Adamas Trust - Earnings Call - Q2 2025

Transcript

Speaker 5

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust's second quarter 2025 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 key followed by 11 on your touch-tone phone. If you would like to withdraw your question, please press the star key and 11 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, July 31, 2025. I would now like to turn the call over to Kristine Nario, Investor Relations. Please go ahead.

Speaker 6

Good morning and welcome to the second quarter 2025 earnings call for New York Mortgage Trust. A press release and supplemental financial presentation with New York Mortgage Trust's second quarter 2025 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're 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 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 Jason Serrano, Chief Executive Officer. Jason, please go ahead.

Speaker 0

Good morning. Thank you for joining NYMT's second quarter earnings call. Joining me today is Nick Mah, President, and Kristine Nario, CFO. Kristine will provide commentary on second quarter results, and Nick will follow with an update on the progress of our business plan. We have a lot to cover this Thursday morning as we share our second quarter recap and insights into the Q3 developments. NYMT reported strong second quarter performance, with EAD surpassing our current common dividend by $0.02. This success demonstrates the effective execution of our long-term capital allocation strategy and the strength of our liquidity position. We maintained strong investment momentum in the second quarter, deploying nearly $800 million into single-family opportunities, aligned with our core strategies of agency RMBS and business-purpose loans at compelling return profiles.

The market backdrop remains supportive for our balance sheet growth, with volatility easing as investors look past tariff-related concerns and progress made on trade agreements, as well as foreign suppliers absorbing part of the impact. Macroeconomic indicators softened slightly in the second quarter, prompting some economists to lower full-year GDP forecasts for 2025 and 2026. We anticipate a steepening yield curve in the months ahead. We believe our portfolio composition is well-positioned to benefit from lower short-term rates. While housing prices remain elevated, several formerly high-growth markets from the post-COVID era have begun to cool, showing modest year-over-year price declines. Meanwhile, rental demand continues to rise, with the national homeownership rate declining to 65%, resembling levels in the 1980s. Seeing a long-term potential to meet the growing demand for non-agency credit and rental housing, we announced the full acquisition of Constructive Loans on July 15th.

The transaction marks a pivotal milestone, accelerating our expansion into residential business-purpose lending and further diversifying our balance sheet to deliver greater value to our shareholders. Investor demand for BPL rental loans is robust. Hallmark traits in the sector include loans supported by property-level rental income, borrower guarantees, and five-year prepaid protection. A few years back, we identified Constructive Loans as a leading operator in the space, with a proven track record of originating and distributing BPLs to institutional buyers, generating attractive gain on sale income. Consistent with NYMT's conservative approach, we closely tracked the originator's performance before moving into full control of the company with a $38.4 million acquisition just a few weeks ago, further meaning 50%. This transaction was a milestone in NYMT's history, reinforcing our long-term commitment to the BPL space while advancing our key strategic objectives.

Constructive Loans will aid as a complement to NYMT's growing investments by further diversifying the portfolio of recurring earnings. We expect this platform acquisition to be immediately accretive to EAD and are focused on scaling Constructive Loans under NYMT's ownership, especially as we entered the third quarter with $416 million of liquidity to deploy. In addition, the successful bond amendment to increase our recourse leverage limit from four times to eight times on our 5.75% senior notes due 2026 provides us with flexibility to continue expanding our agency RMBS holdings, which is now 57% of the portfolio assets and 38% of capital at quarter end. With a stable foundation of net income supported by our expanded agency and residential credit portfolio, we are well-positioned to grow earnings available for distribution, further enhanced by the compelling upside potential of our BPL origination platform.

We believe NYMT's equity remains a compelling opportunity, with shares trading around 70% of book value at a significant discount. Our Q2 results, which showed recurring earnings exceeding the dividend and ample liquidity to drive future growth, reinforced our view that NYMT shares offer exceptional value at current levels. At this time, I'll pass the call over to Kristine to provide our second quarter financial highlights.

Speaker 6

Thank you, Jason, and good morning, everyone. I'll cover the key factors behind our second quarter financial results. As we shared last quarter, we are pleased with the progress we've made in expanding our balance sheet. Our momentum in portfolio acquisition activity continued in the second quarter. We acquired an additional $915 million in assets during the quarter, bringing total acquisitions for the first half of 2025 to over $2.8 billion. This portfolio growth, along with continued rotation into interest-earning assets, contributed to a 10% quarter-over-quarter increase in EAD per share to $0.22 from $0.20 last quarter. Adjusted net interest income per share also rose 10% quarter-over-quarter and 47% year-over-year to $0.44 per share, up from $0.40 per share in the prior quarter and $0.30 per share a year ago. Our net interest spread also increased to 150 basis points from 132 basis points in the first quarter.

