New York Mortgage Trust Inc (NYMT) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by.

Welcome to the New York Mortgage Trust fourth-quarter and full-year 2016 results conference call.

(Operator Instructions).

This conference is being recorded on Wednesday, February 22, 2017.

A press release with New York Mortgage Trust's fourth-quarter and full-year 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 any forward-looking statements are based on reasonable assumptions, it can get 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 earnings press release for the fourth-quarter and full-year results of 2016.

Despite significant volatility in the financial and bond markets during the fourth quarter and full year 2016, the Company delivered an economic return on book value of 8.41% for the full year and 0.47% for the fourth quarter.

In our view, economic return on book value is one of the most important indicators of enterprise long-term viability.

We strive to construct and manage a portfolio of assets that balances a generation of earnings and dividends with the preservation of book value across a wide range of interest rates and credit environments.

Given the particular volatile interest rate environment in 2016 where we saw all-time lows in the 10-year treasury yield of 1.36% in July and a high during the year of 2.6% on December 15, I am pleased with the Company's overall performance in 2016.

We made a strategic decision several years ago to increasingly allocate capital to our residential and multifamily credit investment.

We accelerated the portfolio transition towards credit investments and away from the leverage interest-rate trade of 2016, as evidenced in part by the internalization of our multi-family investment manager RiverBanc.

We believe that these strategic decisions have resulted in a portfolio that is constructed to deliver long-term stable returns in the future over changing economic conditions just as it did in 2016.

Moreover, our acquisition of RiverBanc has added a very capable corporate executive, Kevin Donlon, to our executive team.

Along with his entire team this acquisition positions our Company as one of the leaders in direct lending in multi-family mezzanine financing.

During 2016 we decreased our residential agency capital allocation by 26% redeploying the capital in either distressed residential or multi-family assets.

The increased credit concentration of our portfolio help to mitigate the impact of the rate sell off in the bond market during the fourth quarter, as credit spreads tightened during this period thereby partially offsetting the negative impact from our agency portfolio.

For the fourth quarter our Company generated net income attributable to common stockholders of $9.7 million or $0.09 per share, including net interest income of $14.8 million and a net interest margin of 263 basis points for the quarter.

For the year the Company generated net income attributable to common stockholders of $54.7 million or $0.50 per common share.

We ended the year with a book value of $6.13 per common share delivering an economic return of 0.47% for the fourth quarter and 8.41% for the year ended.

During the fourth quarter we declared a dividend of $0.24 per common share which was paid in January of 2007, bringing the total dividend declared for the year to $0.96 per common share.

During the quarter the Company repaid approximately $56 million of outstanding notes from a November 2013 collateralized recourse financing, which was collateralized by multi-family CMBS securities.

In connection with this repayment of the notes, approximately $182 million of multi-family collateral was transferred back to the Company, allowing the Company to take advantage of more opportunistic borrowing options as compared to 2013, including increased borrowing advance rates, more favorable borrowing cost and multiple options for longer-term financing structure.

One of the most significant events that we accomplished in 2016 was internalizing the management of the Company's multi-family investments.

In May the Company acquired the outstanding common equity interest in RiverBanc, our external manager.

This acquisition will allow NYMT to continue to be a significant leading force in multi-family mezzanine financing while capturing the full benefit of Company ownership.

In the first half of the year the Company completed our fifth distressed residential loan securitization transaction that resulted in net proceeds to the Company of approximately $168 million.

We funded $44 million of preferred equity investments [in owners of] multi-family property and purchased approximately $82 million in Freddie Mac agency multi-family CMBS securities, taking advantage of our extensive knowledge in the Freddie Mac program from our previous investments in the Freddie Mac first loss tranche.

During the year we purchased approximately $82 million in distressed residential loans.

We also purchased $188 million in non-agency re-performing and nonperforming MBS securities and sold approximately $75 million in carrying values of distressed residential loans resulting in total proceeds of $92 million for a net gain of approximately $17 million.

Looking to capital allocation table you will now see that we have approximately 84% of our equity invested in credit assets, including 46% in multi-family and 38% in residential credit assets.

The remaining 16% is invested in our agency strategy which includes fixed rate, adjustable rate, and interest only agency security.

We decreased the assets in this category by approximately $194 million during the year and our equity exposure decreased by $48 million during the year.

We will continue to systematically reduce the agency exposure in redeploying the credit strategy opportunistically.

