New York Mortgage Trust Inc (NYMT) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust fourth-quarter 2011 results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator instructions)

This conference is being recorded on Friday, March 9, 2012. A press release with New York Mortgage fourth-quarter 2011 results was released this morning. The press release is available on the Company's website at www.nymtrust.com. Additionally, we are hosting a live webcast of today's call, which you can access in the events and presentations section of 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 this morning'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 the call. I'd like to -- we distributed a press release this morning at 7.30 AM and I'd like to go through that today. I start with our fourth-quarter and full-year results.

The Company had full-year earnings of $4.8 million, or $0.46 per common share for the quarter -- for the year-ended and the Company had a $1.9 million loss, or $0.16 per share for the quarter-ended December 31, 2011. Excluding the one-time fee for the termination of the Harvest Capital management contract of $2.2 million and unrealized losses on our investment securities and related hedges of approximately $9.7 million, the Company's core earnings for the full year would have been $1.58 per share. The unrealized losses on the investment securities and related hedges were attributable to our Agency IO investments, which are accounted for through the statement of operations and not through OCI on the balance sheet as the majority of our other portfolio investments.

Net income for the year was $19.4 million, up from $10.3 million the previous year, and while -- net interest income for the three-months-ended December 31, 2011 was $5.4 million, as compared to $2 million for the same period in the previous year. The Company had a weighted average net portfolio interest margin of 620-basis points for the fourth quarter of 2011, an increase of 267-basis points from the fourth quarter of 2010. This net portfolio margin benefited by two factors, the addition of the interest-only portfolio during the year of 2010 and the build out of our commercial portfolio.

The Company ended the quarter with a book value of $6.02 per common share as compared to $7.27 per common share December 31, 2010. Included in our press release was a detailed analysis of the book transition for the quarter-ended and year-ended December 31st, which I will speak to later in this call. The Company declared a regular fourth-quarter dividend of $0.25 per common share, as well as a $0.10 special dividend. Both were paid on January 25th of this year.

Now I'd like to go through some events that not only impacted our third quarter but impact -- but continue to impact our results in the fourth quarter. After reaching historic lows in the third quarter, the 10-year treasury continued to trade in a range around 2% during the fourth quarter. This continued low rate environment put pressure on our IO strategy, as well of other RMBS products, as fears of increased prepayment risks did not abate.

Our IO portfolio did experience an increase in fees over the last four month, going from the low-to mid-teens in the third quarter and ending in September at approximately 19 CPR and averaging approximately 21 CPR during the fourth quarter of 2012 and continues to pay approximately 20% CPR through January and February of this month. Today, however, the market fears of runaway prepayment fees have not yet materialized in our portfolio.

In November the US government announced final details of the HARP II program. This program is designed to assist borrowers who are current with mortgage payments but are unable to refinance due to property market valuations. HARP II targets homeowners who do not participate in the original version of HARP and whose mortgages were originated prior to March 31, 2009.

Included in our press release and will be available in our 10-K is a table describing our exposure by coupon and by asset class. It is our opinion that the overall exposure to our portfolio will not be significant. We do, however, expect to see increase in fees over the coming three-to-four months as the HARP program does get fully implemented and those borrowers will take advantage of those transactions.

With the continued uncertainty in the global markets, especially in Europe, we saw pricing pressure continue in several of our asset classes in the fourth quarter, especially in the CLO's and CMBS securities. This price decline was exacerbated as we got to the end of the year, as we saw prices drop in December for the CLO's and CMBS.

As of February 29th mark-to-market prices that we have in place we've seen a partial recovery in pricing in these asset classes, which would result in approximately a 33% increase in book value as compared to year end. We continue to expect those prices to improve, as the fundamentals of those asset classes are sound and will continue to deliver solid results to the Company.

Included also in our press release is a portfolio allocation table, and as we look at that allocation table we see that the first set of assets is our Agency ARMs. The Agency ARMs continued to deliver a mid-teens, fully-levered return, as the prepayment fees in that portfolio have been fairly constant throughout the year of 2011 and continue to be so in 2012 at approximately 20 CPR. The average reset on those portfolios is approximate 14 months. This portfolio is hedged with a small amount of interest swaps, but the majority of these loans will have a reset period of less than six months over the coming year 2012.

