New York Mortgage Trust Inc (NYMT) 2016 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 2016 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 3, 2016. A press release with New York Mortgage Trust's second 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 me to inform you that certain statements made during this conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although New York Mortgage Trust believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release and from time to time in the Company's filings with Securities and Exchange Commission.

Now, at this time, I would like to introduce Steve Mumma, Chairman and CEO. Steve, please go ahead.

Thank you, Operator. Good morning, everyone, and thank you for being on the call. Kevin Donlon, our newly appointed President and former Founder of RiverBanc is on the call, and will be available to answer questions at the end of this presentation. Included in our 8-K filing yesterday was our second quarter earnings press release.

Before I go into specific details about the Company's quarter, I would like to recap the second quarter market environment. Second quarter began with spreads across fixed income markets continuing to improve from the first quarter-wise. This tightening continued throughout most of the second quarter.

In certain RMBS and CMBS markets that we invest in, we saw spreads improve over 100 basis points or 1% from the market-wise in the first quarter. We also lived through the Brexit vote, which apparently surprised everyone that led to a short-term global sell-off in stock markets and a global rally in interest rates with several countries seeing their 10-year rates hit all time lows, including three countries that have negative 10-year rates today.

In July, we saw a massive rally in US equities ultimately with the Dow Jones hitting an all-time high. During this time, the US 10-year treasuries remained near historic lows putting pressure on prepayment sensitive securities, in particular mortgage-backed securities. All this volatility has made the Fed more apprehensive on their next rate move, which may not come until sometime next year.

Throughout this year's market volatility we have focused on credit exposure on real estate assets, both in residential and multifamily. Why? Because we think the dynamics of home ownership has changed, where people will be renters longer, both in the early parts of their life and at the back-end of their life for differing reasons, but, nonetheless, it will impact the way we think about housing going forward. We expect this trend and our increased allocation of capital to multi-family will benefit our portfolio and our operating performance over the next several quarters. We continue to believe that our focus on credit exposure in both residential and multifamily sectors will provide better risk-adjusted returns in these trying markets.

Now, for some specific thoughts on our Company's second quarter performance. We took significant steps during the second quarter to accelerate the transition of our portfolio to one focused increasingly on residential and multifamily credit assets. Consistent with this approach to capital allocation, we acquired an additional $98 million of distressed residential securities and $15 million of Freddie Mac K-Series CMBS during the quarter, while reducing our net capital allocated to Agency RMBS by approximately 11%.

As part of our strategy to further capture the expected continued growth opportunity in multifamily sector, we purchased and completed the internalization of RiverBanc during the second quarter. We anticipate a growing pipeline of multifamily investments in the coming quarter, as a result of the internalization of RiverBanc and our increased capital commitment to their efforts.

The second quarter was marked by a continued difficult investment environment, as evidenced by diminished trading volumes in non-Treasury and Agency markets, due, in part, to reduced inventory positions and risk taking tolerances at Wall Street firms. This new trading paradigm has reduced the investment opportunities available to our Company, while lengthening the time to become fully invested. Our earnings for the second quarter were negatively impacted by a number of factors, including delays in redeploying capital into our target asset classes due to this challenging environment for new investments, which has resulted in operating at less than desired leverage level. In addition, the lengthening of time required to clear loan sales in our distressed residential loan portfolio caused a transaction expected to close in the second quarter to be delayed until the third quarter. Even though we did not generate the desired realized gains in the second quarter, we continue to believe that an annualized return of 15% for our distressed residential loan portfolio is achievable for this year.

Company generated a net income of $11.2 million or $0.10 per share for the second quarter. The portfolio generated net interest income of $17.2 million and net interest margin of 321 basis points, a decrease of 11 basis points as compared to the previous quarter. During the quarter, the Company completed a distressed residential loan securitization, resulting in gross proceeds of the Company of $168 million.

We completed the purchase of RiverBanc internalizing the team with expected synergies to come in future period. As part of the transaction, we also purchased remaining interest in two other entities, giving us complete control over additional multifamily commercial assets. Company also declared a second quarter dividend of $0.24 per share, which was paid in July.

I will now speak to our capital allocation table included in last night's press release. We had approximately $162 million of capital committed to our Agency strategies, down from $180 million in the first quarter. We will continue to reduce this exposure as we see opportunities to reinvest in our targeted asset classes. We increased our equity exposure in multifamily to approximately 50% of our equity or approximately $47 million increase, most of which was related to the purchase of RiverBanc and the related companies.

