New York Mortgage Trust Inc (NYMT) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the New York Mortgage Trust 1st Quarter Conference Call and Webcast.

[OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Ms. Julie Tu with the Financial Relations Board.

Please go ahead, ma'am.

Good morning and welcome to New York Mortgage Trust's 1st Quarter Conference Call.

The press release was distributed yesterday after the close of 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-Chief Executive Officer and President.

Steve, please go ahead.

Thank you, Julie, and good morning everyone.

We appreciate that all of you were able to join us today for our 1st Quarter 2006 Conference Call.

I will begin the call with a recap of the quarter and then go over some 1st quarter highlights.

Michael Wirth, our CFO, will then proceed with the detailed recap of our financial results.

At the conclusion of our formal remarks, we will be available for questions.

I'd also like to mention that, as usual, several other members of our executive management team are here with us and are also available for questions.

I'll introduce them briefly.

Dave Akre, our Vice-Chairman and Co-Chief Executive Officer, Steve Mumma, our Chief Operating Officer and Chief Investment Officer, and Joe Fierro, the Mortgage Company's Chief Operating Officer.

As you know, there have been a number of near-term factors impacting our industry that have continued to give us pressure within our REIT portfolio and our mortgage banking business.

These include a decline in origination volumes nationally, [anomously] low gain on sale margins, thin warehouse spread due to the flat yield curve, and extreme competition due to excess capacity in the market.

To counter these trends, and to allow us to focus on the underlying fundamental strengths of our business model, we have implemented or plan to implement several strategic initiatives during 2006.

To recap, in the 1st quarter we reduced our mortgage banking businesses annual salary expenses by more than $4 million through the elimination of excess capacity and layoffs, the effect of which will be more fully realized in the 2nd quarter.

To enhance our REIT portfolio's net interest margin and to provide liquidity for new higher yielding opportunities, as previously announced, we disposed of $388 million of lower yielding acquired mortgage-backed securities in March 2006.

To date, approximately one-third of the equity freed up from this sale has been re-invested in higher-yielding assets which will help our current portfolio yield; the remainder of which will either be re-invested gradually over time or used opportunistically to grow our mortgage banking business.

We also reverted to selling nearly 100% of our loan production so that, for the near term, we will no longer experience foregone premiums on retained loans as we did in 2005.

Looking ahead at the 2nd quarter of 2006, we expect to begin the long-anticipated rollout of our new loan operating software later this month which will enable us to recognize additional long-term cost savings through substantial additional operational efficiencies and which will also provide us with the technological scale needed to continue to grow our mortgage banking business nationally.

Also, in the 2nd and 3rd quarters of this year, we expect to launch three regional joint venture settlements and title insurance agency subsidiaries which will create additional revenue and profit opportunities.

While some of these initiatives such as the portfolio repositioning resulted in non-recurring items and negatively impacted our GAAP results, we believe that these steps will enable us to operate successfully in a still-difficult, yet improving, short-term environment and to achieve a significant improvement in the financial performance of both our mortgage banking subsidiary and our REIT portfolio in 2006.

Regarding our origination volume, operationally in our mortgage banking subsidiary, we anticipated and experienced a further drop-off in retail origination volumes during the 1st quarter, and while our decline in originations from $823 million in the 4th quarter of '05 to $606 million in the 1st quarter of '06 exceeded our expectations, our 1st quarter '05 to 1st quarter '06 fall-off of approximately 10% compares favorably to the overall industry decline in originations of 20% predicted by the Mortgage Bankers Association for the comparable quarters.

It is worth pointing out, though, that despite this higher than anticipated drop in origination volumes in the 1st quarter, January and February are seasonably two of our slowest months.

More importantly, during March and April, we have experienced an approximately 30% increase in loan origination volumes over January and February levels, and expect this favorable trend will enable us to show significant improvements in our TRS earnings in the future quarters with a targeted breakeven in TRS by the 3rd quarter of this year.

Regarding our wholesale origination business, we funded approximately $80 million during the 1st quarter, and while this business unit is not ramping at the pace we originally expected, we are very pleased to announce that this unit reached profitability in March and is expected to make a significant contribution to our earnings going forward.

Looking ahead, we expect that the profitability of the wholesale unit to contribute positively to our overall financial results, but based upon our current run rate, we expect to fall short of our $700 million 2006 wholesale production target.

Moving on to our quarterly results.

Starting with our REIT portfolio segment, during the 1st quarter, the net interest margin on our REIT portfolio, inclusive of interest rate hedging, widened to 72 basis points from 62 basis points in the 4th quarter of '05 and generated net income of $2 million or $0.11 per share.

This $0.11 does, though, require a note of clarification.

Specifically, the impairment charge on our planned sale of $388 million of assets in Q1 2006 was recognized in our REIT portfolio as a segment in Q4 2005 and was based upon an estimated value of those securities as of year-end.

