New York Mortgage Trust Inc (NYMT) 2015 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 2015 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, August 5th, 2015.

A press release with New York Mortgage Trust second quarter 2015 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 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 Securities and Exchange Commission.

Now at this time for opening remarks, I'd like to introduce Steve Mumma, Chairman, CEO and President.

Steve, please go ahead.

Thank you, operator.

Good morning, everyone and thank you for being on the call.

Company released its second quarter results after the market close yesterday and included in the press release is several tables that I'll be referring to during this call.

During the second quarter, the Company continued to build-out its credit residential strategy by investing additional capital in its multi-family and distressed residential loan portfolios and enhance the Company's capital base with the issuance of $90 million in Series C preferred stock.

Consistent with our focus on credit assets, we are pleased to announce the expansion of our credit residential strategy into a new product category, a targeted second lien mortgage program.

The Company is in the process of finalizing a strategic relationship with the nationally recognized residential loan originator whereby we will be a primary investor in the program.

We anticipate targeting higher credit quality borrowers that are not currently -- that are currently underserved and believe that the program will provide us with an opportunistic way to expand our portfolio with credit assets that we expect will generate attractive risk-adjusted returns.

We will begin to purchase closed loans in the third quarter of 2015 and anticipate that the program will provide material contributions to our net interest income margin before the end of 2015.

As the program is finalized and builds out, we will provide additional details.

The Company did exit the second quarter with over $75 million in excess liquidity and we expect to invest that excess liquidity in the third quarter, primarily in distressed residential loans and our new second lien mortgage program.

The Company generated earnings of $0.20 per share for the second quarter of 2015, which was below our expectation and was primarily attributable to lower than expected loan sale activity in our distressed loan portfolio and underperformance by our Agency RMBS and Agency IO portfolios.

The Agency RMBS and the Agency IO portfolios suffered interest rate spread compressions mainly due to elevated CPRs which we believe will subside as we head into the end of the year.

Agency IO strategy has generated attractive returns for our portfolio over time and we expect this portfolio's performance to return to its historical norms in the future periods.

The lower than expected returns to the loan sale activities in our distressed residential loan portfolio continues to be more a function of timing than price execution.

In response to this, we have adjusted our process and anticipate more timely sales executions during the third quarter of 2015.

Finally, as we expand our credit residential strategy through the introduction of our second lien mortgage program, we expect our net interest margin to increase ratably and provide a comparatively greater contribution to earnings than realized gains on credit assets as we head into 2016.

Now I'd like to recap some of the second quarter activity.

Our net income attributable to common stockholders of $21.5 million or $0.20 per common share.

Our net interest income was $20.3 million and our net interest margin was 391 basis points.

We issued and sold 1.4 million shares of common stock at an average price of $7.79 per share under our at-the-market offering program resulting in net proceeds to the Company of approximately $11 million.

We issued 3.6 million shares of 7.875% Series C cumulative redeemable preferred stock for total gross proceeds of $90 million and net proceeds of approximately $87 million.

We completed the sale of our final CLO positions realizing a gain of approximately $3.2 million.

And a little history for our shareholders.

These securities that we sold this quarter along with another position we sold in 2011 were purchased in April 2009 for a total purchase price of $9 million for $46 million of original face bonds or $0.20 on a dollar per cost.

Over the life of the respective holding periods for these securities, they've generated gross sales proceeds of approximately $43 million or an average sales price of just under $93 per bond, resulting in gross earnings recognition of $34 million as either amortization income or gain on sale.

This does not include the interest coupon that we also earned on those bonds during the respective periods.

This was our first investment in credit incentive -- in a credit sensitive asset post the 2009 recap of our Company and the first time we used an external advisor which at the time was JMP Securities.

We sold or refinanced the distressed residential loans during the period with a carrying value of $16.6 million for aggregate proceeds of approximately $20 million, which resulted in net realized gains before income taxes of approximately $3.6 million.

Our book value per common share was $6.82 at June 30th as compared to $7.03 for March 31, 2015, a decrease of 3% from the previous quarter or 3.4% economic annualized return for the quarter when including the change in book value and the dividend payment.

We declared second-quarter dividend of $0.27 per common share that was paid on July 27, 2015 marking the 13th consecutive quarter at this level.

Subsequent to the quarter end, we entered into a contribution agreement with certain of our investments with RiverBanc Multifamily Investors in conjunction with the filing of a public offering on Form S-11 that is currently on file with the SEC.

For further details, I would ask you to go to the SEC website under the stock symbol RMI to review the S-11 filing.

