New York Mortgage Trust Inc (NYMT) 2016 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 2016 Results Conference Call. (Operator Instructions)

A press release of New York Mortgage Trust first quarter 2016 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 to inform you that certain statements made during the conference 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 on the Company's filings with Securities and Exchange Commission.

Now at this time 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. Included in our 8-K filing yesterday after the market close was our first quarter earnings press release as well as a summary of a planned purchase of a remaining 80% interest of RiverBanc, our multifamily external manager.

The first quarter continued to be a difficult environment for fixed income strategies. As the ten year treasury note hit a six month low of 1.65% in January, down from 2.3% at the end of 2015, only to retrace back up to over 2% before the end of the first quarter. Credit spreads continued to widen through February before showing signs of some recovery in March and ending slightly tighter than the spreads at December 31, 2015.

Trading volumes and related opportunities decreased during the quarter as banks and other financial institutions adjusted to the new regulatory capital requirements as well as the post-Dodd-Frank proprietary trading limitations. While our earnings per share was negatively impacted by the realities of the environment, our portfolio performed well, delivering 11.6% annualized economic return with less than a 1% decline in book value.

In light of the first quarter volatile interest rate environment and projected continued disappointing economic activity, both of which we believe have put or will continue to put pressure on the performance of our Agency RMBS portfolios, we've decided to restructure our portfolio and reduce our exposure agency RMBS.

At the same time, we will increase our strategic investments in both residential and multifamily credit assets where we see continued opportunities. We believe these combined actions will provide better risk adjusted returns in light of the current operating environment and expect this transition to take place over the next several quarters as opportunities to redeploy are identified.

We are particularly excited about our acquisition of the remaining 80% interest in RiverBanc and believe that RiverBanc's balanced approach to both fixed income and growth-oriented investments aligns well with our proven, stable, and long-term investment strategy. This internalization builds on the more than five years of successful partnership between our two companies and provides us with a significant opportunity to capitalize on and enhance our competitive position in the $2.5 trillion US multifamily market.

In RiverBanc we have a trusted partner that is a leading manager with a proven track record of origination and credit underwriting. Moreover, we believe the multifamily investment expertise that RiverBanc founder, Kevin Donlon, will bring?to our senior management team in his new role as President will significantly strengthen our ability to identify and secure future opportunities in this area.

The company generated net income of $13.7 million or $0.13 per share for the first quarter. The portfolio generated net interest income of $18.1 million and net interest margin of 333 basis points, an increase of 29 basis points as compared to the previous quarter. The company delivered an annualized economic return of 11.6% or 2.9% for the first quarter. During the quarter, the company sold distressed residential loans with a carrying value of $34 million for aggregate proceeds of $39.5 million which resulted in realized gains of approximately $5.5 million. The company also declared a first quarter dividend of $0.24 per share which was paid in April of this year.

As you can see in the capital allocation table included in the press release, we had approximately 20% of our capital allocated to agency strategies. We intend over time to transition much of this capital to multifamily related investment opportunities which may include CMBS, direct originations, and direct investments in single multifamily properties. The internalization of RiverBanc will give us a better expense leverage over time as we allocate more capital to this strategy. RiverBanc will continue to pursue third-party capital to invest alongside the company or to provide capital to other parts of the financial structure where we are not interested in investing, such as a senior loan position.

Our other area of main focus, residential credit, where we currently have approximately 42% of our capital allocated which is mostly in reperforming and performing loans or collectively referred to as distressed residential loan portfolio, will continue to be a key driver in our earnings. We completed a reperforming securitization in April 2015, resulting in total proceeds net to the company of $167 million. This type of securitization allows us better tools to manage the portfolio over longer periods of time as compared to traditional bank warehouse lines which are subject to margin calls and limitations set by the lender.

As a result of the new 5% risk retention requirements for the sponsor of a securitization, we believe we have more opportunities to participate as permanent holders of risk as other traditional sponsors move away from being a direct issuer to avoid these risk retention requirements. We currently are working on several strategies that we hope to execute in the coming quarters that will be accretive to earnings.