This was driven primarily by a 17 basis point reduction in average financing costs, supported by lower base rates, improved repurchase financing terms, and more favorable terms achieved through revolver securitizations completed in the previous quarters. During the quarter, we recorded $24.6 million in net unrealized gains, largely attributable to improved valuations in our agency RMBS and residential loan portfolios. These gains were offset by $36.3 million in unrealized losses on derivative instruments, primarily interest rate swaps. We also realized net losses of approximately $3.8 million, mainly from accounting basis reductions on certain investment securities and conversions of residential loans into foreclosed properties that remain on balance sheets. However, these realized losses were mostly offset by the reversal of previously recognized unrealized losses on the same assets.

Net loss from real estate increased slightly to $3 million in the quarter, primarily due to higher operating expenses, mainly insurance and property tax expenses. Importantly, following quarter end, we fully exited our remaining four joint venture equity positions in multifamily properties. These properties were disposed of at or near carrying value as of June 30, and our remaining exposure to multifamily real estate is now limited to our mezzanine lending and cross-collateralized mezzanine lending portfolio. General and administrative expenses declined by $628,000 during the quarter, reflecting the benefits of our earlier restructuring initiatives. Portfolio operating expenses were relatively flat, and we incurred $750,000 in non-recurring costs related to a consent solicitation from holders of our senior notes due 2026 and the replacement of an at-the-market preferred equity distribution agreement.

GAAP book value and adjusted book value per share decreased to $9.11 and $10.26, respectively, representing a 2.8% and 1.6% decrease compared to March 31. Our recourse leverage ratio and portfolio recourse leverage ratio increased to 3.8 times and 3.6 times, respectively, from 3.4 times and 3.2 times at March 31, primarily due to financing activity to support our agency RMBS acquisitions. Portfolio recourse leverage on our credit and other investments remains flat at 0.5 times. As Jason mentioned, we acquired the remaining 50% interest in Constructive Loans, a leading originator of business-purpose loans. As a result, we now fully own the platform and will begin consolidating its financial results in the third quarter. We are in the process of completing the purchase price allocation and will provide further detail in our next quarterly filing.

Based on current expectations, we anticipate Constructive Loans to deliver an annual equity return of approximately 15%, with the potential to grow as origination volume increases, something Nick will speak more about shortly. We also expect the acquisition to increase our G&A expense ratio from 3.4% to the range of approximately 6.2% to 6.4% and to result in an increase in our recourse leverage ratio of approximately 0.2 times. We also issued $90 million of unsecured notes in July, which were predominantly used to acquire targeted assets. Finally, our strategic repositioning efforts in recent years have significantly strengthened our ability to generate consistent recurring income. This has supported our quarterly dividend of $0.20 per share, which remained unchanged for the seventh consecutive quarter.

With continued balance sheet growth, asset rotation, and the addition of Constructive Loans' origination and gain on sale capabilities, we are well-positioned to generate earnings above our current dividend. With that, I'll turn it over to Nick for a market and strategy update. Nick?

Speaker 2

Thank you, Kristine. We delivered another productive quarter of capital deployment, focusing on expanding the investment portfolio to further grow EAD. After the tariff announcements in early April, spreads widened across both residential credit and agency RMBS. In the latter half of the quarter, credit spreads did manage to recover some or all of the Liberation Day widening. During this period, however, agencies have lagged in the tightening that we saw in the other credit sectors. We took advantage of market conditions to continue to invest in our core strategies, allocating the majority of capital into agency RMBS. In the quarter, we deployed $504 million in agencies and $294 million in residential credit investments. The residential credit purchases were concentrated in $217 million of BPL bridge loans and $61 million of BPL rental loans.

As we continue to rotate from our legacy positions into our core strategies, we view periods of wider spreads as attractive entry points to grow the portfolio for future earnings. We capitalized on the volatility in the second quarter to expand our agency portfolio. We increased our equity concentration of agencies from 34% in the prior quarter to 38%. In the quarter, agency current coupon spreads to Treasuries did widen to as much as 164 basis points before ending the quarter at 147 basis points, three basis points wider quarter over quarter. Leverage in the agency book grew slightly from 8.4 times last quarter to 8.6 times, which are comfortable levels for this strategy within a broader portfolio. Consistent with prior quarters, we concentrated our purchases at or near the current coupon, targeting five and five and a half coupon spec pools with minimal payups.

