New York Mortgage Trust Inc (NYMT) 2014 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 2014 Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded on Wednesday, November 5, 2014. A press release with New York Mortgage Trust's third quarter 2014 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 & Presentations section of the Company's website.

At this time, management would like me to inform you that certain statements made during this 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. Good morning everyone, and thank you for being on our call. Today, I have Kristine Nario, our CFO, joining me. Kristine and I will be available for questions at the end of this call. The Company released its third quarter results after the market close yesterday. Included in the press release are several tables that I will be referring to during this call.

The Company generated record net income of $38.3 million or $0.42 per common share for the quarter. Similar to our first two quarters of this year, our credit-sensitive portfolio, which includes our multi-family CMBS and our distressed residential loans, benefited from strong secondary demand for credit-sensitive assets and a continued corresponding improvement in pricing. Our strategy of timely investing in credit-sensitive assets continues to produce attractive yields and capital appreciation.

We believe our results this quarter are indicative of our continued successful execution of this strategy. In particular, we took an opportunity to sell one of our first loss multi-family K-Series securities during the quarter, resulting in total proceeds to the Company of $41.4 million and a realized gain of $16.5 million, while the improved pricing environment for the multi-family CMBS securities in our existing portfolio drove unrealized gains higher by $11.8 million during the quarter.

In connection with the sale of the multi-family K-Series security, we terminated a 2012 CMBS securitization totaling $52 million, releasing approximately $182 million of CMBS collateral value back to the Company that included the security we sold. The remaining, $141 million in collateral value, gives the Company several liquidity options from outright sale to resecuritization.

We continue to deploy capital to the multi-family space focusing on direct investments in mezzanine and preferred equity investments and expect to make additional investments in a multi-family focused investment vehicle that is managed by our external manager, RiverBanc, which the Company owns a 20% interest. The Company continued to build out the distressed residential loan portfolio, adding loans with outstanding principal balance of $38 million during the quarter. While the pace of the additions appears slow, the purchase price and the expected return falls well within our performance objectives.

We are pleased with the performance of our portfolio, which has helped to increase the Company's book value per share every quarter since June 2013 and has contributed to an economic return of 23.1% through the first nine months of 2014. During the third quarter, we had net income attributable to common stockholders of $38.3 million or $0.42 per common share as compared to $16.9 million or $0.27 per common share for the quarter ending September 30, 2013. Net interest income of $19.3 million for the quarter ended September 30, 2014, as compared to $15.2 million for the quarter ended September 30 the previous year and $19.9 million for the quarter ending June 30, 2014.

Our net interest margin for the quarter was 428 basis points, as compared to 460 basis points the previous quarter. The year-ago quarter net interest margin was 359 basis points. We had a realized gain of $16.5 million on a sale of our multi-family CMBS first loss security. The gain was partially offset by the $3.4 million loss on an early extinguishment of debt related to the termination of our 2012 multi-family CMBS financing.

We continue to benefit from price improvements in our CMBS portfolio, which resulted in unrealized gains of $18.1 million during the quarter. Book value per common share was $6.98 at June (sic - see press release, "September") 30, 2014 as compared to $6.83 at June 30, 2014 and $6.32 at September 30, 2013. We declared and paid a third quarter dividend of $0.27 per common share, marking the 10th consecutive quarter at this level.

Now for some portfolio highlights. Included in our press release are three tables related to portfolio performance, an historical quarterly yield analysis table, a CPR historical table by investment category, and a current portfolio yield table. Our net interest income was $19.3 million for the quarter, down approximately $600,000 from the previous quarter. Our net interest margin was 428 basis points during the quarter, down 32 basis points from the previous quarter. The decrease was due to a [decline in] asset yields of 23 basis points and an increase in average liability cost of 9 basis points. The decrease in asset yields is primarily due to an increase in prepayment speeds across our agency portfolio.

