Steve Mumma - Chairman, Chief Executive Officer Jason Serrano - President.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust, Third Quarter 2019 Results Conference Call. [Operator Instructions]. This conference is being recorded on Wednesday, November 6, 2019. A Press Release with New York Mortgage Trust’s third quarter 2019 results was released yesterday.

The Press Release is 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 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 meanings 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 the company is filings with the Securities and Exchange Commission. Now, at this time, I would like to introduce Steve Mumma, Chairman and Chief Executive Officer. Steve, please go ahead..

Thank you, operator. Good morning everyone and thank you for being on the call. Jason Serrano, our President will also be speaking on this call this morning. The company continued to deliver solid results. We generated GAAP earnings per share of $0.15 and comprehensive earnings per share of $0.20 for the quarter.

Our book value per common share was $5.77 at September 30, an increase of $0.02 from June 30 and resulted in a total economic return of 3.8% for the quarter. The company raised $311 million in common equity through two overnight offerings during the quarter.

In October, the company also completed a preferred equity offering, raising an additional $167 million, bringing our total stockholder capitalization to over $2 billion.

The company generated annualized total economic return of 17% through the nine months ended September 30, while maintaining our dividend at $0.20 per share for the quarter, its 11th quarter in a row.

Our investment team remains very active, sourcing and funding approximately $400 million in credit sensitive assets, bringing our total investment portfolio to $4.5 billion at September 30.

Our pipeline of investments for the fourth quarter is strong as we expect to close over $275 million in credit investments in both our multifamily residential assets. I’d now like to have Jason speak about market conditions and some thoughts on our core portfolio strategy. .

Good morning. Global and U.S. equity markets had made modest gains during the third quarter 2019, despite volatility, largely driven by investor uncertainty regarding global trade restrictions and alongside other geopolitical concerns, which is becoming increasingly harder to predict.

While economic data remains mixed, data release for the third quarter suggests that the U.S. economy has continued to expand in-line with the previous quarters at approximately 3%. While GP growth in the labor market had indicated modest economic expansion, consumer and business confidence indices have weekend.

Reflecting our expectations made throughout the year, recent survey data continues to indicate business activity is slowing. However with respect the U.S. housing market, arguably the two most important factors are unemployment and interest rates. Both these data points continue to provide a strong tailwind to the U.S. Housing. The U.S.

labor market expanded during the third quarter of 2019, bringing a lower unemployment rate print of 3.5% and a 30 year fixed rate mortgage is now over 375 [ph] basis points lower than the beginning of the year when the fed reserves started lowering rates. 25 basis points in the last quarter, which is the third time this year.

Strong employment and lower rates improved the cost of homeownership. In fact that household debt service ratio related to a residential mortgage is now at the lowest point in 40 years. These points have mostly offset changes to the 2017 tax code, which dis-incentivized owner occupied housing.

As such, property price forecasts project depreciation by 3% annually over the next two years, equal to the current national growth. On the supply side only four months of housing on the market for sale and near low vacancies of – record vacancies of multifamily demonstrates a U.S. Housing Market that is in great shape.

With this backdrop we are pleased with the results of our rotation form agency to credit. One of the areas we have focused throughout the year is in single-family portfolio of residential credit securitization bonds. This sector represents 14% of total assets at quarter end.

While we did monetize depreciation experience in selected securities in the quarter, on the balance we expect price appreciation to continue, particularly in esoteric markets for securitization asset class that were created after the crisis. We see strong tightening goals that will likely grow tighter.

Total new bond issuance in a single family securitization market is approximately $100 billion year-to-date. The issuance exceeded market supply forecast for the year.

Despite this increased run-off in this sector from bond refinancing and organic asset pay downs, it is likely to bring to flat, net overall supply of residential credit bonds in the year.

I guess a backdrop of solid underlying fundamentals and little growth of new issue residents credit bonds, we expect a demand supply and balance to persist for better selling opportunities. With that said, we have developed channels to source bonds outside the markets general auctions.

With our familiarity as an active investor in asset that are similar to underlying pools that are securitized, we can move quickly to officially price the securitized bond risk, without the need of a rating or performing data from the securitization market.