Between December 31, 2005 and the time we actually disposed of the securities in March of '06, these securities suffered an additional loss of value of approximately $960,000 due to a further deterioration in the market during that time.

Thus, this additional $960,000 loss associated with our portfolio repositioning was realized in Q1 2006.

Excluding this loss, which we don't foresee as recurring in the near future, our REIT portfolio would have earned approximately $0.17 per share for the 1st quarter.

Within our taxable REIT subsidiary we realized a net loss of $3.8 million, or $0.21 per share.

This $3.8 million loss also requires one note of clarification.

Specifically, our TRS' loss includes what we believe will also be a non-recurring loss of $733,000 or $0.04 per share in current connection with our March 30 REMIC securitization.

This loss on our $275 million securitization which was realized in our TRS, was regrettably attributable primarily to an unfortunate or an unfavorable quarter end market execution and to a lack of scale in the size of the securitization.

This lack of scale sufficient to gain cost efficiency in our securitization is another reason why we have decided to temporarily suspend the aggregation of loans for securitization.

Combining our REIT portfolio and our mortgage banking subsidiary, we reported a consolidated net loss of $1.8 million, or $0.10 per share for the quarter When factoring in for excluding the non-recurring nature of the two non-recurring items, we are pleased to report that both our portfolio and our mortgage banking segment showed sequential improvements in financial performance from our 2005 4th quarter to our 2006 1st quarter and that on a normalized basis we broke even for the 1st quarter.

This performance represents forward progress and earnings momentum in both segments and we expect that this positive earnings trend will continue into the 2nd quarter of 2006 and beyond.

Now on to our dividends.

Given all the aforementioned progress, new revenue opportunities, recent cost costs, currently increasing origination volumes, and recent portfolio repositioning, and despite the current market challenges, our Board of Directors approved a 1st quarter dividend distribution of $0.14 per share.

Because we are aware of the importance of returning a consistent dividend to our investors, based primarily upon REIT earnings, we will attempt to maintain this $0.14 cent minimum dividend level for future 2006 quarters.

On that note I'd now like to turn the call over to Michael Wirth, our CFO, to review our financial results in some greater detail.

Thank you, Steve.

Good morning, everyone.

I would first like to break down our 1st quarter performance into distinct segments and provide some detail as to our operating strategies and financial results.

I will start with the operations of our REIT, which is our mortgage portfolio management segment.

As discussed in previous conference calls, performance of the REIT, exclusive of our taxable REIT subsidiaries, is a major foundation for our dividend policy as we must distribute at least 90% of its earnings in order to maintain REIT status.

During the 1st quarter of 2006 the REIT, on a standalone basis, had net interest income of $3.5 million, a realized loss on investment securities of $969,000 and expenses of $495,000.

This resulted in net income of $2 million or $0.11 per share for the REIT segment.

Again, please note that when excluding an additional loss associated with our portfolio repositioning, the REIT would have reported net income of $3.1 million, or $0.17 a share.

The dominant driver of the REIT's net income is the net interest income we earned on our portfolio of residential mortgage loans and securities.

Like our peers, during the 1st quarter we continue to be impacted by rising interest rates and a flattening of the yield curve; however, on a positive note, our cumulative prepayment speeds decreased to 18% from 31% CPR experienced in the last quarter of 2005.

As a result, the net interest margin on the REIT's investment portfolio during the 1st quarter of 2006, inclusive of interest rate hedging costs, favorably widened to 72 basis points from the 62 basis points earned in the 4th quarter of 2005.

It is also important to note that this positive spread-widening during the 1st quarter does not take into full account the wider spreads we should earn on new securities purchased with the proceeds from the sale of lower-yielding securities as a part of our recent portfolio restructuring.

Also significant is that, relative to other residential mortgage assets, our current net interest return is also reflective of the fact that our portfolio is comprised of high credit quality prime loans which are not accompanied by higher levels of credit risk associated with Alt-A or subprime loans.

In other words, our asset yields are reflective of the high credit quality of assets in our portfolio.

We do not anticipate degradation of our portfolio returns due to credit losses.

To further protect our portfolio with regard to credit risk, we have no option, ARM or negative amortization loans in our portfolio.

The credit performance of over 1,500 loans in our investment portfolio continues to be outstanding.

Only seven such loans are delinquent and they represent less than 0.005% of the total par balance.

As a testament to our stringent credit criteria, we are currently expecting no losses on these loans.

For the 1st quarter, our mortgage lending segment recognized $7 million in revenues and $10.8 million in expenses for a net loss of approximately $3.8 million, or $0.21 a share.

The loss of the PRS segment was partially due to overall mortgage and interest rate environments which have adversely affected gain on sale premiums and net interest margins.

