New York Mortgage Trust Inc (NYMT) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by.

Welcome to the New York Mortgage Trust first quarter 2015 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, May 6, 2015.

A press release with New York Mortgage Trust first quarter 2015 results was released yesterday.

This press release is available upon the Company's website at www.nymtrust.com.

Additionally we are hosting a live web cast of today's call which you can access in the events and presentation 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 of the 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 in the Company's filing with the SEC.

Now at this time for opening remarks I would like to introduce Steve Mumma, Chairman, 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 CFO joining me.

Kristine and I will be available for questions at the end of this call.

The Company released it's first quarter results after the market closed yesterday and included in the press release are several tables that I will be referring to during this call.

It should be noted that we enhanced our capitol allocation table by including both interest income and interest expense and the related yields for each of the investments (inaudible) which we believe will be helpful going forward for the people covering it.

The Company's focus on credit sensitive assets continue to provide strong interest margin results generating $21.6 million, or an increase of $3.1 million from the fourth quarter of last year.

We earned $0.21 per common share.

Lower than consensus but overall we thought the quarter will be constructive for the future.

Our Agency IO portfolio experience a turbulent first quarter with increased interest rate volatility and an unexpected FHA program change related to mortgage insurance premiums that resulted in a difficult evaluation period reflected in a negative mark to market for the quarter.

We did sell one of our CMBS securities our distress residential loan selling in the quarter was lower than we originally expected.

The timing of the credit sales including CMBS and distressed residential loans are driven by the buyers due to due diligence process and timing of their actual settlement.

In many cases this is not controlled by the Company as we are focus on maximizing sales proceeds and not timing.

For example, last year we sold a CMBS security that settled late in the month of December resulting in fourth quarter earnings of $0.42 per share.

But sale could have easily been pushed to the first quarter of this year which you would have seen a flip-flop of earnings per share from fourth quarter of last year to first quarter of this year.

Company (inaudible) a number of important steps on the operating front including the successful servicing transfer of over 3,800 loans that we acquired in December 2014, for approximately $328 million which is a critical first step for managing reperforming loans.

In addition, one of our wholly owned subsidiaries was approved as a member of the Federal Home Loan Bank of Indianapolis.

While our ability to access the Federal Home Loan Bank system over the long term remains subject to proposed rule making we are hopeful any final rule from the Federal Housing finance agency will result in a favorable outcome for us as we believe long-term access will provide the Company a more efficient and cost effective way to manage and finance certain of our mortgage related investments.

I would like to recap some of the first quarter results.

As I said we had net income at (inaudible) common stock of $22.1 million, or $0.21 per share.

We had net interest income of $21.6 million and a net interest margin of 415 basis points.

We issued and sold approximately 2.7 million shares of our common stock at an average price of $7.97 a share under our ATM program resulting in net proceeds to the Company of approximately $21.1 million.

The Company completed sale of first loss [PL] security issued by one of our consolidated (inaudible) securitizations realizing a gain for the period of $1.5 million.

One of our wholly owned subsidiary became a member of the Federal Home Loan Bank of Indianapolis.

Our book value per common share was $7.03 at March 31, 2015 compared to $7.07 December 31, 2014, or $6.48 per common share at March 31, 2014.

We declared a first quarter dividend of $0.27 per common share that was paid on April 27, 2015 marking the 12th consecutive quarter at this level.

Subsequent to March 31, we completed a public offering of 3.6 million shares of the Company's 7 and seven-eighth's series (inaudible) cumulative redeemable preferred stock resulting in approximate proceeds of $87 million.

We also issued an additional 1.4 million common shares at $7.79 per share resulting in net proceeds of approximately $10.8 million bringing the total capital raise for the beginning of the year to approximately $119 million.

In April the Company entered into advances for the first time with the Federal Home Loan Bank of Indianapolis totaling approximately $121 million.

These advances were used to fund portions of our agency RMBS portfolio.

As I said before, included in our press release is a new capital allocation and net interest spread table.