This has helped us create proprietary channel investment securities that are off market, where we compete on process and not just price. Within our residential loan portfolio we have selectively aggregated a portfolio of $1.3 billion or 30% of assets for the last 12 months.

We have been more active in what we categorize in our public filings as distress one paper. As mentioned on prior calls, the profile distress loans we are buying is a selective mix of borrowers that are in a payment gray area. These borrowers are generally either a few months delinquent or just a few months current on their mortgage loan.

After the credit prices were over, 7 million borrowers were processed through government modification programs. Our government solution to a loan restructure was a missed opportunity for many loans today. Banks and the GCs continue to de-risk from loan servicing.

Servicing delinquent or recently delinquent loans is not a core business function for these entities and our finding channel to the U.S. with large scale portfolio sales. Given the frequency of multi-billion dollar for further sales throughout the year, big data and analytic is key to the investment strategy.

We seek certain borrowed profiles where we have experienced favorable results to tailored servicing average program. The higher payment velocity after loan forwarding improved our interest income in the quarter.

We expect to build on higher interest income related to this strategy in subsequent quarters as we exit the J curve of new portfolio acquisitions made earlier in the year.

Given our activity in the securitized debt market, leading to a consistent view throughout 2019 tighter bond spreads, we have been patient with the timing of what – to lock in term financing on our loan positions from our bank warehouse funding.

Term financing costs which is typically a fixed rate in this market is now 100 basis points lower than at the start of the year. We will look to lock in these lower term funding rates with certain loan profiles, where we feel execution is favorable in the near term.

Now, the single family mortgage rate is approximately 77 basis points lower than at the start of the year. Borrowed refinancings or CPR's are up in almost all residential mortgage loan sectors.

That benefits our loan portfolio because of the discount to par paid to acquire the asset, however, a different part of our business has benefited more directly. Due to the rapid rate decline, many originators were caught off balance with a spike in refinance volume.

Volume spikes create a strain on origination operations, because it’s more difficult to scale up personnel than down for volume inflections. Given the myriad of compliance and underwriting guideline hedges that were installed with Dodd-Frank, we generally see a higher volume origination process that was created.

In our scratch and dent alone business we helped the originate face near term liquidity – they are facing near term liquidity constraints by buying these loans intended to be securitized with the GCs or non-agency channels. But it can't be sold because of some miss in the underwriting process.

As a result we have a nice build-out in our year end investment pipelines of these assets. Because we can move quickly to price the assets the underwriting issues, we have experience with buying over loans form a hundred different counterparts in this market we are able to driver volumes in this niche subsector.

The value proposition of our business, the buying loans or pools of loans at substantial discounts where the intention was to sell immediately or flip at a premium to securitization channel that is excellent.

Now switching over to the multifamily side of the business where approximately $1.5 billion or 33% of our total assets that are invested as of September 30. We continue to see strong fundamentals with vacancy rates remaining at near historic lows.

Starts on multi-family homes containing five or more average, a seasonally adjusted rate of 367,000 during the nine months ended September 3, 2019 which is at a similar pace to last year. Overall, headline supply and unit delivers remain strong; however, we continue the seamless allocation of the supply.

It was definitely hired labor and material costs that are relatively the same level across different regions in the United States. Builders focus on where rents are the highest to maximize the projects economics. With this constraint we see elevated construction prime gateway markets like LA, San Francisco, New York and Miami.

These developments have access to relatively cheap funding costs, because of the size of the familiarity of the market, especially from overseas financing counterparties. However in these same markets we are observing negative domestic state to state migration.

Residents looking for cheaper costs of living and lower taxes are starting to have negative impact on supply and demand technicals. While we reported examples that include residents in LA who are finding better value in Dallas, or New York City residents that move to Florida in markets like Tampa Bay.

It’s not hard to envision the California resident population is $40 million to decline in the coming decade. This will be the first time California had population decline, even though it’s back to the mid-1,800. Other markets with high new construction such as New York is already seeing a population decline.

