New York Mortgage Trust Inc (NYMT) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to New York Mortgage Trust second quarter 2012 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 Wednesday, August 8, 2012.

A press release with New York Mortgage Trust's second quarter 2012 results was released yesterday. 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 the 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. Good morning, everyone, and thank you for being on the call. Fred Starker, our CFO, is also present will be available for questions at the end of this call.

The Company released after the market closed yesterday's its press release. Included in the press release were several tables that I will be referring to during the call.

For the quarter, the Company earned $5.1 million or $0.34 per common share for the quarter ended June 30, 2012, as compared to $4.2 million or $0.44 per common share for the quarter ended June 30, 2011. We adjusted net income per common share of $0.18 after excluding $200,000 of net unrealized gains related to our agency IO investment strategy and $2.2 million of net unrealized gains related to the fair value of adjustment for the Company's multi-family loans and debts held in securitization trusts.

Net interest income for the three months ended June 30, 2012 was $5.8 million, up approximately $500,000 from the same period in the previous year, but down approximately $400,000 from the previous quarter. If after giving effect to a fully funded CMBS portfolio for the entire second quarter, our net margin would've been approximately $1 million higher. The Company had net unrealized gains of approximately $2.2 million related to our CMBS portfolio as the market continues to improve.

Core expenses remained relatively flat with changes in expenses directly related to management fees. Previous periods had a large realized gain that resulted in increased management fees payout during the quarter ended June 30, 2011.

The Company had a weighted average portfolio margin of 595 basis points for the second quarter of 2012, a decrease of 63 basis points from the first quarter of 2012. The margin decrease was due to a 21-basis-point decline in asset yields, primarily related to our agency ARM and IO portfolio, and an increase of approximately 32 basis points in liabilities cost. The majority of the increase in liabilities cost is related to the permanent financing from our resecuritization that was completed in May of 2012.

The Company ended the quarter with a book value of $6.51 per share as compared to $6.49 per common share as of March 31, 2012. Included in our press release is a detailed analysis of book value transition from March 31 to June 30, 2012. The Company declared and paid a second-quarter dividend of $0.27 per common share.

We purchased approximately $59 million in multi-family CMBS securities, comprised of two different Freddie Mac transactions. The purchase included the first loss securities as well as certain IO securities. The purchases were completed at the end of May and at the end of June of 2012.

We completed our first multi-family CMBS resecuritization in May, resulting in $26 million of net proceeds of a permanent financing of approximately $47 million of securities deposited into a trust, and those were issued at a bond equivalent yield of 9.5%. This permanent financing creates a net equity position of approximately $21 million with a return of approximately 18% without margin or mark-to-market risks on the financing that -- otherwise those securities.

We received net proceeds of approximately $20 million from a public offering in May of 2012 and $33 million in July of 2012. Postseason May were used primarily to purchase multi-family CMBS securities and a majority of the proceeds in July have been invested in agency MBS securities.

Included in our press release is a portfolio allocation table that displays our assets and liabilities by investment title. For -- both our agency ARM and agency IO portfolios remained relatively flat in terms of portfolio size during the quarter. Our agency ARM portfolios' CPR speeds increased from an average rate of 18 CPR to approximately 24% CPR during the quarter, while our IO portfolio speeds remained flat at 19%. We did experience increased amortization costs as a composition prepayments were not evenly distributed across the portfolio -- the IO portfolio -- with higher premium inverse IOs experiencing faster prepays than the lower premium IOs. We continue to believe long-term speeds will remain range-bound and ultimately trim back to the mid-teens. However, with record low mortgage rates will continue to weigh both on CPRs as well as valuations in the marketplace over the near-term.

As previously mentioned, we funded approximately $59 million in additional Freddie Mac CMBS securities, bringing our total investment to approximately $108 million. We have approximately $86 million in five first loss securities as well as approximately $22 million in IO securities. These investments are partially funded with our first resecuritization that resulted in $26 million in permanent financing or an advanced rate of 55% versus the value of securities placed into the trust. In addition, the remainder is funded with short-term financing and general corporate working capital.

The Company will continue to pursue long-term alternative funding for our current CMBS positions, as well as future purchases. But we own $108 million in CMBS securities, our balance sheet and income statement reflect far greater activity. We own 100% of three first loss securities, which, due to accounting regulations require us to consolidate the entire trust activities, resulting in significant asset, liability, interest revenue and interest expenses being recorded in our financial statements. However, the net effect of these consolidation requirements reflect the outright ownership of the securities that we own of $108 million.

There is a footnote explanation for the portfolio allocation table on our press release as well as a lengthy discussion on our Q that fully describes the impact on our financial statements for these consolidations.

We own approximately $196 million of residential mortgage loans held in securitization trusts financed at approximately $191 million of collaterallized debt. These loans had an average yield of 2.87% for the second quarter with a corresponding financing cost of 63 basis points or a NAT spread of 224 basis points.