The table will combine previously disclosed balanced sheet amounts by silo with net income activity including asset and liability yields in ways average earning assets by silo.

In addition we have the historical CPR tables by asset category that we've included in the past.

Our net interest income was $21.6 million for the quarter, an increase of $3.1 million from the previous quarter of 2014.

Our net interest margin was 415 basis points, a decrease of 17 basis points from the previous quarter.

Both changes are related to the $328 million in distressed loans we added late in the fourth quarter of last year.

As more of our capital is allocated to loans we expect the net interest spread to decrease as the stress level loan yields are generally lower than our CMBS yields that we have previously invested in.

However, the decrease in asset yields will be offset by an increase in leverage as the loan market is more liquid and allows the Company more diverse access to funding alternatives.

CPRCs were generally unchanged in the fourth quarter of 2014 but were up over 30% from the first quarter of 2014.

Total weather income decreased by approximately $400,000 for the three months ended March 31, 2015 as compared to March 31, 2014.

While the absolute number is not significant the components are primarily different by the following.

A decrease in realized gain on investment securities related hedges of $0.9 million, an increase of net unrealized loss on invested securities and related hedges of $4 million for three months ended March 31, as compared to the same period 2014 were related to our Agency IO portfolio.

The Agency IO portfolio is an actively managed strategy resulting in both unrealized and realized activity.

The Agency IO strategy is a net margin focus strategy in which we expect the unrealized and realized gains and losses over time to offset each other and have no material outcome over time.

During the first quarter of 2015 the pricing of our Agency IO portfolio was negatively impacted by the significant spread widening due to an unexpected mortgage polity announcement from the Federal Housing Administration and increased interest rate volatility.

An increase in gain on de-consolidation of $1.5 million due to the sale of our first loss PO security issued by a single Freddie Mac sponsored securitization included in our consolidated case series for the period.

Total realized gain from the security over our holding period was over approximately $10.9 million.

An increase in net unrealized gains in multi-family loans in dept total securitization of $8.7 million for the three months ended March 31, 2015 as compared to the same period of 2014.

We had a decrease in realized gains in distressed residential loans of approximately $7.5 million for the three months ended March 31, 2015 as compared to the same period of 2014 primarily due to lower refinancing and sale activity.

Income generated from the distressed residential loans worked out to resale was lower in the first quarter of 2015 as compared to the same period 2014 primarily due to timing.

Company goal in disposing of distressed residential loans is to maximize sales proceeds which frequently results in selling to buyers with lengthier due diligence requirements.

As such, income generation for the work out or resale of these loans is expected to be uneven from quarter to quarter.

An increase in other income of $1.8 million for the three months ended March 31, 2015 as compared to the same period of 2014 was primarily due to two factors.

An increase in income from our 67% ownership, interest in RB multi family investors which is an entity that invests in commercial real estate jv and data like investments and is managed by River Bank, our external manager.

And additionally, we had an increase of income related to our 20% ownership of River Bank as the external manager which gets the income from the RB multi family investors.

We had total expenses of $7.8 million for the quarter ending March 31, 2015 an increase of $3.3 million for the same period last year.

The increase was primarily related to an increase in base management incentive (inaudible) which was driven by an increase in assets under management by external managers primarily in commercial and distressed residential loans and a $3.2 million incentive fee earned by River Bank from the sale of the CMBS security during the period.

An increase in incentive fee earned by River Bank was partially offset by a decrease in incentive fees by Headlands and Midway, our other two external managers.

A $0.7 million increase in expenses related to express residential loans was primarily due to increased assets as it relates to the servicing of those assets.

We continue to focus on investing in credit assets such as residential loans and multi family investments including Freddie Mac first lost securities, direct lending, mezzanine loans and preferred equity which represented approximately 68% of our current capital.

The Company continues to run on a conservative leverage ratio with the overall ratio less than 1.5 times equity.

