New York Mortgage Trust Inc (NYMT) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust second-quarter 2014 results conference call. (Operator Instructions). This conference call is being recorded on Wednesday, August 6, 2014.

A press release New York Mortgage Trust's second-quarter 2014 results was released yesterday. The press release is available on the Company's website at www.NYMTrust.com. Additionally, we are holding a live webcast of today's call which can access in the events and presentation section of the Company's website.

At this time management would like 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 forward-looking statements are based on reasonable assumptions, it can give no assurance that 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 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. Today I have Kristine Nario, our newly appointed CFO, joining me. Prior to May of this year we had been outsourcing our accounting functions to RESIG. But given our growth and increasing accounting demands, we found it more economical to completely internalize our accounting department. We will continue to use RESIG in our tax services needs. Kristine and I will be available for questions at the end of this call.

The Company released its second-quarter results after the market closed yesterday, and included in the press release were several tables that we have been including historically that I will be referring to during this call. Our investment portfolio delivered another successful quarter, generating net income per share of $0.34. The Company's earnings during the quarter benefited significantly from continued price improvement for credit assets, specifically our multifamily CMBS, as it appears a greater number of investors have recognized the value of this asset class. In addition, the Company produced record quarterly net income of $30.3 million and performed in accordance with the design objectives we have established several years ago, which is to deliver stable distributions to our stockholders over diverse economic conditions.

We closed one accretive capital raise during the quarter, raising approximately $110 million, bringing total accretive capital raise for the year to $186 million. We continue to focus our investment strategies and credit-sensitive assets including distressed residential loans and the multifamily sector. More recently, the focus in our multifamily strategy has been towards direct investing as compared to Freddie Mac K-series credit securities as the pricing competition for these us securities has led to less attractive returns relative to other opportunities.

We are working with our external manager, RiverBanc, which we own 20%, to build out a focused strategic partner that will supply direct equity investments in the multifamily transactions, while NYMT would benefit by supplying the preferred and mezzanine financing for these similar transactions. Many of these properties end up with a senior Freddie Mac qualified loan which will ultimately be securitized into a Freddie Mac K transaction, which we have extant knowledge on these types of businesses.

NYMT benefits in two ways -- increased possibilities for preferred and mezzanine investing as well as increased valuations for RiverBanc, which is the external manager for the new platform that we are supporting. As I have discussed many times in the past, the importance for innovative financing solutions to fund our portfolio is critical component to our success, both in profitability and risk management, when investing in credit-sensitive assets.

One avenue we were pursuing was the membership in the FHLB. As you may know, certain of our competitors are currently members while several others are in the process of -- as well as other nonfinancial bank institutions -- of seeking membership. In June, as others were told that a temporary hold was placed on all new captive insurance membership applications to the FHLB for approximately 90 days. This hold was set to allow the FHFA time better to assess the prospective new members and their impact on the FHLB system and the overall banking system.

We ourselves were in the final stages of approval and are hopeful for a positive outcome after the FHFA completes the review, and we should have more information by the end of the third quarter. The FHLB membership would give us access to financing that is more dependable, greater flexibility in maturities and a partner that is focused solely on supporting its members, which has always been a conflict when borrowing directly from our current financial partners.

Asset gathering during the first six months continues to be difficult as competition for yield and capital allocated to credit-sensitive assets seems plentiful. While this has a positive side effect to our existing portfolio, the incremental additions become more challenging. We continue to be very diligent in investing our capital, focused on our core strategies that we believe will perform both in today's environment as well as the expected changing environment that is coming in the future.

Some of our second-quarter highlights -- we had net interest attributable to common stockholders of -- I'm sorry, net income attributable to common stockholders of $30.3 million or $0.34 as compared to $11.2 million or $0.19 per share for the quarter ended June 30, 2013. Our net interest income rose to $19.9 million for the quarter, an increase of $6 million over the quarter ended June 2013 and flat to the previous quarter of this year.

Portfolio net interest margin increased to 460 basis points as compared to 439 basis points the previous quarter, our fourth consecutive quarter of increased portfolio margins. We declared a second-quarter dividend of $0.27 per common share that was paid in July 25, our ninth consecutive quarter at $0.27 per share.

Book value per common share increased to $6.83 at June 30 from $6.48 per common share at March 31, 2014, or a 5.4% increase. Book value has increased $0.50 per share since December 31, 2013, or 7.9%.

