New York Mortgage Trust Inc (NYMT) 2015 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 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, November 4, 2015.

A press release with the New York Mortgage Trust's third 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 & Presentations selection of the Company's website.

At this time, management would like me to inform you that certain statements made during the conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although New York Mortgage Trust believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from 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 would 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. The Company generated $22.4 million in net income to shareholders for the third quarter, essentially flat to the previous quarter. We run our Company with three goals in mind: to provide stable distributions, to maintain a stable book value, and to identify and execute transactions that provide opportunistic growth. This year has been a very challenging year for the Company's portfolio. We've had a volatile interest rate environment, constant uncertainty around Fed policy, monetary policy and consistent economic data and an overall lack of market liquidity. These factors have all weighed heavily on our strategy and performance year-to-date.

In light of these challenges, for the first time in over three years, we reduced our dividend payout ratio to $0.24 per share from $0.27. Our decision to reduce the quarterly dividend in September was primarily a function of our earnings performance year-to-date and our view of the current return environment for new investments. In our view, the supply of investment opportunities that can deliver attractive risk-adjusted returns has declined, and that has made capital reinvestment more difficult in recent quarters.

In response to this investment environment, we've maintained a defensive posture, electing to remain underinvested rather than deploying capital to invest in strategies that may not satisfy our return criteria. This defensive strategy has resulted in lower current earnings, but has delivered a stable book value over the course of this quarter.

Our distressed residential loan portfolio delivered the gains that we had anticipated earlier this year, generating over $24 million in gross realized gains from sales during the quarter, which are gains that were not previously reflected in our earnings or book value.

During the quarter, we initiated our second-lien residential program and continue to build our network of residential lenders. While we believe this product will provide an attractive income stream for the Company over the long term, the current low interest rate environment has limited overall consumer demand for this product, and thus our ability to accumulate these loans has occurred at a slower pace than originally planned.

We continue to concentrate on the credit, residential, and multifamily strategy and remain focused on investment opportunities that will provide attractive long-term potential returns.

As I said before, we had net income attributable to common stockholders of $22.4 million or $0.20 per share. We had net interest income of $18.3 million and net interest margin of 354 basis points for the quarter.

We sold two pools of distressed residential mortgage loans for aggregate proceeds of approximately $144 million, which resulted in gross realized gains of approximately $24 million. While the sales process is less than predictable than we would like, the outcome of the sales has exceeded our expectations. We purchased during the quarter a total of $81 million in first-lien distressed residential mortgage loans for an aggregate purchase price of approximately $68 million.

Our book value per common share at September 30 was $6.82, or unchanged from the previous quarter. We declared a third quarter dividend of $0.24 per common share that was paid on October 26, 2015. Included in our press release is a capital allocation table and a net interest spread table. These tables disclose balance sheet amounts, interest income, interest expense, weighted average yields, weighted average earning asset balances by investment silo. In addition, we have included a table that discloses historical CPRs by mortgage security investment category by quarter.

We had net interest income of $18.3 million and net interest margin of 354 basis points for the quarter versus a net interest income of $20.3 million for the previous quarter and a net interest spread of 391 basis points. The decrease in both dollars and net spread can be attributable to two factors: one, the sale of the CLO securities in the end of the second quarter, which, while representing less than 2% of our portfolio, did have an accounting yield exceeding 35%. And second, continued elevated fees in our IO portfolio.

In addition, slightly lower average earning balances for the period contributed to a lesser extent and should be mitigated in the future as we add assets. Overall, our mortgage securities portfolio CPR's fees totaled 15.1% versus 13.3% for the previous quarter, with our agency ARM portfolio's fees at 18.6%, up from 9.2% the previous quarter, our largest increase. Our fixed rate agency fees were essentially unchanged at 10.5%, and our agency IO CPR's fees increased to 18% from 16.3%.

Going forward, as we build out our residential loan portfolio, we would expect to see the interest spread to become more stable and range bound. We'd also expect our leverage to increase from less than 1.2 times to approximately 2 to 2.5 times. This leverage will initially be supported by bank warehouse lines, but over time as we accumulate loans, we will securitize these loans to create a more permanent financing structure.

Our total other income decreased by $12.9 million for the three months ended September 30, 2015, as compared to the same period in 2014. The change in total other income was primarily driven by a decrease in realized gain on investment securities and related hedges for $20 million. Our Agency IO portfolio experienced an increase in realized loss and derivative instruments of $3.5 million for the three months ended September 30 as compared to the same period in 2014.

