New York Mortgage Trust Inc (NYMT) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust third-quarter 2011 results conference call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference would be open for questions. (Operator Instructions). This conference is being recorded on Friday, November 4, 2011.

A press release with NYMT's third-quarter 2011 results was released yesterday. The press release is available on the Company's website, www.NYMTrust.com in the investor relations section. Additionally, we are hosting a live webcast of today's call, which you can also access in the investor relations section on the Company's website.

At this time, management would like me to inform you that certain statements made during the 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 Steve Mumma, Chief Executive Officer and President. Steve, please go ahead.

Thank you, operator, and 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.

For the call today I would like to start by going over our third-quarter financial review followed by some comments on macro events that have impacted our third-quarter results, then go through some additional portfolio highlights, closing with some thoughts on the fourth quarter and into 2012.

For third-quarter results, the Company had year-to-date earnings of $6.7 million or $0.67 per common share and for the third quarter ended September 30, 2011, the Company had a net loss of $15,000 or $0.00 per share to common shareholders.

Excluding realized gains of $2.5 million in unrealized losses of $8 million and the related incentive fee reversal of $1 million, the Company's core earnings for the third quarter would have been $0.40 per share. These gains and losses were attributable to our Midway residential portfolio, which for accounting purposes the hedging and valuation changes are run through our statement of operations and not through the OCI or the balance sheet as the majority of our other portfolio assets.

Net interest income for the three months ended September 30, 2011 was $6.2 million as compared to $2.2 million for the same period in the previous year and $5.3 million for the second quarter of 2011 or an increase of 17% sequentially. The Company had a weighted average net portfolio interest margin of 715 basis points for the third quarter of 2011, an increase of 50 basis points from the previous quarter and an increase of 352 basis points from the third quarter of 2010.

The net portfolio margin benefited by two factors. Investment in our Midway residential portfolio, which is a focus on Agency IO securities, and the Company being fully invested throughout the third quarter.

The Company ended the quarter with a book value of $6.75 per share as compared to an adjusted book value of $7.44 per share at June 30 and compared to a $7.27 per common share at December 31, 2011. During the quarter, the Company declared a $0.25 dividend which was paid on October 25 of 2011.

Now I'd like to speak to some of the events that impacted our third-quarter results. During the third quarter, the 10-year US Treasury hit an historic low of 1.72% in September, down from 3.16% at June 30 and from a high in 2011 of 3.73% which was hit during the first quarter. These low rates resulted in very low mortgage rates which increased prepayment expectations on mortgage securities, putting pressure on pricing especially on our IO portfolio.

As part of the Fed action, in August they instituted Operation Twist where they would be net sellers in the short end of the treasury market and net buyers in a long end, effectively flattening the curve again potentially lowering long-term mortgage rates and future prepayment expectations -- and increasing future prepayment expectations.

The sovereign debt issues in Europe, which began in the spring and are now in full-blown crisis have left a global overhang of risk aversion leading to credit spread widening across all major categories including our IOs and CLO portfolio.

The Federal Housing Finance Agency or FHFA was tasked with proposing a new mortgage assistance program to borrowers who have today been unable to refinance with their high mortgage interest rate either through conventional methods or the initial Home Affordable Refinance Program or HARP. This new program originally was talked about in September, but general details were not released until October with the final details expected November 15 of 2011.

The guidance released in October indicated that they will target borrowers who have been current for six months in their mortgage payments and their mortgage was originated prior to June 2009. The key element in this new program is it appears that they will be waiving the property valuation criteria to qualify for refinancing, a huge deterrent in the first HARP program. Again, these programs will possibly introduce uncertainty in the future prepayment behaviors by our borrowers that are underlying the mortgages in our portfolio.

And finally, the FOMC has had two meetings since June, one in August and again this week and both meetings indicated that short-term interest rates will remain low at least to mid-2013.

Now I will be more specific how these impacted our portfolio. Historic low rates, refi uncertainty, and the new HARP 2 proposal and the overall market aversion to own risk impacted the pricing of our Midway residential portfolio, which resulted in the Company taking an $8 million unrealized loss during the quarter.

