New York Mortgage Trust Inc (NYMT) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the New York Mortgage Trust second quarter 2005 earnings release.

(Operator Instructions)

As a reminder, today's conference is being recorded Wednesday, August 10, 2005. I would now like to turn the conference over to Julie Tu with the Financial Relations Board. Please go ahead, ma'am.

Good morning and welcome to New York Mortgage Trust's second 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 it is time for opening remarks. I would like to introduce Steven Schnall, Chairman of the Board, Co-Chief Executive Officer and President. Steven, please go ahead.

Thank you, Julie. Good morning, everyone and thank you for joining us today. I hope you've each had an opportunity to review the press release that we distributed yesterday evening. With me today, as usual, are David Akre, our Vice Chairman and Co-Chief Executive Officer; Steve Mumma, our Chief Operating Officer and Chief Investment Officer, Michael Wirth, our CFO and Joe Fierro, the Chief Operating Officer of our Mortgage Company's subsidiary.

This was a very active quarter for us and our success was a direct result of the momentum created since our initial public offering and the exceptional efforts of our employees. I'll begin the discussion today with a brief recap of the second quarter operating metrics. I will then provide an update on the progress we've made at enhancing our mortgage lending segment.

Michael Wirth will then proceed with a detailed recap of our financial results. At the conclusion of our formal remarks, our entire team will be available for your questions, starting now with our second quarter results. Throughout the organization, we are focused on accelerating our rate of profitable growth. Towards that end, during the second quarter we realized record loan origination volumes totaling $940 million. This represents 83% growth over 2004 second quarter originations of $514 million, and it's highly favorable when compared with the MBAA-projected overall industry decline of 2.9%.

We also realized record loan application volume during the quarter of $1.4 billion, and our target for a similar amount of new applications for the third quarter. We expect our 2005 loan origination volume to be roughly double last year's record volume, and we have an estimated current origination run rate of approximately $4 billion.

As such, we remain on target to achieve a substantially self-originated portfolio by the end of 2005. Importantly, these run rate projections exclude any loan volume from our newly launched wholesale loan division, which I'll discuss in a few minutes.

The quarter ending June 30, 2005, was our fourth full quarter as a publicly traded company, and one in which we declared a cash dividend of $0.25, which was paid on July 26 to shareholders of record as of June 14, 2005. We realized net income to the Company's mortgage portfolio management segment of $3.5 million or $0.20 per share on revenue of $16.7 million.

Net of a one-time severance charge, our REIT portfolio earnings were actually $0.24 for the quarter. We ended the quarter with total assets of approximately $2 billion and a loan and mortgage securities portfolio of approximately $1.52 billion, which included $383 million in securitized loans and $234 million in residential mortgage loans held for securitization.

The net interest margin in the Company's mortgage portfolio for the three-month period ended June 30, averaged 100 basis points, down from 116 basis points in the prior quarter. This reduction in spreads is reflective of the current flattening yield curve, as well as an accelerated prepayment speed on our securities portfolio.

As we continue to transition our portfolio from acquired securities to self-originated loans, we are only now beginning to realize the benefits associated with the higher yield on self-origination. Notwithstanding the self-origination benefit, from which we expect some additional yield pickup over the coming quarters, we project a modest decline in our dividend from Q2 to Q3 of approximately 10%.

The exact amount of the dividend decline will, of course, be largely dependent upon prepayment speed. At quarter end, our securitized loans comprised approximately 25% of our portfolio. And I'm pleased to note that, on July 28, we successfully completed our second loan securitization of approximately $240 million. At present, securitized loans comprised approximately 41% of our portfolio.

This securitization was backed by high credit quality, first lien and adjustable rate and hybrid loans, 100% of which were self-originated through the Company's mortgage banking subsidiary. We expect to complete at least one additional securitization during 2005.

Now regarding our mortgage lending segment - I'd like to talk about the status of our mortgage lending segment, as well as the substantive conclusion of our recent cost-intensive growth initiatives.

Since we spoke last quarter, our long-term strategy has not changed, though in this flattening yield curve environment, our mortgage banking subsidiaries profit potential will become a more important component of our earnings for the foreseeable future. We remain committed to delivering maximum portfolio profitability, driving loan origination growth, having our TRS contribute to net earnings and sustaining a favorable dividend.

