New York Mortgage Trust Inc (NASDAQ: NYMT)
Q1 2020 Earnings Call
May 22, 2020, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the New York Mortgage Trust First Quarter 2020 Results Conference Call. [Operator Instructions] This conference is being recorded on Friday, May 22nd, 2020.
A press release and supplemental financial presentation with New York Mortgage Trust first quarter 2020 results was released yesterday. Both the press release and supplemental financial presentation are available on the company’s website at www.nymtrust.com. Additionally, we are hosting a live webcast of today’s call, which you can access in the Events & Presentations section of the company’s website.
At this time, management would like me to inform you that certain statements made during the conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although New York Mortgage Trust believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from 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 Steve Mumma, Chairman and CEO. Steve, please go ahead.
Steven R. Mumma — Chairman and Chief Executive Officer
Thank you, operator. Good morning, everyone, and thank you for being on the call. Jason Serrano, our President, will also be speaking this morning as we talk through the first quarter presentation. I will be speaking to the company’s overview and financial summary sections, while Jason will be speaking to our investment strategy and business outlook sections.
The first quarter was defined by two periods, January 1st to March 9th, where the company continued to execute their plan raising $500 million in accretive capital and deploying it into residential and multi-family credit investments, and post-March 9th, where we saw unprecedented market disruptions from the COVID-19 global pandemic. As a response to these disruptions, we took decisive action to restructure our portfolio and focus on our core strengths, residential and multi-family credit opportunities. And at the same time, we focused on reducing our exposure to what we can’t control, short-term mark-to-market borrowings on our repos.
Beginning on March 23rd and continuing through the quarter end, we sold over $2 billion in assets, reducing our outstanding repurchase agreements by $1.7 billion, finishing the quarter with $173 million in cash liquidity, $1.4 billion in unencumbered assets, and a portfolio leverage of 0.7 times. In early April, we completed a $250 million borrowing against our unencumbered residential loan portfolio. Combined with the proceeds received from the settlement of securities sold in March, we were able to repay an additional $560 million in securities repo. After giving effect to these transactions, the company’s liquidity improved to over $200 million, while reducing our portfolio leverage further to 0.6 times.
These actions did come at a significant cost as the company had its worst quarter in its history, seen its book value decline by 33% and temporarily suspending its quarterly dividends. However, we believe our efforts have better positioned the company to weather the oncoming economic storm caused by the pandemic, and to recover some of the $300 million of unrealized losses carried on our balance sheet, allowing us to return to delivering the results — delivering the results to our stockholders that they have come to expect.
I will now move over to Slide 6, our overview section. As of March 31st, 2020, our investment portfolio totaled $3 billion, and our total market capitalization was $800 million. As of last night’s close, our total market capitalization has moved up to $1.1 billion. Today, our investment portfolio is 100% focused on credit strategies, choosing to manage through our strength of asset management in both residential and multi-family, while reducing our dependency on mark-to-market leverage. We have 57 professionals employed across three offices, all working from home since March 13th.
Moving over to Slide 8, where I’ll discuss market conditions and housing fundamentals. On the economic front, COVID-19 has impacted the global as well as our country’s economy significantly. Our first quarter GDP contracted 4.8% and is expected to decline further in the second quarter. Unemployment rate was close to 15% last month, and we saw lifetime lows in the 10-year treasury. Housing sales declined 17.8% last month and home price appreciation is expected to decline 1% or 2% into the next year.
In response to these factors, the US government initiated several programs to help both businesses and consumers committing upwards of $3 trillion to deal with this crisis. One of these initiatives, the CARES Act, which gives borrowers opportunity to defer mortgage payments, directly impacts our business. We have a history of dealing with payment interruptions from our borrowers, and we feel confident that as we emerge in is crisis, we will be able to assist and manage our borrowers back to their pre-crisis performance. In addition, given the dislocation in the mortgage credit markets, we believe this will present opportunities not seen over — that we have not seen over the last several years.
In Slides 9, 10 and 11, I will address the COVID impact as it has had on our markets, our company and our response. In US, more specifically the mortgage market started feeling the effects of COVID-19 in early March. On March 16th, we started to experience increased margin calls. And by March 20th, it was clear we will be a full blown liquidity crunch. It was a combination of factors that impacted our company and our industry. Reduced liquidity access from the dealers for all types of collateral, decreased availability for credit sensitive securities and accelerating price declines, due in part to increased margin calls and a lack of buyer participants, which were quickly transitioning from return on equity investors to return on asset investors. On March 23rd, we stopped meeting margin calls and began discussions on some form of forbearance relief from our securities lenders. Over the course of the next few weeks, we sold over $2 billion of assets, including 100% of our agency portfolio and 100% of our Freddie K PO portfolio.
Reducing our securities, we purchased borrowings by over $1.6 billion. By April 7th, we were able to pay an additional $560 million in repurchase agreements by utilizing the $213 million in proceeds from sales initiated in March and $250 million in increased borrowings from our residential loan portfolio. As of today, the company has three lenders, with a total outstanding of $1.1 billion in borrowings. We are in good standing with all and ultimately we never entered into any formal forbearance agreements. In addition, we have over $200 million in cash and $1.5 million in unencumbered investments today.
On Slide 12, you can see the changes in the portfolio leverage of the company from December 31st, 2019 to March 31st, 2020. Our company has a history of managing through volatile markets. Never have we experienced such rapid price declines without the corresponding underlying asset deterioration. Our decision to liquidate the agency in Freddie K portfolios was a difficult one, but necessary as we needed to reduce low margin high leverage strategies and levered non-cash illiquid assets from our portfolio. We believe our remaining portfolio of credit investments gives us the best path to recover the book value declines that we have incurred.