This portfolio is primarily comprised of interest only securities and therefore very sensitive prepayment expectations. From a cash flow standpoint, though, this portfolio has performed extremely well averaging 10% CPR over the third quarter and delivering significant contributions to our net interest income.

Given the information that we know and the proposed new FHA program or HARP 2, it appears that 25% of this portfolio falls into the category that will qualify for the HARP 2 refinancing but only 25%, which means that the majority of our exposure will not be impacted by HARP.

While rates have been low throughout 2011, this portfolio has experienced consistent low prepayment speeds, which have resulted in outperformance in our net interest income.

Going forward, we do expect increases in portfolio speeds but we do not expect those speed increases to be reflective of the level of the current valuation of the securities today, so we see further improvement in pricing as we go forward as the empirical results of CPRs will outperform future expectations.

Additionally during the third quarter, we saw a decrease in our book value, which was largely attributable to a price decline in our CLO securities. These are the securities that we have owned since April 2009 that we have purchased for approximately $0.20 on the dollar and today are valued at $0.64, which is down from $0.76 at the end of the second quarter, resulting in a $0.43 reduction of book value per share.

This decrease in value in no way reflects the actual performance of these securities as one of the rating agencies upgraded the ratings on these notes in September of 2011 but is due to the overall market aversion for risk and general credit spread widening.

The CLO manager continues to diversify credits and improves the overall performance ratios and we currently have no concern that will not make -- that the CLO will not make any and all interest payments to our notes. We will continue to hold these notes and will look to exit when the markets are more stable and price recovers to levels closer to our target prices for exiting.

On the positive side, market disruptions have brought opportunities to the companies through our River Bank relationship, where we will be investing approximately $15.1 million under a Freddie Mac multifamily CMBS security this month. We are projecting a 13.5 non-levered risk-adjusted return and after leverage, we expect a high teens to low 20s return on this transaction.

This transaction will bring our total investment to the multifamily sector to approximately $20.2 million, an area which we think brings excellent risk adjustment returns given the current market dynamics.

Now for some additional facts in our current business. The Company had approximately $11.4 million remaining in our distressed residential portfolio. We anticipate exiting by the end of the year this portfolio and project a life to date return on this investment in the high teens. The Company will reinvest these proceeds in other residential and commercial credit opportunities as we see fit.

We own approximately $200 million of loans held on securitization trusts for on balance sheet securitizations. These loans had an average coupon of 2.7% and an average yield of 2.6%. They are financed with permanently refinanced CDO debt with an average cost of 65 basis points or net interest margin of 195 basis points. The Company's net exposure on this balance sheet investment is approximately $7.9 million.

The Company added approximately $400,000 during the quarter to our loan loss reserve, which was related to our securitized loan portfolio, bringing our total reserve balance to $3.3 million or 156 basis points on the outstanding loan balance of which 16% of these loans are greater than 60 days delinquencies.

The majority of the increase in its reserves was related to the continued deterioration in housing values. As a starting point for our reserve analysis, we use broker price opinions or BPOs to form this relationship and over the course of the year we have seen a moderate decline in pricing in general across the country.

As we go into the fourth quarter and into 2012, we will continue to focus on residential and commercial credit investment opportunities and we will rely more on credit decisions and less on leverage that we believe will deliver high teens risk-adjusted returns.

Our 10-Q will be filed on November 4 or thereabouts with the SEC and will be available on our website thereafter.

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

(Operator Instructions). Chris York, ROTH Capital.

Good morning, guys. It looks like your Agency RMBS increased roughly about 36% sequentially. I was wondering if you guys could qualitatively provide me some thoughts on that and the characteristics of those new investments?

Sure, actually from a funding standpoint, they came on balance in July. Those were additional ARMs we added. We thought there was some opportunity there. They came in -- the yields in the overall portfolio of the ARM portfolio for the quarter was very good and the CPR in the portfolio is around 16% for the quarter.

So we were happy with that performance but that was again to balance out some of the liquidity, that excess liquidity we have from the raising of the capital and to help us conform with some of the compliance issues that we have to deal with across the various investments that we make. But overall, hybrid ARM securities, those were all very seasoned hybrid ARM securities and we don't expect to have any issues with those from a hyper-extended prepayment environment.