In support of these goals, we have been focused on greatly improving our mortgage lending segments future profitability potential through aggressive overhead management and new technology, fully integrating the GRL acquisition completed last November, organically growing our retail branch network and launching our new wholesale lending division.

As previously announce, following a comprehensive review of our business and identifying an adoption of certain best practices within our organization, we recently instituted select work force reductions, which reduce recurring annual compensation expenses by an estimated $3.7million. These annual cost cuts, which were executed in the second quarter, will first begin to be realized during the third quarter.

While staff reductions are always difficult, we were able to do so, while at the same time more effectively managing and reshaping our mortgage lending business for improved performance. In streamlining our compensation expenses, our goals were threefold - to improve our profitability by reducing our cost base, to streamline the former GRL branches with existing company branches by reducing redundant operations and support function, and to better rationalize or reduce the cost associated with our executive management compensation, which impacted both our portfolio and mortgage lending segment.

These staff reductions, including a member of our executive management team, affected approximately 45 full-time employees, none of which were loan origination officers, and resulted in an after-tax charge of $2.2 million in the taxable resubsidiary and $800,000 in the portfolio lending segment.

Though the $3.7 million in annual cost savings are the result of the collective staff reduction, the severance expense was due primarily for the termination or separation of one member of our executive management team. Most importantly, these changes will in no way impact our ability to grow our residential mortgage business, nor our ability to proficiently manage our REIT portfolio.

Regarding our new wholesale lending division - while managing cost is critical to any business, disciplined, profitable growth is a key to our long-term strategy. During the quarter, we significantly supplemented our mortgage banking business by launching a new business channel focused on wholesale lending.

This segment is focused on generating high quality, adjustable-rate loans for the Company's REIT portfolio, as well as all-pay loans, which will be targeted for sale by our TRS into the secondary market. The wholesale division has a targeted average loan amount of $350,000 or greater, and while in business less than a month, already has a pipeline of nearly $20 million.

We expect this new unit to run in the negative cash flow of approximately $1.25 million during the third quarter and reach break-even or profitability in the fourth quarter. Thereafter, we expect the wholesale unit to add meaningfully to our TRS earnings, as well as provide an additional steady source of high quality arm (ph) product for our REIT portfolio.

To recap, the goal of this new wholesale business is threefold - to notably increase our mortgage loan volume by the end of 2005 and forward by diversifying our origination channels, to enhance our ability to continue building our self-originated REIT portfolio and to add critical gain on sale profits at the mortgage company subsidiary.

Looking ahead, we've accomplished a lot since our IPO and we expect that the end of 2005 third quarter will mark the conclusion of a major transitional period and the associated transitional expenses for our mortgage lending segment. I'd like to reiterate that our goal for this segment is to be profitable, notwithstanding the foregone premium on loans reclaimed.

This will enable our REIT portfolio to reap the ultimate benefit associated with self-originated loans through lower costs than comparable non-self-originated mortgage assets. Given the current challenging interest rate environment and flattening yield curve, we place a high priority, not only on discipline in interest rate and risk management with the utilization of effective hedging, reasonable leverage and stringent portfolio loan strategies, but also on growing and maintaining profitability in our mortgage banking TRS, which will begin to play a more meaningful role in our earnings picture as we enter the fourth quarter.

We are confident that New York Mortgage will finish out 2005 and enter 2006 as a strong, profitable and growing company.

Now regarding our finance activity - as you may know, on June 8, we filed a registration statement on Form 11 in connection with the posed issuance of up to 6. million shares of common stock. Given the recent pressure on the mortgage REIT sector, we decided to take a wait-and-see approach for a short period of time.

As a result of this recent pressure and the arrival of our one-year anniversary as a public company, last evening we filed an application with the SEC requesting the withdrawal of our F-11 (ph). Meanwhile, having reached our one-year anniversary in June, we are now eligible to file a universal shelf registration statement on Format 3, which gives us more flexibility as to how and when we raise capital.

We intend to file our Form F-3 in the next few days. Once our shelf is declared effective by the SEC, we will be able to raise additional capital at such time that we feel it is most appropriate. Ultimately, our investors can be assured that, like our recent successful growth initiatives, the impact of which are now becoming evident, any significant new growth initiatives, including capital-raising acquisitions or other undertakings will be cautiously measured and most importantly, be carried out for the purpose of increasing our earnings per share while not deviating from our stated levels of risk tolerance.