The next asset class we have is our Agency IO portfolio, which performed well from a CPR experience rate and net margin contribution. However, over the last month that I spoke about in the third quarter and again today has taken significant unrealized pricing pressure in the asset class.

In addition, the increase to market volatility and an overall low-rate environment has increased the cost of hedging over the same period, resulting in an impact to our earnings. As the various government programs and world crises play out we anticipate that these hedging costs will normalize and go back to longer-term trends, resulting in benefits to the bottom line of the P&L.

We ended the year with an unrealized loss of approximately $8.5 million in the portfolio related to the IO program. We believe that these prices are overexaggerated because of the HARP II program and fear of increased fees across the marketplace. However, we think over time this portfolio will outperform expectation and we'll start to realize some pricing recovering in those assets.

Our Multi-Family CMBS strategy, which was implemented in the second quarter, began to pick up steam in the thir -- in the fourth, with over $36 million committed, $16 million of which was funded in the fourth quarter and the remaining $20 million was funded in January and February of 2012. These investments are comprised of first loss securities from the Freddie Mac multi-family securitized program, or K series.

These securitizations, typically $1 billion to $1.2 billion in size and backed by 10-year loans of multi-family properties, are underwritten to Freddie Mac standards. Our credit piece or investment represents approximately the bottom 7.5% of the transaction deal and is purchased at a discount to par.

RiverBanc, our manager, conducts a detailed review of each loan that's in the securitization prior to the purchase of the security. We would look forward to -- we look to the future of these assets and gathering significant size, and as we accumulate size we will look to put in place permanent financing that will take our unlevered 13% to 15% returns into the high teens or low 20s. We will continue to invest in this asset class throughout 2012, as we think the opportunities are excellent.

We own approximately $207 million of loans held in securitization trust. These loans have an average coupon of 2.71% and an average yield of 2.66% for the fourth quarter. These loans are permanently financed, with approximately $200 million collateralized debt with a cost of debt of 67-basis points, or a net margin of 199-basis points. The Company's investment on the on-balance-sheet securitization is approximately $7 million and the actual cash return on this investment is well over 20%.

As part of the securitization the Company's added approximately $200,000 during the fourth quarter to its loan loss reserve, bring our total reserves of $3.3 million, or 159 basis points of the outstanding loans. The majority the increase in our reserve is related to continued deterioration in housing values, as our starting point for reserve analysis begins with a broker price opinion, or BPO, of the properties.

Included in the other category is $8.7 million remaining in our distressed residential loan portfolio. Approximately 25% of that portfolio has been sold this year with the remaining anticipated to be sold in the coming months. The life to date return on this portfolio is expected to be in the high teens and the Company will reinvest these proceeds into other residential and commercial credit opportunities.

Also included in the other categories are CLO securities, which we continue on approximately $35.5 million in one securitization. These securities, as I mentioned previously, came under pricing pressure in the second half of the year and continued to go down in the fourth quarter, even though both securities that we own were operated by Moody' s and S&P during the year. As I said earlier, we've seen a pricing recovery in 2012 in the asset class, and we expect to see further price improvement, as the securities collateral is well diversified, performing well and will continue to deliver strong results to the Company.

I would like to now talk about the book value. As you can see in the press release, we did a detailed -- we listed a detailed chart that took the book value from the beginning of the year -- or the beginning of the quarter through the end of the year. Several components that impacted the book value were what we believe are temporary, including mark-to-markets on our CLO and CMBS, which I mentioned before has recovered nicely as of February 29th, adding approximately $0.33 per book value per share.

In addition, I had mentioned before our IO strategy includes $8.5 million in unrealized losses related to the securities themselves. We believe that these securities will outperform the market over time and will continue to deliver back strength in the market, not only through earnings but also through book value appreciation and price recovery.

One of the contributions for decrease in book value was the $8.5 million in unrealized loss went through our earnings statement, which resulted in reduced GAAP financials. However, the redistributable earnings was high, which was approximately $1.05 per share in earnings for the shareholders. So, we believe that these portfolio and our overall portfolio will continue to deliver strong cash redistributable earnings while we deal with the various market volatility in a mark-to-market aspect.