Our second lien origination program launched in 2015 continues to move forward but not at the volumes and pace that we had hoped. Origination volume continues to be impacted by the persistently low rate environment as well as other borrower options that have entered the marketplace since starting this program a year ago. We have the infrastructure in place and we will continue to maintain a presence in this market.

On a positive note, the loans that we have accumulated are all performing as expected and exhibit better credit attributes than originally planned. In general, our securities -- our portfolio performed consistent with the previous quarter. Our CPR speeds were slightly lower, coming in at 12.7% for the quarter versus 14.7% for the previous quarter. Our IO portfolio which is the most sensitive to CPR levels was unchanged from the previous quarter.

The distressed residential loan portfolio net margin improved as compared to the previous quarter, increasing by 94 basis points. In addition, we realized a $5.5 million gain in the first quarter from the sale of $34 million in loans. Our expenses for the quarter were $9.4 million, down approximately $300,000 from the previous quarter.

Going forward, we would expect an accretive impact from the internalization of RiverBanc to the company's overall earnings. We will be more specific in those figures as those numbers normalize in the coming quarter.

We believe our new portfolio focus on multifamily and residential credit combined with the RiverBanc team addition and our strong balance sheet positions us well in these difficult markets as we head into the remainder of the year and thereafter.

Again, we would like to thank you for your continued support and I'd like to open it up for questions. Our 10-K will be filed on Friday, May 6, with the SEC and available on our website thereafter.

Operator, please open for questions now. Thank you.

(Operator Instructions) Eric Hagen, KBW.

Thanks. Good morning, Steve. Two part question. What is the yield you expect to hit on the RPL securitization you completed? And then can you comment on how active the RPL-MPL market is for whole loans today versus, say, a year ago?

Sure. The securitization was done at a 4.25% yield. 4% coupons, sold at a slight discount for 4.25% yield. We thought we got an excellent execution in the marketplace. It was a tighter yield than had been done on the previous three MPL deals. So, we were pretty happy with that execution. The overall market, I think the volumes in the overall market are down slightly from a year ago. We still see active two-way flows in the marketplace. There are still large bank sellers of RPL loans, several billion dollars have transacted so far this year.

So, we still think there are a lot of opportunities out there. Some of the things we're working on is focusing as much on possible securitizations where we're taking back some of the A2 notes and putting leverage on them through repo where we think we can get a little bit better all-in yield rather than holding the loans outright. Those are things that we're working on but we still think there's a lot of opportunity in the MPL world. The pricing has held in. We had a nice execution sale in the first quarter and we will continue to transact sales periodically throughout the year.

When you relever the A2 notes, what kind of -- can you discuss the structure for that?

So, the A1 notes -- I apologize. I said A2. It's A1 notes. I mean, the typical A1 note, you're getting a repo that's somewhere less than 2% in cost, much less than 2%. Between 1.5% and 1.75%. You typically get a haircut of about 25%. That levered return on that transaction ends up being in the 13% to 15% yield depending on what securitization you're working with on the A1 note. But we think we can create some structures going forward in partner with traditional securitizers. That is going to give us additional access to paper that we currently don't have. We're working on a couple of those right now with partners.

Great. Thanks. Thanks, Steve.

Douglas Harter, Credit Suisse.

Hi. This is actually Sam Choe filling in for Doug. So, I guess I had a strategic question as to the RiverBanc acquisition. I was just wondering why this made sense right now as opposed to maybe in prior quarters? I guess we can start from there actually.

Look, I think you look at your opportunities unfold over time and I think in hindsight if you have the ability to go back in time, yeah, sure, we would have rather internalized them three years ago if we knew today what we knew back then -- or we knew today what we could've known back then. We just look at what we want to do going forward as a company and we look at the interest rate and economic market that we're operating in and the volatility in rates makes it very difficult, in our opinion, to invest in certain strategies.