With that, I will now turn the call over to Michael Wirth to review our financial results in greater detail.

Thank you, Steve. Good morning, everyone. As Julie noted, our earnings press release was issued last night and is available to everyone. Therefore, I'll be brief in my comments in order to allow some time for questions. I'd like to break down our second quarter's performance into distinct segments to give our listeners some detail as to our operating strategies and financial results and the 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 is exclusive of our taxable re-subsidiary, it is in part the basis of our dividend policy.

The REIT mortgage portfolio performed well during the quarter, despite the narrowing of net interest spread by 12 basis points to approximately 100 basis points. This performance has a direct relationship to our hedging methodology to demonstrate the effectiveness of our interest rate management strategies, which are focused on mitigating the impact of a flattening yield curve and continuing premium spread from traction.

This 100-basis-point 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 that you typically associate with lower quality alt-A or sub-prime loans.

Most importantly, as we continue to replace our portfolio from acquired securities to self-originated loans, we expect to more fully realize the benefits associated with our self-origination capabilities. For the second quarter of 2005, the REIT on a stand-alone basis, had total revenues of $16.7 million and total expenses of $13.2 million. This resulted in REIT-only net income of $3.5 million or $0.20 a share.

Note that this net income for the REIT portfolio management segment is inclusive of a one-time charge during the quarter related to severance benefits of approximately $800,000. Adding back this one-time charge resulted in a net income of approximately $4.3 million, an amount that is consistent with the segment's net income for the first three months of 2005. Our taxable resubsidiary or TRS, which is considered our mortgage lending segment, recognized $14.4 million in revenue and $17.3 million in expenses, for a net loss of $2.9 million for the three months ended June 30, 2005.

On a consolidated basis, the combined segments produced net income for the quarter of approximately $508,000, inclusive of a consolidated one-time charge related to severance benefits totaling approximately $3 million, again, 800 of which was expensed to the REIT and 2.2 million of which was expensed in the TRS.

Adjusting for total severance-related expenses, the Company's adjusted, consolidated net income totaled approximately $3.5 million. It is important to put these financial results in the mortgage lending segment into proper context to adjust for certain one-time severance charges, changes in market dynamics, expenses related to growth and our ongoing strategy of retaining in our investment portfolio high credit-quality mortgage loans that we originate.

Importantly, the consolidated $3 million charge related to staff reductions and severance costs incurred in the second quarter have resulted in a reduction of our overall recurring annual compensation expenses by an estimated $3.7 million.

With regard to changes in the market dynamics and spread compression on premiums on loan sold to third parties, we estimate that the tighter spread estimated to have been reduced by approximately 34 basis points during the quarter reduced our premium income by approximately $2 million during the course of the second quarter, relative to spread that we had earned during the immediately preceding first quarter of 2005.

As noted last quarter, our amortizing expenses related to the GRL position continue to decrease from approximately $1.4 million in the first quarter to $817,000 in the second quarter. The expenses related to GRL will continue to decline to approximately $350,000 in the third quarter of 2005.

In addition to our organic, same-store growth, GRL has already proven to be beneficial to our origination volume, as the TRS had an 83% increase in origination volume for the second quarter of 2005, relative to the same quarter of the prior year. And we are experiencing current annual run rates of approximately $4 billion in origination, twice our historical annual run rate for 2004.

I'd like now to discuss other operating characteristics and benchmarks. Total employees increased to 857 from June 30, 2005, from 509 individuals at June 30, 2004. Included in the total number of employees were 385 loan officers dedicated to originating loans, as compared to 202 loan officers a year ago.

Additionally, our number of locations has increased to 59 at June 30, 2005, as compared to 30 locations at June 30, 2004. The increase in personnel and origination locations directly impacts our origination volume. For the three months ended June 30, 2005, we originated a record $940 million in residential mortgage loans. This compares to $514 million for the same period in 2004.

The 83% year-over-year increase in origination volume compares favorably to an overall origination volume decline of 2.9% as predicted by the Mortgage Bankers Association for the quarter.

Approximately 54% of this production was banked originations for which we get gain-on-sale premium income when these loans are sold to third parties. Approximately 18% of our origination volume was retained in our investment portfolio and approximately 18% represented brokered originations.