Our Agency ARM portfolio averaged 21% CPR during the quarter versus 10% CPR the previous quarter. Our fixed rate portfolio increased to 9% CPR from 7% CPR the previous quarter. And our Agency IO portfolio increased to 15% CPR from 13% CPR. Combined, the average yield on our Agency CMBS portfolio declined by 71 basis points. This was offset by an increased capital allocation to our credit-sensitive assets, which has had stable net margins quarter-over-quarter. We expect the CPRs to decrease in the fourth quarter back towards the second quarter averages in our Agency ARM portfolio. The increase in liability cost was primarily due to reduction of the short-term debt, as compared to our longer-term, more expensive outstanding liabilities.

Our total other income increased by $24.6 million and $48.4 million for the three and nine months ended September 30, 2014, respectively, as compared to the same periods in 2013. The increases were primarily driven by the following.

An increase in realized gain of investment securities and related hedges of $13.7 million and $28.8 million for the three and nine months ended September 30, 2014, as compared to the same periods in 2013. The Company sold a single multi-family CMBS security in the third quarter, resulting in a realized gain of $16.5 million for both the three and nine-month period. This realized gain was partially offset by a $3.4 million loss on early extinguishment of debt related to a CMBS securitization. That securitization included a security that we sold (inaudible). In addition, realized gains in the Company's Agency IO portfolio declined by $2.8 million for the three months ended September 30, but has increased $12.3 million for the nine months ended September 30, 2014, as compared to the same periods the previous year.

An increase in net unrealized gains on multi-family loans and debt held in securitization trusts of $11.8 million and $20.7 million for the three and nine-month periods ended 2014, respectively, as compared to the previous year periods, which is due primarily to the improved pricing on our multi-family CMBS securities driven by greater market demand for this product. An increase in other income of $1.3 million and $1.5 million for the three and nine months ended September 30, 2014, respectively, as compared to the same periods in 2013, which is due primarily to the increase in income related to our 20% ownership in RiverBanc.

We had a $6.5 million increase in expenses, which includes G&A expenses, management fees and expenses related to our distressed residential portfolio. This was largely attributable to a $5.5 million increase in management fees, mostly due to the increased incentive fees related to -- paid to RiverBanc related to the gain on sale of the CMBS security. Keep in mind that NYMT owns 20% of RiverBanc, which directly relates to the increase of our other income category. Expenses related to our distressed residential loan business increased by $440,000 as compared to the previous year's quarter, which was primarily due to an increase in growth in the portfolio.

Included in our press release is a capital allocation table that details our asset, liabilities and equities by investment silo as of 9/30/2014. As you can see, we continue to focus on investing in credit assets, including multi-family loan securities, residential loans and other possible residential opportunities, as they represent approximately 64% of our current invested capital.

The Company's decreased leverage in our MBS Agency portfolio is a result of utilizing our excess liquidity. Over time, as we continue to build on our credit portfolio, we would expect that leverage to increase about 7.5 times of allocated equity. Recapping our results, it's important to focus on the entire return of the portfolio and not on the individual components. We've said many times that our business is not a net interest margin focused business, but a strategy that rely both on net interest income as well as realized gains from our credit investment opportunities. We believe this strategy, allows our portfolio to better navigate the changing economic and interest rate environments.

We have and we will continue to maintain a disciplined approach to new investments that has served us well over the course of the last several years as we build out our credit sensitive assets portfolio, by deploying capital to assets that satisfy our longer-term investment objectives. Thank you for a continued support. We expect our third quarter will be on file on or about November 7 with the SEC and will be available on our website thereafter.

Operator, you can now open the call up for questions.

Thank you. (Operator Instructions) Steve DeLaney, JMP Securities.

Thanks, good morning and thanks for taking the questions, Steve. So you went through the CMBS sale in great detail, I won't belabor it, but wanted to focus on the $141 million and I assume that's fair value of bonds that you would still own at about same K-Series. Could you generally comment on like -- you sold the first loss piece, so these are lower rated retained bonds. Could just describe the nature of the remaining $141 million of bonds.