Finally, we announced the termination of the Harvest Capital management agreement. Harvest, which is wholly owned by JMP Securities, was instrumental in recapitalizing the Company in 2008, and in assisting in certain assets that have contributed largely to the Company's recovery and success that we've experienced to date. Going forward, as we focus on residential and commercial assets and less on alternative assets, we felt it was time to part ways with this contract.

However, we will continue to maintain a working relationship with JMP and we look forward to co-investing in opportunities as set forth as they bring them to us in the future. The Company currently has a pipeline of commercial assets, as well as residential opportunities, that we believe will continue to build out a portfolio that will deliver stable dividend returns over time. Our 10-K will be filed on or about March 12th with the SEC and will be available on our website thereafter.

Jim, Fred and I will now like to take any questions you may have. Operator, if you could please take the first question.

(Operator Instructions)

Our first question comes from Boris Pialloux of National Securities, please go ahead.

Hi, thanks for taking my question. Actually, it's more regarding your K series. I see the yield is around 11% and I was trying to figure out if the run -- it would be the run rate for 2012? And second is regarding also the K series, what do you -- could you [give] a brief outlook of what is going on with this series, because they were created in 2009 and they're trying to figure out if it's a rising market and what -- how do you -- what type of outlook do you have for it?

Sure. The 11% yield -- first of all, let me -- I'll answer your first question, the 11% yield. Keep in mind the majority of these assets funded toward the latter part of the fourth quarter and the 11% yield was because of there were some minor adjustments to one of the amortizations of one of the series as it came out of the par -- the first security that we purchased, the K 13, was done in a partnership. We took it out of the partnership and delivered it in a securities form to allow us an ability to ultimately fund it long term. When we took out of the partnership it resulted in a couple of adjustments, but the long-term yield in that portfolio and those securities that we invest in is between 13% and 15%.

The K series, as you mentioned, was developed and started in 2009. RiverBanc Management was part of the operators that helped Freddie Mac put those programs in place. We've participated in, now, three deals and we have a fourth deal coming online. We think that the opportunities -- the multifamily sector is probably the best performing residential sector in the marketplace today. We continue to see that. We feel that will continue to be strong as the demographics of the population, where you'll see baby boomers selling their primary residence and moving into multi-family residences as part of the solution for financial security. We think that's going to play important to that investment class.

One of the reasons why we got involved with this investment class was because of RiverBanc's ground-floor experience, as well as their experience over time with the multi-family class. So when we take -- we are taking the first loss piece in these securitizations, which are approximately $1.2 million in size, 90 to 100 loans. RiverBanc will spend up to three to four weeks due diligenting each one of these loans, visiting approximately 50% of the properties, and all the larger properties are getting a full evaluation as if they were making a one-on-one loan. These loans are also all going through the Freddie Mac underwriting program, and as we are the first loss provider we do control the workout of those securities that gives us some flexibility in dealing with distress properties. So when we book these investments they're actually purchased at a higher yield, but we book these investments net of a credit reserve and over time we'll look at that reserve versus our amortization and make adjustments.

These are all 10-year loans, so these loans -- the nice things about this investment is there's no prepayment risk on these loans. They have risk -- they have interest defeasance and yield maintenance, so these are 10-year loans and they will remain outstanding. So over time -- we purchased these at a deep discount on day one and over time they will increase in value through accretion of the discount. So it gives us some stability in yield return as part of our portfolio from a credit standpoint, which helps offset some of the volatility in our IO portfolio, which is cash heavy, where the PO or the credit risk portfolio is less cash driven, it's more return driven.

Okay, thank you.

Our next question comes from the line of Matthew Howlett of Macquarie, please go ahead.

Thanks for taking my question. Just to drill down on the effect that the yield on the Agency IO, that's -- the accrual, that's an effective yield, so you're effectively using a lifetime prepayment assumption so you took that up in the quarter and you're assuming they're going to say it's sort of -- is it sort of 20% rate, or what can you tell us about that?