Our portfolio and net interest margin for the quarter was 263 basis points, a decrease of 19 basis points from the previous quarter.

CPR speeds continued to remain elevated throughout the quarter with overall portfolio speeds averaged up almost 1% to 16.9% but more significantly up in all three agency categories where we have the most premium risk exposure to prepayment.

We plan to be substantially out of our agency exposure in 2017.

Our average annual portfolio spreads decreased to 293 basis points for the year 2016 from 368 basis points in 2015.

This was due to three primary factors: portfolio turnover increasing exposure to lower yielding but higher credit quality assets which utilize leverage as part of their return and, accordingly, have lower net interest margin; an increase in prepayment speeds in our agency securities portfolio; and increased short-term borrowing cost.

Overall, average earning assets remained largely unchanged for the year at approximately $1.7 billion.

Included in our press release is a detailed analysis by quarter, by investment (inaudible) for interest spread analysis for the previous five quarters.

We had total interest income for the quarter of $14.8 million and $64.6 million for the year.

Total other income decreased by $4.6 million for the year ended September 31, 2016 as compared to the prior year.

We had a decrease in realized gains on distressed residential loans of $16 million due to decreased sales activity in 2016 as compared to the prior year.

Fourth-quarter interest-rate volatility impacts our ability to complete a sale which we now anticipate closing in the first quarter of 2017.

This decrease was partially offset from an increase in other income of $9.7 million in 2016, which was primarily due to the income related to increased ownership of RiverBanc and the related entity that we purchased.

Our total general and administrative and other expenses for the fourth quarter were approximately $7.2 million, down $1.5 million from the third quarter.

Salaries, benefits and directors comp decreased by approximately $700,000, which was largely attributable to the yearend bonus compensation adjustment.

For the year ended December 31, 2016 as compared to the prior year, general, administrative and other expenses decreased by $4.3 million.

Salary benefits and directors comp was driven higher during the period as compared to the prior year primarily due to the increase in employee headcount resulting from the RiverBanc acquisition, which was offset by a $9.9 million decrease in base management and incentive fees during the year.

In addition, the decline in base management fee and incentive fees was due in part to the termination of RiverBanc's management agreement as of May 17, 2016 and lower incentive fees earned in 2016 by our other external managers.

The management fees in our distressed residential loan strategy decreased due to a change in methodology for calculating base management fees from 1.5% of assets under management to 1.5% of invested capital beginning in the third quarter of 2016.

In January 2017 the Company issued $138 million of five-year convertible debt instruments that resulted in net proceeds to the Company of approximately $127 million after underwriting fees.

The debt, which is unsecured, and was sold at a discount to principal, has a total cost to the Company of approximately 8.14%.

This unsecured debt will be used to finance the origination of certain higher yielding investments such as preferred multi-family equity investment, the legal terms for which tend to limit our ability to use in secured financing leverage.

We believe this convertible debt instrument will reduce our overall cost of capital during its outstanding term.

We enter 2017 optimistic but cautious as we await the impact of the new administration's policies on the economy, interest rate environment and the overall regulatory environment.

We will continue to focus on but residential and multi-family credit opportunities going forward into 2017.

Thank you for your continued support.

Our 10-K will be filed on or about Tuesday, February 28 with the SEC and will be available on our website thereafter.

Operator, you can go ahead and open to questions for Kevin and myself.

Thank you.

(Operator Instructions).

Eric Hagen, KBW.

How do you think about possibly hedging your exposure to the commercial market given how tight spreads are there?

And do you think we could see any noticeable weakening in the funding market for CMBS given say the 100 basis point backup in loan spreads?

I mean, it is interesting; we came into the fourth quarter and saw a significant rise in rates.

You saw people clearly jumping to wider margins in the higher yielding securities.

So you saw so some spread tightening in the fourth quarter, you've seen some significant spread tightening in the first part of that year.

You have seen more access to liquidity.

So today, I mean, even with the backup of 100 basis points that would really put us back to where we were in the third quarter.

If you think about a year ago in February, spreads on BBB CMBS securities were almost 650 over and today they are trading at 350 over.

So I think the funding market -- we are less concerned about the day-to-day funding exposure.

We have access to longer term funding both in the repo market and in the secured market that limits some of that exposure per se.

Clearly we are sensitive to the mark to market.

