New York Mortgage Trust Inc (NYMT) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to New York Mortgage Trust first-quarter conference call. At this time, all participants are in the listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Thursday, May 12 of 2005. I would now like to turn the conference over to Julie Tu with the Financial Relations Board.

Good morning and welcome to New York Mortgage Trust's first-quarter conference call. The press release was distributed yesterday after the close of the market. If you did not receive a copy, the release is available on the Company's website at www.nymtrust.com in the Investor Relations section. Additionally, we are hosting a live webcast of today's call, which you can access in the same section or through www.earnings.com. Finally, to be added to the Company's quarterly distribution list, please contact me at 212-827-3776.

At this time, management would like me to inform you that certain statements made during this 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 SEC.

Now at this time for opening remarks, I would like to introduce Steven Schnall, Chairman of the Board and Co-Executive Officer, Co-Chief Executive Officer. Steven, please go ahead.

Thanks, Julie and good morning everyone. Thank you for joining us today for our first-quarter 2005 conference call. With me today is our CFO, Michael Wirth; David Akre, our Co-CEO; Ray Redlingshafer, our President and Chief Investment Officer; Steve Mumma, our Chief Operating Officer, and Joe Fierro, the Chief Operating Officer of our taxable subsidiary.

I'll begin with a recap of our first-quarter operating and financial highlights and then some of our operating objectives and accomplishments year-to-date. Michael will then proceed with a detailed recap of our financial results. And at the conclusion of our formal remarks, our entire team will be available to answer your questions.

Our first quarter of 2005 was a successful one. Our taxable mortgage origination subsidiary originated a record $670 million in mortgages during the first quarter, which was a 137% increase over our first quarter 2004 originations of 284 million. During the same quarterly comparison period there was an overall industry decline of 4.3% as reported by the MDAA (ph). I'm also pleased to report that we are on target to originate in excess of $800 million in mortgages during the second quarter of 2005 and now have an annual estimated origination run rate of over 3.4 billion, which is more than double our 2003 retail origination volume and which is 84% higher than our record 2004 origination volume.

Also note that this run rate projection does not include any volume from our newly formed wholesale division, which we plan to launch in July. Also during the first quarter, we completed our first loan securitization of approximately $417 million backed by high credit quality, first lien adjustable-rate, and hybrid arm loans.

The quarter ending March 31st was our third full quarter as a public company and one in which we declared a cash dividend to $0.25, which was paid on April 26th to shareholders of record as of April 6th. This $0.25 dividend is reflective of our continued dividend growth and follows our prior quarterly dividend of $0.24 for the first quarter of last year and $0.16 for the third quarter.

We achieved REIT net income of 4.3 million or $0.24 per share, which was in line with our prior quarters REIT earnings despite a tightening in net interest margins industry-wide and which is reflective of our successful discipline portfolio hedging strategy.

We ended the quarter with total assets of approximately $1.9 billion and a loan portfolio of approximately $1.6 billion, which includes 486 million of securitized loans and loans held for securitization. At quarter end, self-originated or securitized loans comprised approximately 30% of our portfolio. We remain committed to replacing our initial portfolio of acquired assets with self-originated loans and remain on target to become substantially self-originated by the end of this year.

We also expect to complete two additional securitizations during 2005 and, consistent with our first securitization, we anticipate that these future transactions might include additional opportunistic whole loan acquisitions, which made our prime portfolio guidelines. Also keep in mind that overriding all of our portfolio decisions is a focus on sound interest rate and management strategies, which mitigate the impact of a flattening yield curve.

Now I would like to talk about our commitment to building our infrastructure for profitable growth and our continued investment of resources back into our business. The initial topic I'd like to cover is to bring some clarity to our consolidated first-quarter financial results. As was broadly described in the press release that we issued last night, there were several factors that were unique this quarter, which impacted our CRS (ph) results but which positioned us for very favorable near-term earnings growth.

First, let us look at the status of our mid-November 2004 acquisition of 15 full-service branches and 25 satellite offices from Guaranty Residential Lending. This was a low-cost transaction that enabled us to nearly double our origination volume. As was expected, and as was discussed in our year-end conference call, there was a ramp up phase associated with these branch additions resulting in both short-term integration expenses as well as a lag in revenues that were predictably preceded by overhead expenses associated with the new branches.