Over time, the internalization of RiverBanc will give us better expense leverage and more financial flexibility with these assets. In addition, with the RiverBanc team, we will pursue managing third-party capital to invest alongside the Company that will drive non-capital intensive revenues to our bottom line over time.

Our distressed residential credit strategy, where we currently have approximately 30% of our capital allocated or approximately $257 million, saw a decrease of $94 million in capital, which was largely attributable to the increase in leverage from our second quarter securitization without the corresponding increase in assets.

Company will continue to focus on this asset class and has accumulated approximately $109 million in distressed securities to complement the existing distressed loan portfolio as they are backed by similar types of collateral. These securities were mostly added in the end of June and will have a greater impact on earnings going forward.

We continue to work with partners and co-investors around solutions for the upcoming 5% risk retention requirement for the sponsorship of securitization. We believe we will have an opportunity to participate as a permanent holder of risk as other traditional sponsors move away from being a direct issuer to avoid these risk retention requirements.

Our second lien origination program continues forward, but it is pointing at disappointing volumes. At quarter-end, portfolio reached $8.5 million. Record low interest rates in the first lien sector continue to be the biggest roadblock for decreased volumes, as cash out refis of first liens are more cost effective for most borrowers at these low rates. However, the loans that we have accumulated are all performing as expected and exhibit better credit attributes than originally planned, and carry an average coupon of 7.67%.

Our portfolio net interest margin was 321 basis points, as I said before, a decrease of 11 basis points from the previous quarter. Our CPR speeds were up across all categories with our Agency portfolio experiencing the biggest impact. Our Agency ARMs increased to 17.6% this quarter from 13.5% in the previous quarter. Our Agency Fixed Rates increased to 10.2% from 7.9% and our Agency IOs increased to 15.6% from 14.7%.

We did see our Agency ARM and Fixed Rate portfolio net interest spreads improve. This was mostly due to a decrease in our funding costs that were elevated in the previous quarter from year-end pricing pressures. Our Agency IO net interest spread decreased by approximately 243 basis points as this asset class is most sensitive to changes in prepayment rates. Given the low rates at the end of June and into July, we expect elevated CPR speeds through at least October.

The distressed residential loan portfolio net margin was largely unchanged where our multifamily strategy improved by approximately 82 basis points, mostly due to reduced liability costs of 56 basis points. Contributing to the decrease in our net interest income in terms of dollars was an increase in our average outstanding liabilities, without the corresponding increase in average earning assets. We completed our distressed residential loan securitization with loan proceeds of approximately $168 million in early April, with much of those proceeds not being invested until late June. Match-funding opportunities with asset purchases continues to be challenging for us and we will continue to find ways to try to improve those funding matches.

Distressed residential loan sales closing continue to be difficult to predict with the current quarter impacted by overall nervous markets, buyer due diligence delays and increased buyer scrutiny. While we're not happy with this outcome, we continue to believe that this is a core strategy for the Company and will continue to deliver the longer-term results in the mid-teens as it has in the past.

Total general, administrative and other expenses for the second quarter were approximately $9.9 million, up from $9.4 million for the first quarter of 2016. Total expenses included base management and incentive fees of $3 million and $2.7 million of expenses related to our direct operating cost of the distressed residential loan portfolio. There was an increase in the Company's salary and benefits of $1.5 million, which was due mostly to the internalization of RiverBanc into the Company, which was partially offset by a decrease of base management fees. Going forward, we would expect an accretive impact from the internalization of RiverBanc to the Company's overall earnings and we will be more specific of the actual figures as we normalize over the coming quarters.

We continue to focus on long-term results, while protecting the enterprise value of the Company, delivering a 2% second quarter economic return and a 9.8% annualized economic return for the first six months ended June 30, 2016. We believe our focus on multifamily and residential credit combined with the RiverBanc team and our strong balance sheet positions us well in these difficult markets as we head in to the remainder of the year and thereafter.

Thank you for your continued support. Our 10-Q will be filed on or about Friday, August 5, with the SEC and will be available on our website thereafter. Operator, now if you would please open it up for Kevin and I to answer questions. Thank you.

Thank you. (Operator Instructions) Eric Hagen, KBW.

One of your peers announced last week that they're doing a -- they're sponsoring a securitization of RPL/NPL securities by that Freddie Mac auctioned off in an auction.

That's right.

You guys have a securitization shelf and clearly understand how to work the collateral, is that something you see yourselves participating in?

I mean, we're clearly interested in the loan sales that are coming out of both Fannie and Freddie Mac and we are monitoring the transaction to make sure it makes the right economic sense for us. We were -- we did not participate in the bidding on the first sale of these loans, but it's something that we will look at going forward absolutely.

