New York Mortgage Trust Inc (NYMT) 2016 Q3 法說會逐字稿

Good morning ladies and gentlemen, thank you for standing by. Welcome to the New York Mortgage Trust Third 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 open for questions. (Operator Instructions) This conference is being recorded on Wednesday, November 2, 2016.

A press release with New York Mortgage Trust third 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 & 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 the expectations reflected in the 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, 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 President and Senior Executive heading up our multi-family business, will also be 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 third quarter earnings press release.

The Company's investment portfolio generated solid returns and a stable book value during the quarter as evidenced by the total economic return of 3.1% and a book value of $6.34 per share. Overall, portfolio performance benefited from our multi-family and residential credit investments including sales of distressed residential loans which produced a $6.7 million realized gain for the quarter. We continue to transition our portfolio during the quarter to one increasingly focused on multi-family and residential credit assets, purchasing $76 million of Non-Agency RMBS backed by distressed residential loans and originating $32 million of multi-family preferred equity investments, while further reducing our capital allocation to the Agency RMBS strategy by 9% during the quarter.

Subsequent to the end of the quarter, we also repaid $56 million of outstanding notes issued by one of our multi-family CMBS securities collateralized recourse financing. As a result of this repayment of this financing, we were able to unlock approximately $182 million of multi-family CMBS securities that served as collateral. We expect to securitize these assets again in the near future on terms that will be more favorable than the terms of the prior financing, which was originated in November of 2013.

On a macro-level, interest rates continued their volatile but range-bound movements, with the 10-year Treasury note yield hitting a historic low in July at 1.36%, only to go back up to 1.60% by the quarter end, and today, currently trading around 1.80%. Market in which we compete for investments continues to be challenging, as asset pricing remains high due in large part to greater competition. Because of this, we continue to be diligent in our search for investment consistent with our goal to deliver attractive risk-adjusted returns.

Company generated net income of $20 million or $0.18 per share for the third quarter, an increase of $9 million from the previous quarter. Portfolio generated net interest income of $15.5 million and net interest margin of 282 basis points. Book value per common share was $6.34 at September 30, 2016, down $0.04 from the previous quarter. Company declared a $0.24 dividend during the quarter, delivering an economic return of 3.1% for the quarter, and an 8% economic return for the nine months ended September 30, 2016.

During the quarter, the Company sold $30.4 million of distressed residential loans, realizing a gain of approximately $6.7 million before taxes. We had approximately $108 million in credit assets during the quarter, including $32 million in preferred equity investments in multi-family properties as well as $76 million in re-performing and non-performing non-Agency residential securities.

Looking to our capital allocation table, you will see, we have approximately 83% of our equity invested in credit assets, including 48% in multi-family and 35% in residential credit assets, and the remaining 17% is invested in our Agency strategy, which includes fixed rate, adjustable rate and interest-only Agency securities. We've decreased our equity exposure another $15 million during the third quarter through security paydowns and outright reductions. We will continue to systematically reduce the agency exposure and redeploy in the credit strategies opportunistically.

Our distressed residential credit strategy, where we currently have approximately 30% of our capital allocated, was largely unchanged from the previous quarter. During the quarter, we sold $30 million in loans, realizing a gain of approximately $6.7 million before taxes. We continue to believe this strategy will deliver the expected returns we have seen historically and expect a solid fourth quarter.

As of July 1, we have a new management agreement in place with our advisor that we believe will better align management fees with actual results. The fees will now be based on the net equity invested in our distressed residential loan strategy and not on asset balances. The effect of this will lower base management fees, but should increase potential incentive compensation. However, the overall amount will approximately be the same except in periods where we have reduced realized gains, resulting in less incentive fees, thereby having a better alignment of fees and performance for our shareholders.

During the second and third quarter, we purchased approximately $188 million in re-performing and non-performing securities, which are backed by the same type of collaterals or distressed residential loan portfolio. The yields on these securities had wind up in the second quarter, which presented an investment opportunity. Since June, spreads started to tighten and are currently at levels that are no longer attractive. We will continue to monitor this market for opportunities and anticipate the risk retention regulations will lead to additional opportunities in the securitization market, (inaudible) national sponsor for many of the deals, which were previously done by banks and Wall Street firms.

Our multi-family portfolio, which now represents approximately 48% of our invested capital continues to perform as expected. We added approximately $32 million in preferred equity investments, bringing our total investment in direct properties to approximately $174 million dollars or 30 distinct multi-family properties. We anticipate our growth in the asset class to accelerate as we have fully completed our integration of the second quarter purchase of RiverBanc and have increased our capital allocation and commitment to the sector.

In October, we called our 2013 CMBS securitization repaying $56 million, but more importantly releasing approximately $182 million in collateral value. Since 2013, funding costs have decreased and access to funding alternatives has increased, which should lead to increased borrowing amounts at lower costs. Over time, this will be accretive to our earnings, while allowing us to be a more competitive lender.

