Steven Mumma - Chairman and CEO.

Doug Harter - Credit Suisse Eric Hagen - KBW Christopher Nolan - Ladenburg Thalmann Stephen Laws - Raymond James David Walrod - Jones Trading.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust's Third Quarter 2018 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.

[Operator Instructions] This conference is being recorded on Tuesday, November 06, 2018. A press release with New York Mortgage Trust's third quarter 2018 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 for 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, maybe 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 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..

Thank you, operator, and good morning everyone, and thank you for being on the call today. Included in our 8-K filing yesterday after the market close was our earnings press release for the Company's third-quarter results.

The Company has delivered a solid third quarter with GAAP earnings of $0.21 per common share unchanged from three months ending June 30, 2018 and the book value $5.70 down $0.04 from the previous quarter. Company delivered a 2.8% economic return for the quarter and a 7.1% annualized economic return for the nine months ended September 30, 2018.

The Company raised a total of $101.2 million in common equity during the quarter at an average net price of $6.02 or approximately 4% accretive to our June 30, 2018 book value. Company's net interest margin improved 16 basis points to 255 points from the previous quarter.

The improvement is largely attributable to our continued focus on credit sensitive assets in both residential and multifamily, adding a $161.5 million during the quarter. Company continued to see improved valuation from multifamily assets with the multifamily CMBS securities contributing $12.3 million in unrealized gains during the quarter.

The Company also benefited from a $3.6 million recovery in one of multifamily joint venture equity investments, which we had previously written down. The Company sold distressed loans for total proceeds of $30.1 million in the quarter and anticipates more sales in the fourth quarter.

The previously announced internalization of the single family residential credit strategy progressed nicely during the quarter with the addition of 11 employees, bringing the total number of new hires year-to-date to 12 employees.

We continue to work towards a mutual early termination of our external management agreement and anticipate a final transition strategy for those services by the end of the year. The following are highlights from our third quarter performance.

We had net income attributable to common stockholders of $28 million or $0.21 per common share and comprehensive income to common stock was $18.2 million or $0.14 per common share. We earned net interest income of 19.6 million and had a portfolio net interest margin of 255 basis points.

We had a book value per common share of $5.70 at September 30, 2018 a decrease of less than 1%, from June 30, 2018. We declared the third quarter dividend of $0.20 per common share that is paid on October 26, 2018.

We issued 14.375 million shares of common stock through our underwritten public offering and 2.4 million shares of common stock under our aftermarket equity offering program or ATM resulting in total net proceeds for the Company of approximately $101.2 million.

We acquired residential and multifamily credit assets totaling $161.5 million and total residential mortgage loans including the distressed residential mortgage loan for aggregate proceeds of approximately $30.1 million.

As of September 30, we had over 85% of our capital invested in credit-related strategies including $633 million in capital on our multifamily strategy and $336 million in capital on our distressed residential loan strategy. We have total invested assets of $2.6 billion and total capital including common and preferred stock of 1.1 billion.

Our callable debt to equity leverage ratio was 1.2 times and our total debt to equity leverage ratio was 1.4 times and continues to be conservatively managed.

We generated net interest income of $19.6 million in the portfolio net margin of 255 basis points for the quarter ended September 30, 2018, as compared to net interest income of 17.5 million and a portfolio net margin of 239 basis points for the quarter ended June 30, 2018.

$2.81 million increase in net interest income in the third quarter was primarily due to an increase of $1.4 million from our multifamily strategy and an increase of $1.2 million from our distressed residential loan portfolio, which was partially offset by a decrease of $600,000 from our agency portfolio.

Prepayments fees in our agency fixed rate portfolio which is 93% of our agency portfolio was 7.3% CPR for the current quarter versus 5.9% CPR for the previous quarter. Our agency on prepayment fess decreased slightly to 14.6% from 16.3% but still remain elevated.

Our exposure to agencies continued to decrease as we continue to build on our credit investment strategy. For the quarter ended September 30, 2018, we recognized other income of $24.3 million and the main components were as follows.

Unrealized gains of 12.3 million on our consolidated K-series investments due to continued tightening credit spreads as compared to the previous quarter, total net gains of $2.4 million from the residential mortgage loan sale, $3.6 million from the valuation recovery from a joint venture equity investment, and $1.2 million in income from other equity investments and a $2.3 million unrealized gain from our interest rate swaps accounted for as trading instruments.