What’s even more troubling with these markets is that super majority of the construction is in the luxury sector. According to the RE data last year, a staggering 87% of all new construction, at least 15 unit apartments was dedicated to the luxury high-end segment.

This focus provides uneven growth opportunities in south, southeast where migration is positive and supply is lagging, especially for workforce housing which is a particular focus for us. Due to these trends we see significant growth opportunities for our business.

As an example, in the fourth quarter the company expected to fund its fourth Freddie Mac K-series first loss investment for the year totaling $57 million. Recently FHFA provided updates to their multifamily loan purchase count.

Through the five quarter period of Q4, 2019 to Q4, 2020 Fannie and Freddie will each be about an aggregate of $100 billion of new loan productions. With the NBA's expectation of $390 billion of multifamily lending next year, the GSEs will continue to be a predominant player in this market.

Not only will the robust securitization of K-series deals that continue to be sold by Freddie Mac, we also are expecting the GSEs to look for new ways to tear down their accumulated portfolio holdings in other ways. In fact, last month Fannie May began this effort with its first ever risk-transfer multifamily deal, which we participated in.

We’ve been a consistent partner of the enterprise and look forward to expanding that relationship in new ways into the New Year. Since our first purchase in the K-series investment in 2011, we’ve evaluated the financials and underwrote over 1,200 U.S. multi-tenant properties across the United States.

Of these we have conducted offsite inspections and review the capability of the project manager at over 650 properties, 200 in the last year and half alone. The amount of on-the-ground market knowledge that we had gained though the securitization of first loss over these deals allows us to stay ahead of the headline risk.

The competitive edge is enormous in price for unique off market opportunities. With this knowledge we have built strong relationships with sponsors of multifamily properties across the U.S.

Like an example, our direct mezzanine loan program to multifamily properties continues to add substantial value to our earnings with 15% of our capital allocated to strategy as of September 30. In this space we relied on proprietary relationships, particularly in south, southeast sectors of the United States.

In fact, we are focused on this region of the U.S. for years now, which is consistently providing attractive risk adjusted returns in the double-digits. We consistently win deals largely due to our efficient process and a solid track record of meeting our commitments.

Lastly, as I stated earlier, we continue to rotate out of the agency trade as net interest margins are compressed throughout the year in this sector. Without dramatically increasing leverage, we find it difficult to consistently provide attractive returns, negative convexity risk in this market is very difficult to contain the hedges.

Interest rate volatility tends to increase the cost of hedging, which is why we have 7.7 of capital exposure in this sector and declining. The expectation from here should be incrementally lower exposure, quarter-over-quarter, at least until we see rates flat out.

With the recent cap raises my goal today was to provide you with a full explanation of our focus in the credit markets and how the business transitioned over the years to take advantage of feedback loops generally between our core strategies.

We are excited about our ability to deliver strong earnings and under low levels of leverage utilization of 1.5x today. At this time I'll pass it back to Steve for closing comments. .

Thanks Jason. I’d like to go through a little bit more detail of our income statement and what we've done in the third quarter. We had $34.8 million GAAP in net income and $45.7 million in comprehensive net income. The company generated a net interest income of $32 million and had a portfolio of net interest margin of 240 basis points for the quarter.

Earnings strategy over the last several years does not rely solely on net interest margin, or as many define core earnings to cover our dividend, but on the total contribution for all income sources, including fees, gain-on-sale and unrealized activities.

Our net margin typically represents about 60% to 65% of our earnings in any given quarter, but by generating earnings away from that margin, we take some of the leverage pressure off of our balance sheet.

As our leverage is less than 2x and is currently 1.5x, which we believe reduces volatility of our earnings quarter-over-quarter, has allowed us to maintain the stable book value, enabling us to deliver a $0.20 dividend for 11 quarters in a row.

Our average earnings assets totaled $3.9 billion for the quarter, an increase of almost $360 million from the previous quarter, bringing the total increase for the year of $1.2 billion or 43% since the beginning of 2019.

We expect our investment portfolios to be approximately $5 billion by year-end with average earning assets of $4.5 billion for the fourth quarter, as our investment pipeline continues to remain very strong.