Sure, Steve. So we started accumulating the K-Series first loss pieces in 2011. And in 2012, we did a securitization. And in 2012, primarily the purpose of the securitization was to allow us to accumulate a larger amount of assets relative to the capital of the Company by deploying in fairly safe, long term securitization. At that time we locked up about $83 million in market value, our first loss pieces versus $52 million in debt.

So those securities that initially were deposited $83 million have increased in value to $183 million -- $182 million. So we had one year left to go on a securitization which was at 6.5%. We felt like the rates at which we could securitize the securities were about 100 basis points to 150 basis points lower today than they were in 2012. And the amount of fair market value that was locked up in that securitization, the $183 million versus the financing of $52 million was a tremendous amount of liquidity that was locked up and not being utilized.

In addition to that, we were able to partner with another firm that owns 50% of the security that we ended up selling and generating a very attractive exit price on that particular security. So all the securities that remain in the $141 million are first loss K-Series bonds, they're just now not financed and locked up into a trust. So that gives us flexibility to either do another sale, if it seems appropriate, or to create another securitization that will give us, one, higher proceeds against the fair market value versus where it was in 2012 and, two, a lower all-in rate to finance the securities.

Right. And you mentioned that cost on that initial 2012 securitization was about 6%?

6.5%.

6.5%, and did I hear you say you think you can improve that by a couple hundred basis points?

100 to 150 basis points, given the same type of terms, which is a three --

100 to 150 lower. Okay.

Right, which is a three-year financing.

All right. Got it. So I mean in addition to the obvious -- the gain that you recognized, it seems like you're freeing up potentially a lot of capital by --

We've probably freed up another $100 million of liquidity net after the sale. So if you think about $140 million left, you probably get approximately a 68% advance rate to 70%, that puts you close to $100 million at a capital cost that's around 5%. So that will obviously help --

Okay, great. It sounds like we'll hear more about the actual structure and all on your next quarterly earnings call, it sounds like you're pretty far down the road in terms of putting something in place.

I think it's something that we would monitor as we look at capital transactions to invest in as a alternative source of financing that asset purchased.

Okay. And then shifting gears a little bit to beyond the K-Series, but into sort of this new opportunity you're trying to pursue with RiverBanc both on multi-family, mezz lending and equity investments. Can you just talk a little bit about how that effort is proceeding? Have you funded anything yet? What type of pipeline do you see over the next couple of quarters in that venture?

Sure. We have funded several assets in the vehicle. The vehicle itself has both the component of common equity and preferred equity and some of the preferred equity was placed with a private investor. The goal is to get the Company to critical mass of $100 million and then at which time we would entertain possibly seeking public market execution of some capital. We would anticipate that happening sometime in the next three to six months in terms of asset size. The Company is focused on both mezzanine financing and JV equity. It brings -- it sort of fills out our capital allocation for the Company as a total. New York Mortgage Trust focuses on particular types of mezzanine financing or this vehicle will take more downstream risk and JV equity type investing, which allows us to go to investor and really give him all the capital stack that they need to complete their purchase.

Got it, so a more senior loan may go on NYMT's books and the more equity oriented tranches may go in this new fund.

That's right. And the first loan would more than likely be placed in the Freddie Mac securitization that would not be originated by us, but would be introduced by us. So that's the way that we would currently deliver that capital to the potential investor.

Got it, got it. Okay, very good. Okay, well listen, thanks for the color, Steve.

Thank you, Steve.

Samuel Chao, Credit Suisse.

Hi, I'm calling on behalf of Doug Harter, thank you for taking the call. I just wanted to get more detail on why you made the sales for the CMBS this quarter, just a little more color on that please.

No, look, I think when we invest in any investment especially investment related to the credit sensitive asset, there is a life cycle of these assets, right. And this particular asset had a lifecycle that we felt given the execution in exit price was substantially within the range of our target price to exit over time and we felt that we could better deploy those proceeds into assets that over the next three to five years will give us a better return profile than the exit price of that particular security.

We don't actively look to sell any of these securities, however, we are monitoring the markets and monitoring where demand is for various aspects of products. This particular asset that we sold has some investment characteristics I think at the time the market likes a lot and we felt like we would take advantage of that.