In addition, realized gains in our multi-family portfolio decreased by $16.4 million for the three-month period ended September 30, 2015, due to the sale of a single multi-family security in the previous third quarter of 2014. An increase in net unrealized loss on investment securities and related hedges of $1.6 million for the three months, again related to our Agency IO portfolio. Our Agency IO portfolio continues to be negatively impacted by increased prepayment levels and overall interest rate volatility. A decline in net unrealized gains in our multi-family loans and debt held in securitization trusts of $20.3 million, mainly due to widening credit spreads during the third quarter of this year. An increase in realized gains on distressed residential loans of $26.4 million, due primarily to the sale of two pools of distressed loans in September of 2015.

The above comments are meant to reconcile the individual lines in our income statement, but in summary, our CMBS strategy, net realized and unrealized activity was down approximately $37 million from the same period a year ago; and our distressed residential loan portfolio was higher by approximately $26 million. These two factors represent the majority of the net change. Our portfolio strategy is intended to contribute to the bottom line at differing times in cycles, thereby acting as a self-hedging mechanism versus outright purchase of hedging instruments. In our opinion, this has contributed to a more stable book value over the last three years.

We had total expenses of $9.8 million for the quarter ending September 30, 2015, a decrease of $1.8 million from the same period in 2014. This is primarily due to the decrease in incentive fees related to the realized gain in our CMBS strategy in 2014, which was partially offset by increased expenses in our distressed residential loan portfolio for this current period.

During the quarter, we attempted to take our multifamily direct investment vehicle, RiverBanc Multifamily Investors or RMI, public in late July, but were unsuccessful as the market conditions worsened quickly for financial stocks, especially REITs during this period.

We will continue to pursue other capital alternatives as we monitor the current public markets for future capital transaction executions for this entity. We are committed to the space and continue to invest in the multi-family sector. We initiated our second-lien program during the quarter and continue to build out our network of originators. As I said earlier, we believe this strategy will deliver the risk-adjusted spreads that we target as the rate environment changes in the near future.

The Company continues to run a conservative leverage ratio, while the overall ratio was less than 1.2 times equity. We continue to monitor the FHFA and the outcome of their decision as it relates to our membership as a captive insurance company in the FHLB system. We are hopeful for a favorable outcome and a final ruling in the near future, as we believe the REIT industry can be a positive contributor to the overall mortgage market liquidity and instrumental in increasing homeownership for all. The Company's investment focus remains on residential loans and multi-family investments as we head into 2016.

Our 10-Q will be filed on or about November 9 with the SEC and will be available on our website thereafter. We thank you for your continued support. And, operator, we'd like to open it up for questions.

Thank you. (Operator Instructions).

Douglas Harter, Credit Suisse.

Hi, this is Sam Shah actually filling in for Doug Harter. So, my question was -- I was just wondering about your leverage levels, your comfort level with the current level, and whether you will be taking it up to take advantage of the widening spread environment.

Well, one thing we've done is, as we've said, we've maintained a defensive posture. We have significant amount of capital to invest. And as we look to make those investments, it's a combination of the types of leverage we're going to put on it. The place where we're looking to increase leverage will be bank warehouse lines around our residential loan strategy, both with distressed re-performing loans as well as our new second-lien program. To a lesser extent, we'll look at bulk purchases outside of that category, but the leverage will really be focused around that. And then ultimately, we would use that leverage to accumulate loans and then eventually securitize those into a more permanent structure.

Got it. Thank you.

Yes.

Eric Hagen, KBW.

Hey, good morning. Steve, how are you?

Good morning.

To expand on that concept of the patient approach you guys are taking, what exactly would the environment have to look like as far as spreads and yields go? In other words, what are you guys waiting for?

Sure. Look, in the distressed residential loan space, it's become a very competitive marketplace, which has allowed us to have excellent sales into the marketplace. Our ability to accumulate those loans in large bulk purchases has been reduced because of so much competition. We've been very successful at accumulate lower packages, smaller amounts and smaller package amounts. So, where historically we would buy $50 million to $100 million, we are now looking to buy stuff in the $10 million to $25 million, which takes longer to accumulate. But I think as you accumulate those loans, your entry price into those loans are better placed than if you go out and compete in large bid lists. So that's one thing from a timing.

Secondly, as we launched our second-lien mortgage program, our initial thoughts were that we will be accumulating at rates that would generate up to $50 million to $100 million by the end of this year, which looks like that target is probably going to get pushed out towards the first quarter. We are closing loans, but that pace is at a much slower pace. And those are really the investment strategies that we're focusing on today. We are active in the multi-family mezz lending space, and that's probably going to contribute to a lesser extent of our investment growth; but our primary focus is on those two residential aspects. And really the rate environment, -- [we see] had a dip in rates in the third quarter in October; it's allowed borrowers who have first-lien mortgages to refinance and cash out more effectively than remaining in their first-lien mortgage and take out a second-lien mortgage. We think that will change as rates increase in the future.

When I say we're going to increase leverage, our leverage overall is less than 1.2 times. So when we talk about taking up to 2 and 2.5 times, it's still very low leverage, and the balance sheet is really set up to add assets aggressively if we see spreads widen significantly in the fourth or into the first quarter.