Yes, the IO yield -- so when you look at the IO yield it's going to reflect not only the current market environment but the anticipated future yields. Those fees did increase in the fourth quarter; we do think that those fees -- we do think those fees -- through January and February this year those fees have remained fairly constant, around 20%. We would anticipate them going up slightly. What we don't -- what you do see -- what you don't see in this net margin of 18% is the hedging costs because the majority of the hedging are done futures and they're below the net margin line. So what we do anticipate is the yield coming down slightly, but we think over time we're going to recapture more of the hedging costs that will ultimately drive the bottom-line earnings. And we'd like to see a reduction in the mark-to-market exposure. We've seen some stabilization in IO pricing, and I think that will perform better as we start to get more HAMP and HARP-type CPRs prints over the next three to four months.

Got you, great. It's still a terrific deal for you guys and, given the swings in pricing, could it be -- in terms of capital allocation, I know you're working on the CMBS and you do still have the IO trade, as well, could that component -- could you dedicate more capital to it, or do you think you just want to dedicate more on the CMBS at this point?

No. I think at this point -- look, when we entered the trade we anticipated [speeds] increasing. We anticipated speeds that go into the mid to low 20s, that's exactly what they've done. What we didn't anticipate is these additional programs and overall rate environment putting this pricing pressure on the securities. I think given the volatility in earnings, as we go forward we'll probably allocate more capital to the commercial strategy, and as well as other residential strategy. We will allocate capital for the IO strategy, but we've got to get -- we have to get more comfortable with the IO vol -- the volatility earnings and where we think these programs are going to fall out or any future programs.

Got you, great. And then just when I look at -- there's [an awful lot] of noise in the quarter and you guys did a good job explaining that, but you're still in the high-20s on a core adjusted basis, you weren't really fully deployed in the fourth quarter, you haven't put the financing on the CMBS that you can use, you mentioned. How do we (inaudible) with the core earnings power? It sounds like it's still -- after the noise still really strong and looks like it has a lot of room to really move up when you guys get things in place this year. Am I thinking about it the right way in terms of the core earnings power?

Yes. We think that the -- the multi-family product we're going to be able to get some permanent financing in place or long-term financing that's going to add 200 to 300 basis points to the net invested assets, at least. We think that there's some opportunities out there that will continue to contribute the high-teens returns on a risk-adjusted basis. And if we get the Agency IO portfolio to come back to a long-term run rate, which if you remember in the second quarter we had a tremendous return of about 28%, the overall return for the year was approximate 12% on invested capital, including the unrealized loss hits that we took, if you look at the cash return on that portfolio it was outstanding and we think that will continue to contribute.

Great.

But I think the right way to look at a run rate is the Agency portfolio -- like everybody else has out there, a mid-teens return -- the Agency IO portfolio, while it's going to be more volatile, should outperform that portfolio, the Agency portfolio. The CMBS return is 13% to 15% on an unlevered basis and on a levered basis it's going to go up to 17% to 19%. The securitized portfolio, even though it's a smaller invested amount of capital, 7% still is generating in excess of 20% returns even after taking reserve adjustments against it. The CLOs that we have $35 million on has had some significant price recovery. We did sell $10 million of the CLO investment in 2010 at dollar prices of around $80. If we get price recoveries back into the $80s I think we would look to sell or at least consider selling some additional CLO securities. Other than that, we like what we see in front of us, and we have a nice ramp of deployment queued up for the first four to five months of the year.

Yes, I just think that the diversification is really interesting in the model that you established and I don't think -- it's just something that I think you guys have done a good job with and certainly highlighted. So, thanks for answering the questions, Steve.

Steve, can you hear me?

Yes.

Hey, Matt, I just wanted to add one thing. At the end of the fourth quarter, when we talked with the external manager of the IO portfolio, I think what's important to note is, in the mark-to-market, in speaking with them, who -- they have a decade of managing a portfolio of IOs -- their view was that what was being discounted in the marketplace in terms of forward prepayments was near 40% CPR, and as Steve said, while we think they may go up a bit, they're going up a bit from 20%. So we've -- their expectation is that, even if they go up some, the initial reaction to market prices from HAMP and also the significant rally that we saw in rates was significantly overestimating forward prepayments relative to what we're now experiencing. So, their view is that we should see good price performance and price recovery as we go through and see the actual numbers come through the HAMP process.