A more detailed breakdown of loan originations was included in our second quarter press release and will also be presented in our 10-Q. During the second quarter of 2005, we retained $164 million of originated loans for our investment portfolio. The foregone premium that we would have earned on these loans, had they been sold to a third party, rather than transfer that GAAP cost and retained in portfolio, was approximately $2.2 million.

We continue to expect that our retention rate will be approximately $200 million for future quarters, with a higher run rate as our wholesale division becomes fully operational. For the second quarter of 2005, the GAAP cost of retaining loans was approximately 51 (ph) basis points over par. This is comparable to approximately 59 basis points over par that we experienced in the first quarter of 2005.

On the loans that we banked and sold to third parties for gain-on-sale premium, our gross gain on sales was approximately 190 basis points and our net gain on sale was approximately 137 basis points.

Non-payroll-related G&A expense for the mortgage lending segment as a percentage of originations, was approximately 65 basis points for the second quarter. This is a favorable decline from approximately 93 basis points in the first quarter of 2005. Inclusive of payroll, G&A expense for the mortgage lending segment, as a percentage of originations, was approximately 165 basis points, also a favorable decline from 199 basis points for the first quarter of 2005.

Backing that one-time severance cost further reduces G&A expense for the second quarter by another 21 basis points, to 144 basis points as a percentage of originations. As mentioned in our prior earnings call, qualitatively we'll continue to make infrastructure improvements to facilitate the additional loan production growth we anticipate during the course of this year and beyond.

Our new loan operating system is scheduled to be up and running by the end of this quarter, enabling increased loan origination capacity and operating efficiencies that will ultimately impact the bottom line by the end of the year.

Let me now turn to some key points regarding New York Mortgage Trust's balance sheet. At June 30, 2005, we had total assets of $2 billion, which includes $905 million of residential mortgage-backed securities, $383 million of loans collateralizing debt securities, $234 million of mortgage loans held for investment, $161 million due from loan purchasers, $100 million of receivables for securities sold and $89 million of residential mortgage loans held for sale.

Our aggregate warehouse lines and reverse repurchase borrowings under these facilities was $1.8 billion as of June 30, 2005. We continue to have over 23 different commercial investment banks providing us with financing arrangements with a capacity of over $5 billion. The (inaudible) amount of the Company's interest rates swaps as of June 30, 2005, were $735 million, and the (inaudible) amount of our caps as of June 30, 2005, was $1 billion.

Our net duration GAAP, with a difference between the estimated maturities or lives of our earning assets and related financing facilities was approximately 7 months. As evidenced that our hedging strategies are effective, I'd like to point out that our other comprehensive income or OCI, as a percentage of total equity, is just over 1%, more specifically 1.1% as of the end of the second quarter, relative to 0.9% at the end of the first quarter.

The slow period-to-period volatility in our ratio of OCI to equity indicates a relatively effective hedging strategy that helps prove our narrow duration gap. For the second quarter of 2005, our average earning assets in our investment portfolio was approximately $1.6 billion with the weighted average coupon of 4.5% and a yield-on-earning assets of 4.06%.

We financed this portfolio to 1.6 billion of repurchase agreements, courthouse lines and underlying interest rate hedges, and a weighted average interest rate of 3.06%. The combination of yield on earning assets left to cost to finance them resulted in the net interest margin of 1% for the second quarter.

For additional information, you may access our 10-Q, which will be filed within the next few days with the SEC. You can access our File 10-Q at our website, www.nymtrust.com or at the SEC website at www.sec.gov.

This concludes my comments. The management team at New York Mortgage Trust thanks you for your continued interest and support, and I believe we are now ready to open the call for questions. I'll turn it over back to the operator, please.

Thank you, sir.

(Operator Instructions)

Sir, at this time there are no questions. Please go ahead.

Well, thank you all for your participation or for listening in, and we look forward to speaking with you again next quarter. Bye.

Thank you. Ladies and gentlemen, this concludes the New York Mortgage Trust Second Quarter 2005 earning release conference call. If you'd like to listen to a replay of today's conference, please dial 1-800-405-2236 or dial (303) 590-3000 with the reservation number of 11035209, followed by the pound sign. You may now disconnect.