Our economic return, which is the total of the change in book value were $0.50 cumulative for the year, and common stock declared for the year, which is $0.54, divided by the previous end-of-year book value, totaled approximately 16.4% through June 30, 2014.

Our net interest income was $19.9 million for the quarter and $39.7 million for the six months ended June 30, 2014, both records for the Company. Our net interest margin improved by 21 basis points as compared to the previous quarter with assets yield up 20 basis points and our liability costs down approximately 1 basis point.

As we continue to add to our credit assets as compared to our lower-margin agency portfolio, the asset yield should continue to rise on a relative basis. Asset yields on our agency portfolio, including our ARMs, fixed-rate securities, and IO portfolio, decreased slightly from the previous quarter, due mostly to an increase in CPRs. Overall, the MBS portfolio averaged 10.1% for the quarter, up from 8.8% the previous quarter.

July's speeds have averaged approximately 13.4%. A combination of seasonal factors as well as slightly lower mortgage rates can be attributable to this increase. We would expect our prepayment speeds to be range around between 10% and 15% for the remainder of the year for MBS portfolio.

Included in our press release is a table listing the CPRs by investment category for the last six quarters. Also included in the press release is a table that details average earning assets, portfolio asset yields, liability costs net of hedging and net interest margin. The Company continues to invest capital and reinvest MBS runoff into credit-sensitive assets, which we believe will deliver the best overall returns to our shareholders.

Total other income increased by $17.2 million and $24.2 million for the three and six-month periods ended June 30, 2014, as compared to the same periods in 2013. These were primarily driven by an increase in realized gains on our distressed mortgage portfolio of zero dollars in the second quarter and $8.1 million for the six-month period ending June 30, 2014. The realized gains are derived from loan refinancing, workouts, and resales, with the majority of the realized income on the assets from loan resales during the first quarter of 2014.

Income generated from distressed residential loan workouts and resales was lower in the second quarter of 2014 as compared to the prior quarters, primarily as the result of a lengthier due diligence closing process from the buyers. Because each buyer's due diligence requirements differ, income generation four workouts and resales of these types of loans remains challenging to predict and may be uneven from quarter to quarter.

An increase in net unrealized gains in our multifamily loans and debt held in securitization trusts of $11 million (sic - see Press Release, "$11 million") and $8.9 million for the three and six months ended June 30, respectively, as compared to the same periods in 2013 were driven by improved pricing in our multifamily CMBS investments.

An increase in realized gain on investment securities and related hedges of $9.8 million and $15 million, partially offset by increases in unrealized losses on these same categories of $3.3 million and $7.5 million for the three and six-month period ended June 30 contributed to the increase in other income.

Our agency IO portfolio performed better in the second quarter of [2013] as compared to 2013, due to a lower interest rate and volatility and relatively low prepayments. Also included in the earnings release is a table detailing our general and administrative and other expenses for your review. The increase in general and administrative and other expenses was largely attributable to an increase in management fees; expenses related to our distressed residential loans; and salary, benefits, and directors' compensation. The increase in base management and incentive fees was driven largely by an increase in assets under our external managers as well as improved asset performance by the external managers, generating solid returns to our current stockholders.

The increase in expenses related to distressed residential mortgage loans is due to the increase of investments in this asset class as compared to the same period in 2013. The distressed residential mortgage loan strategy typically has higher costs including servicing and resolution expenses related to the refinancing and resale of the loans. The increase in salaries and benefits and directors' compensation is directly attributable to the internalization of our Company accounting function, and as we would expect, professional decrease over time.

Included also in our press release is a capital allocation table that we typically provide, which distributes and discloses the equity allocated by investment [silo]. As you can see, we have continued to focus on investing in credit assets including multifamily loans and securities, residential distressed loans, and other possible residential opportunities. The Company's decreased leverage in our MBS portfolio was the result of utilizing domestic excess liquidity. Over time, as we complete our buildout of our credit assets, we would expect our agency portfolio leverage to approximate 7.5 times leverage, which is consistent historically with what we run.

Since the end of last year demand for credit assets has continued to exceed supply, favorably impacting our current portfolio of CMBS distressed loans and CLO investments. The side effect of this is to create a more challenging environment for new investments. We have and we will continue to maintain a disciplined approach to our new investing, as this has served us well over the course of the last several years by deploying capital to assets that satisfy our longer-term investment objectives.