The Company added approximately $59,000 during the quarter to our loan loss reserve, bringing the total of $2.6 million or 132 basis points of the outstanding loans or approximately 15% of the loans in greater than 60 days delinquent category. The portfolio continues to perform well as the delinquency to the period was abated or at least slowed down. In addition, it appears that the property valuations in the areas of our exposure have stabilized, and in some cases, started to show signs of improvement, reducing some of the pressure on the reserving requirements.

Our CLO securities continued to contribute nicely to our net interest margin, delivering interest yields on amortized cost basis of over 40%. We continue to believe we have upside potential on valuations as the overall market improves and the overall performance of the collateral that's been created has outperformed its peers.

The Company has approximately $1.5 million remaining in our distressed residential loan portfolio, down from $5.1 million at the end of the first quarter. As we approach the action of this transaction, we continue to monitor other opportunities in distressed loan markets and anticipate committing additional funds in the future.

As the Company heads into the third quarter and the second half of the year, it has this to look back on. We've raised approximately $50 million in additional capital, substantially reducing the fixed costs over on a per-share basis while deploying these proceeds in asset classes that we believe will deliver more stable long-term results over a wider interest rate environment. And we completed our first REIT securitization of our CMBS securities, resulting in $26 million in no-risk permanent financing.

We will continue to focus on residential and multi-family credit investment opportunities that rely more on credit decisions and less on market leverage that we believe will deliver mid-to high-teen risk-adjusted returns over the long-term.

Our 10-Q will be filed on or about August 8 with the SEC and will be available on our website thereafter. Fred and I now would like to take any questions you may have. Operator, if you would please open up for questions, thank you.

(Operator instructions) Chris Donat, Sandler O'Neill.

Just a couple of clarification things to make sure I'm looking at things the right way. On the table of your portfolio asset yields, when I see the CMBS coupon at 8 basis points, is that reflecting the timing of the funding of the CMBS?

No, when you look at our securities in the CMBS, we have two components. We have an IO component and the first loss pieces are principle-only component. So the coupon is calculated over the current par value, so obviously the IOs have a very large current par value relative to the cash they generate. So we end up buying the IO strips that we buy related to our first loss pieces are typically between 10 basis points and 17 basis points of strip, so very low coupon in nature. But relative to the size of the investment, it generates about a 4.5% to 5% coupon on the overall investment. So that's why you see a very low coupon relative to $108 million carrying value. But really, the yield is a better indication of the overall return of that investment.

Right, okay, because as I look back to your first quarter, the similar table there, and CMBS was only $21 million. So, okay.

Exactly. So -- and because during the first quarter one of the investments that we own had no IO cash flow. It was just a first loss piece, so the majority of the investment was in POs, but the relationship of the IO relative to the investment was a little bit higher there. The purchases that we did in the second quarter had a much larger dollar price in the PO than the IO.

Okay, okay.

But the IO itself -- the IO strips that we invested in the second quarter were 10 basis points both, so a little bit lower cash flow.

Right, okay. And then just thinking about your adjusted portfolio net interest margin of 595 basis points, is that a reasonable run rate in the environment?

I think if you look at the portfolio and you look at the size of our Company and you think about that we added $59 million of that, approximately $35 million was done at the end of June. And those assets that were put on in June probably had an average return of 14%. The portfolio margin is going to -- should trend upward. There was some pressure from the portfolio on prepayments on IOs, but as the CMBS portfolio and other parts of the Company start to represent a larger portion of the overall interest-earning assets, that net margin should stabilize at a level that's at this level or slightly higher going forward.

Okay, thanks very much.

Boris Pialloux, National Securities.

Good morning, Steven, thanks for taking my questions. I have two questions. One is more modeling question, is -- can you give more color on the agency RMBS you are investing in? You are investing the proceeds of your July offering, albeit at a fixed rate, what type of leverage? Are you using swaps if you already have an IO portfolio? And second is, can you talk more about the delay in the CMBS deal that may have impacted your -- just the net income in Q2?

Sure, yes. So when we go out -- so the first question, agency RMBS. We've invested in longer-term ARM securities to date, 7.1s and 10.1s, the majority of the assets that we have added. We do utilize interest rate swaps, to a lesser extent than we typically would have done, taking into consideration our IO portfolio. We have also utilized some swaptions, more so to reduce the duration sensitivity of the portfolio on a longer-term basis, not as much as hedging short-term liability movements.

As it relates -- and as we continue to look at investment opportunities where we will look at the 7- to 10-year ARM sector as well as probably the 20-year fixed-rate sector.

As it relates to the CMBS purchases, as we go out and source these credit investments, they typically have a 60- to 90-day window. One of the investments we bought in the second quarter was a secondary purchase, a secondary purchase we anticipated closing towards the front -- the early part of June. However, it was delayed back to the latter part of June for circumstances outside of our control. Those assets re something that require a lot of time and due diligence, so what we do and what we typically will do going forward as we raise capital, we would invest in agency securities that allow us to deploy the capital more quickly and then sell some of those securities as we see the CMBS come into play. We did not do that in the second quarter because we felt like the securities were going to settle towards the beginning of June and didn't want to put a trade on and take it off immediately five days later. But that trade ended up getting delayed a couple weeks, which should put a little bit of pressure on the earnings momentum (multiple speakers). But going forward, we are very comfortable with the portfolio.

