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New York Mortgage Trust (NASDAQ:NYMT)

Q4 2012 Earnings Call

March 06, 2013 9:00 am ET

Executives

Steven R. Mumma - Chief Executive Officer, President and Director

Analysts

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Boris E. Pialloux - National Securities Corporation, Research Division

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust Fourth Quarter and Full Year 2012 Results Conference Call. [Operator Instructions] This conference is being recorded on Wednesday, March 6, 2013.

A press release with NYMT's fourth quarter and full year 2012 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 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 SEC.

Now at this time, for opening remarks, I would like to introduce Steve Mumma, Chief Executive Officer and President. Steve, please go ahead.

Steven R. Mumma

I apologize. Thank you, operator. Good morning, everyone, and thank you for being on the call. Fred Starker, our CFO, is also present and available for questions at the end of the call.

The company released its fourth quarter and full year earnings report after the market closed yesterday, included in that press release were several tables that I will be referring to during the call.

2012 was a very important year for New York Mortgage Trust. We substantially increased our -- the capital base of the company, improving shareholders' liquidity and reducing our fixed expense load, investing in new capital and asset classes that we believe will perform over a wide array of economic outcomes and closed on what we believe were several innovative financing transactions.

Here are some of the highlights for the fourth quarter and full year. The company earned $9.4 million or $0.19 per common share for the quarter ended December 31, 2012, and $28.3 million or $1.08 per common share for the year ended December 31, 2012. The company completed its fourth public stock offering, receiving net proceeds of $104.1 million in October 2012, bringing the total capital raise for the year to $231.6 million.

The company completed 3 credit acquisitions of multi-family CMBS during the quarter, totaling approximately $76 million, finishing the year with a total investment of approximately $195 million.

We completed the acquisition of approximately $61 million in distressed residential mortgage loans, representing $92 million in performing and re-performing residential mortgage loans. We closed on 2 structured financing transactions during the quarter, a $52 million 3-year repo financing transaction, secured by approximately $112 million in CMBS securities and $38.7 million in a 3-year revolving structure for our recently purchased distressed residential loans.

We declared to pay the fourth quarter dividend of $0.27 per share, bringing our total dividends for the year to $1.06 per share.

Now I'd like to go into some further detail. Net interest income for the 3 months ended December 31, 2012, was $11.4 million, up approximately $6 million for the same period the previous year and up approximately $3.3 million from the third quarter of 2012. This increase is -- was primarily due to the increases in average earning assets for the year and the previous quarter related to common equity raises over the same periods.

The net interest spread was 333 basis points for the fourth quarter ended December 31, 2012, as compared to 470 basis points for the third quarter of 2012 and 620 basis points for the fourth quarter of 2011.

As the company has significantly increased its earning assets, the composition of the portfolio has changed. Going from a mostly unlevered or low-levered credit rate to a more diversified portfolio, including a greater percentage in our levered Agency fixed rate and Agency ARM strategy.

For the fourth quarter -- or for the quarter ending December 31, 2012, approximately 64% of earning assets were Agency fixed and Agency ARM securities as compared to 20% in the fourth quarter of 2011, driving down the average net margin but resulting in a more stabilized dollar amount of net margin. The company utilize its MBS strategy while forcing additional credit advantage investments during the period of deployment.

The company had net unrealized gains of approximately $1.7 million and $6.7 million for the quarter and year ended December 31, 2012, respectively, related to our CMBS portfolio as multi-family credit spreads continued to tighten from improved market conditions throughout the year.

The investment in IO strategy delivered strong results for 2012, including a net unrealized and realized gain of $2.3 million for the year ended December 31, 2012, as compared to a net unrealized and realized loss of $3.9 million for the previous year. We continue to believe there are favorable opportunities in the IO market, including possible investments in excess mortgage servicing rights in 2013.

Our general, administrative expenses for the year were $11.4 million, including $6.4 million for general expenses and $5 million related to management fees. Our external managers continued to perform at above -- at or above our expectations, contributing to the success of the company during 2012. Our general expenses, excluding management fees, have averaged approximately $1.5 million to $1.6 million per quarter over the last year. And more importantly, the operating expense leverage has been reduced by over 60% due to the growth of the company's equity base.