Thank you for your continued support. Our second-quarter Q will be filed on or about August 8 with the SEC and will be available on our website. Operator, if you would please open the call for questions. Happy to answer any.

(Operator Instructions) Steve DeLaney from JMP Securities.

Very solid quarter, especially the significant gain in book value to $683 million. So congratulations on putting up another good quarter. It seems the focus, the thing we need to talk about strategically that is most clear and present would be the multifamily whole loan strategy and preferred equity. Looking at the allocation table, the $419 million of assets in your multifamily category -- are there any such multifamily whole loans, mezz loans, in that $419 million as we look at it today?

Yes, there is, Steve. There's approximately $40 million in loans in there. We are -- as you can imagine, it takes probably 12 to 16 weeks to close many of these loans. And we've had several loans, unfortunately, fall out in the pipeline that we thought we were going to close and that's for various types of factors. But that is a sector that we have increased. Kevin has brought on additional staff in RiverBanc and that is clearly a focus on what we are trying to add as an asset class as we go through the remainder of the year.

Any idea that -- I know it's early on. But is your goal for this for it to be fairly meaningful, something on the order of, say, a couple hundred million dollars? Or do you think that's too ambitious, to set that kind of goal (multiple speakers) --?

Look, it depends on your timing. We would like to think that we could add between $25 million and $50 million a quarter in loans. That's what we are prepared to finance from their pipeline. What we don't want to do is jump on a large loan just for the sake of grabbing one property and increasing the assets. So, I would say our typical investment asset is between $5 million and $15 million and has averaged less than -- it has averaged about $7 million to date.

As we have grown our capital base we have looked at a little bit larger investments. But I would say the general property that we are looking at probably has a total value of between $20 million and $30 million, where we are going to participate between 7% and 10% of that capital structure and the financing. And that would be your typical mezz or preferred loan that we would participate in.

We are very excited about this new venture that we are supporting where Kevin is going to have a new platform and he will provide direct equity into the transactions, which will give us some additional availability to invest in, we believe, as well as build out the valuation of the RiverBanc to manage it.

Steve, did I understand you to say that as you are talking to borrowers, these multifamily borrowers, that some of these, say, mezz loans that may be created -- did I understand you to say that there might be a first mortgage opportunity in that relationship as well that could then be sold into one of the GSE multifamily programs?

To date, Steve, I don't think we would be a first mortgage originator. What we would be doing is introducing that investor to a first mortgage originator, who are relationships with those originators as well as with Freddie Mac. So there's opportunities that we see, given the multitude of investments that we own across the K-Series. We have approximately [$10 billion] of multifamily properties under our K-Series securities. So we have an extensive knowledge of managers of those properties, and they are constantly in the market buying property. So we think there's some opportunities there with relationships that we will be able to garner more attention; might be able to provide the entire capital stack either directly or indirectly through contacts.

Well, that's helpful. So you will serve as a broker? Because I didn't think you currently had (multiple speakers) --

No. Yes, we will not be originating -- exactly. We don't have a license to originate, and we don't anticipate getting one.

Great. Okay. And then just one final thing -- I appreciate you updating us from just at least mentioning your desire to enter the Home Loan Bank. And I know that situation is tenuous and fairly sensitive right now. But can you offer any color just from what -- I assume you are in ongoing dialogue with the specific Home Loan Bank that you were talking to. Do you have any color for us? This is a broad issue that affects our whole industry. Is this a sort of -- the FHA is looking at this as an all-or-none, right-or-wrong thing? Or do you get the sense that they just want to step back and look at it and maybe move forward with certain conditions or limitations applied? I'm trying to figure out, is this binary? It's either yes or no? Or it's more of a maybe/if kind of scenario?

I'm happy to give my personal opinion on that. I don't have any direct knowledge of what that is, but our lawyers, who has extensive knowledge with this process, has opinions also. I think one of the things that the FHFA is grappling with is an increased membership applications that have come over the last six months. There's no question that certain parties have identified nonbanking entities as being the majority of these memberships. So that, I think, has raised some concern with the FHFA. I think what they have to grapple with, though, is there is a history of non-bank members in the FHLB. And some of those non-bank members are subsidiaries of larger banks that are in the federal system.

So it's not simply to say -- I don't know how -- I don't think it could be all or none just because they have a history they have to deal with. I think what they are trying to make sure is that the FHLB system has sufficient knowledge of the members', the new applicants' businesses, that they don't introduce risks that people aren't comfortable with. And I'm hopeful they can get over that because I think the types of counterparties that we would love to have would be an FHLB counterpart because they do take some of the pressure off of us borrowing from providers that have other businesses that put pressure on the lending business to us indirectly that have nothing to do with our business model. So that is something that we look forward to hopefully getting into that system.