We will maintain a disciplined and measured approach as we continue to monitor the effects of COVID-19 on our markets and focus on credit assets that rely less on leverage from short-term mark-to-market financing. In addition, we continue to focus on financing transactions that have longer committed terms and minimal or no exposure to mark-to-market.
As we move over to the financial results, we’ve included — included in Slides 26 to 34 is our Quarterly Comparative Financial Information section that will help in aiding discussions of our performance — our financial performance.
On Slide 14, we’ll go through the first quarter financial snapshot, which you can see our basic and diluted GAAP loss per share of $1.71 and comprehensive loss per share of $2.11. Our economic return for the quarter was a negative 32.6%. We temporarily suspended both our common and preferred dividends on March 23rd. We continue to evaluate market conditions and hope to reinstate our dividends in the near future. Our investment portfolio totaled $3 billion with 78% in credit asset — in residential credit assets and 20% focused on multi-family credit assets.
Our average net margin — net interest margin for the first quarter was 2.92%, up 2 basis points from the previous quarter. Our average asset yield decreased by 16 basis points, but that was more than offset by the 18 basis point decline in our cost of financing, primarily due to Fed actions which began late last year. With $2 billion in asset sales and the related reduction of $1.7 billion in borrowings, our quarter end portfolio leverage was 0.7 times and our overall leverage ratio was 0.8 times. As I previously stated, our current portfolio leverage is 0.6 times today.
On Slide 15, our first quarter summary, you can see that we had $512 million loss in the first quarter — I’m sorry — we had $512 million in equity raise in the first quarter with two successful raises, one in January and one in February, generating $20 million of accretive capital. In addition, we have $333 million in purchases through the first week of March. The last two weeks of March, we sold $2 billion in securities and loans, and we had a GAAP net loss of $599 million and a comprehensive loss of $241 million.
Going into Slide 16 where there is further details of our financial results. You can see that we had net interest income of $47.1 million, an increase of $3.1 million from the previous quarter. We would expect second quarter net interest income to decrease due to the sale of the portfolio of sales that took place at the end of March. However, we don’t expect a significant decrease in our net interest margin in terms of basis point spread. We had not-interest losses totaling $622 million, including $153 million in realized losses and $397 million in unrealized losses. These losses were primarily related to the $2 billion in asset sales and the mark down of our quarter end portfolio valuation. Sales included $1.4 billion of Agency and non-Agency securities, $550 million in Freddie K first loss POs and $50 million in loan sales. Also included in the realized and unrealized losses was the impact of unwinding our entire swap portfolio. The company has over $300 million of unrealized losses still on its balance sheet, which we believe we can substantially recover in the future as the world reopens post COVID-19.
We had total G&A expenses of $10.8 million for the quarter, an increase of $1.5 million from the previous quarter. This increase was largely attributable to $1 million related to long-term incentive costs — amortization costs and a $500,000 increase in professional fees primarily related to the expenses incurred over the last two weeks of the quarter. For presentation purposes, the calculation of net loss attributable to common stockholders includes our preferred dividends. Even though they were not declared, the preferred dividends must be paid in full prior to any common stock [Technical Issues] and therefore included when determining net income for common stockholders.
The graph on the page shows that — shows the five quarters’ book value. The first quarter — for the first quarter of 2020, we broke out the realized and unrealized losses for the purpose of illustrating that almost two-thirds of the book value decline is related to unrealized losses, which we believe we can substantially recover in the future.
I’ll now turn the presentation over to Jason, who will go through our investment strategy. Jason?
Jason T. Serrano — President
Thank you, Steve. Good morning. Starting on Page — on Slide 18. As Steve mentioned, our book is now weighted toward single family at 78% versus 20% in multi-family. On 12/31, we had $1.5 billion of repo against $2.4 billion of assets. Looking at the end of the quarter, we ended with about $1 billion of assets, with about $118 million of total securitization repo, which when we get into the second where a lot of the liquidity issues arose, that $180 million is net of restricted cash.
On Page 19, we’re looking at here on the single-family credit strategy. It starts with the residential loans, which is our distressed loan portfolio, where we’ve been purchasing sub-performing loans that had a checker delinquency history in the past but showed elements of being able to continue paying on the mortgage loans with servicing oversight help. In that case, we spent time with our servicer working on the borrowers in determining their servicing strategies and looking at different ways we can maintain a borrowers current payment from being, let’s say, 30 to 60 days delinquent being coming a current loan or 12-month current loan, which is the goal. Obviously, with respect to the COVID-19 outcome and economic distress, we’re spending obviously more time with our servicers ensuring that borrowers are getting the relief that they need and/or just understanding the terms of our loans. So, this is not an unusual strategy for us in working with borrowers that we’ve managed non-performing and sub-performing portfolios collectively for over 10 years on average on our team. So we have — with our calls with our servicers, we have design strategy to meet the issues that have arose out of COVID-19.
On the performing loan strategy, where most of those assets, other than outside $94 million is related to scratch and dent loans. These are assets we’ve been purchasing at discounts to par with respect to some kind of technical issue at origination of that loan that was supposed to be sold to either Agency or a non-Agency conduit. In that case, with lower rates, we’re seeing a pickup of prepayment rates on our portfolio, which is shortening the duration of our discount, which is actually increasing return of that asset class. Performance has been — has done well through this period as well on the performing side.