The company ended the quarter with a book value of $6.50 per share as compared to $6.52 per common share at December -- September 30, 2012, and $6.12 per share as of December 31, 2011. Included in our press release and our Form 10-K to be filed is a detailed analysis of the book value transmission for both the quarter and the year ended December 31, 2012.

As I said previously, we received net proceeds during the year of approximately $232 million from 4 public stock offerings. These proceeds were used primarily to purchase Agency MBS securities, multi-family, first loss CMBS securities, distressed residential loans and to a lesser extent, continued investment in our interest-only investment strategy. Included in our press release is a portfolio allocation table that details our assets and liabilities by investment silo as of December 31, 2012.

We increased our Agency RMBS portfolio during the quarter by approximately $335 million, bringing the total investment to $902 million as of December 31, 2012. This portfolio includes approximately $274 million in Agency hybrid ARMs and $628 million in fixed-rate MBS, mostly concentrated in 15-year fixed-rate paper. The Agency ARM portfolio, CPR speed, decreased slightly in the fourth quarter from 17.5% CPR in the third quarter to 14.5% CPR. And the fixed-rate portfolio continued to pay a very low CPR at less than 2%. This can mainly be attributable to the new originations. The majority of these securities are less than 6 months old. This portfolio is financed in part by $806 million in repurchase agreements, bringing the year-end leverage ratio to approximately 7.8 to 1 for this investment silo.

The Agency IO portfolio ended the year with approximately $99 million in assets. Financing part was $75 million in repurchase agreements, with the year-end leverage ratio of approximately 1.2:1. Our Agency IO prepayment fees increased to 21.8% CPR in the fourth quarter from 19.2% CPR the previous quarter but is consistently paid in the high teens and low 20s for almost the last 2 years.

We closed on 3 Freddie Mac K Series multi-family investments during the quarter, including a floating-rate first loss security issued by Freddie Mac, their first, bringing the total investment at the end of the year to $195 million. Company owns 8 first loss securities, including 4 -- including 100% of 4 of these securitizations, requiring the company to consolidate the underlying loans and related by liabilities, resulting in $5.4 billion of financial assets and $5.3 billion of financial liabilities being recorded in our financial statements. The company has no additional risks or requirements outside of our actual investment of $195 million, other than these accounting disclosures. Included in our press release, as well as other 10-K, is a detailed table illustrating actual ownership and risks to the company, as well as further explanations in this consolidation process.

The company closed 2 financing transactions during the year, including 1 in the fourth quarter totaling $52 million. Both of these transactions are over $79 million, resulted in longer-term financing solutions that reduced credit exposure and liquidity calls back to the company while enhancing the overall return of this portfolio.

During the fourth quarter, the company purchased approximately $92 million in distressed residential loans for approximately $60 million purchase price. The loans have an average coupon of 5.77%. These loans were securitized in a trust in finance of the 3-year note. The note allows the company to actually manage the collateral for 2 years without repaying the note. This feature will enhance the company's overall return, providing more stable funding with limited risks back to the company's balance sheet.

We own approximately $187 million of residential loans held in securitization trusts that is financed with approximately $181 million of collateralized debt obligation. These loans had an approximate yield of 2.91% and the cost of financing of 68 basis points or a net spread of 223 basis points. With the overall net investment of the company of approximately $7 million, the return on this investment is over 30%.

Our CLO securities remain a solid investment in 2013, generating over 40% yield on amortized costs and adding over $4.8 million in unrealized gains during the year that was included in our OCI as part of our equity. There is a table provided in our earnings release and in the Form 10-K that summarizes coupons, yields and CPRs by significant asset class for the fourth quarter.

Company heads into 2013 with an increased equity base, a diversified portfolio that we will continue to pursue these existing investment silos, as well as other complementary asset classes that we believe will enhance return for the shareholders in 2013. We also believe, coupled with innovative financing structures that we put in place in 2012, as well as additional structure that we will pursue in 2013, these financing transactions will also provide an important role at returning a more stable return to our shareholders by limiting the risks back to the company in an ever-changing economic and interest rate environment.

Our 10-K will be filed on or about March 15 with the SEC and will be available on our website thereafter.

Fred and I would now like to take questions that you may have. Operator, if you could please take the first question.