Yes. Well, we will stay tuned on that. And thanks for the comments, Steve. Appreciate it.

Mike Widner from KBW.

So my first question is going to be a real simple and probably stupid one. But I'm looking at just the two tables that -- let's see. The first table, you have got a carrying value of the multifamily stuff at $419.5 million. And then if I go over to the fourth table, you have got multifamily at $402 million. It's just sort of a simple modeling question. I'm trying to understand why those two are different. All the other ones sort of lineup.

Yes. The difference -- it's not a stupid question. It's the complexity of our accounting world. So in the table, the second table, the yield table, we have some assets that are considered, for accounting purposes, non-yielding assets. We have to account for them on the equity method because of the ownership interest that we have in them. So even though they drive a interest type outcome for income, we account for it as the equity method. So there's approximately $17 million of those type investments. That's what the difference is.

So, because in the yield table what we are trying to depict is actually assets that we account for above the line in net interest margin, that's -- so there's some assets that are part of the other income, which would be the difference between $402 million and $419 million.

Yes. No, I think that makes sense. And so as I think about, then, the 12% yields I should think about that relating to that $402 million. And then there's some effective equity yield, if you will, that's going to flow -- hopefully, as it comes in, flow through basically unrealized gains on the other $17 million.

And understand, when we categorize that from an accounting standpoint as equity, it is actually an interest-bearing investment. But because of the relative percentage of preferred to the common equity, it has to be accounted for as equity. It's an accounting quirk that forces us to do that. So in our minds it's a fixed-income asset. It is generating fixed-income type activity. But from a GAAP accounting standpoint, it does not generate fixed-income type activity.

Yes.

It will be within the same parameters of that yield that's there.

Got you. Okay, great. Appreciate that. So I guess -- a different question. You characterize the investment environment today -- or I don't want to put words in your mouth -- as being a little tighter. There's a lot of bids out there for assets, and it's harder to find attractive high-yielding assets relative to, say, a year or two ago.

So with that said, where do you see leveraged ROEs, whether you want to talk about it pre-expense or post expense, either way, where do you see that today on dollars you are putting to work today?

Look, one of the things that we have focused on is the distressed residential loan market. And we know there is multiple ways to accumulate these loans. We can accumulate that in $1 million to $5 million and $10 million blocks or we can go out and bid on a $150 million to $200 million pool. The difference in pricing and that is 10 to 15 points because the $100 million pool has 30 people bidding on it. The $1 million to $5 million accumulation over time is relationship driven. It flows businesses that we have in place with partners that affords us opportunities to accumulate loans at much higher returns. It allows us to focus on assets where the return is coming mostly from the assets and somewhat from leverage, as opposed to mostly from leverage and a little bit of that asset.

So, to the extent that we can continue to generate those types of activities, we will pursue that. If we need to bid more aggressively on larger-block loans we have to get a better financing execution in terms of either securitizing and selling them at the marketplace or getting lines of credit in place with other lenders that have better rates, because we just can't generate those yields.

So, we are comfortable that we can continue to accumulate loans in the multifamily space and loans in the residential space on a comfortable, secured, levered basis that will generate 13% to 15% yields consistently.

13% to 15% leveraged yields?

Yes.

And is that post expense or pre-expense you are talking about?

We would target post expense, keeping in mind that some of those expenses would depend on exit strategies, the incentive fees. The incentive fees paid for both the distressed residential loans and the multifamily are not based on unrealized activity, they are based unrealized activity. So the expenses could jump to the extent that we have sales. But yes, on a total rate of return of owning that investment, that's what we would anticipate, net expenses to our shareholders.

Okay. And so when I try and put all the pieces together here on thinking about how the income is generated and the different pieces going forward, the question I'm wrestling with is still you are a REIT, so you are look at along with a lot of the other REITs. And everyone focuses on core income. And for you guys that's a little trickier concept because so much of the dividend and the total return is based on gains. But from a core net interest spread income, obviously you guys are -- it's something well below the $0.27 dividend.

That's correct.

And so how should we think about that? And again, if I think about that $0.27 dividend, that's -- about a 15.7% ROE sort of equivalent, if you want to support that you need to generate about a 15.7% ROE, regardless of what form the income takes. So how should we think about that against the potentially more challenging environment to get investments that generate that kind of yield?