RMI is currently in the marketplace and I'm not at liberty to speak in detail about this transaction.

Included in our press release is capital allocation table and a net interest spread table.

These tables disclose balance sheet amounts by silo, net interest income activity including interest income, interest expense, weighted average yields, and weighted average earning asset balances.

Also included in disclosure is the historical CPR table, which will assist in the performance of the overall silos.

Our net interest income was $20.3 million for the quarter, as I said previously, a decrease of $1.3 million from the previous quarter.

Our net interest margin was 391 basis points, a decrease of 24 basis points from the previous quarter.

The decrease is above net interest margin and basis points are primarily due to elevated CPRs on our Agency MBS and Agency IO portfolio and lower average earning assets for the period.

CPRs were up approximately 15% overall from the previous quarter with our fixed rate Agency MBS and our Agency IO portfolio the main reasons for the yield decrease.

Total other income decreased by $5.4 million in the three months ended June 30, 2015 as compared to the same period in 2014.

The change in total other income was primarily driven by several factors; a decrease in realized gains on investment securities and related hedges of $2.6 million, our Agency IO portfolio had an increase of $5.8 million in realized losses on its derivative instruments for the three months as compared to the same period of June, 2014.

The increase in realized losses generated by the Agency IO portfolio was partially offset by realized gains from our CLO sales totaling $3.2 million for the period ending June 30, 2015.

An increase in net unrealized gain on investment securities and related hedges of $6 million for the three months ended June 30, 2015 as compared to the same period in 2014, primarily related to our Agency IO portfolio.

The increase in net unrealized activity was partially offset by the realized loss previously discussed above.

The Agency IO portfolio strategy is structured and hedged to primary generate net interest margin on the portfolio such that over time, the unrealized and realized gain loss activity associated with the strategy will offset each other and result in no significant gain or loss.

During the second quarter, additionally, our Agency IO portfolio was negatively impacted by the increased prepayment levels I previously spoke about.

A decrease in net unrealized gains in our multi-family loans and debt held at securitization trust of $14.6 million for the three months ended June 30, 2015 as compared to the same period in 2014.

While the portfolio continues to perform very well, the yields have gotten to levels where further tightening is less likely as compared to the previous two years.

An increase in realized gains on the distressed residential loan portfolio of $3.2 million for the three months ended June 30, as compared to the same period of 2014.

Just to understand, there were minimal gains in the second quarter of 2014 as the first quarter had a large gain of approximately $14 million.

I say this to point out the timing issues in sales activity, which we are trying to manage and have more timely deliverables to make the earnings statement more consistent throughout the year.

An increase in other income of $2.1 million was due primarily to an increase in income from our common and preferred investments in RiverBanc Multifamily Inc.

and entities that invest in commercial real estate assets and debt investments and the income generated from our 20% ownership of RiverBanc, the external manager.

We had total expenses of $9.1 million for the quarter, an increase of $1.6 million from the same quarter in the previous year.

Of the $1.6 million increase, almost all of it or $1.4 million is related to the increase in our distressed residential portfolio, which had the corresponding increase in expenses from higher servicing costs, work-out costs and due diligence costs.

We continue to focus on investing in credit assets, such as residential distressed loans and multi-family direct lending mezzanine loans and preferred equity investments.

In addition, as I spoke earlier, we are launching an initiative in the second lien residential mortgage product, which we believe will be our next significant business silo heading into 2016.

The Company continues to run at a very conservative leverage ratio with overall ratio less than 1.4 times equity.

We continue to monitor the FHFA, the outcome of its decision as it relates to our continued membership as a captive insurance company in the Federal Home Loan Bank System.

While we are hopeful for a positive outcome as we believe the REIT industry can be a positive contribution to the overall mortgage market liquidity, as well as develop innovative products that are instrumental in increasing homeownership for all.

We endeavor the Company to manage a portfolio of investments that will deliver stable distributions to our stockholders over diverse economic conditions and not focus on the result of any single quarter.

We continue to believe our current portfolio coupled with improved loan sales execution on our distressed loan portfolio and the full development of our excess -- the full deployment of our excess liquidity can generate annual earnings that are reflective of our current dividend policy.

Thank you for your continued support.

Our 10-Q will be filed on or about August 7 with the Securities and Exchange Commission and will be available on our website thereafter.

Operator, if you could please open for questions.

Thank you.

(Operator Instructions).

Michael Widner, KBW.

Hey, good morning, Steve.

This is Eric on for Mike.

Hi, Eric.

How are you doing?

Good, how are you.