The upfront costs related to the GRL branch acquisition, which tracked into the first quarter of 2005, were approximately $1.4 million; the majority of which were non-cash expenses. We expect these short-term expenses to continue into the second quarter, although to a much lesser extent.

During the first quarter, we also enhanced our origination business by hiring a fourth regional manager who's commenced a build out of our retail franchise and expansion of our geographic footprint, starting first in Arizona with plans of expanding it to neighboring states soon thereafter.

During the quarter, we also successfully recruited a high volume of experienced loan officers whose production value is only now beginning to be realized. Additionally during the first quarter, in order to accommodate our current and future growth initiatives, we accelerated our investment in infrastructure, including making several key hires in accounting, compliance, and technology as well as a stepped up investment in the implementation of our new loan origination software, which we expect will create significant efficiencies and cost savings beginning in the third quarter.

Lastly, on the origination front. To complement our growing retail mortgage business, as announced previously, in March, we added two mortgage industry veterans, Richard Penn (ph) and Joseph Gordon (ph), to execute on our new wholesale origination business strategy. Rick and Joe have already made tremendous strides towards building up this new unit, which we will launch in July.

Our budgeted start-up investment in this new wholesale business is approximately $1.75 million with profitability projected to commence during the fourth quarter of this year.

Overall, as you can see, there was a great deal of growth-oriented activity and associated expenses during the first quarter of this year, some of which has continued into the second quarter. That being said, 2005 should be another very solid year for the mortgage industry and for us and we believe that New York Mortgage Trust continues to be in a great position to capitalize on current and future opportunities. As such, our primary mission in the TRS for Q1 and Q2 is twofold.

One, a concerted and highly focused reinvestment plan designed to enable us to drive efficient loan production growth to reduce operating expenses and to provide a positive long-term impact on earnings. And two, to continue to leverage the loan origination value of our TRS such that over time our increased volume will enable us to utilize a smaller percentage of originations to maintain a fully self-originated portfolio.

Importantly, this will increase our capacity to both generate favorable portfolio returns and to retain earnings in the taxable mortgage company subsidiary in the future.

Now before turning the call over to Michael, I would like to make or reiterate a few final points. First, we're very excited about the opportunities and growth trajectory present in both our TRS and our portfolio segments. We are also keeping a keen eye on favorable acquisition opportunities in the market that can potentially add further value for our shareholders.

We're committed to continually providing our customers with top-quality mortgage products and services that they have come to expect from us. We maintain a critical discipline of interest rate and risk management with the utilization of effective hedging, reasonable leverage, and stringent portfolio loan selection. We remain focused on being able to sustain or grow our dividend and you have our commitment that we will keep profits as our number one long-term priority.

We look forward to sharing our ongoing achievements over the coming year. And with that, I will turn over the call to Michael Wirth, our CFO.

Thank you, Steve. Good morning, everyone. As Julie noted, you all should have received our press release. Therefore, I will be relatively brief in my comments in order to allow time for questions.

Overall, we're pleased with the performance of our 2005 first quarter. I will now breakdown our first-quarter's performance into discrete segments to give our listeners some detail as to our operating strategies and financial results in a context in which to evaluate these results.

First, I will start with the REIT, or what we call our Mortgage Portfolio Management segment of our business, on a stand-alone basis. As the performance of the REIT, exclusive of our taxable REIT subsidiary is the basis of our dividend policy. The REIT's mortgage portfolio performed well during the quarter despite a narrowing of interest rate, net interest spreads, by 18 basis points to 1.16%. This performance has a direct relationship to our hedging methodology and demonstrates the effectiveness of our interest rate management strategies, which are focused on mitigating the impact of a flattening yield curve and continuing premium spread contraction. This 1.16% net interest margin is also reflective of the fact that our portfolio is comprised of high credit quality prime loans, which are not accompanied by levels of credit risk associated with lower quality, Alt-A or subprime loans.

The REIT, on a stand-alone basis, had total revenues of 14.9 million and total expenses of 10.6 million for the first quarter of 2005. This resulted in REIT-only net income of 4.3 million or $0.24 a share. Our taxable REIT subsidiary, or TRS, which is considered our mortgage lending segment, recognized 9 million in revenue and 16.1 million in expenses for a net loss of 4.3 million for the three months ended March 31, 2005.