Additionally, as Steve discussed earlier, our TRS' 1st quarter results include a non-recurring loss of $733,000, or $0.04 per share, incurred in connection with our March 30, 2006 REMIC securitization.

Excluding this item, our TRS would have reported a net loss of $3 million, or 17 cents per share.

For the 1st quarter of 2006, the combination of our two business segments produced a consolidated GAP net loss of approximately $1.8 million or $0.10 per share.

Excluding the two aforementioned non-recurring items, we would have broke even for the 1st quarter on a consolidated basis.

The financial results of our mortgage lending segment also are impacted by a 40% reduction in gain-on-sale premiums to 144 basis points for the 1st quarter of 2006 relative to our experience of 239 basis points for the 1st quarter of 2005.

And while we don't foresee a return to these levels in the near term, we are finally seeing our gain-on-sale margins begin to widen slightly.

I'd now like to discuss other operating characteristics and benchmarks.

As of March 31, 2006, total employees decreased to 752 individuals from 810 individuals a year ago.

Included in the total number of employees are 372 loan officers dedicated to originating loans at the end of the 1st quarter.

This is a 6.9% increase from 348 loan officers for the 1st quarter of 2005.

The 7.2% reduction in overall headcount is due to a 17.7 decrease in administrative back office and other non-sales related personnel.

The reduction in non-sales personnel was partially as a result of efficiencies gained from branch consolidations and shared markets during the past year.

These branch consolidations lowered our number of locations to 53 at March 31, 2006, as compared to 63 locations a year ago.

During the 1st quarter of 2006, approximately 70% of our loan origination for bankered loans which are sold to third parties and approximately 30% was brokered to other lenders.

For additional information related to the characteristics of our loan originations, please refer to our earnings press release that was issued last evening.

For loans we originated and sold to third parties for gain-on-sale, our gross gain-on-sales, inclusive of premiums, was approximately 264 basis and our net gain on sale was approximately 115 basis points during the quarter.

Non-payroll-related GNA expense for the mortgage lending segment as a percentage of originations, was approximately 90 basis points for the quarter.

Exclusive of payroll-allocated to net gain on sale for bankered and brokered loan originations, GNA expense for the mortgage lending segment as a percentage of originations was approximately 201 basis points.

Let me know turn to some key points regarding New York Mortgage Trust balance sheet.

At March 31, 2006, we had total assets of $1.7 billion, which includes $683.3 million of available for sale residential mortgage backed securities, and receivables for securities sold, $740.5 million of mortgage loans held in the securitization trust and loans held for investment, and $101.2 million of due from loan purchasers and $114.3 million of residential mortgage loans held for sale.

Our aggregate warehouse lines and reverse for purchase borrowings under our facilities was $1.3 billion as of March 31, 2006.

We also had $220.5 million of outstanding collateralized debt obligations as a result of our most recent securitization.

This securitization structured for sale treatment rather than of financing for GAP purposes creates long-term financing at a locked rate in order to better stabilize earnings and expected cash flows.

Helping us to maintain liquidity and financing capacity, we have over 23 commercial investment banks providing us with financing arrangements with the capacity of over $5.4 billion in borrowings.

The notional amount of the company with interest rate swaps as of March 31, 2006 was $652 million.

The notional amount of our CAPs as of March 31, 2006, was $1.8 billion.

Our net duration GAP with the difference between the estimated maturity or lives of our earnings assets and the related financing facilities is approximately 10 months, which represents a slight decline from the prior quarter.

For the 1st quarter of 2006 the average earning assets in our investment portfolio was approximately $1.5 billion with a weighted average coupon of 4.85% and a yield on earning assets of 4.75%.

We financed this portfolio to re-purchase agreements for house lines and underlying interest rate hedges and a weighted average interest rate of 4.04% for the 1st quarter.

The combination of the yield on earning assets less the costs of financing resulted in net interest margin of 71 to 72 basis points for the 1st quarter.

For additional information you may access our 10-Q which will be filed later this week with the SEC or at our website, www.nymtrust.com or at the SEC website www.sec.gov.

On that note, I'd like to turn the call back over to Steve.

Thanks, Mike.

As you can all see, the current environment has presented us with some significant challenges which have been reflected in our financial results over the past several quarters.

Overall though, we believe that the changes we are implementing and have already implemented will strengthen NTR's growth rate in terms of profitability, sustainable capital efficiency and cash flow going forward.

In short, we believe that the worst is behind us.

This concludes our comments, and once again, we'd like to thank you for your continued interest and support and we are now ready to open the call for your questions.

[OPERATOR INSTRUCTIONS].

The first question comes from Paul Miller with Friedman, Billings, Ramsey.

Yes, thank you very much.

Can you give some further clarification on gain on -- gain on sale margins?

We know the 1st quarter was tough for a lot of companies out there with a lot of loan products per se, but we've heard some improvements in the second half of the 1st quarter that should have been carried over to the 2nd quarter.

