New York Mortgage Trust Inc (NYMT) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the New York Mortgage Trust 2010 fourth-quarter earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions following at that time. (Operator instructions). As reminder, this conference is being recorded. And now I will turn the call over to Chief Executive Officer Steve Mumma. Please begin, sir.

Thank you, operator. Good morning, everyone, and thank you for being on the call. Jim Fowler, our Chairman; and Fred Starker, our CFO, are also present and will be available for questions at the end of this call.

I would like now to review the 2010 fourth-quarter and full-year activities. During the fourth quarter the Company fully funded its investment in a limited partnership for total amount of $19.4 million. The partnership was formed during the third quarter for the purpose of acquiring, servicing, selling or otherwise disposing of first lien residential mortgage loans. The investments have distributed $1.2 million during 2010, consisting of interest income, realized gains, principal repayments and sales proceeds occurring during the fourth quarter. The limited partnership contributed $500,000 to income for the year. The loans were purchased at a significant discount and we believe going forward into 2011 will result in accretive risk-adjusted returns to the Company's bottom line.

In the fourth quarter we took charges totaling approximately $800,000 or $0.08 per share related to a reserve we established for our investment in New Bridger Commercial Funding. I will speak in greater detail about this investment later in the call.

The Company earned $1 million or $0.11 per common share for the quarter ended December 31, 2010, as compared to $4.2 million or $0.45 per common share for the quarter ended December 31, 2009. Excluding the reserve for New Bridger, the Company would've earned $0.19 per common share. The Company earned $6.8 million or $0.72 per common share for the full year 2010 as compared to $11.7 million or $1.25 per common share for the full year 2009.

The Company declared a fourth-quarter dividend of $0.18 per common share, and this was paid on January 25, 2011. We declared a total dividend of $0.79 per common share during the year ended December 31, 2010.

The Company ended the quarter with a book value of $7.27 per common share as compared to $6.69 per common share at December 31, 2009. The book value for December 31, 2010 includes a net unrealized gain of $1.88 per common share comprised of $2 per common share of net unrealized gain in our investment portfolio offset by $0.12 per common share in our unrealized losses relating to our hedging of the investments. The Company had a weighted average net portfolio interest margin of 353 basis points for the fourth quarter, a 10 basis point decrease from the previous quarter. The Company had a weighted average net portfolio margin of 376 basis points for the year ended December 31, 2010, a 25 basis point increase over the previous year.

The Company earned net interest margin of $2 million for the fourth quarter of 2010 as compared to $3.9 million for the fourth quarter of 2009. The decrease of $1.9 million was primarily due to a decrease of $159 million in quarterly average earning assets from December 31, 2009 to 2010. The Company had a net interest margin of $10.3 million for the year ended December 31, 2010, as compared to $[15.9] million for the year ended December 31, 2009. This decrease of $6.9 million was due to a decrease of $241 million in average earning assets for the year ending December 31, 2009 to December 31, 2010.

As the Company transitions away from a leverage strategy, this focus will result in a lower average total assets outstanding, as well as decrease in leverage. The Company had a $1.4 million realized gain from the sale of approximately $10.8 million of non-agency securities during the fourth quarter. The Company sold approximately $24.6 million in non-agency ARMs during the year, realizing a total gain of $4.4 million. These sales were related to the securities purchased at distressed prices during 2009 and were sold as they hit our price objective targets. The proceeds from these sales in part were used to fund our investment in limited partnership as well as other general corporate uses.

The Company added approximately $350,000 to our loan loss reserve related to our securitized loan portfolio during the quarter, putting the total reserve at the end of the year of $2.6 million or 113 basis points of all outstanding loans.

The Company had total expenses of $1.8 million for the quarter ending December 31, 2010, a decrease of approximately $65,000 from the fourth quarter of 2009. The Company has total expenses of $8 million for the year, an increase of $1.1 million for the full year ended December 31, 2009. The increase was primarily due to a $1.6 million increase in management fees. Of this increase, $1.5 million was related to an increase in incentive fees due to the realized gain from sale of our alternative assets purchased in 2009. This increase in expenses was partially offset by a decrease in other G&A expenses of $500,000.

It should be noted that the alternative investments have significantly contributed to both our earnings in 2009 and 2010 as well as significant book value growth from the Company since 2009.