I see, so do you see this kind of investment opportunities in the coming quarters?

No, look, I think it depends on where we can reallocate capital and it depends on the execution of the exit price. Look, most of the assets that we're investing in are 10-year assets, some of those assets were done in 2008 so their maturity lives are starting to shorten. And I think when you look at the life cycle of these credit assets here is a point in time when you want to exit and based on where the price is and if yields start to get to a point where we can take those proceeds, and reinvest to what we think are similar risk at higher yields, I think we're supposed to do that right.

Okay. I just have a general question, so where do you see the most attractive return opportunities today and what are the outlook for gains going forward?

I think for gains it's hard to predict, right, these are opportunistic. I don't want to say -- I think we've said over time that when you look at the Company's performance over a 12-month horizon, we would expect both a net margin component, as well as a realized gain component and that component can be at 65-35, 60-40, 70-30 depending on timing of when we have these capital transactions and other opportunities. We still like looking at credit-sensitive investment for a couple reasons. One, they are higher yielding and lower leveraged all-in strategy. Two, we think some of the investments that we're putting our money into will better perform as the rate environment starts to improve, assuming that the economy is improving.

I mean many of our strategies that we put in place are trying to protect the portfolio in the event that rates rise, because we are anticipating that rates will rise because the economy is improving. So that's part of the internal portfolio heads that we're trying to put in place is that aspect. Now given the cycles of where our various credit assets are, we are better sellers and better holders depending on that particular cycle.

Okay, thank you. Thank you so much.

Sure, no problem.

(Operator Instructions) David Walrod, Ladenburg.

Good morning, Steve.

Good morning, Dave.

Just one, I guess, quick additional question on this transaction. You mentioned that the management fees increased about $5.5 million partially due to the incentive component of this. Can you give us some color as to how much was the incentive component and how much is due to increased investment with your outside managers?

Sure. I would say, Dave, the $5.5 million -- I don't have the exact number before me, I apologize, I should. I would say about 80% of that increase is related to the incentive fee, if not a little bit higher. We did have an increase in base management fees as some of the asset classes have increased over time. Again, if you think about our incentive fee structure, they get a 35%, carry over a 12% return after deducting the base management fee.

Our expectation on these managers is that, when you have these outsized gains, you're going to have a bump in the incentive fee. Remember that New York Mortgage Trust owns 20% of RiverBanc. So essentially 20% of the fee that we pay them comes back to us through their earnings. So it is a large number, it is not a number that surprises us. It's a number that, look, when we get into these transactions, the benefit of picking the right asset and having a massive growth in pricing over a very short period of time results in these gains.

We would think -- our expectation, when we first got into the CMBS transactions that a lot of the appreciation would be through accretion to maturity, when in fact we've had a massive decrease in yield from our purchase yield relative to the market yield today, which has allowed for a large market capitalization. In the particular asset that we sold, we felt like the actual exit price was even inside where the current market values were in our opinion. And so, given the maturity of the asset that we sold and given the exit price and given our expected exit price that we would earn over time, we felt that it was better to sell the asset than hold it to maturity.

No, understood.

Yeah.

Can you, I guess, talk about what you're seeing in the distressed loan environment today?

Sure. I mean, at yield, the distressed loan environment is very active, there is large pools trading weekly. The large pools are more problematic to buy. I mean we can buy them, we expect to be the highest bidder. The large pools trade in the high 80s. The smaller loan accumulation trades in the low 80s or high 70s. And so we focus on to some of the smaller pools, we are working on ways to securitize the larger pools to try to get a -- to try to put us in a position where we can pay higher dollar price and still generate a higher return. We still think there is ample supply of distressed residential loans out of the marketplace. You know and you just need that to be diligent in going through and reviewing.

Okay. Thanks very much.

Great. Thanks, Dave, for the questions.

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

Thank you, operator, and thank you everyone for being on the call. We appreciate it. We continue to build our portfolio and look forward to closing out the year. We think it's going to be a very good year for the Company. And thank you very much for your support.

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