We continue to focus our lending in areas of the country where we see positive population growth, favorable business environments and an opportunity for properties value enhancement.

Our second lien origination program continues to move forward albeit at a slow pace; as of September 30, we had approximately $13 million funded. We are in the process of bringing two new originators onboard, one of which has a dedicated second lien sales force, which we anticipate will increase our investment flows in the coming quarters.

Our portfolio net interest margin was 282 basis points, a decrease of 39 basis points from the previous quarter. CPR speeds were up across most categories with our Agency ARMs increased to 20.7% from 17.6%. Our Agency Fixed Rate essentially unchanged at 10%, our best performing class, and our Agency IOs increasing to 18.2% from 15.6%.

As we reduce our agency exposure the net spreads are more negatively impacted by our interest rate swap costs, which are allocated solely to these silos for consistency purposes, when in fact they are hedging the overall duration of the Company in some instances. While our IO net interest spread decreased to 13 basis points, this should not tell the entire story, as the overall performance of the quarter was outstanding, delivering approximately 15% total rate of return on invested equity.

For the quarter ended September 30, 2016, we recognized other income of $16.6 million, primarily from realized gains of $2.3 million and unrealized gains of $1.6 million on investment securities and related hedges to our Agency IO portfolio. We had realized net gains of $6.4 million from a distressed residential loans and $5.6 million in other income, which was driven from our investments in unconsolidated entities related to our recent purchase of RiverBanc.

Total general and administrative and other expenses for the third quarter of 2016 were approximately $8.7 million, down $1.2 million from the second quarter. Salaries, benefits and directors' compensation was unchanged at $2.7 million, which now fully reflects the additional employees from of the RiverBanc purchase, which closed in May of 2016. Base management and incentive fees decreased by $1.5 million due to two factors; the management fee calculation change related to our distressed residential loan strategy and the internalization of RiverBanc, which eliminated fees altogether.

We continue to focus on long-term results while protecting the enterprise value of the Company, delivering a 3.1% quarterly economic return and a 10.6% annualized economic return for the first nine months of the year. We will continue to focus on multi-family and residential credit, as we believe these asset categories will give us the best opportunity to lever stable risk-adjusted returns. Thank you for your continued support. Our 10-Q will be filed on or about Thursday, November 3, with the SEC and will be available on our website thereafter. Operator, if you could please open the call for questions for Kevin and I. Thank you.

(Operator Instructions) Douglas Harter, Credit Suisse.

Hi, this is actually Sam Choe filling in. So, I saw that you guys unlocked the multi-family CMBS and you mentioned that you are looking to re-securitize those. What kind of terms do you have to see to kind of determine -- I guess when to securitize those now as opposed to maybe in the near future like, what do you consider when you do that?

It's our need for current liquidity. Right now, we said we have multiple alternatives for funding. We can actually do -- three years ago, we couldn't do really any type of repo. Today, we can do repo with several different lenders at rates that are far lower than a securitized cost, but they don't have this longer term, but we can do repos from one month up to two years. We can do securitizations now up to five years, all of which will be less than the costs of what we had done previously. The previous financing was at LIBOR plus 525 basis points, and the advance rate on that initial funding in 2013 was approximately 50%. And depending on the term of the maturity today, it's anywhere from 60% to 70%. So, far more proceeds at a much lower cost of capital. The repo gives us flexibility to deploy it as needed. The securitization will give us more certainty of execution and costs for a longer period of time. So, clearly, as we get more fully invested, we would roll from a repo funding strategy into a more longer-term securitization.

I guess, this leads into my next question. So, leverage ticked up a bit this quarter and I was wondering if that's a good run rate that we could use going forward?

Look, I think the anticipation would be to ultimately bring the leverage up for the Company to about 1.7 times. We are under -- we are looking for ways to fund our preferred equity investments, which right now are not levered. So, we are looking at possible ways to access markets and/or get some kind of secured borrowing and get that portfolio. We have not levered our CMBS securities, which we have $200 million in collaterals sitting there that are with very low leverage on them. That's available to leverage in the future if we need to. I mean, our distressed residential loan portfolio now is getting close to where we think the proper levels are from a leverage standpoint, and our second lien program is so small we haven't put any leverage on that, but we do have opportunities to do that. But I would say, overall, Sam, about 1.7 times; in that 1.7 probably 60% of the 1.7 is in securitized financings that are more permanent and the other turn or 0.7 turn is related to repo.

Eric Hagen, KBW.

I want to better understand the sales of the distressed loans during the quarter. It looks like the premium that you sold that package of loans over the carrying value was about 24%, but at the end of the first quarter, you did a similar size deal that went for about 16% over par. I want to better understand the difference between this quarter's sale and the first quarter's sale.