Okay. And then you alluded in your opening comments that there's been a delay in some of the process to clear distressed loan sales. Can you go into some detail on that, where you can?

I mean, look, we put out sales on a periodic basis. We try to get the sale on a quarterly basis done. We did not get one done in the second quarter. We would anticipate getting the second quarter one done shortly and have another sale done in the third quarter. When you go through the sales process, it involves trying to maintain the maximum price and a lot of times you have bidders out there that bid on a pool of loans and then when they go through due diligence, they try to kick out half the loans and maintain the same price. So, we're constantly managing our expectation of price execution with the buyer's expectation of closing on as much of the loans that we put in this loan sale. Coupled with that was several large bank sales that occurred in the second quarter and a couple of due diligence firms that are typically used, seem to get overwhelmed with volume, which delayed some of their capabilities, which we had to change to go or the buyer changed due diligence firms midstream, which probably added three to four weeks to the process, unbeknownst to us.

So, you wouldn't characterize it as a structural market issue that we can expect?

No, not all. I mean, I do think, as we get more seasoning in these loans, people take more time at looking at the loans as we do ourselves when we're going out and buying loan packages. There has been additional scrutiny from regulators around these loans and the servicing of these loans. So, I think people have become more diligent in boarding loans, that process takes longer. So, all of those combined have delayed these processes, which we know or which we do understand, but they seem to be getting further extended every month.

I see. And last question from me, if you don't mind, what was the size of the credit reserve at the end of the quarter for both distressed loans and CMBS positions? And how would you say that will trend over the next year let's say?

Yes, the way -- so when we -- in both cases, when we look at our CMBS portfolio, especially we have a large exposure into Freddie Mac K-series, we are putting that credit analysis in the yield that we're creating those bonds. So, we do a monthly and quarterly detailed review of the underlying collateral and make an assessment of what we think the ultimate recovery of those loans are going to be; that's in the K-Series bonds. In the direct mezz that we're making loans on them, we are looking at those properties and managing them with an expectation of where we are going to have an outcome on that.

I mean, we don't currently have any active reserves against those positions, but again they're built into the accounting yield. On the distressed residential loans, we look at those, the way we do those accounting mechanism is distressed credit accounting, which makes you look at future expected cash receipts, and it goes through an impairment analysis on a monthly basis. And so, you may see in our line item in our income statement increase in losses or decreases. In this quarter we had a recovery. So, that is a constant review of the forward expected cash flows that were going to be received, based on the current information of the servicing files that we get on these loans. So, there's a lot of work done on analyzing future expected cash collections that impact our credit reserves, which is either specific in loan loss or embedded in the accounting yield in the interest income.

Right. So, that non-accretable discount to par, what is that number?

The non-accretable discount to par, we don't disclose that in the credit reserve. I think typically we have talked about that in previous phone conversations when we booked these K-Series bonds and when we did book them back in 2011, 2012 and 2013, our expectation was that you would ultimately have between 100 and 150 basis points of loss across the entire deal. So, if you think about a K-Series deal of a $1 billion, your expectation is between $10 million and $15 million and so we own the bottom credit piece which is 7.5% or $75 million. So, if you think about we go into an investment 4 or 5 years ago with our expectation on the $75 million investment, we're going to collect $60 million, that's sort of how we think about accreting the accounting yield. And as we go over time and we look at these assets and we see what assets have improved and what assets have deteriorated, we go back and analyze that future expected collection look reasonable and do we need to increase our accounting yield or decrease our accounting yield to account for that expectation.

In the distressed loans, in the foot note, there is a disclosure of what is accretable and non-accretable which tries to -- so when you look at those numbers that accretable yield that is out there is a fairly large number. That would assume that you hold these loans to maturity, in most cases our average loans held is probably 36 months. So while that is a number in theory you could collect over time, the reality is that we are not going to hold it for 30 years, but that is the way the accounting mechanism works.

Douglas Harter, Credit Suisse.

This is actually Sam Choe filling in. So, my first question regards RiverBanc, and so, have you guys quantified the benefit from the synergies you're looking to achieve?