For the quarter ended September 30, 2018, the Company had $7 million in general and administrative expenses as compared to $6.1 million in the previous quarter, an increase of $0.9 million was primarily related to the increase in salary and benefit due to the increased employee headcount as part of the internalization of our single-family residential credit strategy.

We expect the increase to be offset by a decrease in base management and incentive fees upon expiration of our external management agreement. As we entered into fourth quarter of 2018, our pipeline for new investments is strong with over $390 million in purchases or commitments to purchase credit assets including securities and loans.

We believe the addition of our new team of residential credit professionals together with our existing team has us well positioned for 2019. We have delivered an annualized 7.1% economic return and a 12% annualized total rate of return through September 30, 2018, while in a very difficult interest rate environment to our stockholders.

We believe our credit investment strategy is our best opportunity to continue to deliver a combination of stable book values and attractive dividends as we go into the fourth quarter in 2019. We appreciate your continued support. Our 10-Q will be filed on or about Friday, November 9th with the SEC and will be available on our website thereafter.

Operator, now can you please open for questions..

[Operator Instructions] And our first question comes from Doug Harter with Credit Suisse. Please proceed..

Can you talk about where you are today with the deployment of the capital? I know you have referenced that the pipeline of credit investment, is there additional capital to be deployed once those close?.

Yes, look we have a pretty strong pipeline going into the fourth quarter, a lot of the stuff as you know when you're buying loans takes longer than securities.

So, we will have all the capital that we have raised in the third quarter deployed early in the fourth quarter as well as we have access to other ways to financing some of our assets or increase some of the leverage in the Company, but we are always looking for opportunistic ways to increase the capital base of the Company as well as grow the portfolio..

And then, can you talk about what the spread experience has been on the K-series bond so far in the fourth quarter? And how that might impact the realized and unrealized gains lines?.

Sure, there is no question on the new issue markets. Some of the weighted bond spreads have widened and I wouldn’t say widened significantly, but have widened 5 to 10 basis points recently. Our expectation there is really more of the amount of the supply demand that's coming to the market.

The new issued market has been quite heavy so far in October and November and we saw a little backup in spreads. The first loss piece that we own though is the security that trades.

While a trade spread related, there is a supply and demand oriented security and we have seen quite a bit of secondary trading in the third quarter in those particular securities, which has resulted in tightening of spreads.

So, we continue to monitor that first loss instrument as a great investment for the Company, and we anticipate that asset continuing to perform very well into the fourth quarter..

Where do you see yields on those types of instruments today?.

We don't really disclose the yields overall on an individual instrument. I would say the instruments in general have come in significantly when we started investing in those.

Our initial investments in those securities were in the mid to high teens, and I would say the investments now are closer to the low double-digits or very high single digits in some cases depending on which vintage 5, 7 or 10 years..

And our next question comes from Mark DeVries of Barclays. Please proceed..

Ivan Zwick Just Ivan was Mark here. Just wanted to quickly follow up on just the K-series comments you guys had.

Can you just talk about I guess there was a 12.3 million in gains this quarter and how we think about that run rate going forward, if you guys just could talk about that?.

If you think about our K-series position which totals about little less than $600 million today. Talking about assets, they have very long duration. So, it doesn’t take much of a yield tightening to add a significant amount of value to those assets.

And so, our asset life across our portfolio, we have been buying in since 2012, but we continue to add to the position so the average life across the entire portfolio is approximately 6.5 to 7 years.

So while we have seen significant tightening on some of these vintages, the five years in, we saw several bonds trading in the third quarter at very aggressive yields which had a significant impact to some of the values of the securities on our portfolio. Now, you don’t -- it’s a lot of secondary trading in those instruments.

So, now that the program has gotten, it's starting to develop into a really robust program in terms of number of issues outstanding and several different types of players in the markets, you are starting to see more frequent exchange of the securities. So, it allows holders as securities to get a better sense of secondary market valuation.

And I think that's when you have seen some improvement in the mark-to-market of those securities recently.

Prior to really this year, the majority evaluation was really based on new issue activity, and to the extent that we participated and/or active in bidding in that process that’s where we are getting the majority of our information prior to 2018..

Can you just talk about some maybe that sort of 390 you guys disclosed for 4Q? Can you talk about the allocation there between the different kinds of credit assets you are looking at? What [multiple speaker] multifamily?.

What we can say is about 135 million that was in security and about 250 million to 260 million of is low residential loans, loans or multifamily mez loans, but I don’t want to get more specific to that. Some of those are commitments to purchase and we are in the process of doing due diligence.