With our portfolio's average coupon of 5.59%, we are well-positioned to benefit from a strong carry profile and one that should improve further if rates decline. We continue to favor agency RMBS for its superior liquidity, scalability, and its historically wide spreads. Over time, we expect that the agency portfolio will trend towards 50% of total equity. In BPL bridge, performance remains stable with a continued decline of 60-plus-day delinquent loans. From a trading perspective, there is a trend of a more competitive market environment forming for BPL bridge. The growing use of rated securitizations has provided competitive financing to a broader segment of investors, tightening pass-through yields and intensifying overall competition for BPL bridge loans. Although we remain committed to this asset class, our comparative pace of acquisitions may decline as we continue to be selective on credit despite stronger investor demand for loans.

BPL rental has grown to our largest credit asset class within the portfolio. We have started to provide additional information in our supplemental materials for this product. The hallmark of our portfolio would be the overall credit composition. We target loans with high debt service coverage ratios, or DSCRs, with strong FICOs and favorable LTVs. Our portfolio has a solid average DSCR of 1.38 times. Equally as important, only 1% of BPL rental loans in our portfolio carry a DSCR below one times. Delinquency rates in our portfolio remain subdued, with only 2% of the portfolio's 60-plus days delinquent. We expect to have increased activity in BPL rental loans in the future, which we see as a key area of growth for us within our residential credit portfolio, especially with the purchase of Constructive Loans.

In the multifamily sector, Kristine Nario mentioned the milestone of fully exiting our remaining JV equity positions in July. This marks the end of a multi-month divestiture process of the larger multifamily joint venture equity portfolio that started in the third quarter of 2022 with 19 assets. We ended our acquisition program for this strategy back in April of 2022 as part of a broader strategic shift. In our multifamily mezzanine loan portfolio, we continue to see steady performance with consistent payoff rates. In the quarter, the portfolio paid off at an annualized rate of 17%. We have previously highlighted the seasoning of these loans and the resulting equity buildup, creating an incentive for these borrowers to refinance or otherwise prepay.

Given our ongoing discussions with our borrowers, we believe that the future payoff activity for the rest of the year should occur at a higher run rate than what we saw in the second quarter. Overall, the proceeds from the multifamily joint venture equity exits, along with future multifamily mezzanine payoffs, will continue to be rotated into our single-family core strategies that we believe are more EAD accretive. Let's turn our attention now to the Constructive Loans acquisition. We are thrilled to incorporate Constructive Loans into our more comprehensive BPL strategy, which gives us direct control over the origination of highly coveted BPL assets. Since entering the BPL bridge market in 2019, New York Mortgage Trust has grown our broader BPL portfolio to almost $2 billion.

With this track record and our partial ownership in Constructive over the last two and a half years, it was a natural next step for us to bring Constructive in-house. Our longstanding relationship with Constructive facilitated the deal's efficient execution. Following that, the integration process has also been proceeding smoothly. Constructive's seasoned management team, with 35 years of experience, will help lead this best-in-class platform as a standalone subsidiary of NYMT. While we aim to grow our exposure in BPLs, we remain committed to preserving Constructive's originate-to-distribute model and their established trading relationships. Historically, NYMT has purchased only a modest share of Constructive's overall production, and we expect for that trend to continue in the future. This would allow us to expand Constructive's origination volume in a capital-light strategy to earn fee income.

We started with a barbelled approach for NYMT to grow our highly liquid agency RMBS strategy and to consistently acquire home loans. Now, adding Constructive's platform's gain on sale earnings will provide incremental equity upside. Since its inception, Constructive has originated over $5.2 billion of business-purpose loans across a national footprint. As an equity partner, we have witnessed that growth and the portfolio's stable loan performance firsthand. Constructive was profitable even through a period of rapidly rising interest rates from 2022 to 2023. This is a testament to the quality of the business and the management team. Above all, Constructive shares NYMT's commitment to high credit underwriting standards, aligning with NYMT's investment ethos in the BPL space. Constructive has a diversified lending footprint originating in 48 states and DC. They have strong production in the Northeast, Mid-Atlantic, Great Lakes, and the larger Sunbelt states.