The Company's average earning assets for the fourth quarter were approximately $318 million as compared to $477 million for the quarter ended December 31, 2009. The Company's average earning assets for the full year of 2010 were approximately $371 million as compared to $612 million for the full year 2009. As I mentioned previously, our assets and related liabilities will be lower as we go forward, as we are focusing on less leverage and more on asset selection.

As of December 31, 2010, the Company had total assets outstanding of $375 million as compared to $489 million. Included in total assets at December 31 were approximately $86 million in investment securities, $228 million in mortgage loans held is securitization trust and $19 million in limited investment partnership. The Company had total liabilities of approximately $306 million as compared to $426 million at December 31, 2009. Included in liabilities at December 31, 2010 were approximately $36 million in agency reverse repurchase agreements, $220 million in CDO obligations related to our securitized loan portfolio and $45 million in subordinated debt.

The Company's Series A Preferred Stock matured on December 31, 2010, at which time we redeemed all outstanding shares at $20 per liquidation value, or approximately a total of $20 million. These securities were paying a dividend of 10%.

As of December 31, 2010, the investment portfolio totaled approximately $86 million consisting of $48 million in Fannie Mae agency securities, $9 million in non-agency securities and approximately $30 million in CLO notes. Our residential portfolio had an average coupon during the fourth quarter of 4.56% and a yield of 5.81%. The RMBS portfolio had a CPR rate in the fourth quarter of 21%, down from 26% in the previous quarter. The portfolio averaged an annual CPR rate of 25% for the year as compared to 18% for the previous year.

The residential portfolio was financed in part with $36 million in reverse repurchase requests at approximately a cost of 39 basis points (technical difficulty). The Company had repos outstanding with four counterparties at the end of the year. Our leverage ratio at the end of the year was less than 1.1 to 1 as compared to 1.4 for the previous year end.

[Our] $46 million of CLOs which were purchased during the first quarter of 2009 for $9 million are currently valued -- were valued at $29.5 million at December 31, 2010, an increase of $5.6 million from the quarter ending September 30, 2010. The CLOs are currently backed by 182 loans from 30 different credit sectors. This is up from 74 counterparties when we purchased the loans back in April of 2009.

This increase has substantially reduced our exposure for credit outstanding. Further, all three bonds that we own were upgraded in January of 2011 by a major credit firm with two of the three bonds exceeding their initial rating at issuance in 2007, quite a feat for the managers [of the Cratos] securitization. These rating improvements were not reflected in the year end marks.

The investment portfolio also includes $228 million of loans held in securitization trust for on-balance sheet securitization. These loans had an average coupon of 2.75% and an average yield of 2.65% for the fourth quarter. These loans are permanently financed with approximately $220 million of collateralized debt obligations which had an average interest cost for the quarter of 71 basis points, resulting in a net margin excess spread of 194 basis points. The Company's net investment in our securitizations is approximately $8.9 million. 100% of the loans remaining with securitization are 5/1 ARMs with all loans now in the short-term reset period, either at one-year or six-month indexes, primarily based off LIBOR.

As of December 31, 2010, the securitizations had approximately $23 million in greater than 60-day delinquent category or 39 loans as compared to $17 million greater than 60 days in the previous year. There were three properties in REO at the end of the year, totaling $700,000.

The Company added $350,000 to the loan loss reserves during the quarter, bringing the total reserves outstanding at the end of the year of $2.6 million. Approximately 71% of the delinquent loans currently are under some type of short-term modification plan while the Company works with these borrowers to rehabilitate their credit.

As we go forward into 2011, I would like to reiterate our investment philosophy. We continue to focus our energies on investment strategies that are more focused on asset performance and less on leverage. During 2010, we made an investment in New Bridger commercial, which specializes in small balance commercial originations. Our intention was to provide financing for projects in the scope of $3 million to $20 million range. These financings would include not only the first mortgage, but also include some form of subordinated funding such as mezzanine loans or preferred equity. Ultimately, NYMT would be the holder of this higher-yielding mezzanine and preferred equity in the portfolio with the first mortgage being sold to a commercial conduit to be securitized in the CMBS market.