And from a hedging perspective we are probably more focused on hedging our exposure relative to interest rates than credit spreads widening.

I think most of the credit investments we are making both in Freddie Mac CMBS agency securities and in our direct lending would be tough to hedge with CMBS indexes while we can make a bet on the overall market.

I am not sure it has a great tracking record against our specific asset classes.

And we would be more inclined to focus on interest-rate exposure than just pure credit exposure.

Got it.

There is some basis exposure there that you don't want to take on.

Yes, I think it is too difficult to hedge efficiently.

Right, right, that makes perfect sense.

As the agency segment winds -- continues to wind down, how do you think about possibly consolidating your other external relationships there?

And how much of the agency exposure do you actually need to maintain in order to keep that [REIT] qualification at this point?

I mean really we don't need to keep any agency exposure to be honest with you.

I mean, most of our whole pool of commitments can be met by our lending either in direct lending into multi-family or in our whole loan activity in distressed residential loans.

So I mean, we do have some amounts -- we'll probably keep some amount of agency from a liquidity standpoint.

But less concerned in keeping any significant amounts to qualify for anything from a REIT or [4D-AC] perspective.

Got it.

And how about consolidating some of your relationships there?

Yes, look, as we wind down the agency trade at some point there will be a scenario where we will have very little activity probably with the Midway Group today as we go forward into 2017.

And we could see that relationship probably getting to a point where we will exit that relationship at some point.

They have been a great partner for us in a difficult environment.

In the future if we think the opportunities change, I mean we are 100% happy with the activities that they have done for us in a difficult market and we would have no problem going back into that trade in the future.

But that is something we would see to get out.

I mean clearly we are monitoring our distressed residential portfolio and want to make sure we get a better turnover velocity.

We were disappointed again not getting a trade-off in the fourth quarter.

The rate environment didn't help and we need to get that activity more responsive and more activity turnover in the portfolio for us to continue to invest in that strategy.

Right.

Right, well, thanks for the comments, Steve.

Thanks, Eric.

Ben Zucker, JMP Securities.

I was curious if you could tell us when you expect to re-securitize the multi-family CMBS and what kind of rate you thought you could get based on current market pricing.

I think what you just repaid has a rate of L plus 525, so just trying to get a sense of the cost savings we could expect there.

Yes, that is right.

I mean look, there is -- when we say multiple options, look, we have -- not only can we do a fixed-rate transaction that we think will be 150 -- if we did a three-year financing today it would probably be 150 to 200 lower on a floating rate basis.

If we did -- and floating rate, if we did a fixed-rate it's probably 150 basis points lower.

But we have other options to do longer-term financing with banks that not only have very competitive rates but also eliminate probably 100 basis points in legal and underwriting placement fees from a securitization and have similar types of mark-to-market risk that we would get in the securitization.

So, we have got -- when we talk about multiple options we really mean probably two or three different kinds of secured financing options placed with a private investor, as well as multiple counterparties willing to lend one- and two-year money to us on those particular asset classes.

That is great.

And do you think we will see that come through sometime this year, early 2017?

Yes, absolutely, absolutely.

I mean I think we are trying to figure out where -- when we want to put the leverage on as we accumulate asset growth.

Right now we are about $1.8 billion in assets, what we consider assets, not when you look at our balance sheet with on balance sheet consolidation, but when you look at our equity allocation table.

And we think we can get the asset balance sheet up to about $2.4 million just with what we have done in terms of the note that we raised as well as our borrowing capacity of assets we have on the balance sheet today.

And then we think that is about the right run rate from a total leverage of standpoint for the Company and that puts us in a pretty good scenario.

But, so we would see scaling into that leverage as the asset acquisitions come on balance sheet.

I got you, that makes sense.

And this is more high level but could you help me understand what is going on in the agency IO silo?

And I understand like the interest rate volatility in 2016.

I am just trying to really understand the yield pattern that we saw throughout 2016 while also understanding this is part of a larger kind of trading strategy in the whole.

Yes, the Midway -- the IO portfolio, which is run by Midway, is a total return strategy.

And so, their method of running the portfolio, which has been consistent since they started to fund in 2000, is a combination of generating interest from the IOs and inverse IOs is one aspect, and then hedging that exposure with derivatives including TBAs, options on futures, futures, etc., interest-rate swaps.

So, that combination is in some periods, if you go back to 2012 or 2013 and 2014 when we owned it, a significant part of the return was coming from the net interest margin.