In closing, we anticipate closing all of that stuff, all those items that we talked about but until we physically close them all, we would rather not be specific in general and be more general..

And our next question comes from Eric Hagen with KBW. Please proceed..

Another follow-up on just the unrealized gains, I hope it's not a….

No, sure..

Anyway, I know that a portion of those unrealized gains certainly seem to help pay the dividend potentially.

Can you just talk about how you monetize the value of those unrealized gains in order to pay that dividend?.

Now, look, and I think when you look at our company's performance this year, last year and over the last five years, I think one of the frustrations that's been from all the analysts that our spreading comes as not cover our dividend.

And while we have said many times that our investment thesis is not purely to generate spread income is to generate total rate of return, which includes capital gain. Now as we go through and markup our Freddie K-series bond, which we have sold historically on occasion.

But the way we do monetize those unrealized gains is, we are able to finance those assets and we are able to get other many types of financing five years ago it was only two securitization. Today it's through securitization either via re-REMIC or just straight up three year or five year fixed term securitizations on the repo format.

We can also get short-term repos from banks and long-term repos from banks that can go out to two years. So, we have a lot of different opportunities to borrow money against those assets, which is really no different than every asset, other asset class in a rebalance sheet. We are all borrowing money against them.

So, what we're trying to do is not only generate earnings through spread, but unrealized gains as well as realized gains we are selling at our distressed loans, so the distressed loans have a little bit higher velocity in realizing that our multifamily because we continue to see value improvement in those assets and that's why we don't sell them.

And that's how we get the money here. I mean it's really not a matter of we need to generate realized cash to pay for a dividend. I get frustrated when some people have a spread income that covers their dividend which is great, but they give it all back in book value deterioration because of lack of hedging or mismatch in hedging.

So, we try to focus and I think we have said as many times on the call, not only as spread income is part of the component, but the total rate of return of our economic book value. So, we want to sustain the franchise value of the Company going forward to pay the dividend.

What we don't want to do is deteriorate the franchise value and put extreme pressure on it to maintain the dividend which we have so far been able to do this year with the 7.1% positive economic return..

On the expense front, do you expect there will be any cost savings from fully managing that credit portfolio in Houston? I know that when that portfolio was externally managed, there was an incentive fee.

Will that be preserved under the in-house format?.

The in-house employees will be all part of the compensation program at the Company, similar to every other employee, and we have various programs depending on level. So, no, there will be a performance based bonus that everybody, all key executives are under, so that is largely attributable to the performance of the Company and not specific assets.

But we do expect -- we don’t expect savings, what we do expect to have is a more robust investment team at about the same cost. So, I think what you'll see is while our expenses won't decrease, we don’t anticipate any increase tremendously. What we do expect to have is more opportunities in other asset classes to invest with this investment team.

And I think what part of that is, if you look at the robust pipeline in the fourth quarter, I would anticipate that number to grow as we continue to add employees and we are going to continue to add other types of credit assets in both residential and multifamily..

And then one on leverage, if you don’t mind. I know the leverage is low and that’s certainly positive.

But what were your unencumbered assets at the end of the quarter or just even roughly?.

Hold on a second, I can tell you. If you look at our securities position, we have about $900 million pledge versus $1.3 billion. We have a significant amount of borrowing capacity again some couple asset classes that we have historically not borrowed again.

We have $260 million, approximately or $230 million of mezzanine loans in our multifamily that we are currently looking at ways to finance that book.

We have under levered distressed residential portfolio that we have the securitization outstanding that will probably call at sometime its due to and it's three year period in March in 2019, so the expectation would be something about that. So, we have some additional capital relief from those securitizations.

And what we have seen in the marketplace is, you have seen more parties come into the marketplace willing to lend money against increased assets that I spoke previous to your question about financing and first loss Freddie K bonds. We probably have 15 different counterparties willing to lend against that today when five years ago, we had none.

We have maturities from 30 days to two years from large banks, very stable financing available for those asset classes, at advance rate much higher than we were doing even three years ago.

So what we have learnt that we look at our leverage ratio and understand types of assets that we have in our balance sheet and liquidity around those assets, so it's not really comparative to us to agency only REIT, I mean we would never be any kind of levers with our company, but I do think we can safely run our company at 1.8 to 2.2 times leverage, depending on the components of the assets, right.