As the commercial market unfolded during 2010 the landscape became very competitive. And through the late summer and into the fourth quarter this competition increased tremendously, which made it very difficult for Bridger to complete in the first mortgage origination although Bridger continues to be very competitive in the second mortgage financing rates. In 2011 we will focus primarily on providing solution for mezzanine type financings.

Similar to our other strategies, we will align ourselves and have allied ourselves with a very strong partner with whom to execute this strategy. We will continue to focus on markets with total debt needs of less than $20 million. We feel that this strategy will reduce our operating expense over time and allow us to achieve our goal of investing in assets with higher-yielding returns.

In addition, on February 11, 2011, we entered an investment management agreement with the Midway Group pursuant to which Midway will serve as the investment manager for a separate account for NYMT. The Midway Group has been managing assets and accounts for approximately 11-year history, investing in the broad spectrum of RMBS and derivative securities. This portfolio will focus on long-term capital appreciation, on investments across the various market cycles but focusing on strategies that are bond-specific and perform well in rising interest rate environments. We expect Midway to invest in securities that are backed by prime or lesser credit quality first lien residential mortgage loans and securities to diversified -- with diversified loan characteristics across securities in the portfolio.

On February 28 of this year, we funded approximately $24 million in the initial feeding of this account.

We will continue to target investments with risk-adjusted ROEs in the mid-to high teens, as our hurdle rate for investment is approximately 15% on an unlevered basis. Our 10-K will be filed on March 4 -- or, on or about March 4 with the SEC and will be available at our website thereafter.

Jim, Fred and I would now like to take any questions you may have. Operator, if you could please open for questions.

(Operator instructions) Jason Weaver, Sterne Agee.

Steve, I was hoping you could talk a little bit more about the (technical difficulty) pricing on the new assets acquired both within the LP in the fourth quarter and with the Midway account.

Sure. As it relates to the fourth-quarter investment and limited partnership which is being managed by Headlands, those are loans. Those are residential loans. They have been purchased at significant discounted prices with the ultimate resolution resulting in a combination of interest yield and capital appreciation on the resolution of those loans. So the loans themselves are purchased for an approximate price of about $0.65 to $0.70 on the dollar.

Okay, thank you. And for the Midway?

And, as it relates to the Midway, this investment was initially seeded -- this investment will be targeted investments that are not in a distressed mode. These are investments that are targeted towards either an interest sensitivity strategy or a credit strategy. So to the extent they're credit strategy focused, they may have some price discounting. But overall, I am not at this point able to comment on the pricing.

Okay, and also just more of a general question than anything else, but given the new origination activity in the CLO market -- is that typically likely an avenue to deploy new assets to in the future?

We got into the CLO investment in the first quarter, at the end of the first quarter of 2009 with the intention of making multiple purchases because we liked the market and we liked where the pricing of the market was. We will probably be less interested in participating in a new origination CLO market unless we feel like we can accumulate distressed assets and have some advantage there. But I don't think we will directly participate in the new CLO market.

Okay, well, thank you, guys. Congratulations on a solid year.

(Operator instructions) Matthew Howlett, Macquarie.

Good start to the year, the question is on capital allocation. How do we look at where NYMT will put -- you have these managed funds and you have New Bridger you could deploy capital to. How do we look at that going forward?

Sure. If you look at -- you know, we made an investment -- we fully funded our limited partnership by of the end of the year, approximately $19.4 million. We have put an initial feed of $24 million in the Midway. We continue -- as we look into 2011, we look to incremental investment adds in the commercial space as well as the Midway space and, to a lesser extent, in some of the residential strategies. But we feel like those incremental ROEs in these investments, as I mentioned at the end of the call, would be targeting a mid ROE return of -- mid-teens ROE return, and our hurdle rate is at 15% on an unlevered basis.

Okay, and in terms of -- are you looking to do like a third, a third, a third into some of that New Bridger?

I think we would be opportunistic. Initially, what we would like to do is we would like to get our commercial project off the ground and get that thing funded at least at $20 million to $30 million. But as we would go forward, I would say it's probably, today, probably 45/45, and with are making 10 going opportunistically in other residential strategies. But, for example, if we feel like the prime space opens up and that (inaudible) market starts to be more fluid and liquid, as we have seen several large dealers look [to be] entering the jumbo origination market, we could definitely allocate capital towards the credit space in that market.