On a consolidated basis, the combined segments produced a slight net loss for the quarter of approximately $38,000. It is important to put the loss in the mortgage lending segment into a proper context to adjust for certain infrequent cost, changes in market dynamics, expenses related to growth, and our ongoing strategy of retaining, and our investment portfolio, high credit quality mortgage loans that we originate.

Let me detail some of the items that created the GAAP loss at the TRS. First, there was an 800,000 non-cash charge to earnings that the TRS incurred for entering into a sublease at our old headquarter space on Park Avenue. Our sub-tenant will be paying less than our current contractual rent on this space. And as per GAAP, we recognize the loss differential between the rent we are still obligated to pay the landlord offset by the rents we will received by the sub-tenant. If we had continued to let this space be underutilized, we would have incurred over $2 million in rent expense over the next four years.

Second, counteract the typical seasonal decline in originations and to introduce our new portfolio loan product to our retail sales force. We discounted certain borrower lending fees amounting to approximately $250,000. This opportunity cost, which no longer exists, further reduced the revenue that TRS would have earned on a typical run rate basis.

The TRS also had a $225,000 non-cash expense related to the amortization of a pipeline premium that was paid when we acquired selected branches of GRL in the fourth quarter. As of the end of the first quarter, this pipeline premium has been fully amortized and thus this expense will be non-recurring.

Also related to the GRL acquisition, we incurred over 1.1 million in accrued retention bonuses for the GRL sales force. This non-cash recruit expense was heavily weighted toward the first quarter of 2005. As these retention bonuses vest anywhere between 6 and 30 months.

In the second quarter, this accrued expense will drop to approximately $870,000 and the accrual for subsequent quarters will drop substantially for the following quarters. GRL retention bonuses are paid mostly in the form of performance stock. As it relates to our strategy of originating and retaining high credit quality loans and thus will go on the gain on sale premium, we would have recognized, had we sold these loans to third parties, we estimate that the premium in income foregone was approximately 2.1 million for the quarter on a retained loans of 136 million.

It is important to note that the approximate 200 basis points is foregone first-quarter revenue and is an immediate drag on revenue. Whereas, the lower cost basis of these loans in our investment portfolio, in terms of lower premium and amortization costs going forward over the lives of these loans. As a result, our low cost basis of these loans gives us more protection as our costs are typically below the premiums paid for the securities purchased by passive investors.

A line (ph) for incremental yield and the ability to absorb additional hedging cost mitigate interest rate risk. This is a cornerstone of our active REIT strategy. Furthermore, these loans are transferred in book at cost basis on our balance sheet. The net GAAP book value is understated relative to the fair market value of these assets.

Getting back to the financial performance of the TRS, the TRS also had non-cash expenses of approximately $265,000 related to the expensing of restricted stock and options granted to employees of NYMC in connection with our IPO last June.

Lastly, the TRS incurred approximately $75,000 in additional interest expense related to the 25 million deferred operating of trust subordinated debt on March 15, 2005. This interest expense will be of recurring nature at LIBOR plus 375 basis points and capped at an 8% rate through interest rate caps, which we had entered into to mitigate the impact of rising interest rates.

With regard to changes in the market dynamics and spread compression on premiums on loans sold to third parties, we estimate that the tighter spread, estimated to have been reduced by nearly 35 basis points during the quarter, reduced our premium income by approximately $1.5 million during the course of the first quarter, relative to spreads that we earned during the immediate proceeding fourth quarter of 2004.

To recap, these expenses at TRS, most of which are non-cash items, we had one, related to our strategy of retaining in our investment portfolio, high credit quality loans, an estimated 2.1 million of foregone premium on the loans that we retained and booked at cost rather than sold to third parties for gain on sold revenue.

Two, infrequent expenses is just over $1 million related to the sublet of our old headquarters space and a waiver of certain loan fees during the quarter. And three, generally recurring, but non-cash expenses of approximately $265 related to the amortization of restricted stock and option expense and approximately 300,000 of expense-related to freestanding derivatives for our interest rate lock and forward loan sales commitments at the TRS. And, related to our originations passed in growth strategies, approximately 1.4 million of costs related to the GRL acquisition. This 1.4 million of costs related to GRL has already proven to be beneficial to our origination volume as the TRS had a 137% increase in origination volume for the first quarter of 2005 relative to the same quarter of the prior year. We're expecting a current annual run rate of 3.4 billion in originations, twice our historic annual run rate for 2004.

