a growing income base. At this time, I'll pass the call over to Kristine to discuss our financial highlights. Kristine.

Kristine Nario-Eng
Kristine Nario-Eng
CFO at New York Mortgage Trust

Thank you, Jason. Good morning. I will focus my commentary on the main drivers of our third quarter financial results and refer to the quarterly comparative financial information section of our supplemental. As Jason highlighted, our continued focus on investing in assets that provide recurring income resulted in undepreciated earnings per share of $0.39 in the third quarter, as compared to undepreciated loss per share of $0.25 in the second quarter. Our earnings were positively impacted by valuation improvements on our residential loan and bond portfolios due to changes in interest rates, contributing $1.07 per share of unrealized gains, which were partially offset by $0.67 per share in losses recognized in our derivative instruments, primarily consisting of interest rate swaps.

Kristine Nario-Eng
Kristine Nario-Eng
CFO at New York Mortgage Trust

With the intent of rotating our investment portfolio into interest income earning assets, our investment portfolio increased on a net basis by approximately $1 billion and $1.8 billion during the third quarter and year-to-date, respectively, ending at $6.9 billion as of September. As a result, net interest income contribution increased to $0.22 in the current quarter from $0.21 in the second quarter and $0.18 a year ago. Our quarterly adjusted net interest income also increased by $1.4 million to $288.7 million in the third quarter from $27.3 million in the second quarter, and as detailed in slide 27, our yield on average interest earning assets has steadily increased over the last few quarters, growing by 23 basis points during the quarter and 48 basis points year-to-date. Net interest spread was slightly lower in the quarter, but has increased by 30 basis points year-to-date.

Kristine Nario-Eng
Kristine Nario-Eng
CFO at New York Mortgage Trust

Our interest rate swaps also continued to benefit our portfolio, reducing average financing costs by 63 and 72 basis points during the quarter and year-to-date, respectively. We continue to make progress in the disposition of our multifamily real estate assets held on balance sheet. During the quarter, we disposed of six multifamily real estate assets and received net proceeds of approximately $34.7 million and realized $13.6 million of net gains to the company. These dispositions had a secondary positive impact that we will benefit from in subsequent quarters. With these dispositions, we reduced a negative drag from these properties, consequently decreasing our net loss from real estate from $13.1-$7.5 million during the quarter. We are actively working to dispose of additional multifamily properties, and we expect earnings to improve without the negative drag from these assets in the range of $1-$1.5 million per quarter.

Kristine Nario-Eng
Kristine Nario-Eng
CFO at New York Mortgage Trust

Although total G&A expenses were essentially flat as compared to the previous quarter, the growth in our residential loan book resulted in an expected increase in portfolio operating expenses of $1.1 million. We also incurred debt issuance expenses of $2.4 million related to the issuance of two securitization deals, which were fully expensed in the current quarter and not amortized over a longer time horizon due to our fair value election. GAAP book value increased by 1.4% during the quarter, and adjusted book value per share ended $10.87, down 1.4% from the second quarter. Adjusted book value was lower due to a reduction in the fair value of our amortized cost liabilities caused by decreases in interest rates and a reduction in cumulative depreciation and amortization add-back related to our multifamily property.

Kristine Nario-Eng
Kristine Nario-Eng
CFO at New York Mortgage Trust

As of quarter end, the company's recourse leverage ratio and portfolio recourse leverage ratio moved higher to 2.6 times and 2.5 times, respectively, from 2.1 times and 2 times, respectively, as of June 30, due to our continued financing of investment securities, primarily Agency RMBS. Our portfolio recourse leverage on our credit and other investments stands at 0.8 times, up from 0.5 times at June 30, due to acquisitions during the quarter partially funded by recourse repurchase financing. With our utilization of securitized financing for our credit assets, we do not expect to see a linear increase in our credit portfolio recourse leverage with the growth in our credit book. We paid a $0.20 per common share dividend unchanged from the prior quarter.