And then I think that the second comment I wanted to make relative to your question was -- and I think Steve would concur with this -- is through January and February there's -- and March, obviously, we don't know yet, but through January and February there's nothing that we're seeing today that would lead us to conclude that the run rate for the first quarter is significantly different or even modestly different than what our -- on a cash earnings basis, core earnings basis to what our stated dividend is. So we did get a little bit of an impact on the fourth quarter mark-to-market on the market reaction, but the core earnings of the Company looks to be very much in line with what our expectations were in establishing our core dividend rate.

Great, Jim. Thanks, I really appreciate it.

Our next question comes from Chris York of Roth Capital, please go ahead.

Good morning, guys.

Good morning, Chris.

Most of my questions have been answered, but wanted to expand on a previous question. What type of securities are you looking to deploy principal and prepayments going forward?

I'm sorry, Chris, what kind of investments were you looking at is your question?

Yes. I know you're going to go with CMBS, are you looking still at K series?

Yes, we would continue to look at the K series. We have -- we're currently -- there's one under review right now that we're looking to close some time in the second quarter. It takes about six weeks to do the underwriting of the loans and we're in that process today. We would continue to look at other commercial assets. We may look to lend direct on a mezzanine basis. Those loans would be smaller in size, $2 million to $5 million, and those loans would typically return 15% to 18% given that loan size.

We also are looking at other residential opportunities. We like the residential credit trade, we just can't get comfortable with the return to date. We continue to look at possible structured transactions that may give us the yields that we would like in buying distressed loans. We're working at possibly getting that in place. We would continue to look at doing some Agency ARM or Agency security lever trades, also.

Interesting. That's helpful, thanks. And then, looks like you had a provision here of 234, so what needs to happen, or what do you need to see to release a little bit of your reserve by '12 or '13?

Yes, what needs to happen? Our borrowers need to start paying us. But, of the 46 borrowers who were in some form of delinquency, the majority of which we have in a short-term modification plan, when we put these reserves in place one of the things we do as part of the reserve process is do broker price opinions, or BPOs, which is really just an assessment of the overall real estate market in the area. So, a lot of that drift in our reserves, especially over 2011, was really mostly related to real estate values in general, and not specific borrower experience. There is occasion when we have specific borrower experience. Many of our loans are in judicial states, which means that the time horizon from the beginning of foreclosure to the end of foreclosure is two to three years. That adds to cost of getting the borrower out of the house.

But we would anticipate -- look, our borrower net securitizations mortgage rate is less than 3%. These borrowers, they come under distress, many of which are job related. We try to work with them to get them through those jobs until they get back to full employment and get them back into paying full [level] mortgage rates. Because their mortgage payments are so low today with the rates it's really getting through this economic crisis. And as the economy improves, that's where we think you're going to start to see some recapture of the reserves because I think you'll get a stabilization of the real estate market and you'll get our borrowers back to work. And if you think -- the majority of the borrowers in a securitization were 2005 -- they were all 2005 originations, mostly prime borrowers, 740 FICOs, 68 LTV properties.

So generally that borrower was in good shape in 2005 and in many cases, they've done things away from our house that has impacted their economics that has put pressure on their cash flows. And it's working through those pressures to get back to current in our house exposure that will help us relieve the reserve back to earnings. On a cash flow basis -- that equity investment that we own, on a cash flow basis that equity's generating between $200,000 and $300,000 of cash a month on a [couple] million dollar investment, so it's a nice return.

Sure. And then, lastly here is, looks like Jim will stay on board or you had previously announced he'll stay on board until maybe later June. Any developments there?

Yes, we are in the process of interviewing candidates to replace Jim on the Board. Jim is -- Jim has -- will be remaining Chairman, unless he's removed before the Board meeting, with the day before the Board meeting he would step down as Chair. But we anticipate having somebody in place prior to that.

Perfect. That's it for me, thanks, guys.

Thanks, Chris.

(Operator Instructions)

I'm showing no further questions at this time, and I'd like to turn the conference back over to Mr. Steve Mumma for any closing remarks.

Thank you, operator, and thank you, everyone, for being on this call. We look forward to speaking to you in the future. We think we have great opportunities in front of the Company. We anticipate recoveries in prices that put some of the pressure on the Company's balance sheet and book value through the end of the quarter. We're very positive going into this quarter, and thank you for your -- thank you for following the Company.

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