New York Mortgage Trust Inc (NYMT) 2004 Q4 法說會逐字稿

Thank you very much sir. Ladies and gentlemen at this time we'll begin the question and answer session. (Operator Instructions)

At this time we do have a Paul Miller. Sir, please state your name, your company name followed by the -- your question.

FBR, how you guys doing? Hey could you talk a little bit about the $800,000 loss -- I believe it was in your interest rate locks and how that ends up flowing through your income statement over time?

Yes, we have on our mortgage origination pipeline we have derivatives, interest rate lock commitments and forward sale commitments. Those are mark-to-market every quarter and that mark-to-market flows through the P&L in terms of interest expense or interest income as they change. So it's not just a--you'll see when we have our 10-K, you'll actually see in the cash flow the actual cash paid for interest. But the mark-to-market delta between the ILC and FSLC's from period to period do impact either interest income or interest expense and those can be fairly volatile depending on how our secondary marketing group is hedging the mortgage pipeline portfolio.

Correct me, if I'm wrong though, it's a non-cash, it's a revenue recognition issue, am I correct, it's a non-cash....

That's right it's a non-cash charge. What it is, there's no cash actually going out for these derivatives. What it is, it's a derivative and not a cash, it's not a hedge so it doesn't flow through OCI. These are, most of these are freestanding derivatives which means they have to flow through the P&L.

It's comprised of two items. When we issue a loan, an interest rate commitment to a borrower at the end of each period, we have outstanding interest rate lock commitments and those are mark-to-market based on whatever interest rates stand at the end of the period. Similarly, when we forward sell loans to third parties, we mark those positions to market at the end of each period as well. And then we net those two against each other, the positive or negative goes to the P&L.

And the other thing is, I'm going out in this --, and I mean being discussed heavily and out there is the -I guess the tightness of the swap spread. The tightness, the tightness of the swap spread, sorry guys, I can't get that out, it's only Wednesday. Anyway can you just talk a little about, like what type of experience-I mean historically-I've heard these things are about the tightest it's ever been. And that the mortgage, the swap spread has been very, very tight, how that impacts your business going forward?

Yes. I mean basically this is Dave Akre. Mortgage spreads are very tight and historically I don't know that they are the tightest they've ever been but they're you know close to that and they've been that way now for several months. And basically that impacts ROE, in that ROE is decreased as mortgage spread to Treasuries or to swaps have decreased. And I think basically that's what you're talking about.

To give you some perspective our net spread for that 6 months of '04 was about 143. For the fourth quarter of '04, it was about 134. At 12/31/04, it was about 127 and currently it's less than 120. So you could see this spread narrowing.

Hey Paul, it's Ray Redlingshafer. I think one way to characterize your question versus the tightness in swap spread. If you-from every REIT's perspective, if you looked at the curve and said yes, it's flatter. Particularly in the 1 month to 2 year category. it's very flat. But it's flatter at much higher levels, so roughly a 150 basis planned since June of last year, short rates have moved up. So that can be reflective in tightness of swap spread yes, but it's driven by short rates are flat and high from the 1 month to 2 year category. Does that help?

Yes. It does help and I guess the offset not the offset but the positive on this though are the assets you have on your books now are worth more in value. Am I correct?

Exactly and they are adjustable rate in nature.

The mark, actually the mark on assets is probably down but the value of the swaps is up. And the tightness of the spread of these assets are significantly tighter.

Yes, for example, we bought like 3/1s that we bought in October in spite of a backing up of rates because of the tightening they had actually appreciated slightly in value. So you can have a situation where the rates go up and the value of your assets increase because of tightening spreads and that, we did see some of that in late '04 and early '05.

And I know, I know that none of us can really predict the future but that's one of our jobs to do that. Is with rates, I mean have you guys had to deal with, I mean we've seen rates now go up I believe 50 basis points in the last 45 days and these things continue to tight. Do you think the assets are being priced irrational, the mortgage backed securities being priced irrational in the market? And that we could see some type of a correction in the pricing.

Yes. I'll answer that. This is Dave again. No, I think there is a function of, overall if you look at macro level, I think there's still a tremendous amount of liquidity in equities and in fixed income and I think it's just chasing yield and chasing returns to tight, historically tight levels. Volatility is decreased, again equity affects income.