Right. That's helpful. I mean, maybe drilling into the multi-family piece just a little bit, I mean, spreads have already widened. How much more do you think they could widen, and at what point would that look attractive to you?

Sure, our multi-family investments have centered mostly around mezz lending and first loss pieces in the Freddie Mac new issue space. And so, while those spreads have widened, which is an accurate statement, they have not widened to levels where we exited the marketplace in early 2013.

We continue to monitor that space. We think if spreads get out, there is a point where we'll re-enter that marketplace. It's not there yet. We have not participated in the AAA market. It's just something that we're not really interested in with that type of leverage transaction today. I mean, if it gets to a certain level, we may change that strategy.

But as we stand today, really our focus to multi-family is mezz lending, JV investments, and first-loss multifamily securities and agency space.

Last question on the multi-family: do you think the spread widening in the third quarter was mostly a credit driven widening, or was it more of just a strong issuance calendar.

I think overall, any new issuance market has issues today, multi-family or commercial CLOs, residential securitizations. The problem we have is you have a limited supply of the front-end cash flow buyers, the AAA buyers, if you will. They know there's pipelines coming, and there is an unwillingness of the Street to take down inventory.

So these securitizations have to be placed into the marketplace. These AAA investors know that; and so in my opinion, they sit there and wait for these deals to come and the deals widen out, because they know they have to clear. And they're just putting pressure on the system. And I don't think you see significant amounts of activities outside of the commercial CMBS.

We have not participated in a non-agency CMBS deal, quite frankly, because we're concerned with just the volume of deals and the quality of the deals, and so we focus on our agency side. I think it's a factor of supply and limited participation from non-end investors.

Thanks, Steve. Those were my questions. Thanks a lot.

(Operator Instructions) David Walrod, Ladenburg.

Good morning, Steve.

Hey, Dave. How are you doing?

Good. I want to discuss a little bit the pipeline of asset sales. Obviously you have the distressed loan sales this quarter. Can you talk about your expectations for multi-family and distressed sales, both in the fourth quarter and then into 2016?

Yes, I think, from a distressed residential loan strategy, I think we'd like to think over the course of the year, you have a 25% to 35% turnover in the portfolio in terms of your accumulating and selling, and so as we'd like to ramp up to a $600 million to $700 million distressed residential loan portfolio. Over the course of a year, you'd probably see between $200 million to $250 million in sales. We'd like that to be on a quarterly basis, and it has not been historically; that's something that we're trying to shoot for. But what the -- the first priority as it relates to any sales transaction is to maximize proceeds. So, we will generate the sale to the buyer of the highest price, and we will dictate that timing to try to cater to the buyer, which has resulted in timing misses on those sales, but I think excellent execution from a pricing standpoint.

Multi-family wise right now, we like where we sit with the portfolio. I don't think we are aggressively looking to sell any of those securities. The pieces that we have sold historically were seasoned pieces that we bought that were inside of four years to maturity. We don't really have anything left on the books that looks like that.

We did sell some multi-family IOs in the quarter, not a large balance in terms of dollars. They were lower yielding assets, and we just wanted to free up some capital for some other investments. But I don't think we have an active, aggressive sale opinion right now in our multifamily space. We're more in accumulation mode there and the distressed residential loan strategy and, in fact, incorporate sales as part of that process. So that's really the one strategy that we will be selling. The second lien program is not a buy and sell strategy; it's a buy and hold strategy and securitized. So that will also not generate sales.

Okay. Great. And then the other question I had is on the FHLB. Can you talk to us about how much you've drawn down there and what your expectations are for that going forward?

We limited our financing with the FHLB to about a third of our agency portfolio to date, primarily because the way we entered the FHLB system, we had to sign a letter saying that in the event that there was a negative outcome, we would have to exit in 30 days. So we're a little hesitant to put loans on the line today. If we get some clarity, we may change that opinion; and we've really only put a third on the line there because we want to keep our credit lines open with our counterparties on the street and until such time that we have better long-term future.

I think over time, if we became a permanent member in the FHLB system, the majority of our financing in the agencies would go to the FHLB. And we would look to transfer some of our loan financing activity to the FHLB also.

Okay, thank you.

Yes.

Steve DeLaney, JMP Securities.

Thanks. Good morning, Steve, how are you?

Good, Steve.

Good. So I just switched over; I apologize. I may have missed some of your initial comments. I'd like to start with book value -- I mean, congratulations! A flat book value and this quarter is going to show very well within the mortgage REIT universe. A lot of people took pain on CMBS during the quarter, but with spreads widening. Curious that that was not the case there, despite your heavy investment in multi-family, securitized loans. Can you comment on that, and as to why your mark to market, if you will, on your K series bonds did not result in a negative impact to book this quarter.