When you guys run different projections and distressed scenarios for your investments to anticipate trends, shocks, things like that to pre-paid fees, default, loss severities, et cetera.

Can you share some -- how both the assumptions and the outputs change over the next year or so?

More specifically, how do you expect credit overall to perform not just under the first fed rate hike but perhaps a series of hikes in 2016 and the possible headwinds to the economy as a result of that?

Thanks.

We position and we have positioned the portfolio over the last three years with the expectation that at some point rates are going to rise.

And that expectation has been built around the fact that rates will increase is because the economy is doing well and improving.

I think the economy while it's not doing great is not doing poorly.

And I think right now it continues to mutter forward because there's so much liquidity in the marketplace, it's almost impossible for it to go backward.

We do believe that credit is the cycle and we do believe as we've gotten in and out of securities, some of those investments that we've made historically, such as the CLO, such as the Freddie Mac's K loss security, we were able to get attractive yields from a combination of two things, market liquidity and the overall market.

As the credit continues to improve, we start to look at the last dollar invested in our REIT performing portfolio and continue to think those yields are attractive however, the dollar prices are getting higher and higher.

One of the reasons why we're starting to focus at other newly originated products is we do think that the borrower's balance sheet is improving.

We do think that the current underwriting standards that we will write our loans to will be fully documented and we do believe that we'll be able to identify what we believe are good risk-adjusted returns for our products.

We absolutely run varied scenarios of risk.

I mean, anytime you're taking a second position in a mortgage lien or anytime you're investing in a credit sensitive asset, you have to be sensitive to what the overall economy is doing.

We think there'll be a cycle there, we think we're at the early part of the cycle and we hope to gather and capture a large portion of that cycle in the coming 12 months to 18 months to 24 months and we will continue to evaluate it.

So while I don't like to get into specifically how we run those scenarios, we absolutely are running many scenarios.

We do think if the fed continues to raise rates -- look they need to raise rates at some point, do I think rates are going up 300 basis points, absolutely not.

So I think they're going to raise rates over the next 18 months.

Yes.

Do I think it's gone up by 100 basis points, probably, but I don't think they're going to raise it in a vacuum.

The ADP number that came out this morning was massively understated from what expectations were 185,000 versus 237,000.

I think if the employment number comes out and it's below 200, the Fed is not doing anything in September.

And I think the [Fed's stability] assumptions; they just keep getting mixed signals on how the economy is doing.

So and that's what we're trying to figure out where we want to participate.

We do think the combination of our entry point in the credit on the second lien program and our ability to create structures around those assets will deliver some interesting yields back to our portfolio.

Any volume predictions for the second lien program at this point?

Because the second lien program really is a new program and we know that other people have been talking about putting it and we know there is incremental programs across the country.

We have expectations today, but really based on discussions and not based on any empirical evidence.

We do know that there is a dearth of this product and we -- I can better, I'll better be able to speak to that as expectations after the third quarter.

We would anticipate having loans closed in the third quarter and we would anticipate those loans not to be one or two loans, but start to generate some meaningful amounts of investment dollars.

Got you.

Thanks, Steve.

That's really helpful.

Great.

David Walrod, Ladenburg.

Good morning, Steve.

Good morning, David.

On the $75 million of excess liquidity, can you give us some thoughts to how much you were able to deploy in July and how quickly you think you'll be able to deploy the rest of that?

A good part of that -- the liquidity is really two functions.

We head outright cash available on hand.

So most of that cash has been invested.

We still have excess liquidity because we can leverage up some of the assets that are under-levered today.

If you looked at our Agency portfolio, it was really under-levered and we have some loans that we finance with cash and we can put out on warehouse lines to get some additional leverage.

But we have some dry powder primarily from the second lien's program, but we'd like to think that this thing is going to ramp up substantially.

We don't know, but the thing is going to start to percolate this month hopefully and we'll start closing loans going into September and get a better sense of volumes.

But we're pretty excited about this program.

Okay, that's helpful.

And then secondly, in your press release you talked about the asset sales and how you changed some of your processes in order to I guess remove some of the lumpiness and have more consistent closes.

Can you talk about some of the changes you made?

Look the Company's portfolio has increased substantially going into this year.

So we were running at a $200 million or $250 million portfolio, now, we're almost $600 million.

Our loan sales average size has increased and so as that loan sales size has increased, you sell into more competitive markets, which require more due diligence and additional documentation.

And some of that timing was not expected in terms of closing, which has caused problems for us though we've gone back and readdressed our sales pool.

Information as well as the way our pools look more homogeneous.

So we think we'll get better price execution on a more predictable timely basis.