Our investment portfolio totaled $4.5 million since September 30, including $956 million in agency RMBS securities, with $142 million or 7.7% of our total capital as Jason alluded to.

Our focus remains on credit sensitive investments, which are priced generally at a discount or near par to minimize our exposure to interest rate complexity risk, mainly prepayments, which is a significant component to this agency return.

We have $2 billion in residential credit investments, including sub performing and reperforming loans, as well as non-agency securities backed by varying types of residential credit loans. These investments are currently funded with repo lines, but we continue to evaluate both the rated and unrated markets for possible securitizations.

We anticipate our first securitization will be completed in the first quarter of 2020. We have $1.5 billion in multifamily investments or 37% of our invested capital. In the fourth quarter the company expects to fund $56 million in our four Freddie Mac first loss security for the year.

We believe the fundamentals for renting remains very strong and we’ll continue in the future as the dynamics of homeownership versus renting evolve. Our net interest income totaled $21.4 million for the quarter.

Included in our press release for the first time are several tables by income category within non-interest income to try to better explain these components as there are many. We had net realized gains for the quarter of $6.1 million, primarily from the sale of certain CMBS securities.

We had net unrealized gains of $11.1 million for the quarter, really comprised of two significant components; one, a $13.3 million loss from interest rate hedges, which was offset by $24.4 million in unrealized gains from both our multifamily and residential loan portfolios.

We had other income of $3.9 million, largely comprised of income from our multifamily direct lending investment.

But for accounting purposes they do not qualify as loan accounting and therefore the income generated from those assets must be characterized in non-interest income, even though the actual risks are identical to the loans that we're including in that margin.

Our general and administrative expenses were $8.3 million for the quarter, down $1.5 million from the quarter ending June 30, 2019.

The decrease was due to two main components; the termination of our last external management agreement in the second quarter which resulted in the reduction of management fees of $575,000, as well as the $700,000 decrease in expenses related to an annual equity board compensation award that was done in our second quarter.

On a normalized basis going forward, we would expect the expenses to run at approximately $8.5 billion per quarter. As we head into year end, we believe the company has never been better positioned. Our market cap exceeds $2 billion for the first time in company history.

We have a strong and growing pipeline of targeted credit investments and a team of professionals focused on our mission to deliver stable book values over longer periods of time, while maintaining a stable dividend to our shareholders.

We appreciate your continued support and look forward to speaking about our annual and fourth quarter results in February 2020. Our 10-Q will be filed on or about Friday November 8 of this week with the SEC and will be available on our website thereafter. Operator, if you could please open up the call for questions for Jason and myself. Thank you..

My pleasure. [Operator Instructions]. And our first question will come from the line of Stephen Laws with Raymond James. Your line is now open. .

Hi, good morning. I appreciate the comments in your prepared remarks Steve and Jason. Can we talk about, you know you’ve raised a bit of capital in the last few months.

Talk about the incremental returns you’re seeing and I guess coupled with that, I know you guys did touch on this in your remarks, but what are you seeing the most attractive between the multifamily and resi.

I know you mentioned that the Agency is likely to run down here, but where are you seeing the most attractive opportunities today and other than agency are there any asset classes that you guys are really just avoiding at this point?.

Yeah, I think – look, when we think about raising capital and we look at where we're going to deploy it Stephen, over the last really three years it's almost fallen 50/50 at the residential credit multifamily, and right now we see equal opportunities in both classes, but there's a varying difference between those classes, right.

At the multifamily side the investment involves much more credit analysis on a specific asset, either in the direct lending or a combination of several larger assets in the Freddie K first loss securitizations. Those, we are going to fund with a lot less leverage than we would typically in a residential portfolio.

On the residential side, you know we continue to focus on credit and maybe Jason can speak further on the residential side. .

Yeah, so on that side we are seeing multi-billion portfolio sales on a quarterly basis from both the GSEs and large banks.

Our goal to those portfolios is to find us a portion of those portfolios where it meets our guidelines for acquisition, where we have servicing strategies and data that's helping us understand the ability of already pre-disposed of the positive outcome.