Look, when we purchased RiverBanc, it was a combination of really several things. One, we felt like the purchase price of RiverBanc relative to the cash flows that the assets that they were managing for us that would generate over time, was an opportunistic time to take that in-house and not continue to manage it externally. Two, bringing the team internally gave us some flexibility on financial management of those assets in terms of how we can finance those securities that have differing impacts on the way the incentive fee is calculated, and now there is no longer an incentive fee being calculated. And thirdly, and most importantly, we want to contribute and put more capital towards this strategy, which includes building out some type of external management -- investment management that's going to drive we believe revenues over time away from capital to our Company and we didn't want to -- if we're going to continue to build value for RiverBanc, we wanted to own RiverBanc and take 100% of the upside and not share that upside with other partners, and we felt like it's the right time to do the transaction. We do think the assets that we've invested in and the incentive fees that we expect -- we would have expected to pay in the future obviously when we make that purchase, we would expect to have a significant savings relative to the price that we discounted those cash flows on.

Got it, okay. So, one thing I would want to -- yes, go ahead.

I would say on an ongoing basis, on a run rate of expenses -- because of the way the incentive fees are paid out and are largely paid on those sales, you obviously get bigger savings in quarters where we have sales of multifamily assets than when we don't have sales of multifamily assets. So, it won't be spread like peanut butter, but it will be significant in quarters when we have sales.

So, there is more variability because of that, I'm I correct?

Well, I think now that we've taken out the incentive fee going forward, there is less variability in expenses because the expenses would jump in quarters where we had a sale. I think that the expenses will be far more predictable because now we're doing salary bonus for everybody as opposed to incentive fees, which are driven by sales. So, I think those expense ratios and rates will be better defined going forward and we'll talk about that in the third quarter because that will be the first full quarter where we have everybody on board and we have a good run rate of expenses. We have a good projection what we think it's going to be, but I would rather talk after we experience a quarter at least.

So, I noticed the leverage kind of picked up, do you kind of have a sense of how that's going to trend over this year?

Sure. Look, we've increased the leverage, and one of the -- we will continue to increase the leverage on some of these assets. We came out of the first quarter, we had called all the financials, all the leverage on the distressed loans in anticipation of doing a securitization in the first -- in the early part of the second quarter. So, that's why that leverage dropped and so that popped back up in the second quarter. We would anticipate increasing leverage on our CMBS portfolio also. We have a financing coming due in the third quarter of CMBS securities, that when we funded those securities at a 50% advance rate, those securities worth $100 million today, they worth about $300 million. So, we think we can generate another $100 million of what we would consider very manageable leverage at very low advance rates, at attractive rates that will give us some additional capital to invest without putting additional pressure on increased share count.

We have not gotten that invested yet. We're looking for opportunities and we hope to be fully invested and fully levered at the Company level by the end of the year, which is why I would expect overall leverage for the Company as compared to our equity, which is less than 2% today, would be up around 2.5 to 2.75 times.

Steve DeLaney, JMP Securities.

Want to focus a little bit on the forward opportunity in multifamily now that RiverBanc has been internalized. So, when you look at that, Steve, should we think about it as more a direct investment or lending activity involved in specific projects in contrast to your prior focus where you were approaching it through securitization through investing in subordinate K-series issues? So, is this really going to be more of a hands-on specialty finance lending activity versus CUSIP investing?

Look, we intend Steve, to participate in the entire capital stack of multifamily. Now, when I say that, we will not be a first lien lender, but we hope to create an external fund that may participate in that first lien lending. So, we would like to be able to provide to these multifamily investors a complete menu to satisfy their capital needs that starts with the first lien, but more importantly what we have been -- what RMI -- so we bought RMI as part of this RiverBanc consolidation or combination. RMI had in it both JV equity investments and mezzanine debt financing. We will focus on mezzanine debt financing, we will keep the JV equity investments that we have that were through RMI.

I think going forward though we will do JV investing in an external fund and not really have JV investing in our Company. We will still focus on interest earning assets in our REIT primarily. That being said, if there's an opportunity out there that we think is just going to generate out-sized returns, we may take that initiative. So, we will be a specialty lender. We will continue to look at CMBS -- the CMBS we bought in the second quarter and we bought a little in the first quarter was really from the spread widening in the BBBs and BBs, not in the bottom stack that we have traditionally invested in. Yields have gotten tighter as they've backed up. We will -- it's not out of the question that we won't step back into that market. And we continue --

And those have obviously -- those have tightened back in a great deal now, haven't they from your entry point?

That's right. But the new issue market is probably out about 150 basis points from the tight. So, it's still a place where -- it's cuspy where we think there's some opportunity but we continue dialog with all the agencies in hopes of finding some way to do other types of transactions that could be beneficial for our Company and our shareholders.