Now that the results of the TRS have been explained in the proper context, let me move to a discussion of other operating characteristics and benchmarks. We continue to experience significant growth and during the year, we added loan officers and sales personnel to our branch offices. Total employees increased to 810 at March 31, 2005 from 447 individuals at March 31, 2004. Included in the total number of these employees, the number of loan officers dedicated to originating loans increased to 462 at March 31, 2005 from 197 a year ago.

Additionally, our number of locations have increased to 63 at March 31, 2005 as compared to 24 locations at March 31, 2004. The increase in personnel and origination locations directly impacted our origination volume. For the three months ended March 31, 2005, we originated a record 672.5 million residential mortgage loans respectively. This compares with 28. -- I'm sorry. This compares with 283 million for the same period 2004. This is a 137% year-over-year increase in origination volume as compared to an overall origination volume decline of 4.3% as predicted by the Mortgage Bankers Association.

53.5% were bankered (ph) originations for which we get gain on sale premium income. 20.3% of our origination volume was retained on our investment portfolio and 16.2% represented brokered originations. The more detailed breakdown of our loan originations is included in our first-quarter press release and our 10-Q.

We retained 136.4 million of originated loans for our investment portfolio during the first quarter of 2005. We expect that our retention rate will be approximately 200 to 250 million for future quarters with a run rate at the higher end of the range once our wholesale division becomes operational.

The first quarter 2005, the GAAP cost of retained loans was approximately 59 basis points over par. This compares to approximately 50 basis points over par experienced in the fourth quarter of 2004. The increase is due in part to the loan fees we waive for certain portfolio and mortgage loan products during the quarter.

On the loans that we bank for gain on sale premium, our net gain on sale was approximately 100 basis points. Our gross gain on sale, which includes premium income and fees earned from the borrower, was approximately 344 basis points with approximately 176 basis points of commission and personnel expenses and another 66 basis points at non-payroll costs to originate.

Non-payroll related G&A expense, as a percentage of originations, was approximately 0.9% for the first quarter. Inclusive of payroll, G&A expense as a percentage of originations was approximately 2%. Our debt to equity leverage, as adjusted for the 25 million trust preferred subordinated debt issuance, was approximately 12 times as of first quarter end. We, and the providers of our financial facilities, generally view the 25 million of subordinated trust preferred debentures as a form of equity rather than debt.

Qualitatively, as mentioned since our mid-November acquisition of GRL, we have fully integrated our sales force and continue to make infrastructure improvements to facilitate the additional loan production growth we anticipate in 2005 and beyond.

As a result of these initiatives, and as mentioned in our last earnings call, we have incurred atypical upfront costs, including legal and consulting fees as well as increased personnel, technology, and other expenses associated with this increased capacity.

Let me now turn to some key points regarding New York Mortgage Trust's balance sheet. At March 31, 2005, we had total assets of 1.9 billion, which includes 1.1 billion of residential mortgage-backed securities, 417.4 million of loan to collateralizing debt securities, 68.5 million of mortgage loans held for securitization, 99.6 million of residential mortgage loans held for sale, 91.3 million due from loan purchasers, and 22.4 million of advanced fundings from pending loans to be closed.

Our aggregate warehouse lines and reverse repurchase facility borrowings under these facilities was 1.7 billion as of March 31, 2005. We continue to have over 21 different commercial and investment banks providing us with financing arrangements with a capacity of over 4.8 billion. The notional amount of the Company's interest rate swaps as of March 31st was 735 million and the notional amount of our caps as of March 31, 2005 was 685 million.

Our net duration gap, with a difference between the estimated maturities or lives of our earning assets and related financing facilities, was approximately six months. As evidenced that our hedging strategies are effective, I would like to point out that our other comprehensive income, or OCI, as a percentage of total equity, is less than 1%. More specifically 0.9% as of the end of the first quarter and 0.2% as of year end.

The low period to period volatility in our ratio of OCI to equity indicates a relatively effective hedging strategy and helps prove our narrow duration gap.

For the first quarter of 2005, our average earning assets in our investment portfolio was approximately 1.45 billion with a weighted average coupon of 4.39% and a yield on earning assets of 4.01%. Financing of this portfolio through 1.36 billion of repurchase agreements, warehouse lines, and underlying interest rate hedges had a weighted average interest rate of 2.85%. The combination of the yield on earning assets less the cost of financing (ph) resulted in a net interest margin of 1.16 for the first quarter.