We have liked the credit transactions and we continue to like the credit trade. We feel very comfortable on taking single multifamily property risk. We have a great team and as we dedicate more capital and allocate more capital to those strategies it got to the point where it made sense over time to try to bring up this management team into the fold. So, it's a great addition to our senior management team as well as the RiverBanc team itself has done a great job in credit underwriting and credit origination which we'll build on that.

Got it. And you said that the timing was around the end of second quarter? Am I correct?

We entered into the purchase agreement and we would anticipate to close in the second quarter. So, it will not go past second quarter.

Thank you.

David Walrod, Ladenburg.

Yes. Good morning. I don't know if you'll be able to do this. Obviously you've got a Q coming out but can you give us some idea in the management fees, over maybe a broader term, what percentage of those were RiverBanc and which were some of your other managers?

We don't actually break that out, David. I will tell you especially in periods of time when we're executing sales and have large realized gains on the CMBS which we have done historically, a significant part of those fees are related to RiverBanc. So, we absolutely expect it to be accretive. You will see the base management fee drop by at least 50%. In periods of time when we're selling CMBS securities, that number would be even greater.

So, you'll see a corresponding pickup in other general and administrative which would be the payroll for those companies, the employees. But net-net to the company, because remember we own 20% of RiverBanc. So, we were picking up income above the line in other income. But the net of those two numbers will be accretive to the company overall going forward. And as we can better define what that accretion looks like we'll talk about that in specific terms in the second quarter call.

Great. And then on a different topic, you've talked a lot about how the board looks at the dividend as far as the earnings over a cycle. Can you give us some thought as to what you think the overall earnings, the earnings over a cycle are still in line with where the dividend is or if maybe that's not the case anymore?

I think one of the reasons why we're transitioning and making this change is the anticipation was that we were going to go into a different rate environment and I don't think after the last three quarters or two quarters, especially the fourth quarter into the first quarter, you're just not seeing consistent data that would indicate that either the world economies are improving or specific economies are really improving at any significant amount.

Coupled with the pending election and all the uncertainty that will bring, we just -- we're going to reevaluate our portfolio. One of the things we're doing is as we put together a plan to reallocate the capital and look at what kind of yields we can generate, not only with the assets that we will invest in multifamily, but what does that look like in terms of external capital that we can bring in, what kind of fees that drives.

So, we will be reevaluating our earnings potential. We currently have not changed that plan to date. We declared a first quarter dividend of $0.24. We are keenly focused on our economic book value returns. We don't want to start generating negative economic book value returns and underwriting the dividend and putting overall pressure on the economic franchise, enterprise franchise.

So, we are sensitive to that. We look at several factors in setting our dividends and we will continue to do so. And when we do make a change, if we do make a change, that change would be to a level that we would anticipate holding for an extended period of time as we have done in the past.

And then the last question is just your thoughts and the board's thoughts on a share buyback?

I've been vocal about not being overly excited about doing share buybacks. I think they're short-term fixes for not long-term solutions and while it's accretive, it's absolutely accretive, I just don't like what it does long-term impact to the company. If our stock trades down to levels where it was in January and you get to 50% of book, I think at those levels you have to start to look at what's going on in the world and if we have the excess liquidity, probably step into the market. I don't think we could ever make a significant impact that really changes the course of the company and I think the excess capital that we can redeploy long-term will be more beneficial to the shareholders than buying back stock.

Thanks a lot.

Jack Marino, Colorado Wealth Management.

Thanks for taking my questions this morning. First thing I've got for you, with the acquisition of RiverBanc, in future periods should we expect segment level data so we can see how effective that acquisition has been?

We probably will not do segment reporting. It would only probably be a requirement if the majority of the activity that we're doing is unrelated to the securities business in type of methods we're making today which I don't really see happening. We can -- you'll be able to see the contribution that does in our capital allocation table where we do break out yields, both asset yields and liability costs. We don't go through though and break down expenses by category yet. But we've just done the net margin. So, I don't anticipate doing segment reporting going forward given the business we plan on doing today.

Will there be any way for us to see a break down then in terms of fees received by RiverBanc for assets under management for other investment firms?