No, I think -- well, I think if you look at the types of assets that we have accumulated over the last two years and you look at the gains that we have in our portfolio and think about the distressed residential loans not mark to market, so there's really no book value and/or earnings benefit from the appreciation of the loan, based on the way we account for those activities. We think we have realized gains generated from possibilities that we can hit targets in terms of what we want to hit to deliver to our shareholders as well as continue to maintain a portfolio that we think can go into the future and maintain the pay rates that we are paying. We are hopeful that the dividend yield goes down with the stock value increase, as opposed to we think that the 14% is too high relative to where our stock is trading. But we are comfortable, we have been comfortable since we've had nine consecutive dividend payments of $0.27 that the pay rate is somewhere in a range that we feel very good about.

Yes. No, that certainly makes sense. So just one final one, if I may -- you mentioned having the realized gain potential. And one of the things that we like to do across companies is quantify what that is. I'm struggling going through the stuff you disclosed here. I might find information in the Q. But in here I can't seem to find a way to back into what that unrealized, not already flowed through the income statement potential gain is. So I'm wondering if you could quantify that or if I've got to wait till the Q.

Yes. I think you need to wait for the Q, actually, Mike. And I think the thing to recognize in the distressed residential loan world is that the fair market value -- we go through and do -- there is a fair market value disclosure in the footnote that talks about the difference between the purchase price and the fair market value of the loans. And then when we go out and market these loans for sale, it's very difficult marking these loans until you go out and get a real bid. So there is some noise in those numbers. That's really where you would see the difference in the distressed residential loans.

And then as we look at the multifamily, those all our -- all the multifamily are marked. So you can get those in the financials. And you can get that from the press release. But some of that goes through equity and some of that goes through our earnings. And the reason we have a dislocation of that is there is certain multifamilies that we have to consolidate. And just for ease of accounting we have elected to mark to market those through the income statements. The other ones go through equity of the Company, and those are the ones related that we don't have to consolidate. But it is -- it's a challenging accounting environment for us in terms of understanding our business. But the main theme of our business is net interest margin is only one piece of our business and identifying asset opportunities that result in capital gains is another large part of our business and has been for the last two years.

No, absolutely. And we certainly appreciate that about you guys. And the accounting challenge from our side as analysts is just to make sure we have a grip on what those different components are and particularly if we go into that multifamily piece. That disparity where some of the assets are marked through income and some are marked through AOCI makes it very challenging to disassemble the pieces.

In a perfect world I wish I could tell you that we're going to do $20 million of realized gains and $5 million a quarter. But the reality is it's going to be dependent on opportunities of selling and it's going to be also dependent on being able to close the transactions. And we've had a purchase that we have been working to close since June. We hope to close it next week. And it just takes a lot of due diligence. And when you are buying loans, as you can imagine, in this world of litigation that not only the seller is concerned with litigation, we as a buyer are concerned with the transfer of litigation. So, we want to make sure we cross our T's and dot our I's when we are doing a lot of these transactions. It just takes a lot of time. And we think it's time well spent, but nonetheless it's frustrating when you are trying to deliver a consistent earnings from quarter to quarter. I absolutely understand that.

Yes -- well, appreciate all the comments, as always, guys. Thanks.

(Operator Instructions) David Walrod from Ladenburg.

Pretty much have been through all that I had. Just one kind of broader thought or question -- I know you talked about expanding the multifamily, though, what you are doing there. Any other asset classes, given the challenges that you've had deploying the capital, any other asset classes that you are eyeing that might be able to generate more attractive returns?

Yes. Look, I think we would love to be more active in buying residential loans outright. We don't -- would we see a tremendous amount of opportunity doing securitization right now for us? We think if we can get other financing avenues, there are certain loans that we could invest in that would generate returns that make sense for us. And we need to wait and see how that plays out over the coming quarter.

We are constantly in discussions with a multitude of residential type activities that could possibly generate the returns that we look for. It just takes a long time to vet these and see what opportunities are. But they are primarily around residential loans and lending and where do we want to enter in that market.

Okay. Great, thanks a lot.

Thank you. At this time I'm not showing any further questions.

All right, operator. Thank you very much. At this time I would like to close the call and thank everybody for participating in the call. We look forward to talking about our progress in the third quarter sometime in early November.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.