If you look at historical levels of volatility measurements, they're all at or near lows, orhistoric lows close to lows. So I think it's the function of liquidity and money chasing assets and now is that going to change, who really knows but chances are spreads widen from here they don't narrow any further.

In terms of mortgage loans themselves, because of an accounting anomaly banks are able to put mortgage loans on the balance sheet and not have to mark them to market going forward. And I think that has created an appetite by the banks for mortgage assets and specifically for home loans that is fully spreads in as well.

You know Paul, one additional thing is that if you listen to the relative value providers from the specific mortgage securities arena. The 3/1 hybrid is one of the few short term assets in the market place that still has a positive OAS and what that's done is brought in non-traditional buyers to tighten it further and you may call that irrationally priced or you may just call that positive OAS and very few things still have that. I think that has brought a new sector of the buying public in the mortgages and kept them tight.

Along with the couple of points that some of the other folks have made is just the 3/1s are not being originated as heavily as they were back in October. So the 5/1s are the much larger part of the mortgage pipe that we see coming through.

Yeah and we've also heard that pretty much the short term stuff is starting-was losing some of its popularity but with rates, the yield curve has steepened I know, we talked, has steepened a little bit from the 2 to 10s at least. Right. Would that force some of the 3/1s to come back in popularity or do you think product of choice is still in that 5/1 space.

Yes, I think 5/1s are still going to be, is still going to be the product of choice. You know 5/1s and 30 years is going to represent probably 80% or more of originations going forward. You know this year I would say that-even if you look at last year and the year before that's been the case and I don't think that's going to change dramatically.

It's why we're seeing a lot less of the 1 month and 6 month paper come through because the outright level of those mortgage rates are up in the 3/1 category and that's very close to the 5/1 rate on the street which is why again the 5/1 is a stronger predomination in most originator's pipeline.

Hey guys, thank you very much.

Thanks Paul.

Our next question comes from James Ackor.

Good morning. RBC Capital Markets, I was wondering Mike, maybe if you would be able to give us the actual absolute dollar amount of loans sold during the quarter and what the gain on sales margin was.

Sure, the originations for the fourth quarter, we originated about 480 million of runs that we've anchored and about 152 million of brokered loans for a total of 632.6 million or so for the quarter.

Of loans that were actually sold in the secondary market?

Loans that were actually-well of the 480 million, 411 were actually sold in the secondary markets at that point. The difference between loans that we brokered.

Gain on sales margins, the average gain on sales margin?

Was about 144.

144. Okay. I was also wondering if somebody might be able to comment on dividend policy, its, unless I'm missing my guess here looks like you guys are paying out of capital as part of the dividend.

Well, the dividend policy is largely based on the REIT earnings. As you know REIT's have to pay out 90% of more their net income. So what we look at first and foremost is what is the REIT generating. On a consolidated basis of the TRS, you're right, there would be a implied return of capital component but again we're basing everything off of what the REIT earnings are and you know over time as we get through the infrastructure changes that we're undergoing as far as those additional costs and hopefully we'll see some spread widening we'll see you know profitability in the PRS and thus, that won't be as much of an issue.

Okay. So the policy on a forward looking basis is going to be driven off of what the QRS is able to produce.

It has to be because again you know if we, if we want to maintain the compliance with the REIT statute we'd have to do that.

Is that right?

Yes. The REIT has to pay 90% more of its net income.

Regardless of what happens with the TRS.

Yes, the TRS is technically treated by the tax code as a separate taxable entity and for all practical purposes for most of the calculations for any of the REIT test is excluded. So the TRS for tax purposes is truly treated as a standalone taxable entity.

But for tax purposes when folks get their tax forms at the end of the year, there are different tax considerations for dividend income that comes from ongoing operations versus paid out of capital.

There will be. Yes. There will be some adjustments related to certain timing items and temporary differences between a GAAP and a tax standpoint.

Okay. All right, that's all I had. Thank you.

Okay.

(Operator Instructions)

Our next question comes from Steve Delaney. Sir, please state your company name followed by your question.

Sure. Ryan Beck. Congratulations guys on a great start to life as a public company.