So, initially we should be -- as capital gets allocated away from Agency and you identify opportunities, we should think about you building a mezz loan portfolio secured by multifamily projects. And can you give us a sense of like the -- just on an unlevered basis with the loan coupons, the range kind of looks like for the type of mezz loans that you're looking to originate?

Sure. And actually, if you go to our website there's actual guidelines on our website of what their programs are. That's probably the easiest place to look, but just in general, we are trying to target a 10% to 12% unlevered return. Some of that coupon will be cash, some of that will be accreted towards the back-end and it will depend on the property type. Our size that we think that we're -- that we think that we are competitive in is probably less than $15 million, as we get above $15 million and maybe even above $10 million in size, I think the pricing becomes a little bit more aggressive and there's far more competitors in that space. We just are not going to compete in the large lending platform.

We will check the website out. Thanks for mentioning that. And just one final thing, it's definitely tied into this same theme. So, we recently launched on a company that I'm sure you or Kevin both know, and it's called Bluerock Residential, ticker is BRG, and that's an equity REIT, kind of Sunbelt focused equity multifamily REIT, but one of the things they do, they have a little pocket of quasi debt within their asset allocation, and we noted they're getting like 15% preferred returns on development financing -- I call it development equity or whatever you want to refer to it. And I'm just curious whether are you going to be considering development stage projects or are you going to wait for and work with just on completed properties?

Kevin, do you want to speak to that?

Yes. Two thoughts on that. I think the senior bank debt market is backed up. They used to lend 75%, so the room to do mezzanine -- up to 75% LTV, so the room to do mezzanine was very restricted. We've seen that back up to 60% or 65%. So, if we could go in now and do mezzanine debt between from points of attachment of 60% to 80% or 85%, I think that's -- I think those are good investments. We've looked a lot at those Bluerock structures and I would just say all mezz and preferred equity is not created equal and I'd drill down really hard on what the true point of attachment was on those deals. We think of mezz, we think of it from senior lender to on a stabilized building maybe 88%, on a construction deal 80% to 85% and we're seeing some people out there doing lots of different structures to where I think, it may be called preferred equity or mezzanine, but you're really deep, deep into the equity. And from a pure market standpoint, the market won't support 15% unless you are deep into the equity. So, I think that's something --

It seemed a little too good to be true. So, usually there is an angle there.

I would say just direct comparison when you think about our portfolio, if we're going from like a low 70%s point of attachment to high 80%s, I think that's a true mezzanine portfolio. If you look at the Bluerock, they're going from low 70%s to by the time you buy a building 103%, so your weighted average point of attachment is much higher. So, I think I'd point that out to people, if you compare our returns to the other multifamily REIT's returns, but you look at them on a relative point of attachment basis, I think we're still hitting a pretty sweet spot.

David Walrod, Ladenburg.

Just wanted to clarify, Steve, did you say that you expect to complete a loan sale that you had hoped to close last quarter, this quarter and then another one in the third quarter as well?

Yes.

And then I wanted to get a little color, you briefly mentioned the risk retention, has the format of that I guess kind of (inaudible) or are you going to be taking a bottom tranche or a vertical tranche across all the classes. Can you talk a little bit about that?

I mean, it's interesting. There's two thoughts on that, right. You're required to retain 5%. Most attorneys will tell you that you need to retain a 5% of vertical [slide] which means you have 5% of every single class. There is a couple of attorneys that have gotten comfort that you can remain -- you can just take the horizontal bottom 5%. The deals that we've been involved with has been vertical. There was one deal that was put out into the market, they initially were going to take a 5% horizontal but changed at the last minute and took a 5% vertical just to be safe.

So, I think until we get more clarity, most people are taking a 5% vertical, which requires you to buy obviously more -- it requires you to buy more different types of bonds, it's still 5%, but in most securitizations that we participate we are taking the entire credit piece at the bottom which is greater than 5% anyway. So, we would prefer to do horizontal only. It's just a matter of getting our legal comfort and there is a lot of legalese around describing what exactly is 5%; the confusion comes around what is the true market value of the 5% and who is calculating it and how do you disclose it in a perspective where it meets the needs of the lawyers and the SEC and the investor base, and it's not about meeting the needs today, it's meeting the needs tomorrow if something bad happens.

And so, their concern is, it's much easier to say that you have 5% if you take a vertical stack because you've taken 5% of everything, than taking 5% of the bottom and then somebody questions was that really 5% or was that something less than 5%.

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

Thank you, operator, and thank you everyone for being on the call. We look forward to speaking again in November. We will have much more information about this combination and will be further along in redeploying our capital. Thank you so much.

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