Kristine Nario-Eng
Kristine Nario-Eng
CFO at New York Mortgage Trust

We remain committed to maintaining an attractive current yield for our shareholders, and as we continue to rotate excess liquidity into reinvestment in assets that generate recurring income while optimizing expenses and growing fee revenue through third-party joint venture arrangements, we expect recurrent earnings to move closer to the current dividend. I will now turn it over to Nick to go over the market and strategy update. Nick.

Nicholas Mah
Nicholas Mah
President at New York Mortgage Trust

Thanks, Kristine. The long-awaited Fed pivot materialized in September, with a sizable 50 basis points cut closing out an overall positive quarter for fixed income markets. Recently, however, volatility has increased due to robust labor market data. We are well positioned with a diversified mix of agency RMBS and credit investments to navigate this evolving market. As Jason mentioned earlier, we also have meaningful capability and capacity to take advantage of market opportunities ahead. We made over $1 billion of residential investments in the third quarter, led by $372 million of agency RMBS, $378 million of short-duration BPL bridge loans, and $232 million of 30-year BPL rental loans. We have achieved seven consecutive quarters of increasing whole loan purchases. This steady uptick in capital deployment has been directly correlated with the growth and durability of overall adjusted interest income.

Nicholas Mah
Nicholas Mah
President at New York Mortgage Trust

Alongside the growth of our whole loan investments, we were also a more active issuer of securitizations this year. We have now completed a total of six securitizations in 2024 across several sectors, making this our most active year of issuance in the firm's history. Not only have base rates been trending lower, but a healthy economy has been germane to lower credit spreads. Overall execution of these deals has improved compared to conventional repo financing. Terming out financing of our loans into non-mark-to-market securitizations will contribute to more stable liquidity management in the future. In executing our BPL bridge securitizations, we currently have $706 million of revolving debt that we can recycle to fund future purchases. We also have access to additional financing from $2.2 billion of available whole loan repo capacity.

Nicholas Mah
Nicholas Mah
President at New York Mortgage Trust

With the combination of revolving securitizations and repo, we can more efficiently utilize leverage and fund future investments. As we mentioned previously, our conservative loan selection criteria also fits well within the parameters of rated BPL bridge securitizations. We have now completed two rated BPL bridge deals, executing on our second one in the third quarter with a $238 million size at a 5.65% effective cost of funds. This represents 112 basis points lower effective cost compared to our inaugural rated BPL bridge deal issued in the second quarter and more than 140 basis points lower effective cost compared to repo. These incremental cost savings will aid in bolstering future net interest income. We have restarted our BPL rental program this year and recently issued our first securitization in the sector since 2022.

Nicholas Mah
Nicholas Mah
President at New York Mortgage Trust

We were dormant in the BPL rental asset class for several quarters during a period of tightening monetary policy where the market experienced heightened pricing volatility. However, as the end of the Fed hiking cycle came into view, we pivoted to increasing our exposure to BPL rental loans. Generally, BPL rental loans have prepayment protection through prepayment penalties, which can be beneficial in a declining rate environment. Like our philosophy in BPL bridge, we target high-quality loans with strong characteristics and shy away from the incremental yield at the periphery of credit eligibility. We will continue to opportunistically participate in this strategy on a go-forward basis, with a goal of continuing to finance these assets through securitization. In Agency RMBS, current coupon mortgage spreads declined from 148 basis points to 129 basis points in the quarter as interest rate volatility declined.

Nicholas Mah
Nicholas Mah
President at New York Mortgage Trust

Given the decline in spreads, we have slowed the pace of acquisitions with a 20% drop in Agency purchase volume quarter over quarter. Overall, however, the portfolio is still growing. The agency RMBS book is now almost $3 billion, which constitutes 42% of our asset portfolio and 23% of our capital allocation. We expect the portfolio to continue to grow as Agency RMBS remains a core strategy for us in the near term. The strategy trades at historically wide spreads and provides diversification for the credit portfolio. Furthermore, the liquidity in our Agency RMBS strategy allows us to rotate from this asset class when other opportunities arise or to lean into the strategy when spreads move wider. Our target assets are still current coupon spec pools due to the favorable carry profile, but we have also started to diversify our purchases to include some belly coupons as well.