Thank you, Steve.

As you know it's not going to get any easier though.

We've been reading that

Not telling you anything that you don't already know. Right. Can you tell us what percentage of the portfolio today, represents self-originated versus market purchase, you may have mentioned it but it passed me if you did.

Currently $420 million of the portfolio was comprised of our securitizations and the majority of those securitizations came from self-originations. About 60% of it.

Okay. So basically just treat the latest securitization is and 61% of that as being the self-originated component.

That's right.

Ignoring you know anything loans pending securitization.

That's right. And also note that the rest of the securitization was comprised of loans that we purchased very opportunistically at a low cost which had very similar credit characteristics to what we're originating in our retail channel. So they look a lot like our own self-originations.

Okay.

Also, Steve the day we securitize and print that deal, then we have loans that we're holding of our own in the day-after for the next securitization, so that number just keeps rolling up.

Right. Okay. Could you give us some sense like if we look at comparable assets classes like 3/1 hybrids. What's the yield, would you estimate the yield advantage to be on your self-originated paper versus the market purchase paper that you have now.

Yes. The numbers we've always talked about historically are around 40 basis points.

Okay.

We've talked about a range but that's somewhere in the range. So it's a-with the advent of the bank appetite for loans, you know, maybe it's become a little bit tighter than that but it should be 30 - 35 basis points easily.

And the thought being that you can be substantially self-originated in which we're holding value in.

Correct.

Okay. Second question would be on, on the new trust preferred. Are you going to look at that just like common equity when you make a decision as to how far to lever it?

Yes. It's going to be from a GAAP accounting perspective, it's treated as, as subordinated debt but from a financing, as far as dealing with our counterparties...

Right

it is treated as equities, so it will be treated just like you say.

Okay. And the final question would be, given the discussion earlier about the tight spreads and especially how mortgages have closed to Treasuries. That seems to go against the grain of the gain on sale margin. I apologize, I don't have in front of me the third quarter -it was one 134 in the third quarter. So I stand corrected. You were saying that you're 144 for fourth quarter sales.

Yes.

Okay. So you just picked up 10 basis points.

Actually our third quarter wasn't too far off that mark either.

Oh really?

Yes. I think it was, it was somewhere between 130 and 140.

Okay.

I don't remember the exact numbers for the third quarter. It deviated a little bit but not significantly.

Thank you very much.

Okay.

Our next question comes from Mark Patterson. Sir, please state your company name followed by the question.

NWQ Investment Management. Thanks for the 25 cents. First of all, I wanted to ask a couple of questions and I'm sorry if I missed this earlier in the call. Could you guys provide a, kind of a roll forward to tell us about the $865,000 change that affected, looked like 3 line items? Specifically the gain on sales on security.

Yeah but we actually will sell that when we do the Q. There was a reclassification amongst the comprehensive income on income items related to pre IPO gain on sale of some marketable securities that were in the private company that were sold prior to the IPO to avoid any kind of legacy investment issues. And those securities really were not the REIT qualifying, so we got rid of those and there will be a adjustment in the K when you look at the quarterly breakout between revenue and expenses.

Okay, so that played a role in, did that play a role in the other comprehensive line as well?

That played a role in the -- year to date, yeah.

Okay, okay, great.

I do wanna be clear though this does not impact anything post IPO as far as, you know, it was all pre IPO reclassification.

Sure, great. Did you guys also, last question, did you mention opportunities for consolidation throughout the remainder of this year, is there anything, you know kind of goalwise that you've set, origination platform-wise?

We haven't stated any specific goals although we are looking at a number of opportunities. There's a lot of consolidation taking place. There's a lot of banks and thrifts and other larger mortgage companies looking to divest or shut down certain of their origination channels and so there should be some free opportunities to pick up branches and then there should also be some low cost opportunities as well and I would expect that we'll probably do something growth oriented in addition to organic growth this year.

Great, thanks a lot guys.

Thank you sir. Ladies and gentlemen, as a reminder, if you have a question, press the star followed by the one on your touch tone button phone. If you are using speaker equipment, you may need to lift the handset before pressing the numbers. Our next question comes from Doug Ligner (ph). Sir please state your company name followed by your question.