Okay, and then what was the expected return on those?

You know, on a fully levered basis of 7 times, we would expect the return to be in the high teens.

And then could you just explain to me some of your thinking behind the Freddie Mac purchases that you will be making here in November?

Sure. The initial Freddie Mac purchase that we made, that we have put in our second-quarter Q and talked about is related to the first loss piece in a multifamily securitization. We will be participating again in the first loss piece in a securitization that's scheduled to close in the next week. And there will be some IO strip attached to that. So you will be getting a combined return from an IO strip that's rated AAA along with the first loss piece of securitization.

The deal is backed by approximately 92 properties and in total it's a $1.2 billion securitization.

Okay, that's helpful. Last one is just housekeeping. The release said that your portfolio margin was 715, went down 50 basis points sequentially, but it looks like second-quarter release, it's 644. Am I missing something?

No, there's two numbers that we released. We lease one -- we lease one spread that we call portfolio spread, which excludes the Taberna cost of debt, and then we have another spread that it's a total for the portfolio. It was actually up 50 basis points. And then really that increase in spread was due to -- that increase in spread was really due to the additional investing in IOs and just the overall prepayment performance of security during the quarter.

Okay, so then if I take a look at apples-to-apples basis, what would be the margin comparatively to that 644 from Q2?

You know what? It will be in our Q that will be filed later today. I can get it to you. I don't have the number right in front of me.

Sure, and we can take that off-line.

It will be in the Q. It will be slightly lower the 715 because that's going to include the $45 million of Taberna debt that's at approximately 4%. So when you weighted average that cost, it is going to drop it down about -- it will drop it down about 60 basis points, I think.

Okay, that's it for me. Thanks, guys.

Boris Pialloux, National Securities.

Thanks for taking my question. I have like three questions. One is about Midway in October. Second is about the run rate for your G&As. And the third one is about the yield for your multi-family investments.

So the first one is about Midway. Do you have any color on the Midway portfolio in October?

Second one is about -- (multiple speakers) -- second one is about the run rate for your G&As. I think you had $0.8 million in Q3. Is that something we should use for Q4?

And second -- and third is about -- I think you mentioned that the yield on your [K 15] series would be around AAA, so I just wanted to have kind of an indication what type of yield it would be?

Sure, going back to the first question, Midway color, we typically don't comment about the portfolio prospectively in terms of what we have experienced. But the Midway portfolio, we -- there has not been a significant change in the portfolio dynamics. There has not been a significant change to date in the prepayments experience of the portfolio. We continue to believe that the portfolio pricing is being impacted more from future expectations as opposed to actual experience rate. And that's really all I'd like to talk about the portfolio at this point.

As it relates to the run rate of G&A, included in our G&A line in the income statement is our incentive fees and because of the unrealized loss in the incentive fee -- because of the unrealized loss incurred by Midway, there was a reversal of incentive fees that were booked in the second quarter because they have certain targets that they have to hit and hurdles. So therefore, there was a reversal.

But the actual runway would be more closely aligned with approximately $2.4 million from an expense standpoint. I'm sorry, $700,000 from an expense standpoint of the relates -- $701 million relates to expenses and then you have a line for management fees. Those management fees will be driven directly by the performance of the individual assets.

So for example, the year-to-date management fees will be about $2.7 million but the management fees for the quarter will be approximately down $500,000. So that's one reason why the expenses look a little lower. I think when you get the Q later today, you will be able to -- you'll be able to better see the dynamics of that change.

And the yield on the multifamily -- there are multifamily investments typically are a combination of two securities for the first two that we have invested in and that combination will be one of a credit piece. That's the first loss piece and the second will be of a small sliver of IO strip. We do the IO strip to generate some cash for the security.

But the combined overall return of those two securities is expected to be around the midteens return. And that -- so the credit piece obviously has a higher return and the AAA rated IO strip has a lower return. But the blended return on that investment is in the midteens.

Okay, thank you very much.

Matthew Howlett, Macquarie.