So we particularly, we’ll partner on transactions where we can take a sub-sector with a larger pool and acquire it for our purposes. So we still see equity type returns in that space, which is the sub-performing loan space.

As the bids on pen and paper continue to ratchet up with lower rates, that's providing a nice tailwind for gains in our portfolios. In the residential space, you know we still don't see a large market opportunity in the non-QM trade. We avail ourselves to all originators of market as we're not competing directly against any one of them.

The supply in that space continues to underwhelm.

You know a lot of the refinance we’ll probably see at lower rates as comprised of some of the equity returns, but you know the overall, you know aggregating the larger portfolio for a securitization is taking – would take a longer period of time, which exposes you to more rate risks that we would like.

The only area of market I’d say that we kind of have, one area that we definitely have pushed back quite a bit is in fix-and-flip, where we have aggregated portfolios in that space selectively.

Our concern there is that the refinance volume of borrowers that are going through fix-and-flip rather than selling their home after a year, and again which date back to the market where borrowers are basically taking bridge loans for your – to renovate a property and sell it at a profit.

In that space the renovations to a sale are now renovations though a refinance, then to a sale. So when we start seeing a pick up refinances in this market versus a sale volume, you know that the original project parameters were missed. Something was missing in the project for it to not be sold within that year period.

We believe that may add risks to that sector over time and cause pick up in defaults, so that’s an areas we’re a little bit more concerned about, just simply looking at the timelines of the sales that are occurring by these local developers, they are taking these houses through a sale.

Its overall, you know as I said in my comments, you know looking at the SPL market, looking at scratch and dent given the higher volumes of origination activity and more mistakes that are made, that’s because you know they continue to provide us with attractive equity returns..

Thanks for those comments.

And Jason following-up on the portfolio sale commentary, you know how should we think about opportunities in the fourth quarter, you know with multiple holidays in the back half of the quarter? Do things slowdown or with year-end or large financial institutions who were incentivized to try and sell these underperforming portfolios off the balance sheet.

You know how do we think about the investment opportunity and seasonality in the fourth quarter?.

Yeah, I mean every year we've been doing this for seven or eight years in this space, in the loan space, but I’ve been doing it.

There always is window dressing towards the end of the year for some institutions that provide some opportunities, which you know requires our traders and analysts to be at the office over the near period, but for closing, so that is more optimistic in nature and generally at bigger discounts, so you think that opportunity will avail itself toward the end of the year, it almost always happens.

But if you look back the last two years we had quite a bit of volatility in December. I think the market and talking to you know different participants out there, I think we should expect a slowdown of trading activity, simply because of that volatility.

Last year was also very tough for the market and obviously there was a – this thing can bounce back in the first quarter.

But at this point, there has been profits made on the residential credit sector, and it would seem more likely that everybody would try to print their stabilizer book by not entering into large scale of trades in the fourth quarter.

With that said, you know we obviously are – we’ll be open for business and will likely see some opportunities, but again it will be more optimistic in nature. We are not expecting any significant large portfolio sales. Those sales are happening in this month. .

And Steve if you think about the amount of capital that we raised over the last 12 months, and you think about our earning assets relative to the ending quarter balance, because of some of the assets that we're investing in, especially residential loans, there's probably a 60-day lag between entering into a letter, some kind of purchase agreement in the actual settlement of the loan.

So we sort of have a rolling natural 400-ish pipeline of investments that are going to fund in the fourth quarter and so a lot of the activity that we would typically do in the fourth quarter, you're not going to really see it until the first quarter of 2020, especially as it relates to a lot of the residential investing.

But you know, I think we feel pretty good about from a funding standpoint where we are going to end up at the end of the year and as Jason said, you know I think that we – there was just a large Fannie Mae loan sale this week.

There will probably be another one next week from another seller and then as we go into the end of the fourth quarter you'll see sporadic selling that we think we can take advantage of. .

Great! Thanks Steven, and my last question, flipping to the financing side of the equation, you know it looks like the financing costs for the resi credit decline, the multifamily credit actually went up a few basis points.