If and when there is a final determination of the Federal Home Loan Bank membership we will better be able to decide how we will continue to finance certain of our real estate related investment strategy.

We believe permanent access to the Federal Home Loan Bank system would be beneficial overall to the mortgage market reducing our, and our members reliance on short-term funding from financial institution.

In the event the outcome is unfavorable we will continue to utilize the securitization market and seek new ways to extend our liability maturity that would rely less on callable financing structures.

I said this before, but I believe this is an important point when only analyzing our Company's results, we manage our business over a 12 to 18 month horizon and not by quarter.

Our business is not only a interest margin focus business but a strategy that relies both on net interest income as well as realized gains from credit investment opportunities.

This strategy, while less predictable over short periods, we believe will allow our portfolio to better navigate the changing economic and interest rate environment in the future.

We intend to maintain a disciplined approach throughout 2015 by deploying capital to assets and satisfy our long term investment objectives and believe that our current portfolio is well positioned to take advantage of new interest earning and capital gain opportunities.

Thank you for your continued support.

Our 10-Q will be filed on our about May 8, with the SEC and will be available on our website thereafter.

Operator, if you would please open for questions.

Operator, if you would please open it up for questions.

(Operator Instructions).

Our first question comes from the line of Doug Harter with Credit Suisse.

Your line is now open.

Great.

Steve, I was hoping you could touch a little more on the comments about the FHLB.

You did take some advances.

How are you planning to use your membership in the interim sort of while we are still waiting on a final role from the FHSA?

I think our thought process is we would use the line to fund what we would consider very liquid assets and we would use the line to fund very short-term in nature.

30 out to maybe 90 day repo on our agency securities will be our primary focus.

If we thought we would put any kind of loans on the financing schedule which we can do, we would make sure we had a committed back up line that would be able to accept those assets in a short period of time.

Until we get through a more certain outcome, I think that's the prudent thing to do.

Got it.

With some certainty there then you can look to use that and possibly get bigger savings down the line from funding some other assets?

Absolutely.

I think the most important aspect of the membership, and keep in mind we are equity members of the FHLB and we still are susceptible to haircuts, mark to market, but the biggest advantage is getting longer term financial access and not having a partner.

We have a partner who is permanently in place to fund their members as opposed to us going to the street where we can extend our liabilities through interest rate swaps, but we're still beholden to the 30-day repo or shorter term financing market.

And even the warehouse lines that we get for our loans typically are one to two year in nature but they're not permanent financing vehicles where the FHLB would allow us to fund certain parts of our portfolio for three, five and seven years which would match much more nicely with our loan portfolio and much more cheaply than a securitization market.

Great, thanks, Steve.

Thank you.

Our next question comes from the line of Steve DeLaney with JMP Securities.

Your line is now open.

Thanks, good morning, Steve.

How are you?

Good, how are you?

When we look at the quarter, you did a great job laying out some of the timing issues, I guess.

I wanted to ask about this large $300 million plus MPL acquisition.

I think you purchased that in December and you noted that you had just recently boarded those loans.

Could you kind of describe as you bring in a large pool like that, I think it was 3,000 loans or something, can you talk about the time frame over the next couple quarters, sort of the process and the time frame for the revenue ramp that we will likely see over the next few quarters when you bring in a large pool like that?

Thanks.

Sure.

Keep in mind that transferring servicing today under the new CFP regulations is a very tedious process.

The vote from the seller standpoint, the seller of these loans, which is a financial institution, is subject to make sure the person buying these loans is qualified to service these assets.

First and foremost you have to meet that test and your servicer needs to meet that test.

Second, there is a very detailed process you need to go through from a legal standpoint to ensure the handoff is properly done and that any process of any type of modification or type of servicing assistance, that carries through to the new purchaser of the assets.

We had over 3,800 mortgages actually that were transferred, Steve.

We put a task force in place shortly after we bought the loans and it took almost 12 weeks to complete that process.