Nicholas Mah
Nicholas Mah
President at New York Mortgage Trust

The weighted average coupon of spec pools purchased was 5.34 this quarter across a mix of six, five, and four and a half coupon specs. In BPL bridge, we have invested over $4.5 billion to date since the inception of our strategy in 2019. We are focused on traditional credit profiles within this sector. Because of this, we have been rewarded by improving credit fundamentals along with preferential execution and bond investor interest in our rated securitization program. We experience a steady increase in our portfolio size through our acquisition pipeline, with delinquencies continuing to decline on both an absolute and percentage basis. We continue to avoid niche strategies such as ground-up construction and multifamily lending, with these assets accounting for only 18% of our overall BPL bridge portfolio.

Nicholas Mah
Nicholas Mah
President at New York Mortgage Trust

The percentage of these niche sectors in our portfolio continues to decline given the focus on more traditional bridge product for our ongoing acquisitions. In multifamily, we expect continued redemptions in our mezzanine lending and cross-collateralized mezzanine lending portfolios. The strength of the portfolio lies in our borrowers having a combination of fixed-rate senior debt or hedged floating-rate senior debt, keeping financing costs lower and supporting overall NOI at the property level. In the third quarter, our combined mezzanine lending and cross-collateralized mezzanine lending portfolio redeemed at an approximately 6% rate. We will reallocate this and future redemption proceeds into our core strategies to further drive interest income growth. As we noted last quarter, we look forward to deploying capital into multifamily strategies through third-party capital partnerships. We are proactively building a pipeline of investments in parallel to onboarding a JV partner in this space.

Nicholas Mah
Nicholas Mah
President at New York Mortgage Trust

We will now open up the call for Q&A. Operator?

Operator

Thank you. At this time, we will conduct the 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. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Bose George with KBW. Your line is now open.

Bose George
Bose George
Managing Director and Senior Equity Research Analyst at Keefe Bruyette & Woods

Hey, everyone. Good morning. Actually, in terms of your book value, now you noted that the JV piece now is pretty small. So do you feel like your book value is largely bottomed, or is there stuff in the multifamily piece that we should keep an eye on as well?

Jason Serrano
Jason Serrano
CEO at New York Mortgage Trust

Yeah, thank you. As we noted in prior quarters, the book value volatility stemmed from our JV equity book. As we noted, we have $19 million remaining in that position. And in that position, there's seven total assets. On the seven, four of them we have near-term, line-of-sight visibility into resolutions. Our current holding value represents the price we're receiving in those LOIs. And then the remaining three is roughly about $1.4 million of total value. So when you look through where that volatility has come from, it's been centered around the JV equity book and the fact that we're very close to actually winding down nearly all the assets with remaining value of $1.4 million after these LOIs are in place. We see that book value, that volatility we've, given this portfolio has now moved on.

Bose George
Bose George
Managing Director and Senior Equity Research Analyst at Keefe Bruyette & Woods

Okay. Great. Thanks. And then, actually, can we just get an update on book value as of date, any changes?

Nicholas Mah
Nicholas Mah
President at New York Mortgage Trust

Sure. As of this week, we see Adjusted Book Value down somewhere between 1%-2%.

Bose George
Bose George
Managing Director and Senior Equity Research Analyst at Keefe Bruyette & Woods

Okay. Great. Thanks.

Kristine Nario-Eng
Kristine Nario-Eng
CFO at New York Mortgage Trust

Thank you. One moment for our next question. Our next question comes from the line of Jason Stewart with Janney Montgomery Scott. Your line is now open.

Jason Stewart
Jason Stewart
Director and Equity Research Analyst at Janney Montgomery Scott

Hey, good morning. Thanks for taking the question. Jason, maybe Nick, could you just give us a high-level take on where you see gross ROE by strategy, maybe specifically on the agency side and the BPL side?