And this past year, as you can see and you have identified, actually in the fourth quarter we had a negative interest margin but the portfolio was still positive for the quarter because we picked it up in hedging.

They are hypersensitive to interest rates in terms of prepayments.

The prepayments have been -- CPRs have been in the high teens.

The portfolio from 10% to 12% delivers a very nice interest rate yield.

As it starts to get north of 15% the interest rate yield becomes difficult.

And so, it has been elevated above 15% for the last six quarters.

And that has put a lot of pressure on the net interest margin.

And so, they have offset some of that with hedging, the hedging is expensive and not always perfect.

And so, the more volatile the markets the more difficult it is to generate a return.

That is very helpful, Steve.

And then lastly, and maybe this is for Kevin, could you provide some kind of commentary on the market in general and also the competitive landscape for mezzanine and preferred lending right now?

Kind of talk about the pipeline and where you are seeing the most competition.

I am just trying to get a sense for how quickly this line item could ramp versus the MBS and other multi-family assets.

And that is it for me, guys, so thanks.

So, Kevin, go ahead and answer that.

It is competitive.

I think our biggest source of competition is common equity.

A lot of times we will get into deals and we will look at doing a slice of mezzanine and preferred equity behind the senior in the transactions.

And LPs -- and it has been this way for a year, LPs in the transaction or other forms of common equity will step up and take our position.

I think that that is going to pull back.

As rates move up the senior financing proceeds will be reduced.

And I also think as the stock market and other sectors of the economy do better people want to diversify away from the real estate exposure, especially since a lot of people are competing with the smaller investors.

So I think it is positive in the future but I think it's fairly competitive now.

Okay, that is great.

Thanks again, guys, for the comments.

David Walrod, JonesTrading.

You mentioned that you had -- there was a sale of distressed residential loans that you had planned for the fourth quarter and you expect that to take place in the first quarter.

I guess can you talk about the pipeline for other loan sales in the first quarter and maybe first half of the year?

Yes, look, our target -- we talked about it all last year in 2016.

The goal is to really have a significant sale every quarter.

We did not achieve that goal in 2016.

We had a fairly large sale to try to execute in the fourth quarter.

And given the rate volatility that occurred in the second half of the fourth quarter we just felt it was better to pull that pool out of the marketplace and not try to get something closed.

And of course it closed into a volatile interest rate market where people were taking advantage, in our opinion, of pricing.

We felt like we were going to get a much better execution as we got into 2017.

But the anticipation would be to have a 33% to 40% turnover in the existing portfolio throughout the year, which puts about a 10% -- an 8% to 10% of the portfolio being sold each quarter.

Okay, great.

And then I guess if you could just give us an update on the second lien mortgage, just what is going on there.

Yes.

I mean, we are about I think through -- we finished yearend about $20 million in invested assets funded.

Clearly not anywhere near where we thought we would be.

The backup of interest rates in the fourth quarter will be helpful.

We have clearly gotten far more attention on the program going into 2017, we have multiple originators that we're in the process of bringing on board.

The fall off in refinancings in the marketplace -- you have seen the refinancing index plummet -- is only going to be helpful to us going forward.

We have a lot of competitors entering the space that are willing to lend at a much higher LTV than we are.

So we will be diligent and just try to be very selective.

And if it doesn't -- if we can't get a critical mass -- I mean I think we are at the point now where over the next six months if we don't get a critical mass of [$50 million to $100 million] by June it is something we are probably going to let step back from because we just can't make it work.

But we like the assets, we are very happy with the assets that we have accumulated, they performed exactly as expected.

It is just a matter of accumulating them.

And we do have a lot more attention focused on this particular asset class because for the first time in two years since we started the program you have loan officers that can't have the low bearing fruit of a refinance laying up to them.

So they have to work now for a living.

And so now they are going out looking at doing all kinds of other types of lending strategies, one of which will be a fixed term second.

Okay, thank you very much.

Thank you.

(Operator Instructions).

That is okay, operator.

If there is no more questions --.

No questions from the queue.

Okay, then why don't we complete the call?

Thank you, everyone, for being on the call.

We look forward to talking about our first quarter.

We appreciate your support.

Ladies and gentlemen, thank you again for your participation in today's conference.

This now concludes the program and you may now disconnect at this time.

Everyone have a great day.