Great, okay, and with the investment in February, how do you look at -- you have been under-levered for a while now. You were 1 to 1 at the end of the year. How do you look at the firm's excess capital/excess cash position?

Sure. We look at -- we can add a turn of leverage to increase some available funds for investments. But as we get invested in these strategies and we get the -- fully levered into our earnings momentum going forward, we will look to add incremental capital as it -- both to the shareholders from a book value standpoint and an earnings standpoint. With these strategies, keep in mind, since we are not relying on a multiple of leverage, we're talking about assets and adding assets incrementally in the $20 million to $50 million range as opposed to $300 million to $400 million range.

Right, Exactly, but it's been a while, so we really still haven't seen the earnings power as a fully levered Company yet.

In 2010 we spent a good part of 2010 reviewing and trying to identify strategies that we felt would be incremental not only on a trade basis, but on a longer-term basis. And we were frustrated in the sense that we weren't able to close more transactions. We feel very good going into 2011 that we have targeted some very good strategies and we feel like we can get fully invested very quickly.

And then just moving to the Cratos, it was a great investment last year. What do you look as the upside here going forward? Is the deal passing triggers? When you run the stuff, is that --

If you look at that deal that we purchased in 2009, the deal never passed triggers as it related to our bonds. The equity of the deal was turned off, I believe, for two quarters and then turned back on. All the bonds -- the lowest-rated bond, the e-note that we own it is now back to where it was rated at issuance. The two other bonds, the C and D, are actually above those issuance. The average price of these securities at the end of the year was in the mid-60s. That price, as you can imagine, all things else being equal, with the ratings going up will increase. As the price starts to approach closer to par, clearly the upside for those securities is diminishing. But we are very happy with those securities. They are floating rate off LIBOR. We have a $9 million investment that's generating interest income off $46 million in assets that are approaching the mid-80s in price eventually.

But they're still $1.50 plus in book if it does go to par, accretion to book, I mean?

Absolutely. The securities are performing great. They're generating a nice interest yield for the portfolio because we purchased at such a low price. So it's a great tool to generate interest income to offset interest expense on our subordinated debt, for example.

Great, congrats on that investment. And then the last question, Steve, when you look -- we are looking forward to seeing the Company on a fully levered basis, a fully earnings basis. But how do we look at just the loan loss provision? I know it's on legacy securities and the majority are cash flowing those deals. You have gotten a lot of cash out of them, and you only have $10 million or so of the ultimate invested capital still left (inaudible). So how do we run that loss line? I know a lot of it will depend what the delinquency is, but how do we look at that going --?

If you look at that -- the way I personally look at that securitization right now, all three securitizations have equity in the deal. That's why we are receiving cash flows. All three securities have 200-plus spread from the earnings yield from the assets versus the liabilities. And really, as we go forward, we now have an asset class that is short-term in nature in the sense it's one year or less in reset with liabilities that reset on a monthly basis, so it would be fairly easy to immunize that basis risk. So we feel very good about the spread of that interest because the assets will be resetting.

We did have an uptick in some of the delinquencies. Part of that uptick in delinquencies is because of our temporary modification program, so some of these loans we have elected and we have worked with the borrowers. We feel comfortable that they are going to get back to a situation where they can become current where, otherwise, some servicers or some processes may have led to a foreclosure process which would reduce your delinquencies but would increase your severity.

So we feel comfortable where the reserves are. It is a $200 million plus portfolio with an average loan of $550,000. So when you do have a loan go down, there is some sensitivity to that. Keep in mind, when we originated those loans, the LTV was less than 70%. So we still -- our biggest risk and one of the things we monitored very closely is when a loan does go down, is can we rehabilitate it. And if we can't, how quickly can we come to resolution? Because our severities, a large part of our severities are timing, getting to resolution. That's where the increase in severities are, so that's what we have tried to minimize over time.

Great, we'll watch for those. And the last question on the dividend -- does the Board, when they get together, will they really look at the future earnings power of the Company fully levered? How do you look at returning -- paying out the dividend and the payout ratio here going forward?