If we go more securities, the leverage will be higher. If we go more mezzanine loans, the leverage will be lower. And then you would have a marginal ratio in between depending on the components of the balance sheet..

And our next question comes from Christopher Nolan with Ladenburg Thalmann. Please proceed..

The higher net interest margin in the quarter, could give a little detail around that it wasn’t quite clear to me in your comments what was driving that?.

As it related to the multifamily that was largely attributable to increased earning asset balances, so we added another Freddie K first loss piece, so that is a low double digits yielding piece of security. So, that obviously contributes nicely to the net margin.

And just in general, as the overall Freddie K portfolio continue to increase from accretion, that is a larger interest-bearing balance, so that’s going to generate a higher yielding margin relative to the rest of the balance sheet.

And then it relates to distressed residential loans, a lot of that interest margin has been very noisy because of the accounting of distressed credits which were reducing our position and doing fair market value. But we had a better experience trading collections on the underlying loans that generated a higher yield for the quarter..

And did the higher NIM include the $3.6 million recovery?.

It did not. That is another -- other income..

Follow-up question is given that your business model sort of levered towards a growing economy which benefits credit sensitive investments, and given your comments sort of indicated that you are adding assets in distressed residential multifamily and so forth.

At what point do you start pulling back? What point you will realize that we might be able to top of the cycle or give any comments around that?.

Well, no absolutely, I mean look that’s the number one question obviously when you are learning a credit balance sheet.

As it relates to our -- if you look at some of the specific things that we do and so, when we're in a Freddie K program, those are generally securitizations that have represented from a broad swap of the United States, largely centered around the large MSA areas of the country, but there is a 30% of those portfolios are across the entire country.

So you know across, we probably now have over 1,200 multifamily properties that we're looking at or reviewing underwriting. So we get a pretty good into a lot of different MSAs. And then when we make specific mezzanine loan financing, we are looking at individual properties.

So, there is particular MSAs that we don't like to direct lend into because we think that it's overpriced or has been overbuilt. So, we are doing those elected decisions.

Distressed residential loans is a little different because you are talking about assets that are 10 years old, so you do have some what we hope is from HPA protection in those assets. But we are clearly looking at the credit underwriting of any new residential credit assets that we are putting on.

I think we have very selective portfolio criteria when we are adding non-QM loans to our portfolio and that’s one of the reasons why it's not growing as fast as we like it to grow, because some of the competition has lowered their credit criteria in accumulated loans and we are not willing to do that in some sectors. So, we do monitor it.

We do look at. We look at the cash flows on individual multifamily properties across all our properties, K deals and otherwise, and looking how those things are changing. So far, everything looks very strong, rent growths are strong. Occupancy rates are high.

You do have selective markets that had particular issues in particular asset classes or have issues that we look at or try to avoid, but we continue to still feel very good about the economy as we sit here today.

But no question, there will be some point at sometime in the cycle where you are going to start to think that, the curve starts to steepen and you may have better opportunities into the agency trade and that’s something we'll look to shift that, eventually if we have to.

But we are not -- the portfolio is designed that, right now, we are 50-50, residential multifamily could be 60-40, multifamily resi, but it also could be 30-70 multifamily resi, if we thought that’s where the environment was going..

Is it fair to say that given that your increased focus on K-series and so forth is increasing your asset sensitivity i.e.

making your balance sheet benefit more from higher long-term rates?.

I don’t know, I mean, look the higher long-term rates from the yield perspective, put pressure on the current assets that we own. Higher rates on an incremental investment basis, if the spreads are widening is better for all, but it just depends how you get to the higher rates.

A flat curve that raises nothing to really do with a whole lot of good other than raise our cost to financing. It gives us a higher asset yield, but if our liabilities raise as fast as our asset yield, we don’t really accomplish whole a lot.

It's really the relationship of the spread of the assets we are investing to the ability of financing in our cost to capital..

And our next question comes from Stephen Laws with Raymond James. Please proceed..

A number of them covered already, but just wanted to touch base on portfolio mix versus the need for new capital and leverage and again you hit on a couple of these things, but you sold some loans during the quarter. Your press release commented that you anticipate more sales in the fourth quarter.

How do you identify the assets you are selling, what's the decision-making process for some of those that you decide to monetize and recycle capital as opposed to utilize new capital or higher leverage or your ATM program, as you think about growing the portfolio and shifting the mix as we move forward?.