Well, I think there are two things: one, one thing that helps book -- a lot of times when you have an entire balance sheet that's marked to market and you sell those assets, as those assets leave, that mark to market leads with it. So our loans that we sold with a large gain, since they're not marked to market, you get the benefit of that flowing through your earnings and not really dragging down your book value.

Okay, that was helpful. And secondly, when we go to mark our multifamily securities, they are seasoned securities. So we look to the new issue market. We look to the secondary market, where these loans are trading. And I think a lot of this spread widening in the collateral is centered around the front of the curve -- I mean, they've all widened out, all the rated securities.

And I think that pressure comes from the pipeline of CMBS that's on the docket. And I think, like I said previously on a previous question, that I think the end investors have become very savvy to pipelines, and they understand that the distribution has to go to end users. And the ability for Street firms to warehouse inventory is reduced dramatically. And I think the untold story in the third quarter and going into the fourth quarter is that overall liquidity in the marketplace is dramatically lower than it has been in the last three to four years, in my opinion. And while securities are trading, there's very little inventory being taken; there is very little willingness for people to take inventory on. So that has put pressure from AAAs down to BBs.

The credit pieces, yes, they did have some widening in them. I think we look at where our securitized credit pieces are marked by third parties in securitization. We look at transactions in the marketplace, and we look at where new issues are being priced. And so we think that the new issue Freddie Mac space has probably widened out about 200 basis points from the (inaudible) a year ago and about 100 basis points during the third quarter. And as we go into the fourth quarter, there is additional widening in that sector.

Got it. Thanks, that's helpful, Steve, thank you. And your comments on the second-lien program, just picking up some of the wording in the press release, you were talking about the delay. It sounds like that's still a program you think will be viable. But we're just -- it's taken awhile to get some traction. And one of the reasons you referred to the current low interest rate environment, just trying to understand the impact on consumer demand: are you trying to say to us that with low rates, with mortgage rates being low, maybe just the traditional refi is being viewed as more attractive than taking out a second mortgage? What's the issue about low rates?

Yes. Look, when we started talking about this program back in May and June, which was really back in May when we initially started putting this together, the thought was the Fed was going to start to increase rates at some point this year, and the curve was going to get a little bit steeper and rates were going to go higher. And our feeling was for the borrowers who were sub 4% in 30-year mortgages, as that rate goes above 4% and heads towards 4.5%, and they want to cash out -- they want to generate some cash from HCA in their homes, they may look to do a second lien in lieu of doing a refinance of the entire balance -- it may be more economical. And so we thought that stand-alone second would be very attractive. With rates still at sub 4% on 30-year mortgages, that just hasn't come to fruition.

Our piggyback program is -- it's a piggyback where the borrower lives in an area where the agency conforming balance is less than what they need to borrow, and they don't have access to a jumbo loan in their market. Where we would do an agency first and a second lien on that to trade a piggyback, that has been where we've gotten some traction. The MI companies have become very aggressive in their insurance costs. And so under these new compliance rules and regulations, you have to present the borrower with all alternatives. Some of those alternatives from the MI space look lower on a payment basis but probably cost longer -- cost more on a long-term basis, but the standard is on a monthly payment. And that's also been competitive to our second lien mortgage product.

All right. That's helpful. Then, one last quick thing and I'll let you go. Back in the second quarter release, I believe you discussed the contribution agreement with RiverBanc. There are certain assets that you had on the NYMT balance sheet, so now as I understand it, the plan for an IPO there has been delayed. Should we just assume, Steve, for modeling purposes that those assets that otherwise would have been contributed -- should we just model that those are just going to remain part of your investment portfolio for the foreseeable future?

That's correct, Steve. That's correct. And I think what we will do is as we accumulate more mezzanine loans, the thought was you would contribute into RMI. RMI would do a financial transaction within RMI to get some leverage on that transaction to increase the yield. I think as we get to critical mass in our Company, we'll do that financial transaction in our own Company. We know we're still hopeful that there is a place for this RMI out as an independent company, and the strategy there is to create an investment vehicle that has a cost of capital that's less than a mortgage REIT. Where mortgage REITs trade between 12% and 15% dividend yields, the commercial REITs trade between 8% and 10% dividend yields. And so the thought is we can create a cheaper cost of capital. We would do it there; we do like those investments. It's just that that will be the strategy going forward -- that we'll accumulate and finance on our own balance sheet until such time that it changes.

Great. Thanks for the comments, Steve.

Okay. Thank you, Steve.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Steve Mumma for any closing comments.

Thank you, operator, and thank you for everyone that's been on the call. It's been a difficult quarter for the REIT sector in general, especially difficult for our shareholders; but we understand that, and we're doing everything in our power to get this thing reversed. We're confident that our portfolio going forward that we can continue to generate attractive returns. Thank you, and we look forward to speaking to you in March or late February.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.