Sure. Look, we made some investments in the future during 2010, in my opinion, as we look at investment strategies. And, clearly, when you look at the charges -- if you look at the actual dividend earnings in the fourth quarter before the charge, we did earn it above the dividend. We feel comfortable with where our earnings or growth is going to go as it relates to the current dividend and where we are going to go in the future.

Great, we'll wait for that [note], so thanks, guys.

(Operator instructions) Scott Preston, Encompass Investment.

A couple of questions -- first off, now that you have put some more money to work, can you maybe give us a sense on how these new investments may affect the book value going forward? Can you give us some sense where that might be currently versus the $7.27 at the end of the quarter?

Sure. The incremental investments -- these asset adds are more of a yield strategy as opposed of a distressed strategy. Clearly, in 2009, the assets that we added to our books -- we took advantage of a dislocated market and got some tremendous book value appreciation. The assets related to The Midway Group will generate some book value appreciation, but primarily earnings momentum. The investment in the residential securities -- residential loan securities at a discounted price will result in some book value appreciation over time, we believe, as well as some earnings momentum. But to the extent -- keep in mind, as you resolve these loans and sell them, that book value gets paid out as earnings, to some extent.

Okay, and then, with respect to potential future capital raises, can you give us some sense of how you guys are thinking about that? Are you going to be very sensitive to doing something that is accretive to book or accretive to the dividend? Can you give us some sense of how you guys might approach the capital raise situation?

Sure. We exited 2008 with a book value in the mid-4s. At the end of 2009, we are at $6.69, and today we are at $7.27. Clearly, during that time, we could have elected in my opinion to go out and raise capital and continually leverage that asset strategy, which ultimately would have resulted in a significant dilution to the existing shareholders. We felt like the assets that we had on our book at the end of the 2008 and as we went into 2009 we're going to be accretive in nature to the book value. So as we look to add additional capital to our Company, it will be in consideration of the existing book value and the impact it has on our shareholders today.

Hey Scott, it's Fowler. Let me just add one comment to that. You've seen in the press release the investment that we made into Midway. And Steve has commented that we are going to continue our strategy in the commercial mortgage segment on a slightly more focused basis. Both of these strategies -- well, the Midway has clearly been funded, which we've reported. We have the liquidity available when we finalize some very minor terms on the commercial partnership that we are establishing with a very qualified manager, to fund that as well.

So both of these segments are -- our approach to this is to provide funding today, have each of the managers put capital to work. We will be quite transparent in the assets into which that capital is being invested. So, rather than do some financing that is anticipatory of these that might be dilutive, if and when we come to market for additional capital you will be able to see assets that we have acquired. These assets are also liquid assets, but nonetheless, it does take a bit of time to put that together. So it won't be large financings at a particular point in time, anticipating investments; it will be much more of a just-in-time financing strategy, per se, with a lot of transparency on the returns that we have put on the book and the parameters around which our managers are investing our capital.

Okay, that's helpful. And then a little bit of a follow-up on Matt. When we start looking at the dividend, you guys have been, I guess, shrinking a little bit through 2010 as you've kind of been changing strategies a little bit. But now that we've got a little bit more money deployed and kind of get a little bit more to a steady state. Can you maybe talk about how that is going to start playing into maybe Q1, Q2, Q3 and when you think you will be able to give us some guidance on how the income you're generating from these new investments starts flowing through to the shareholders, the dividends?

I think clearly we were under-invested in 2010. As we become fully invested with our strategies, you can come to a fairly quick conclusion that the earnings momentum should be upward. And typically, with earnings momentum upward, the dividend would follow. As far as exact guidance, I think as we get more comfortable, as these assets get deployed and invested in these strategies, we may in the future come out with earnings projections, but at this time we will not.

Okay, thanks a lot.

Thank you, and I am showing no further questions or comments at this time. I would like to turn the call over to Steve Mumma for any closing remarks.

I'd just like to read a couple remarks that I believe were not talked about at the beginning of the call, but we did release a press release last night after the market closed. It is available on our website at www.nymtrust.com.

Also, during the call -- I need to read this standard statement. During the call there were statements made that may not be historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. And, although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that these expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in our press release that was done yesterday and from time to time in the Company's filings with the SEC.

So thank you very much for being on the call. We look forward to talking about our first quarter, and thank you again.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect, and have a wonderful day.