Have you seen some of those improvements?

There was continued pressure on the gain on sale margins which lasted all the way through the 1st quarter but towards the very end we started to see them widen out ever so slightly, so our gain on sale margins for the 1st quarter net were about equal to what we experienced in the 4th quarter but the 2nd quarter is looking a little bit better.

And you might have put this in your news release, but I might have missed it, but what was the mix between 30-year 51?

Do you like 50-50 mix between the two?

Slightly more fixed, I think it's like 52 or 53% fixed.

Okay.

And then could you go over real quickly again your headcount?

I know you said your overall headcount declined by 7% but you said your loan originators increased from like 330 to 370, did I get that right?

That's correct.

Employees, loan officers at the end of the quarter were 372 as compared to 348 the 1st quarter of '05, so that's about a 7% increase.

The overall headcount had a reduction of 7.2%, I believe it was a 17.7 decrease in administrative back office and other non-sales related personnel.

Now is that pretty much done?

The back office headcount, or can we expect that to go down even farther.

We're continuing to look for opportunities where we can consolidate some branches.

We've typically run a purely decentralized platform which means that there's processing, underwriting and funding personnel in every branch, or at least in every branch that's large enough to support those functions.

What we're trying to do now is to find branches which are located within close proximity to one another or at least regionally and consolidate some of those functions.

Those aren't easy changes to make so we have to do them carefully and gradually but over time, we expect that we'll continue to be able to reduce the number of full-time employees it takes to basically fund a loan or increase the number of loans funded per full-time employee.

What we're also trying to do is increase the headcount in sales staff without materially increasing the headcount in operations so that will also help improve efficiencies and numbers.

And the last question I had is on the AM&A front.

Have you seen any good opportunities out there on the AM&A front to increase your scale?

As we have discussed many times in the past, we were seeing a lot of interesting opportunities and we're working hard to trying to accomplish something to help us to grow our mortgage business in a very significant way.

Okay.

Thank you very much, gentlemen.

All right, thanks, Paul.

Thanks, Paul.

Thank you.

Your next question comes from David Milewski with RBC Capital Markets.

Please go ahead.

Thanks.

Good morning.

This is actually Jim Ackor.

How are you guys doing?

Hey, Jim.

Hi, Jim.

A couple of question for you.

You mentioned cost savings that were partially realized in the 1st quarter.

I was wondering if you might be able to discuss how much of the cost savings were actually realized and how much more we would see the 2nd quarter?

Well, the cost savings...when we say they were partially realized in the 1st quarter, it's because the small round of layoffs that we did happened somewhere in the middle of the quarter or it happened basically gradually throughout the quarter.

So the 1st quarter is actually only partially reflected of that annualized $4 million in savings, so as we moved into the 2nd quarter, we started the quarter with a lower (inaudible) rate.

Okay.

So is it fair to say that on a runway basis when you started the 2nd quarter all of the changes were effectively in place?

For the most part, yes, although as I mentioned to Paul and a minute ago, we're continuing to rationalize some of the expenses.

We're not done.

We'll never be done.

We're an ongoing basis trying to make some consolidations of operations and branches and finding additional places where we can save money.

Okay.

In terms of the repositioning of the portfolio, if I recall correctly, about one-third of the proceeds have been reinvested at the end of the quarter.

I was wondering if you might be able to share with us what you're seeing for a sort of incremental spreads on investments that are being made with the redeployment of this capital?

Jim, it's Steve Mumma.

There's two things we're doing here.

One, we're looking to put some more floating rates-type assets that are strictly floating to help reduce the interest rate with ongoing basis and then we'll combine that with doing some either 5/1 or 7/1 transactions that are fully hedged and we think that's going to give us an improvement of co-marketing margins 72 basis points and we'll crank that up to open at the low 80s or mid 80s.

And the last question, I looked through the release.

I'm not sure, I may have missed it, but I was wondering if my comment in where your book value is and what your thoughts are on the possibility of doing share repurchases?

Net book value is on the issued shares is about 513.

If you take the equity balance and divide it by the issued shares.

It would be a little bit higher if you did by, on the weighted averaged diluted shares, obviously.

What was the second part of your question?

I was just curious about buy-backs.

It would be a little bit higher if you did (inaudible) it on the weighted averaged diluted shares but obviously if you're trading at book then it's not terribly compelling necessarily to be using the capital in that way.

Okay.

That's all I've got.

Thanks a lot.

Thank you.

The next question comes from John Moran with Ryan Beck & Co. Please go ahead.

Actually, I'm sorry.

Most of mine have been answered.

So I'll bow out.

Thanks.

Thank you. [OPERATOR INSTRUCTIONS] At this time I show no further questions.

Okay.

Well, thank you everyone for tuning in and for your support and we look forward to talking to you again next quarter.

That concludes the call.