Can you talk about what drove that and with LIBOR moving lower and obviously the forward LIBOR curve now pretty flat, can you talk about what you expect to see occur on the financing cost as we look forward?.

Yeah, and really it was really the financing cost increase and the multifamily was really more of a function of the increase in the leverage there in extending the term, some of the financing Steve.

So you know to the extent that we’re able to get you know 12 and 18 month repos on up to two year repos of some of our Freddie K securities and so we just felt like just to be prudent, to take some of the volatility on the funding side is to expand some of those maturities and that's where some of that cost increase went to.

You know there was a little disruption in LIBOR pricing as we went into the quarter end.

So you know as we started to think about refinancing our repo book in September, we started pushing some of the repos out over year end just to avoid the year end possible price issues and so that's why, that little tweak up in cost, but no significant increase in cost.

And in fact you know as we look at our warehouse lines and our loans, were under process of finalizing a new agreement which will lower our costs in the residential loans. So we think funding still seems to be very advantageous. It's just a matter of you know transitioning stuff from 30-day exposure to a little bit longer, less risk exposure..

Yeah, I’ll add you know from the funding side from warehouse lines, we are seeing spreads tighten, you know roughly 20 basis points to 30 basis points, which we will benefit from as we renew these lines.

On the LIBOR side you know we saw a one month LIBOR decline, about 38 basis points over the year, which is to say this on an annualized basis you know roughly $8 million per year in total financing costs, so that obviously is – you know the financing side of the equation is very helpful you know to the overall business in generating return to the assets we own.

There's a, you know inter play that occurs between that and the assets. The assets are – you know when the investors are looking at a targeted you know king's return, you look at the equation of lower funding LIBOR costs and you know that does tend to increase the price of the next portfolio.

So you know the – while there is benefit in lower LIBOR, there is an offset of you know slightly higher asset costs, so we have to be and obviously look at the markets where you know there's been a delay in that activity and not reflected in the current pricing in the market.

But you know we’re very happy about our ability to gain fee with the savings here and also our timing of when we would look to securitize as funding costs have come down 100 basis points in the securitization market. So that has been a good result for us and something that I look to take advantage of in the next quarters. .

Great! Thanks a lot for your comments. .

Thanks Steve. .

Thank you. And our next question will come from the line of Eric Hagen with KBW. Your line is now open. .

Thanks, good morning guys. The loan pipeline with the GSEs, it sounds like conforming originations that you talked to in the prepared remarks.

Can you walk through that again? I just want to understand why you guys are able to buy loans at a discount to par when they would be able to sell in the specified pool market for you know quite a hefty premium. Thanks. .

Yeah, so what we're talking about here are loans that failed some underwriting guidelines at the point of origination, simply giving a borrower notice of 60 days prior to closing loan of what is you know – what interest costs you would incur and other items like that or you know a borrower that may have taken out an auto loan in the period of which he was underwritten, to the period in which it was closed, so therefore the DTI, debt-to-income ratio changed slightly.

So these are the things that we see that is persistent in this market since the beginning of really the agency market, and these defaults, when they come up basically or have an issue in that, the loan that is on a warehouse line, it was intended to be sold to the agencies.

Generally now it is disqualified for being online and the originator has a certain period of time of removing those assets off of the route [ph] line. Originators are basically you know close to 20x lettered entities. They have 95% you know tying our advance rates, plus on the loan-to-date they originate.

So in that case you know there is a near term liquidity issue that originally we faced, especially with respect to non-bank lenders.

In that case you know we have deployed strategies here where we work with originators, look at the issues that they uncovered on their loans as they attempted to sell to the pipelines and we would look to buy those on the discounts given the time line required to get those lines, those ones off and the infraction that was caused.

Now we’re typically looking for technical refractions here, you know fraud and other items like that that do come into play. You know those are not loans we look to buy and you know this is more of a kind of a fire sale opportunity for us to acquire assets now.

In this market with origination volumes increasing and dealing with the supply and the origination framework, and it's hard to add employees to deal with the origination versus you know the other way around, so in this case you know the originators are kind of strapped for you know the operational side of the equation.

When you have increasing origination and more supply going to the same pipeline without increasing your total production capacity, you know that you do find more issues.