Thanks for taking my question. Congrats on a solid quarter. You've got a lot going on. I guess I will just start again with the Midway portfolio. Does the yield that you are capturing here in the quarter, does it incorporate -- obviously speeds potentially going higher or what does that incorporate? How could we -- you said you are not going to be that really impacted by HARP 2.0 but if speeds do increase from their current rate, would that be incorporated in the current yield we are seeing or would there be some type of adjustment or normalization if you will of that yield?

So what we release in the earnings statement is a yield that was experienced in the third quarter. What we project when we look at that portfolio, what we anticipate are yields that are higher than what we have experienced. And I think that while -- when we ended this investment, we clearly expected its fees to be probably 25% to 30% higher than what we had experienced to date and we anticipate those speeds going up because of the low rate environment. Although we don't anticipate the speeds going into any kind of hyper movement that you would think in a sustainable 40 or 50 CPR speeds.

We think at that this portfolio will probably transition from a very low CPR of 10 which we experienced in the third quarter to probably the midteens to mid to high teens on a portfolio average as we go into the fourth quarter into the new year. And you may experience some peaks but I don't think you'll see some sustained peaks across the portfolio.

They have done a good job of identifying collateral that has criteria that we think will give us an outperformance from a prepayment standpoint.

Great, and the returns have just been terrific. So I guess what you are saying is there -- you still expect healthy returns on that portfolio.

Yes, clearly when you get into an interest-only security, your risk is centered around prepayments because you are buying a strip of cash flows in the future period. So we are very sensitive to the prepayments qualities and collateral backing those securities and as we look these various programs that come out, we think outside of an outright if you have a mortgage you can refinance, we are in very good shape here.

We think that given the dynamics of some of the collateral, we are very -- many of the collateral, much of the collateral is very seasoned collateral, so we think that we don't have a lot of risk in that collateral.

Got you. Well, it has been a terrific investment for you guys. Moving on to the non-Agency RMBS, I know it's a small piece but the yield went up there. The accrual yield went up on that. Was that just due to higher prepayment or better credit expectations?

You know what it is? We have two things. One, higher prepayments. We have one bond that is a structured bond, the largest piece of that security, so it's a very small dollar amount in total. But the majority of those dollars is in one bond and that is a structured transaction backed by 6.5% Citi prime mortgages.

So to the extent that that thing pays above 20%, you get a nice kick in prepayment. So that bond is paying down fairly rapidly and we own it at a discount, so that generates some additional return there.

And just from a law standpoint, we really -- the securities that we have on board they are de minimis losses on those securities. They were AAA-rated deals that we put on the books back in '05, so there's not significant losses on those. The majority of that portfolio should pay down through just normal course of business hopefully through the end of the year and into the first quarter.

Some other REITs have been active in that space with the selloff in the -- so (inaudible) I know there's some dealer inventory that could come on the market. Would you be looking out on that if opportunities were there?

No, we are clearly going back and looking at that sector because we think some of the pricing has come off from 5 to 10 points especially in some of the marginal prime securitizations that are Alt-A/prime. So we think there could be some opportunities there but it would be a combination of where we feel comfortable putting a more term type of leverage on that trade if we can get a securitized transactions done or some kind of longer-term financing where we are not really exposed to short-term financing in that trade.

Got you. We will look for more details of that. Then just last question on the commercial end, the River Bank, you spoke about the Freddie programming. What is -- could you update us on the origination efforts? I know you are looking to do some mezz lending and so forth.

Yes, absolutely. We targeted -- we -- our first couple of investments that we did, one was in the Freddie Mac deal and we did two other mezz loans. We have looked to do mezz loans in the third quarter. The conduit market tightened up substantially or shut down, so a lot of the mezz that we were looking at that we thought we possibly would book into the third quarter got postponed if not delayed permanently.

But we have this other channel of multi-family credit that we have a great pipeline that we see coming forward to us that we think is going to deliver some nice results that ultimately will lead to some kind of structured transaction that we think will be very accretive to the shareholders over the next three to four months.

Great. We will look for that. Thanks, Steve. Appreciate it.

(Operator Instructions). I am showing no questions at this time.

All right, operator. Thank you very much for being on the call. We look forward to talking about our fourth quarter and our plans for 2012 on our next call and we appreciate you following the company. Thank you.

Ladies and gentlemen, this does conclude your conference. You may all disconnect and have a wonderful day.