Yeah. You'll see that. Right now because we own 20% of the company, we were picking up the income from RiverBanc on a line that was other income. But if the number becomes -- if the fees that we're getting from third-parties is materially to the overall income statement then it would be broken out in a separate line. But it would have to be material so that would probably be somewhere, $2.5 million to $3 million, we would break it out as a separate line that would say external management fee revenue.

Okay. So, $2.5 million to $3 million. Is that going to be annual or per quarter for you to feel it's material?

Probably per quarter. And we hope that it becomes material. Believe me, we would love -- if it becomes material obviously we're going to be talking about it and we'll be disclosing it in ways that you'll be able to understand that.

And then another analyst had a question about expenses paid to RiverBanc and it sounded like you guys were saying that wasn't broken out separately but on your last 10-K, page F57 it looks like you break it down by year, the fees paid to RiverBanc.

Yeah. In the 10-K we put it out there. That's right. On a quarterly basis we typically do not.

Okay. That makes sense. That's all my questions. Thank you very much.

(Operator Instructions) Stephen Laws, Deutsche Bank.

Actually, Steve, all of my questions related to RiverBanc have been answered. Thank you.

Steve DeLaney, JMP Securities.

Thanks. Good morning, guys. I apologize, I'm hoping on late. So, I apologize if you've already covered some of this. I'm just curious, I know that RiverBanc was founded by Kevin in 2010. I believed it's headquartered in Charlotte, North Carolina. Kevin, could you tell us how many people are on your team down there that are -- I assume all the employees are coming over and will become employees of New York Mortgage Trust?

Yeah, Steve, Kevin's not here right now. He's got approximately 13 employees in Charlotte. Those responsibilities are between origination, credit underwriting, and asset management.

Okay. And all that will just be -- overhead associated with that will just run down as comp expense and facilities and all that?

That's correct.

Because in effect, I think I used the term in my note, internalization of the sub advisor. I hope that was accurate.

That's correct. As you think about it, the way we show RiverBanc today, we pick up 20% of the net income of RiverBanc plus less the management fees that we pay to RiverBanc. But RiverBanc itself runs at a profit, so we're going to collapse that, we'll collapse the entire business into us, eliminate the management fees that we pay, but the net of all that activity will be accretive back to the company over time.

Okay. I know that when you first started working with Kevin, the real focus was getting involved in the Freddie Mac K-series deals, but when you look at everything that RiverBanc has done, $400 million in sum of transactions, I know the focus is multifamily but does that sort of cross the entire capital stack from senior debt all the way down to equity and particular projects?

Absolutely. We do own 67% of RMI which was a company that we tried to take public last summer and in RMI we have JV equity investments as well as mezzanine debt. We don't have any senior loans today, Steve. I don't think as of now we don't have interest in putting senior loans on our books. However, one of the things I did mention was we are going to keep the external manager active. So, we will continue to try to attract other capital that we can manage and part of that thought would be to the extent that we went out to the multifamily property, we wanted to be the JV equity and-or mez provider, we would use this capital that we raised to lend for the senior position, so we could actually be a full solution for a particular property.

Got it. In the past when you've allocated capital, Steve, I know markets change, but you sort of expressed a desire to find mid-teen ROE. So, as you go into this with RiverBanc, would you still be looking to put capital to work with that kind of return expectation?

Look, the typical asset that we think we can invest in multifamily is in this low double digit, 10% to 12%. We think that by bringing in some of these activities directly onto our balance sheet it's going to give us better access to funding those assets and getting some leverage. So, we think after we get some leverage on those assets, that will continue to drive close to 13% to 15% types of returns and those are the things we're going to be analyzing going forward in terms of where we think we can drive returns given the environment that we're in and the kinds of risks that we're willing to take to get those returns.

I appreciate the comments, Steve. Thanks.

I'm showing no further questions at this time. I would like to turn the conference back to Steve for closing remarks.

Thank you, Operator. Thank you, everyone, for participating in the call. We appreciate your support. We look forward to talking about the internalization of RiverBanc and our portfolio as we go forward in the future on our second quarter earnings call. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.