So our team has been busy evaluating those and we’ve seen almost a doubling of our pipelines in that space, simply because of three finance activities that’s occurred in this market given the floor rates. .

Very interesting. No, I think that just supports the niche opportunity one gets in the New York Mortgage Trust. That's very interesting, thank you.

And then on the distressed loan segment, I'm just trying to gauge how fast the run off is? I don't think it's right to maybe phrase the question in terms of a prepayment speed or a CPR in the portfolio, but how much capital is being returned back to you in any given period, just in that kind of segment of the portfolio. Thanks. .

Yeah, I think if you – oh! Historically Eric, I mean the rotation really is a couple of combinations right, and your point is well taken about pre-payment. I mean really there is a lesser amount that comes from direct prepayment.

It's really either we throw them into a permanent type vehicle with the securitization or we sell the loans out right, because we've been in the – so we really, we've accumulated a significant amount of loans over the last 12 months.

We transitioned them to a new servicer, so what we're trying to do is bring these borrowers to a different place in the credit cycle that improves the value before we think about selling them.

And so I think what you'll start to see as we go into 2020, increased velocity in selling some of these loans or putting them into permanent vehicles for financing, to try to monetize that part of the credit improvement.

We have not been significant active sellers of a loan in this year, primarily because we've been in the building portfolio phase and we still think that we can – the loans that we're keeping, we think that we can continue to add value to them and that's really why we haven't sold it, because it’s very little. .

Got it. Alright, great. Thank you very much for the comments guys..

Sure..

Thank you. [Operator Instructions] Our next question will come from the line of Matthew Howlett with Nomura. Your line is now open. .

Thanks guys, thanks for taking my questions; another strong quarter. I just wanted to talk about the upcoming securitization. You know where – what’s the opportunity there and what do you think? You said 100 basis points and the market’s come in 100 basis points.

Are we talking about a 3% term type securitization that would take your overall cost down? Could you just maybe just go into a little more details of what you’re expecting early next year?.

Yeah, as it relates to the securitization market, we’re obviously getting term financing which is going to have slightly wider you know total cost of debt versus you know short term repo funding. However it is turned down to the risk of you know any kind of mark-to-market or any other events like that.

It is you know no longer an issue given the term financing. So, you know when you look at securitizations, you look at it you know as a function of the overall life of that financing, not just day one.

So given the 100 basis points decline, it's become more competitive or at least more competitive closer to kind of repo financing terms given the flat curve or inverted curve earlier. So it's providing us with the opportunity to basically term out with you know slightly increases of cost of financing.

You know when we talked about a securitization, you know we – the New York Mortgage Trust, you know we will be looking to be a frequent issuer in this market over time given our aggregation of loan portfolio that we will be receiving and earning the NIM off of those securitizations is what our business plan is.

You know there is a gestation period of when that happens, given the payment profiles of borrowers that we’re buying that would have, that we are looking to make more stable.

When you get to a point where the borrowers paid for all consecutive months, it starts opening up the channel for really efficient financing where you can get a rated securitization done and that is our goal.

In the interim process there is – before that event happens, as you buy new loan pools, there are you know esoteric unrated securitizations that can be completed on our portfolios, where you know financing cost has come down as I said early, about close to 100 basis points.

And in that case we’re – we’d be taking subsectors of our portfolio and moving them to more of a term funding type of facility where we see the esoteric market pricing, fairly the risk that is being assessed there. Again, we are buyers of the securitization debt.

We’ve analyzed and underwrite the loans in those portfolios almost daily, as new deals come down and looking at our current portfolio. So we are constantly monitoring where the inflection point is for us to go and see a securitization and which type of assets should go in securitization based on our pricing needs on the securitized debt.

We have financing facilities in place that are – you know that will be evergreen rolling facilities. So we will have along those periods of when repose would – you know for repo rolling, which has helped us you know as we get concern of any kind of cash needs in the near term.

But the securitization side of the equation is becoming more attractive given – you know these esoteric markets are becoming more of a normalized market where empirical data has been provided to the bondholders and they are getting more comfortable with respect to the risk that they are taking on the line deals, given that these are generally new securitizations that have been produced in this market.