For additional information, you may access our 10 Q, which will be filed likely later today or tomorrow at our website, www.nymtrust.com or at the EDGAR website at www.sec.gov.

This concludes my comments and the management team of New York Mortgage Trust thanks you for your continued interest and support. I believe that we're now ready to open the call for questions and we'll now turn the call over to the operator.

(OPERATOR INSTRUCTIONS). Paul Miller. Please state your company name followed by your question.

FBR. On the $1.4 million MBS portfolio that you guys have, can you -- you're probably going to put this out in your Q. Can you give me the weighted average coupon rate and cost of funds and then hedging costs that goes along with it?

Sure, Paul. It's Steve Mumma. The portfolio has a weighted average coupon of 4.39%. The cost of the liabilities, including hedging, is 2.85%. The cost of the liabilities, without hedging, is 2.65%. So if you take the average yield of the portfolio for the fourth quarter of 4.01% less the cost of the liabilities of 2.85, including the hedge, that gets you down to the 116 basis points of margin for the quarter.

So and then G&A for a GAAP number, the 150 that you guys are telling us, isn't that fully loaded with G&A?

The 116 is exclusive of G&A.

So that's just your taxable --?

That's the top line number before expenses.

What would G&A be?

G&A, as a percent of originations, is roughly 2% all in.

I mean of your REIT.

It's actually fairly de minimis because a lot of the allocations of expenses get allocated up to the top. Let me tell you what the actual number is. It's actually -- I want G&A only. I've got the full expenses, but for the G&A only, it's going to be roughly -- actually G&A -- we had a gain on sale. So it's probably going to be about $300,000 additional G&A and then another 500,000 or so for salary expense at the REIT level only.

So another 10 basis points then? I'm just trying to get a fully loaded taxable NIM, that's all. Fully loaded including G&A.

It's roughly another six basis points.

And then on your -- you guys are expanding out your wholesale divisions and opening up a couple branches. Are you guys going to maintain -- are you going to expand your product line? Do you have any thoughts of where we are going to head, where you guys might head in the Alt-A and subprime market or just expanding your overall product line in general? Maybe not in those areas, but in other areas.

Well, in the mortgage company origination business, we currently originate virtually every type of product. We originate a lot of Alt-A and subprime. We are expanding the subprime origination business somewhat. But there are no plans to increase it significantly as a percentage of the total business.

As far as the portfolio is concerned, our focus will remain prime high credit quality arms with some cherry (ph) sort of handpicked, high-quality Alt-A loans.

Do you mainly on the Alt-A and subprime, you mainly broker those loans out. You really don't actually fund those loans. Am I correct?

We bank 86% of our volume. In fact, we don't broker any Alt-A loans out and we have tended against brokering subprime as well. At this point, we're banking most of our subprime business.

Just out of curiosity, what are you brokering out? You do broker out a portion of your loans.

It's about 15% (16.1% last quarter). That business is -- it's really -- there are loans that we don't choose to do or can't do. Things like some construction loans, which we have incidentally started to bank. Things like -- just obscure products. If a borrower wants to blanket multiple properties, niche things that there is a local S&L that will be happy to do. Whereas, we can't.

Going back to the spread again. The 115, the Fed -- I think the futures have the Fed continuing to raise rates. Probably the next three to six months, going to see a continued flattening of the year curve, which I would guess for every (indiscernible) out there, there going to have continued pressure on that spread or new product being brought on. I know you're fully level at$1.4 billion. You're not self-originated yet. But as you get self-originated, will that help that spread or will you still -- are you still maybe just running even as the Fed flattens the year curve.

Paul, this is Dave. Basically, what I think is going to happen is -- what we're fairly sure is going to happen. The new wholesale division is going to focus on Alt-A and portfolio exclusively. So we're anticipating possibly half of that production will go into the portfolio. And as we pick up 35 or so basis points on that versus going out and buying securities, that gain will more than offset what we see as set activities in the future.

Spreads will narrow and the overall portfolio yields should still see some net increase due to the pickup from self-originations.

Steve DeLaney with Ryan Beck.

You gave the loan officer count at the end of the quarter of 462. Could you tell us what that was at the end of the year? Kind of get a handle on how many people you recruited in the quarter?

It's probably about a 5% increase in loan offers from year end through the end of first quarter.

So 20 to 25 folks. Something like that. I believe the figure for the cost of ramping up the wholesale division, you mentioned, was 175 million. I assume all that's going to be expensed.