The first quarter's sale was put out really in the fourth quarter, okay, and so, fourth quarter into the first quarter, spreads have widened a little bit and pricing was a little softer; as we've gone through this year, the prices have gone better. And then, the other caveat to that is, if you look at the composition of the portfolio and the types of loans we are selling and the types of buyers of the loans that has an impact on the pricing also. And so, there's a lot of different factors, overbearing factor is market environment and then the second-largest factor is composition of the portfolio that we're trying to sell.

And it seems like in both cases, you sold a pretty similar amount of loans themselves. So, is there something in the market that -- is there like a supply-demand factor in the market that allows you to only traffic in about $30 million of loans at a time or is there something special about that number that you do have [reported]?

No. I think we try to have more targeted sales as opposed to a large pool sale that goes -- they will (inaudible) a large participation. So, while we will sell $30 million or $40 million in loans that may be represented by five or six separate sales. So, we will accumulate loan in pools where we think we have demand on various types of either geographic region or types of loans and that's where we think we get a better execution.

And maybe you can comment just generally on how competitive new investments are for CMBS right now.

Yes, look, we are out making multi-family investments. We have a good team of people out there working those investments. The timeline in those investments is between 45 and 90 days to close. So, it's a long time horizon in the securities market, especially spreads in the CMBS credit sector have come in dramatically from the first quarter. You don't see a lot of trading activity. The new issue market seems to be well bid and competitive. So, it's difficult to accumulate significant size on a rapid pace, and we think our best alternatives today is origination and that's where we are focusing a lot of our time on today.

So, the trepidation behind some of the things we've heard in the CMBS market, we should, -- I don't want to say we should ignore those altogether, but how should treat those headlines surrounding?

Look, I think one thing that we've demonstrated over time is statements about general markets, is not something that we really focus on. And we really focus on our investments that we're doing. Yes, we're worried about overall spread widening in a particular market sector, but really, when we are making a credit investment in an asset, we are really looking to the performance of that asset irrespective of what's going on in the marketplace and we need to be comfortable with that first. The mark-to-market of those assets were sensitive too, but we are really more driven by long-term performance in the cash flows of the property. And so, when I talk about we are focusing on areas of population growth, favorable business environments, which is exactly what it means, right. We don't -- the overall economy in the country maybe a 2%, but there is parts of the country that are doing much better than 2% and there is part of the [companies] that are doing much worse than 2%. So, we're trying to use that geographic region as a benefit to identifying assets.

(Operator Instructions) Jessica Levi-Ribner, FBR & Company.

Just a quick question on, I guess, piggybacking off the last question, the opportunity side in the multi-family origination space versus CMBS?

Well, we like to invest in the CMBS. We historically have invested in CMBS. This is the first loss Freddie Mac K-Series bonds. Those spreads have gotten back to levels that are what we think may be attractive. We are watching that market. We've also participated in the class that's right above the first loss fees. And that's something that we are interested in participating in and we'll probably participate going forward in the future. That new issue market is back out to levels that may make sense to us. We have participated historically on season credit pieces when they widened out in the first and second quarter. We've sort of backed away from that in the third quarter. We try to focus on the Agency-issued CMBS market as opposed to the Non-Agency CMBS market. We just think that we are more comfortable with the Agency CMBS market today. And then a direct origination, it's really a matter of making sure that we develop partnerships with originators and investment property owners around the country, and as we brought RiverBanc into the NYMT fold, the capital that NYMT can dedicate to RiverBanc I think is going to help those sales guys out there in culturing those relationships and we would like to think that our pipeline for origination as we go into 2017 will start to build off the $32 million we funded in the third quarter. Keep it in mind, seasonally, I would say, the fourth quarter -- as you get to December, January, those are probably the two slowest months and I think as we get, February, March, April, those are probably -- June are the two biggest months, the strongest period of time to originate. So, we are focused on trying to develop a consistent pipeline, but we don't want to sacrifice quality for just the sake of investing dollars.

And then just thinking about reducing your agency exposure, especially given kind of the seasonality in the fourth quarter in terms of originations, do you -- are you going to slow your sales of Agencies, just so that you don't have too much of a cash drag on the balance sheet or how are you thinking about that?

That's right. I think the way we look at our Agency portfolio right now -- in the first question, I was talking about when we do a securitization on CMBS. Clearly, we were sensitive to the asset flows. We like having an optionality that we can get in and out of assets or increase or decrease funding to support the asset investments, and that's what we're trying to do, right, and we are looking at what's the best. Is it better to borrow money or sell agencies? And so, we look at the incremental impact of the portfolio yield and that's really how we are making the decisions. If we see an opportunity where we can get fully invested in the credit asset, we would reduce the -- we would start selling the Agency portfolio more aggressively and reducing it.

Thank you. There are no further questions at this time. I would like to turn the conference over to the Chairman and CEO, Steve Mumma, for any closing remarks.

Thank you operator, and thank you, everyone for participating in the call. We appreciate that and we look forward to talking about our year-end results sometime in late February. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.