Yeah, thanks guys I'm from the Ashton Fund (ph). A couple of questions with regards to your spread, you mentioned that spreads are now down to 120 does that include the incremental pickup from your self-originating loans already or is that just still from the MBS (ph) decreasing?

Yes, no it does. It includes to the extent that we're right now self-originated it does include that.

So basically it's up that 30%,so I'm just trying to figure out going forward if you guys are picking up an extra 30 to 35 % basis points you know and your spreads are down so if spreads decrease from 137 to120 should we see that you know pick back up going forward and therefore we'd see a higher dividend?

It should be more, well what it will do, it's Steve Mumma. What it will do is you should see the spread become more stable it will help mitigate the increasing cost of the short term funds

Yeah two events basically the flattening, flattening curves and tighter mortgage spreads are offset by higher spreads on self-originated.

Okay I'm just trying to figure out do those -- do you kind of see those two offsetting each other this year and then increasing as the spreads from you know the loans are flattening out or do you see an incremental pickup, that's my question

It depends on -- it will help mitigate the spread compression, no question. Will is start to expand it will depend on how many times the Fed goes for the remainder of the year.

I'd also say, your definition of incremental pick up, if that's versus you know, a REIT that just invests in hybrid securities and gets nothing else and can never get anything else, we're slways going to have that incremental pick up versus that opportunistic buy in the market but you know if you're referring to our own internal incremental pickup where we replace the self-originated versus the securities that we owed, yeah that's going to be in place versus the price in the market always

Okay, yeah I was talking about the latter. But that definitely helps, appreciate it.

Thank you sir. Our next question is a follow up question from Mr. Paul Miller, please go ahead sir.

Yeah, I believe on Monday you guys announced that you guys are going to start doing some wholesale lending. Can you just touch on that a little bit and where you plan to take that going forward?

Sure. As we announced we recently hired Richard Payne and Joe Gorton and the reason that these guys were so attractive to us is that we got to know them during the transaction where we picked up the SIB branches. Dick and Joe ran SIB Mortgages and when they started the predecessor company to that, it was doing about 16 or 18 million a month in business. Four or 5 years later they had built it to almost 2 billion a month. Most of that business was wholesale, so these guys have a pretty tremendous track record in building wholesale businesses from the ground up.

So as we look at opportunities we are seeing a lot of wholesale businesses for sale or a lot of banks looking to shut down their wholesale businesses. It made sense to us rather than going out and paying for something or rather than inheriting something that had problems that we weren't aware of, it made sense for us to start something from scratch given the opportunity that we had with these guys.

So, as far as our wholesale relative percentage of our production going forward within 3 or 4 quarters we would expect that the wholesale business, well hard to predict but it will be a substantial portion of our overall production going forward.

I mean, correct me if I'm wrong Steve. Did you guys put out there, because you did about $1.6 billion in '04.

1.8

What's that?

1.8

1.8. And you've doubled your production since the GLR acquisitions. And I think we're looking for around $3.2 billion in originations for '05. With this wholesale channel coming in, I mean I am not asking you to bump up those origination levels but it could if it works well, that 3.2 could be conservative. I guess that's, am I thinking in the right way?

Yeah, exactly. 3.2 is about our projected run rate for the year and wholesale will increase that depending on how

That 3.2 does not include any wholesale originations at this point?

That's correct.

Okay. Thanks a lot guys.

Thank you. And Paul let me just say also the wholesale operation is going to focus on portfolio and all day product not going to be doing fixed rate.

So it could be in the turbo charger for what you're alluding to. Could be.

Got ya.

But it's a startup you can't hang your head on it. But I'm sure it will do very well.

Okay. Thank you very much guys.

(Operator Instructions).

Gentlemen at this time there are no further questions. Please go ahead.

Anyway just once again I wanted to thank everybody for participating in the call and we look forward to talking to you again next quarter. Thank you.

Ladies and Gentlemen this concludes the New York Mortgage Trust fourth quarter and year ending conference call. If you would like to listen to a replay of today's conference, please dial 800 405 2236 or 303 590 3000. The password for the conference is 11025573. Once again if you would like to listen to a replay of today's conference please dial 1800 405 2236 or 303 590 3000. With a pass code of 11025573.

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