Ten weeks of the 12 weeks was set on testing the process and making sure the information coming over was accurate and making sure when it was boarded it would be reflected properly and the borrowers would have immediate access to the financial information that would be seamless to their previous servicer.

That being said, as anybody is used to an any type of routine, especially when they use an automated payment system on a monthly basis, they get the letter identifying new buyer of their mortgage, notifying them when the new payment process is going to change.

However, that doesn't mean it changes seamlessly.

There is a lot of follow-up phone calls making sure the money is in the correct place.

That boarding took place and transfer took place in the early part of March.

We talked about doing a securitization on those loans which will probably take place at the end of this quarter, the second quarter, or early the third quarter.

And primarily the reason for the (inaudible) is to make sure the boarding information comes over properly and that the delinquencies don't pop up because of timing issues.

Not true delinquencies, just payment delay.

From an interest carry stand point we have been very happy with the flows of cash that have come in from the servicing (inaudible) in the interim period, we don't expect that to change long-term.

We expect it to be bumpy in the short-term.

And then over time as you start to board the borrowers you get a better sense of their credit worthiness and various options we can use to improve their credit and enhance their ability to refinance their mortgage and then start to capitalize on some of the gains we seek to get for the loans that we are buying.

Got it.

And process three to six months before we start doing that.

That's very helpful.

And the securitization, early on in this you found some very attractive private financing.

When you mentioned securitization on the RPL, MPL, are you thinking more the standard type of non rated deal we are seeing with like 50% senior sub with 50% [UPB] subordination, LIBOR plus 400?

Something in that range?

Today's RPL market, Steve, not MPL, these are RPLs and these are about 95% to 98% current.

We would expect the advanced rate on these would be in the 70s, and we expect the interest rate would be somewhere around LIBOR plus 400 or possibly sub 400.

The typical structure is done with three years with two, one-year extensions, but there is some people looking at four years.

There seems to be ample buyers out there for the front piece of paper, so we are pretty confident that we can get a nice securitization done.

The previous question about the Federal Home Loan Bank there is loans we have purchased that we believe could be financed to the Federal Home Loan Bank system which would result in lower earnings and less legal costs in terms of doing a securitization.

Not all of the loans would qualify, but many borrowers have good credit and good LTVs and good underwritings.

Some of those will be available to be financed in the system.

Great, great.

That's good color.

Thank you.

I had no idea it was that large of an RPL versus MPL percentage.

That's good to know.

Switching gears.

When you talk about the quarter and I totally get what you are talking about the lumpiness and we calculated the last four quarters if we average them it has been $0.37 a quarter.

When you talk about the quarter though one of the things you mentioned was we had a lot of rate volatility in the first quarter, big swings, 40 basis points or so in the 10-year,

You mentioned weaker results from the midway IO strategy.

That, by its nature, that investment would seemingly have less predictable returns than some of the other things you are doing.

I am curious given where you are with other activities you have going on with multi family and with the MPL business, do you still see the IO strategy as something that adds long-term value to the story?

Thanks.

Yes, Steve, absolutely.

I think if you look over the last 24 months the amount of capital we committed to that strategy has been fairly flat.

We still think there is upside to that strategy.

If you look at our investment in Midway over the last three years the quarters where they have the most difficulty is when you have a high volatile interest rate environment, so the second quarter of 2013, the third quarter of 2012 and this first quarter.

Really when you see the 10-year go from above 2% to almost down to 160 in January, that coupled with the FHA announcement that they will reduce insurance MIP premiums on Ginnie Mae increase projected CPR speed.

So while our actual CPR speed in the IO portfolio from fourth quarter to first quarter were largely unchanged, the projection of future speeds in the Ginnie Mae part of the book impacted the pricing on those securities negatively.

Midway employs an actively remanaged modeling system to hedge.

So when you have shocks like that to the model you have to recalibrate your model, but when those shocks occur, they are painful and they are punitive.

You have seen some recovery in the IO pricing especially the last two weeks with rates now up around $2.18 in the tenure.