So this ability, the difference in terms of adjusted net income between Q1 and Q2 was mostly a cash drag; am I correct -- due to a delay in funding?

Yes.

Cash drag because you had raised money in April and you invested at the end of June; am I correct?

That's right. You had a slight decrease in net margins from the IO portfolio, but the majority -- really -- so the slight decrease was probably -- would put the portfolio at flat to the previous quarter. But if you included the fully funding of the portfolio, the net margin would've been substantially higher.

And also the last question is, in order to understand your new agency or MBS portfolio, can we -- if we you look at all of the yield you get on your RMBS, it's about 1.5%. Would that be the type of yield you would get in your new investments?

So the ARM portfolio -- so our ARM portfolio is relatively small. So, when you look at the number of securities that we own, our CPR speeds went from 18 to 24. And really, when you look across the portfolio, there were two ARM securities that traded very fast out of 10. So, as we build out the portfolio, that variability will be reduced just because of pure numbers. But I would anticipate the net margin as you go out -- as many people have talked about, depending on which ARM sector, where you are investing and how you are hedging it is between 150 and 200 basis points. Clearly, as you -- if you throw in a wider margin you are dealing with either longer-term assets or assets that you have a different view on how to hedge them. But I would say the opportunities between 150 and 200 basis points.

And you are using repos?

Yes, we are using repos, absolutely.

Well, thank you very much, I really appreciate it.

David Walrod, Ladenburg Thalmann.

You kind of touched on it a little bit, but the last capital raise that you talked about how you deployed it all into agencies. Is that a temporary thing as you are waiting for more CMBS deals to present themselves, or is this more permanent, this is how we want to position the portfolio?

No, we will -- so, the combination, that answer, would be, one, we are building out the agency ARM portfolio and agency MBS portfolio in general. But we will use that portfolio as a short-term investment vehicle until we bring on additional CMBS securities. We are currently in the marketplace reviewing a transaction that if we go through the final review, we would anticipate that closing towards the end of the third quarter, and we are actively pursuing other opportunities in CMBS.

Unfortunately, the way those investments are sourced, there is a 60- to 90-day window from beginning to end, and that's when some of the (inaudible) comes about. But we think, when we look at that, while it may put near-term pressure on a quarter, we think that long-term, those yields, which we typically have invested in the 10-year program as a Freddie Mac K-Series, which alone don't have any prepayment ability to them, so we believe that that return is a nice offset to some of the other prepayment-sensitive securities that we invest in, in portfolios such as the IO portfolio. So we think that's going to be a nice, stabilizing effect to the net interest margin as we go into the future. But we would anticipate deploying funds in the agency RMBS strategy, and we would take those funds and either put them into a CMBS strategy, and we are also pursuing a distressed loan strategy along with a structured financing transaction that we think can generate some very attractive returns that we hope to close sometime in the third quarter, if possible.

Okay, thanks for that. The other question -- you talked before about increased compensation in the CMBS market, more folks bidding on these K-Series. Can you address that in regards to the transactions you are looking at today?

Yes, the one transaction that we're looking to close in the third quarter is something that we've -- we are in the process of reviewing and closing without competition. So we've already gone through the preliminary analysis, but until we go through and do a more detailed analysis, it wouldn't be a formal commitment and we are in the process of doing that. As we go out and bid on these transactions, a year ago you probably had 2 to 6 counterparties bidding on these transactions, and that number has increased. The difficulty of bidding on these transactions is these investments are typically backed by 70 to 100 individual loans that we go out and do a due diligence review on the majority of them. And in many -- and for the net investment of $20 million to $25 million, that is a lot of work for many investors to commit the capital to go after that transaction. So we are pursuing other avenues of possible investments that will be away from the Freddie Mac K-Series program, although it will have the same kind of credit characteristics of multi-family to supplement that.

Okay, thanks a lot.

(Operator instructions) Calvin Hotrum, Sterne Agee.

Can you give a little more color on what you guys are looking at as far as distressed REO? And I guess a little more specifically, if you guys are taking a look at the GSE RAO to rental program?

Actually, when we talk about distressed loans we're looking at in loan form, not property form, to date we have not chosen to participate in the REO form. We think that we have better opportunities in the distressed loan format, and we probably will not in the short-term or the near-term see any reason to pursue the distressed REO avenue.

Okay, thanks for that color.

I am showing no further questions in queue. I'd like to turn the conference back over to management for any closing remarks.

Thank you very much for being on the call. The Company is very happy with the portfolio it has in place today. We anticipate a nice growth rate in the portfolio. We think there's excellent opportunities out there in the credit space, and the CMBS and residential, we'll continue to source those out. We will continue to look at permanent financing solutions that enhance our yields without putting pressure on the balance sheet and look forward to talking about these results as we get to the third quarter. Thank you very much for your interest and have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.