1.75 million.

Okay. I assume all that will be expensed rather than any other capitalized. Is that correct?

Most of that will be expensed. Some of that has been incurred already. This is a startup division. So there's a lot of new technology being deployed, a lot of new staff being hired ahead of production. So that's our budget total negative cash flow until the division reaches breakeven or profitability, which should occur most likely in the fourth quarter of this year.

So that's the key most of drag (ph) until we get to that point, to the breakeven. Just a question about the net interest spread, which given the environment we are in, I think 16 basis points is realistic I guess or reasonable. Was some of the give back there related to the fact that you had caps rather than swaps? And I guess given the way that rates have moved towards where the levels of those caps might have been, do we now have caps that are effective that maybe were not effective --had not been reached in the first quarter?

The majority of our caps, 100% of our cap positions are really to eliminate or to reduce the REIT debt risk on some of the hybrids in the future. None of those caps are close to being in the money. The spread margin is being protected by our swap position. (indiscernible) portfolio. So between the -- if you look at the portfolio over the last six months, we have shifted some of the portfolio from Phase III (ph) ones into shorter products, including some securities that we set monthly. And as (indiscernible) setting over LIBOR monthly, which helps mitigate some of the flattening of the curve. So between our swap positions and rebalancing the portfolio, that's how we're defending the margin. The caps are merely to protect more catastrophic-type interest rate moves, not day-to-day margin preservation.

Thanks for clarifying that. So it's really just the fact that there is some gap there in the short run.

That's right.

One last question. You talked about the new portfolio project. Could you give us a quick profile of the characteristics of that portfolio product?

We don't actually have a new portfolio product.

I'm sorry. The one you did the teaser on with the new offices.

What we did, after the IPO, just to really introduce the portfolio product, our REIT core portfolio arm product to the sales force was we gave them a teaser discount on some of the ancillary borrower fees. The idea was really just to focus their attention on the arms we wanted to retain versus other and secondary market investors on products that we also offer. And it was very effective; but it's no longer necessary. So that expense giveaway has pretty much stopped in the last few weeks.

But those were not teaser rate coupons. Those were just some --.

Okay, right. That was just a straight discount of the fees.

Some of the fees were waived. Not the coupons. (indiscernible) portfolio rate arm remains the same. It's a full market arm that the 5 1 and then with very low loan to value and very high FICO score that lends itself towards the securitization process.

Steve, just to clarify on the 800, on the employees. We had an employee count of 810 as of the quarter end. 348 were loan officers. 462 were actually support staff.

So 348 were the loan officers.

Right. But we still had an incremental increase in loan officer count.

We're constantly adding new experienced loan officers and terminating some low producers. So you are always having a net pickup in volume per employee is the goal.

(OPERATOR INSTRUCTIONS). Our next question is a follow-up from Paul Miller.

Can you talk a little bit about your tax benefit, the $2.2 million tax benefit? That was a little bit higher than we expected. I know these things are very difficult to flow through. But why exactly did that particularly flow-through this quarter? And then trying to figure out, going forward, can we expect that type of tax benefit or will it go down?

We hope that it will go down over time obviously because the tax benefit is solely as a result of the losses at the TRS level. So that number is going to be variable based on either the income or the loss at the TRS. And roughly it's around a mid to high 40s effective tax rate.

So I know some of these models, it's hard to predict when these things are coming through. But I guess for you guys, it's just going to be if the TRS is losing money, that's basically where the tax benefit is going to come from.

Exactly. That creates the tax benefit. As the TRS becomes profitable, we will be able to effectively draw down on that tax benefit.

The other question I had was you guys paid $0.25 dividend. And this is a question just because I think a lot of people are confused by it. Yet again, you really only made $0.24 in the REIT. Can you just address the cash flow dynamics between the two? And also can you also address some other cash sources that really GAAP doesn't pickup? That flows through the system?

Well, first regarding the dividend being a penny higher than the earnings. It was attributable to a few things. One is a slightly higher increase in expenses at the REIT parent level than we had expected. Really just an allocation issue. And the second one, the larger issue, was that, as you know, we issued this 25 million of subordinated -- of the preferred securities. And we had expected -- first of all, that was an accretive issue until we had expected it to occur earlier in the quarter. So the projected $0.25 dividend took into consideration. Not having happened earlier, it was really a delayed beyond our control. What was the other part of your question?