There is some volatility and it is unfortunate that it introduces volatility to our earnings and quite frankly there was probably $0.02 to $0.03 of this quarter that unexpectedly came in late in the quarter that we did not predict because of the mark to market.

We think going forward it will be a less and less percentage of the total investment.

However, we still think the investment itself will deliver nice results.

There are a couple things that we're working on with then that we believe will enhance the return away from the IO strategy.

Some of the ways they hedge the portfolio we think we may be able to generate using more re-eligible assets that will be beneficial long-term for us.

Thanks for the color, Steve.

Sure.

Thank you.

Our next question comes from the line of David Walrod from Ladenburg.

Your line is now open.

Good morning.

Good morning, David.

A couple of questions.

The capital you have been raising through the ATM and through the preferred, would you say that's supporting existing activity or are there new areas of investment that you've got your eye on that you kind of wanted to get loaded up for?

There's two or three new areas we are looking at that we think we are going to have some opportunities to invest capital between $20 million and $50 million that could be interesting and new for us.

Some of the capital is pre-existing.

We came out of the fourth quarter fully levered with the purchase of $328 million.

We didn't have much dry powder.

We have a pipeline of mezzanine financing and CNBS that we will fund over the next 45 days and then some of that capital will be used for.

And the RB multi family investment sub that we have owned 67% of is an entity that we put in place that will focus on assets that have yields lower than we can put on our books from our cost of capital standpoint, but we still think are attractive assets.

And we are hopeful over time that entity will generate a cost of capital of 7% to 8%.

They will be able to look at investments that we pass on and they are also invested in jv equity.

We made an investment in that company that we intend to limit how much more we will put into the company, but we hope the company will grow away from our capital and thereby driving additional revenues River Bank, the external manager, which we own 20% of which will drive additional value back to our Company for our shareholders.

Great, That's helpful.

Second question, management fees for external managers, they are about $6.8 million and you had $3.2 million of incentive fees.

Is the run rate of base management fees in the $3.5 million to $4 million or were there other incentive fees in this quarter?

No, That's right, David.

That's right.

The last question I don't know if you can discuss this or not, but you drew down $120 million roughly on the FHLB.

How big is your line?

We said $200 million and it is really a line that when we went to set the line we set it at $200 million which is about a third of our agency repo book.

We can get access to more lines if we want that, but as I said to Doug, when we look at the FHLB line, until we get better comfort that it is a permanent line we will focus on funding the agency securities.

We may fund a small pool of loans, but then again if we do the loans we will make sure we have a committed back up line that we can move the loans to the back up line in the event the outcome is negative.

We did have to execute a letter that said we would be willing to move our liabilities within 30 days of a negative occurrence.

That puts you in a position where you better make sure you have a home for any assets you are currently funding if you become a member in 2015.

That's all I have.

Thanks a lot.

Great, thanks, David.

Thank you.

(Operator Instructions).

Our next question comes from the line of Mike Widner with KBW.

Your line is now open.

Thanks, and good morning.

Good morning.

Let me just ask a follow-up.

Just want to make sure I understand.

I think we have gone through it before.

We can go through it again I guess.

On the income state you have $13.6 million gain in the multi family debt.

I assume that's all related to the series k stuff.

You have had pretty consistent gains on there and just wondering if you can talk to us more about how do we think about that line item there?

And you also break out in the first table in the schedule the pure net interest spread on the multi family.

Just wondering if you can remind me how to think about those two different components of that?

Sure.

The majority of the multi family investments we have are in Freddy Mac PO security (inaudible).

Over time we are creating them on a loss adjusted yield basis.

Over time, the cost basis will go up on those assets and as you mark those to market you will be shifting some mark to market to the interest income line.

Everything else being equal.

The second thing that has happened pretty consistently for the last 24 months is that you continue to see an increase in participation in the Freddy Mac K series investments which has caused the yield to continue to be driven into tighter and tighter amounts which is one of the reasons why we stopped investing in the K series of 2013 and started to be a net seller.