Nicholas Mah
Nicholas Mah
President at New York Mortgage Trust

Sure. So I'll start with the BPL bridge side since we've done a few securitizations recently this year and have a pretty decent color in terms of where things are pricing out. So execution there continues to be very robust just given the advent of rated RTL securitizations this particular year. So for that particular strategy, we do see 20-plus% type gross ROEs on that on a levered basis. On the agency side, there's been a fair amount of volatility. So end of the quarter, relatively tight on a Z-spread basis, it has widened out to today a little bit wider. So I would say that the ROEs there are somewhere in the mid-teens. In terms of some of the other strategies that we have, we mentioned BPL rental strategy, which we've also had recent securitization prints. We see that something in the mid to high-teens type ROEs.

Jason Stewart
Jason Stewart
Director and Equity Research Analyst at Janney Montgomery Scott

Okay. Thanks. And then on the agency side, given that you mentioned the volatility, I mean, spreads are wider. So ROEs probably at the higher end of that range. Have you shifted capital allocation at all into that, leaning into the widening?

Nicholas Mah
Nicholas Mah
President at New York Mortgage Trust

Yeah. So I mean, you're seeing it from our activity that we're pretty market-driven on the Agency strategy. The trend line will still be higher. We intend to grow this portfolio, but we don't have to do it all in one particular quarter. So last particular quarter, as spreads have tightened in, we have de-emphasized Agencies. Now with wider spreads, we expect to be more active in the agency space.

Jason Stewart
Jason Stewart
Director and Equity Research Analyst at Janney Montgomery Scott

Okay. Thanks. Just one last question on the overall, just macro, just curious your take. I know multifamily on the JV side is down to something pretty nominal, but how has this increase in volatility, rate volatility impacted CRE and maybe especially multifamily deal activity?

Jason Serrano
Jason Serrano
CEO at New York Mortgage Trust

Yeah. So on the deal activity side, it certainly has slowed overall activity in the market, purchase activity of properties. We have a putting together final touches of a JV agreement where we're focused on adding mezzanine loans with third-party capital that we noted last quarter. That could be up to about $300 million. And what we're seeing overall relating to our pipelines in that asset class for that third-party capital is that it's definitely lower year-over-year, quarter-over-quarter. I think this latest rate move higher, the deal activity was starting to be positive quarter-over-quarter. And then all of a sudden, those who did not lock in fixed-rate coupons or didn't have the hedges in place, we saw properties come off market and purchases that ended up just moving away.

Jason Serrano
Jason Serrano
CEO at New York Mortgage Trust

So I think overall, particularly with respect to election, there's not a lot of folks in the space that want to put long-term duration risk on their balance sheet and then looking forward towards looking at what are the economic plans of whoever is in office and what that would mean for rates and deficit growth, etc., to then step into the market as a whole. So the market, I think, has been basically curbed a little bit as it relates to the timing of activity. We're not going to see a lot of activity in November in this space. And then generally, December cyclically is a low month. So I think you're going to see robust activity back into January and February given the slowdown in the last two months of this year.

Jason Stewart
Jason Stewart
Director and Equity Research Analyst at Janney Montgomery Scott

Great. Thanks, guys. Appreciate it.

Operator

Thank you. 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. One moment, please. This concludes the question and answer session. I would now like to turn it back to Jason Serrano for closing remarks.

Jason Serrano
Jason Serrano
CEO at New York Mortgage Trust

Thank you for your time this morning. We look forward to sharing our fourth quarter financial results early next year. Have a great day.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Executives
    • Kristine Nario-Eng
      Kristine Nario-Eng
      CFO
    • Nicholas Mah
      Nicholas Mah
      President
    • Jason Serrano
      Jason Serrano
      CEO
    • Kristi Mussallem
      Kristi Mussallem
      Head of Investor Relations
Analysts
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