I think if you look across our portfolio there is really different lifecycles for all the assets that we own right because the mezzanine loan program has a different lifecycle than the distressed loan program. The distressed loans I would say are probably the shortest duration assets from a lifecycle holding period.

The intention is to buy the asset to do some kind of credit improvement with the borrower, figure out the solution, get the borrower paying more consistent payments which increases the value of our loan and then to sell the loan.

And really, your total rate of return from that loan is not so much driven by the net margin, but driven by the debt margin plus the capital gains when you exit the loan. So, we would like to think as the holding periods of loans are 24 to 36 month, and as you are selling those loans, you are trying to cycle into loans.

The pricing of those loans that we are selling have obviously gone up comprised, but the cost to buy new loans is also gone up. So, we looked it in non-QM market, now the non-QM is totally different where you got to do a securitization and you are really making a longer-term credit play on those assets. So that's a little bit longer holdings cycle.

So, the Freddie K program while they are 10-year assets and most of the assets that we invest in, the expectation is right now we have most of them we sold a couple of them.

And so, we continue to look at the collateral in the Freddie K the deals relative to where we think they are going to perform long-term versus what the market will pay us and do an analysis whether it's worth holding our selling. So today we hold most of those assets.

There is no really fine line on those periods and as it relates to capital, it's really about where we can enter the capital market and determine raising capital. I mean we are constantly looking at our common equity base relative to our expense ratio, the cost of other types of capital both in preferred and convert.

And then looking at what we can do with financing the underlying portfolio, that’s currently not financed to one of those options. And how does that impact to the overall liquidity of the Company? So, it's not a simple equation.

There's a lot of moving parts and then there is opportunistically what can we invest in the marketplace through that capital and how quickly can we get invested..

Thinking about maybe a follow-up on the dividend question earlier, are there any significant differences from the GAAP number you report versus taxable income either positive or negative that we need to take into consideration when thinking about the earnings power the Company is posting versus the dividend?.

No, look, I think, yes, there is differences to the extent that you have unrealized gains in your GAAP earnings, your taxable income typically does not count unrealized activity as a taxable distribution requirement. So to-date, this -- I mean last year I think about 60% of our dividend was taxable.

And if you go back and look at numbers in front of me, but I would say in general we are looking at our tax distribution, but we are really trying to generate -- we're really looking at the overall performance of the Company and trying to maintain a competitive dividend in the marketplace, which allows us to continue to grow our business and grow the capital base of the Company..

And then one last quick question. You commented earlier on the expenses probably won't change materially as you run through the internalization process, at least I think I'm paraphrasing correctly there.

But are there any one-time expenses we need to consider around the internalization of the management structure? Or is that not going to take place?.

We are still in the process of trying to come to a resolution. I mean the existing contract allows them go to in June 30 of next year. We are trying to come to an agreement to have an earlier exit, and I think we will have an agreement. And so, I don't -- I'd like not to comment about what it will be obtained or not.

At this point, we are still in the process of discussing how that exit looks and what it looks like..

[Operator Instructions] Our next question comes from David Walrod with Jones Trading. Please proceed..

Can you talk about the impact that pre-pays had on your portfolio this quarter? And how you are looking at that and going into the fourth quarter?.

The fixed rate portfolio and arm portfolio is now less than $1 billion. It doesn’t contribute a significant amount of that margin the Company, although, it does contribute something.

Our fixed rates went from 5.9% to 7.3%, it's a slight uptick in amortization expense, but nothing, nothing that was a significant driver to decrease in the return of the portfolio.

In the arm portfolio, it was $72 million so even don’t relate -- ours actually dropped 1.5%, but still not a significant dollar amount that really change the outcome of the net spread into those assets.

We do anticipate continuing to decrease that exposure while we don't like -- the opportunity on looks decent for investing in an agency security portfolio. No questions of that, the thing that concerns us is the convexity risk of the movement of interest rate and the hedging cost of doing that.

And so, so far, we like the return aspects from some of the credit assets for investing relative to the agency, but we continue to monitor it and it's not the same that in the future, if the curve steepens a little bit or we will get a sense where the short-term rates are going to finally stop raising, we may go back into that investment..

Thank you. At this time, I'm showing no questions in queue. I would like to turn the call back over to Steve Mumma for further remarks..

Thank you, operator, and thank everyone for participating in the call. I appreciate it. We look forward to talking about the fourth quarter and things that we are doing in 2019 when we talk next in February. Thank you very much. Have a good day..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day..