Constructive's core product is heavily weighted to BPL rental loans with mostly 30-year terms that constitute 93% of its product mix, with 7% in bridge loans with mainly one-year terms. Loan volume is generated primarily through the wholesale channel at 85%, with the remaining from their retail channel. Constructive is still primed for future growth. In the near term, we can unlock synergies by providing more consistent capital to accelerate the origination volume and to procure more accretive financing lines to fuel that expansion. Over the medium to longer term, we see expansive areas of growth in broadening the geographic footprint, diversifying origination channels, and scaling the nascent BPL bridge business. We are excited about this new phase in the NYMT and Constructive partnership. We look forward to discussing more about Constructive and its impact on our business on our third quarter earnings call.

Now, we will open up the call for questions.

Speaker 5

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 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question today comes from Douglas Michael Harter with UBS Investment Bank. Your line is open.

Thanks, and good morning. I was hoping to talk a little bit more about the equity allocation strategy. You kind of mentioned agency trending towards 50%. Do you view that as kind of a core long-term positioning, or is that more reflective of the current opportunity? How dynamic do you expect to be in that equity allocation?

Speaker 0

Yes, thank you for your question, Jason. Yes, we do see this as more of a medium-term allocation strategy for us. Historically, New York Mortgage Trust's held an agency position on their balance sheet, which we removed after March 2020, after COVID. That was about $1 billion. About two years later, we reestablished that position. We think that New York Mortgage Trust will continue to hold a position in the agency space, potentially not as high as 50% over time, but we see that as a core investment strategy for the company.

Great. On Constructive, you mentioned that you would expect that to kind of be more of a capital-light approach. Are there conditions or times where you would look to balance sheet those loans, or is it, given the product mix, that you would generally foresee being more of a distributor of those loans versus holding them?

Speaker 2

Hi, Doug. This is Nick. Historically, with our relationship with Constructive Loans, we have been buying part of their production. From a historical perspective, we have purchased approximately 25%, about a quarter of their overall production. For the time being, we see that continuing. We have a desire for those assets. We believe those assets are accretive to the REIT. At the same time, we do see a benefit for the overall business to be able to generate gain on sale income in a capital-light way. For the time being, I think that we will continue to purchase some portion of production on a go-forward basis. As I mentioned earlier, it's probably not going to be the majority share. Overall, I think the main goal is to increase volume through various means, increase margin through various means, and I think all sides will benefit.

Great. I appreciate that. Has there been any meaningful change in your book value so far in July?

Sure. As an update, we see adjusted book value down slightly from quarter end. As of July 29th, we see adjusted book value down somewhere between 0% to 1%.

Thank you so much.

Thank you.

Speaker 5

Thank you. Our next question comes from Randy Benner with B. Riley Securities. Your line is open.

Hi. Thank you for taking the question. This is Tim Baggett's email on for Randy Benner. First, congrats on the closing of the Constructive Loans acquisition. My question relates more to we've noticed that generally mortgage activity, whether that's origination or acquisition, was lower in the second quarter. We're just wondering what you're seeing in the market now in the beginning of the third quarter here in July and what your kind of perspective is going throughout the year.

Speaker 2

Sure. I would say from the Constructive Loans perspective, and once again, they're more involved in business-purpose loans, that their volumes have been strong in 2024. In 2025, thus far, you are correct, it has moderated somewhat. We do see areas of growth and areas for improvement. I think overall, clearly there has been a fair amount of rate volatility that we have seen over the past quarter. That definitely will have an impact, especially when the rate volatility also includes rates moving higher, especially on the long end. It is not surprising from our perspective in terms of seeing a little bit of a quarter-over-quarter moderating growth in terms of origination volume.

I think from a long-term trend perspective, I do believe that there is a strong path for originations to continue to grow, especially within the context of DSCR, which we have already seen is a growing area within the non-QM market. Non-QM just generally within the overall mortgage market has also been growing. From a sector trend perspective, we think that there are strong tailwinds for originations within this particular asset class to grow.

Okay, great. Thank you for that. With stronger tailwinds, just in terms of leverage on the portfolio, is there a target that you're aiming for, or how should we think about leverage going forward?

From a leverage perspective, obviously a lot of it is market dependent, number one. Number two is also dependent on the mix of assets that we have. You're seeing our recourse leverage ratio in our residential credit book being relatively low, right? So, 0.5 times. And our agency book, 8.6 times. If you take a look at some of our earlier comments about how we expect our agency portfolio to trend higher to about 50%, and if you kind of do the math, once again, keeping leverage ratios constant, we get to around 4.5 times across the business. Once again, you know we can flex up and flex down the different asset classes' leverage. For example, in residential credit, if we are ramping up towards a securitization, we will be taking on a little bit more recourse leverage before that comes back down.