The four assets we've sold to date have been focused around assets that had more seasoning and/or floating rate aspect.

We felt like when we looked at our portfolio we felt there was better opportunities given where these assets were trading.

So we bought those assets in high double digits and sold those assets in single digits.

When we look at our investment thesis to the extent we can capture gain and take out almost a thousand basis points of realized gain it is something we look at seriously depending on where we will go in the future.

And That's really what we have done.

We focus more of our energy on mezzanine and preferred investments in the multi family space, but again that space continues to be very competitive and many new members have added that space, so we are looking at other areas to try to deploy our investment strategy.

I think the one thing we continued to focus on is loans.

Securitization market continues to develop.

The reperforming market pricing has gotten tighter which has been helpful for us.

But it is still a very competitive landscape.

That makes sense.

I appreciate that.

Thinking about that $13.6 million line item specifically, just trying to make sure I'm thinking about it the right way.

I would think that there is some level of spread tightening in there.

CMBS has been, the series K has been in more demand.

I would imagine there is some level of as rates fall, bond prices rise, but I am not quite sure how much, sorry, as yields come down the bond prices rise, so there is just an evaluation gain that naturally comes with that.

There is sort of discount accretion, if you will, in there too.

Are each of those components in there, and how prevalent are each of those?

The majority of interest income generated in the multi family column is accretion income.

You can get a sense of that in our cash flow statement.

From a mark to market standpoint there will be a point where the tightening slows or stops.

Therefore, you'll have less mark to market gains.

The one thing we don't do in our portfolio is we don't mark to mark our distressed residential loans.

So, there are unrealized gains in those loans that aren't really reflected in our earnings statement or our book value.

So as we monetize and sell those loans over time, you will see more gains coming from that portfolio and probably less gains from the CNBS just because of the run the CNBS portfolio has had.

I appreciate that.

Specifically what I am trying to think about for projection purposes is very specifically with regard to the $13.6 on the multi family.

10-year rates were down somewhere in the order of 40 basis points Q-over-Q, just day-to-day.

Obviously they've backed up since then.

Obviously the spread tightening won't go on forever.

That is harder to predict.

We can see where interest rates have moved Q-over-Q and where they are today.

Obviously they are much further back up.

Anyway, I am just trying to figure out how much of that might be just purely marking the bonds to market and not the spread tightening or widening so much as the rate move into part of the curve influencing those, if that makes sense.

It does make sense, but I will tell you that to date the majority of price depreciation has been from spread tightening and not bond movement.

We entered into these investments and they are basically they are 10-year term loans with no prepay options.

The loans are assumable.

You can't prepay them.

There is little prepayment risk.

All of the risk is at the back end from a roll over risk.

You look at these bonds from a prepayment standpoint you have that prepayment risk.

You will ride this bonds down the curve.

So these bonds are now 2.5 years old so they are now 7.5 years.

If you look at the majority of the price depreciation to date it has been driven by tightening.

One of our thesis two and a half years ago was we didn't know when rates would go up, but we felt like (inaudible) and we felt like if rates were to go up, this was one asset class that would perform well because rates are going up and the economy is improving and therefore the credit market is improving.

Quite frankly, the best performing asset class in the last 2.5 years has been multi family.

It has been a great transaction for us, and one of the reasons we sold some of the first CMBS securities was they were getting three to four years to maturity and we think that when you look at the risk of the loans they are probably back loaded risk and we are sensitive to the maturity of the assets.

And through securitizations and sales we'll try to mitigate as much of that risk as we can to our investors.

I think the majority of the price appreciation is on spread tightening, period.

That makes sense.

Appreciate the clarity on that.

Thanks.

Sure.

Thank you.

I'm showing no further questions at this time.

I would like to turn the call back over to Steve Mumma.

Thank you very much, Operator.

Thank you everyone for being on the call.

We look toward to talking about our second quarter results in early August.

Thank you.

This concludes today's conference.

You may all disconnect.

Thank you.