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Got it. So when I think about L&Ds leverage profile going forward, these securitizations should enhance really the economy leverage given you're going to be coming at [inaudible] capital for reinvestment.

Is that the way to sort of think about the impact to earning going forward?.

Yeah, I think if you – like we talk about callable leverage and total leverage of the company, and so what you're doing is transferring some of your callable leverage risk to permanent financing which you know it may increase our leverage in the securitization, but it doesn't increase our risk with the leverage.

And so that's really what we're evaluating – and to Jason's point, again, trying to factor in how much money we can monetize against the loans and what’s the cost of doing that relative to our short term financing options..

Got it. Okay then flipping to Fannie, I just want to go back to those comments you made on Fannie selling first loss risk with Freddie. We know Freddie has that well developed K-series. Talk about Fannie’s program? I know they’ve sold the DUS bonds, the AAA and now looks like they are going into sort of coping Freddie.

Can you just go over the opportunity there as a tangible return profile?.

Yeah look, the Fannie program it is different than the Freddie in the sense that the Freddie is a true securitization where they sell the bottom layer risk out to the private market place.

In the DUS program what Fannie is doing currently is they are accumulating a series of risks that they hold because of the DUS program and when you think about the DUS sharing, loss sharing program, it’s more of an insurance policy with the originator right, so the originator is sharing some of the risk with Fannie Mae.

Fannie Mae is selling their portion of the risk, not 100% of the risk on a particular loan.

So unlike Freddie K for its loss bond where we actually have a chance to oversee the collateral and work out situation as the holder of the first loss piece, in a Fannie Mae it's more likely a residential transfer program that both agencies have, where you are just buying a bond based on an expected yield and you don't really have any ability to go in and deal with the collateral.

And so all your analysis is up front, and so you’re looking at that and you're trying to figure out if the yield is going to enhance here. So it was a very liquid market; it was very well bid, the first transaction and in some cases the bonds were 40x oversubscribed.

So I think that they were taking advantage of an under supplied market in this kind of product and so it's really these first couple of transactions that are going to be fact-finding in terms of trying to determine what is the right yield.

So I think we are into the first trade, one we wanted to make sure that we were – we know the Freddie program very well and we want to get an understanding by getting involved. But it's really – at this point it’s more of a wait and see and see what really long term opportunities are going to be.

We think at minimum there is short term, it’s a trading opportunity, and overtime we’ll have to see how it plays out from an actually credit analysis possibility. .

Great! Look what you guys have done, and it’s the first move with Freddie K, so we look forward to hearing developments on Fannie. I appreciate the comments. .

Thanks Matt. .

Thank you. And our next question will come from the line of Christopher Nolan with Ladenburg Thalmann. Your line is now open. .

Hey guys, did I hear you correctly that operating expenses in the fourth quarter should be $8 million to $9 million or did I miss-hear that?.

That’s right, about $8.5 million we think the run rate will be Chris, around that. .

And Steve do you think, that’s going to be the case, even though leasing the first half of ’20. .

Yeah, I mean look, you know the company’s experienced tremendous growth both in capital portfolio side and human capital, which is obviously the large component of G&A. I think the significant hires are behind us, and we can continue to grow the portfolio.

I mean at the margin, you know if we continue to grow the company larger, will it be a slight increase in expenses? Possibly, but I think the run rate is pretty solid now. I mean we’ve done a lot of growth in 2019. .

Got it. That’s it from me. Thanks. .

Thanks. .

Thank you very much. And I'm showing no further questions in the queue at this time. So now it is my pleasure to hand the conference back over to Mr. Steve Mumma, Chairman and Chief Executive Officer for any closing comments or remarks. Please proceed. .

Okay, just want to thank everybody for being on the call, the continued support of the company and we think we are in a great position right now as a company in terms of opportunities and we will continue to push the company forward as we’ve done in 2019.

We look forward to going through our fourth quarter updated in the year end in February of next year. Thanks everyone..

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we may all disconnect.

Everybody have a wonderful day!.