On the agency side, we could flex up leverage to increase acquisitions, and then it could come back down again. There's still flex within the particular asset classes, but I think that's, I think, some guidance in terms of what we're thinking.

Great. Thank you so much for taking your questions today. That's all from us.

Thank you.

Speaker 5

Thank you. Our next question is from George Bose with Keefe Bruyette & Woods. Your line is open for questions.

Hey, guys. Good morning. Actually, what's the ROE on the agency allocation versus what you're seeing on the credit side?

Speaker 2

I think you were breaking up a little bit, but I think the question was related to the ROE on agencies. We see, at least where we're investing right now in the 5s and the 5.5s, we see ROEs on a fully hedged basis somewhere in the mid-teens. It can flex up to the high teens to the extent that we reduce leverage. For the time being, we are purchasing assets on a fully hedged basis as we're ramping up.

Okay, great. How does that compare to what you're seeing on the credit side? That allocation you have to the multifamily piece, like what's the ROE on that piece?

Sounds good. On the credit side, let's spend some time on the BPLs, both BPL bridge and BPL rental. BPL rental, we see somewhere in the mid to high teens. BPL bridge is also within that generic context. I didn't mention the increased competition within BPL bridge. With pass-through rates coming down, I do see pressure on those ROEs on a levered basis coming down somewhat. On the multifamily side, on the multifamily mezzanine loan side, we see ROEs in the low double digits to potentially low teens. It does make sense for us from a pure economic perspective to rotate out of multifamily into some of the core strategies.

Okay, great. Thank you.

Speaker 5

Thank you. Our next question is from Eric J. Hagen with BTIG. Your line is open.

Hey, thanks. Good morning, guys. Do you guys, would you say you prefer the BPL bridge or the rental product right now? In the rental portfolio, do you feel like there's a lot of flexibility to charge a higher coupon when the DSCR ratio is lower?

Speaker 2

Yes, we do see more room for growth in the BPL rental side for the reasons that I mentioned. We obviously now have Constructive where the majority of the production is within BPL rental. We do see an area of growth there in terms of additional volume. On BPL bridge, some competitive pressures there. We still expect to continue to invest there, but I think from a growth perspective, my expectation is that BPL rental will increase. With regards to the second part of your question, can we charge higher coupon rates if DSCRs come down? Yes, I believe that within the matrix, there are adjustments based on how LTV moves, how DSCR moves. Clearly, a lower DSCR loan is riskier and therefore should demand a higher coupon.

From our perspective, though, and this is really our philosophy throughout the credit book, we don't necessarily prioritize additional risk for marginal amounts more of coupon or spread. We like the fact that the DSCR portfolio has a high DSCR rate, and that's effectively part of the market that we're targeting. We're very happy with the coupon rates, the levels, the yields, and the DSCR composition as we have it today.

Right. Okay, that's helpful. Just curious how the securitizations might benefit from the Fed cutting rates and how your financing costs might change on the back of that. I mean, I guess we don't think about a lot of interest rate duration in the residential credit portfolio, but if the Fed cuts rates, I mean, how should we think about the mark-to-market on both the asset and liability side of the balance sheet, especially as it applies to the securitizations you guys have open?

Yeah, I think obviously cutting rates, depending on the context, should be helpful to overall securitization execution. The cutting of rates has a very direct impact on shorter-term financing like repo because SOFR is directly impacted. In terms of securitizations, we tend to issue within, let's call it, the two to five-year space. Generally speaking, from what we have seen in interest rate moves, that part of the curve has been more stable than the longer end of the curve. Because of that, our expectation is that if rate cuts occur, and if they occur in a more consistent and meaningful way, that should also bring not only the really front end, but also the two to five-year part of the curve down as well. That will benefit securitization execution for sure.

That's helpful. In the backbook of securitization, though, right, the existing securitizations that you have in the portfolio now, is it all fixed rate? Or is there any benefit that you get from the Fed cutting rates on those financing costs?

Oh, from the liabilities, as to whether or not they're fixed or floating, right? That's the question?

Yep.

Within the securitization market. For most of our securitizations, they are fixed rate. You're not going to see, we've effectively locked in the financing execution on that.

Okay. I mean, one quick dent in that, you could see some benefit with respect to our call optionality in those deals and being able to call the deal and refinance into a lower rate environment, which would be accretive to our NIM. Yep. All right, that's helpful. Thank you guys so much.

Speaker 5

Thank you. This concludes our question and answer session. I would now like to turn it back to Jason Serrano for closing remarks.

Yes, thank you for your time this morning. We look forward to discussing third quarter results in October. Have a great day.

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