The cash piece, Paul. For most part, and when you look at the operations of the business, pretty much everything is based on cash. The gain on sales is cash. Obviously, the net -- the coupon yield that we get is cash. The non-cash items -- the non-cash items would be effectively the amortization of the premium in our portfolio, which you can look at it by evaluating the coupon versus the effective yield of the average earning assets.

Don't you get some points upfront when you originate the loan, which is a cash item that doesn't really get picked up in GAAP?

Well, it actually goes probably more against us when you think about it because the fees that we get upfront --

Reduces our GAAP cost.

Reduces our --

Go through the GAAP cost of the loan.

It does go through the GAAP cost of the loan. But what there's actually probably more expenses that are -- I mean if you look at a timing lag from quarter to quarter, there's actually going to be more expenses, as far as the cost of origination, because, for instance, we pay commissions as soon as the loan officer -- as soon as the deal closes. So what happens is we may retain that loan on our books for some period of time before we sell it to recognize gain on sale revenue. So our expense base is -- as our originations grow, we're recognizing more expense in a quarter relative to the actual offsetting of income based on the gain on sale. Because the gain on sale may actually come in the next quarter.

On a cash basis then, are you guys on a negative cash position as you ramp up this portfolio or neutral cash position?

Neutral.

-- I ask that question is what is the other sources of cash because you made $0.24 and you paid out $0.24 and the TRS lost $0.24. I'm just trying to figure out where -- what other --

Keep in mind that we identified a lot of the losses at the TRS as being non-cash. The GRL performance shares, the pipeline premium that we amortized fully in the first quarter that we had already paid for in the fourth quarter. There are --.

The write off of the lease.

The write off of the lease was a non-cash. So good chunk of what is happening at the TRS is what is on the loss perspective. It is actually a non-cash.

And you guys did say that. I just missed it.

At the REIT level, everything there is cash for the most part except for the amortization of premium.

So basically -- if you guys could put -- we have been -- a lot of companies are starting to put cash flow statements in here because I think some investors are asking about the cash positions of these companies. And it helps us understand it better.

Obviously that's going to be in the 10-Q, which is going to get filed either later today or tomorrow.

The other question I had and this is the last. What were the prices of loans transferred to the REIT? What transfer prices did you use this quarter?

The GAAP transfer price for this quarter was approximately 59 basis points over par.

What is your -- of the $1.4 billion, what is the -- what is the mark to market on that? Is it like 101, 101.5, 100.5?

The overall mark to market, from a carrying value standpoint, the balance sheet is about -- it's about par 40. A little bit less than par and a half. The loans that we're carrying, Paul, are not --they are kept at historical cost. So the market will be slightly lower but not substantially lower.

Jason Arnold (ph) with RBC Capital Markets.

Just a quick question. You had mentioned that the GRL ramp up phase costs would extend into the second quarter. I was wondering if you could add any expectations for what that would be going into the quarter?

Mike actually mentioned that a lot of the ramp up costs had to do with the accrual of the performance shares and cash retention bonuses. So that will decrease from the 1.1 million in the first quarter to 800 and change.

870,000 in the second quarter. And then after that, it is going to substantially decreased because it all depended on the vesting period of these retention bonuses. In the third quarter, it drops to about 350,000. And then it drops pretty dramatically thereafter.

Also, from a staffing perspective, when we acquired these branches, part of the deal we made with the seller, GRL, was that we would acquire all of the employees as well. And we've since realized some economies of scale and there are significant opportunities now to cut expenses, which we are currently doing. So this is kind of all taking place right now and so when I say the expense creep has happened into the second quarter. By the end of this quarter, most of what is going to take place there will be done. And now in the third quarter, that business should really start to show the profit and capability.

So there is no other real foreseeable expenses other than the non-cash retention bonus?

The other expenses in the TRS, as we mentioned, are the expenses associated with the build out of our wholesale business. Also, we are spending a fair amount of money on the implementation of a new loan operating software. This is a multimillion dollar commitment, which is taking place over probably three to four quarters. That investment will enable us to see substantial reductions in personnel needed to process and close a loan. So that's just another significant expense that's taking place now.

I'm showing that we do not have any more audio questions. I'll turn the call back over to you for any closing statements you may have.

Thank you for your questions and thank you for your support of our business and we look forward to talking to you next quarter. Goodbye.

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