And so for example, we put out pools in the second quarter of $30 million to $40 million and find out that the seller with the best price wants to kick out 75% of the loan, which makes no sense to sell the pool, so we pulled the pool back.

Now was that seller, was that buyer real buyer, apparently not and so we'll be more careful going forward on who we target the sales to and how we conduct the auctions of the sale.

Okay, great.

And my last question, you touched on the FHLB at the end of your prepared remarks.

Did you start to receive advances from FHLB or is that something you're looking to do going forward?

No, we do have advances.

We were currently financing our Agency portfolio.

We'd love to put some long -- and most of the financings are 30 days or less only because we had to execute a letter that gives them the right to throw us out in 30 days in the event that the FHFA ruling comes back negative for captive insurers, especially REITs.

We are trying to figure out a way that we can create some longer term liabilities with them that gives us some kind of put back to them for cost.

I don't know if that will ever happen.

We'd love to have some kind of final ruling.

We are working with some associations to try to get some lobbyist actions going to assist our cause, but that is, washing takes a long time and you really don't have any reasons to opine on this situation.

But we do have fundings, we do have borrowings, about a third of our repo book is with the FHLB right now.

All right.

Thanks very much.

Thanks David.

(Operator Instructions) Steve DeLaney, JMP Securities.

Thanks, good morning Steve.

I just jumped on a little bit ago and I apologize if you've addressed some of this in advance.

But I'm excited about your second mortgage opportunity.

As far as the product that you've designed, is this going to be a fixed term loan product or more of a floating rate line of credit product?

Steve, at this point, we would prefer not to talk about our product until we get out to the marketplace.

It's going to be a very competitive product.

It will meet, it will qualify for most of the needs that the regulators are looking for.

And that's really, what I want to talk about.

We will absolutely put out the program guidelines as we go into the third quarter at least generally speaking, but it will be a product that I think will be very attractive as an alternative for additional financing for borrowers looking to buy a home, that of a home purchase price puts him outside of an Agency conforming loan but he cannot qualify for a jumbo mortgage with the large providers today.

Got it, got it.

So it sounds like it's a, it's a prime or euro prime type of targeted borrower, correct?

That would be correct.

Okay, good.

Absolutely.

And as that grows, can you give us a sense on where capital will most likely be reallocated from?

I know you have some excess liquidity currently.

But as you burn through that, looking at your current allocation as we add another column into your investment table, sort of where is it like, if that goes up, what comes down?

Over the last three years, what has come down is our Agency portfolio and I think we would continue to let that silo decrease until such time spreads become more attractive for us.

We have not purchased a Freddie Mac K-Series first loss piece since 2013.

While we like the asset class with deals, we can do better elsewhere.

One of the reasons why we have made a separate investment in a company RMI is to try to generate a second currency of capital that's less than our currency, so they could be more competitive in the marketplace.

So I would think that we will put less dollars in Freddie Mac K-like investments unless the yields expand and put more dollars towards new originations like products.

So the second will be the first program that we're doing but we're also looking at other products that -- REITS are currently doing non-QM first is something that we are looking at and probably will start investing in at some point in late 2015 or 2016.

But we'd like focus currently on the seconds program.

Okay, great.

And as you look down the road there, do you see any opportunity with respect to the new product.

Is there a securitization market opportunity there?

Or your discussions with the home loan bank, I personally don't know whether they consider taking second mortgage loans, I was curious whether you've gone down that road with them?

Look the product descriptions, they do have -- they do and this is across the Federal Home Loan Bank System.

There is underwriting guidelines to finance second lien mortgages.

We will absolutely, as we have done with all the other asset classes, especially around credit, look to eventually create some kind of permanent financing structure for those assets, whether it be a securitization longer-term loan from the Federal Home Loan Bank System or some other form of capital transaction which we haven't thought of.

But yes, we are absolutely working on that and have partners, right now they're are going to look at that for us.

Well, appreciate the color around that new program and all the best.

I hope it's a big success for you.

Thanks.

Thanks, Steve.

Thank you.

I'm showing no further questions in the phone queue at this time.

I'd like to hand the program back over to Mr. Steve Mumma for any concluding remarks.

Great.

Thank you, operator, thank you everyone for being on the call.

Thank you for supporting the Company.

We are very excited about this new program.

We look to build a strong business model and to finishing up 2015 and have the tailwinds at us going into 2016.

Thank you.

I look forward to talking to you in November.

Ladies and gentlemen, thank you very much for your participation.

This does conclude the program.

You may now disconnect.

Everyone have a wonderful day.