Question-and-Answer Session

Operator

Mr. O'Neill -- I'm sorry, sir, Mr. Sandler.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Chris Donat here. The first question for me, Steve, is on -- so the NIM was 333 basis points this quarter, and you commented that deploying the capital raise takes time. Can you give us a ballpark on expectations for NIM in the first quarter, just maybe what you expect sort of a normalized NIM going forward?

Steven R. Mumma

Well, at this point, I'd rather not, Chris. I will tell you though, if you look at the credit assets that we put in place, about $78 million in the CMBS world, and those yields are in the mid-teens and the credit asset -- so those assets came onboard October, November, December. And the distressed loans that we purchased at the latter part of the fourth quarter that we believe will contribute a significant amount of income on an ROE basis, we would expect the NIM to increase from this base of 333 for sure. I mean, the average of those assets were not really reflected in the fourth quarter relative to the rest of the assets. The majority of the Agency portfolio was purchased in September and really settled into October. So you had the full brand of the Agency portfolio with the luxury impact from those credit assets.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay, got it. And then can you just remind us on Headlands Asset Management? I mean, that's sort of a newer relationship here, what it is they're doing for you, and is that relationship structured similarly to your others?

Steven R. Mumma

Sure. Yes, Headlands is a manager that we worked with in the past. In 2010, we put a portfolio on the books. The different caveat this time is, coupled with the asset purchased, we're working on for the last year a financing structure that not only allows us to get what we believe is a nice advance rate against the loans from a funding standpoint but very stable cost of funds but more importantly, gives us a 2-year window where we can work out these loans and reinvest those proceeds back into other loans without paying down the note. So we have a very stable base of funding. And Headlands will be key in managing the work out of those loans. Their expertise lies in sourcing and working out distressed mortgages, and that's the function they'll play. We use our knowledge in providing a financing structure that we believe can enhance this and return back to the company substantially.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then I guess I apologize in advance for asking this one, but with the news out of Washington this week on potential changes to the GSEs. And I guess, separately, there is a report from -- of think tank in Washington about the concept of winding down and ultimately, eliminating Fannie and Freddie is not new. But just any implications that you're aware of or could be thinking about for, say, your case series investments or is that something that were too hypothetical here?

Steven R. Mumma

No, look, they didn't talk about reducing some of their activity in the multi-family sector. Look, I think at the end of the day, if you look at what we're trying to achieve in the Freddie Mac multi-family, where we're partnering with an agency and we're really providing the first loss piece and they're ramping this up, 92.5% of the cash flows, you would have to believe they look at those types of structures when they look to the residential business and think that at some point, you're going to have to incorporate some type of privatization of costs of loss. And those are exactly the types of investments we're interested in playing in. So I think while it may appear that there may be some limits, I think there is going to be other opportunities opening up in the residential space, that the direct residential, not the multi-family, where we will be able to participate in some form of credit insurance with Fannie and Freddie or whatever the new institution will be called. And we don't really think there's a significant impact. We do know that because of -- since we started investing in these multi-family assets about 18 months ago, there is more interest in the asset class, the more competition, which benefits us from a yield standpoint that's describing them in but inhibits us in terms of getting other asset classes, then we feel confident that we'll still participate in that market in 2013. And we're pursuing other investment ideas around these asset classes that gives us access away from Freddie Mac, resulting in the same kind of risks and returns that we foresee.

Operator

Our next question comes from Boris Pialloux of National Securities.

Boris E. Pialloux - National Securities Corporation, Research Division

I just -- if I understand, you mentioned MSRs. Is that something you would get into or?

Steven R. Mumma

Well, I think it's an extensive -- what we got into our IO strategy in 2011 really was the thought of -- we felt like there was possibility to get some outside returns relative to the prepayment environment. We continue to believe that. I think it’s the natural extensions of looking at any kind of servicing asset as it relates to our investment IO strategy because we're buying nothing more than the same types of cash flows. I understand the prepayment risks and the underlying assets, and it's the -- comparing the value of where we think we can purchase servicing rights relative to where we think we can purchase IO securities. And we continue to look at those types of strategy.

Boris E. Pialloux - National Securities Corporation, Research Division

Okay. And also, regarding the distressed loans, I mean, do you have some indication of getting the characteristics of this type of loans or?

Steven R. Mumma

Yes. We will -- there'll be some characteristics included in the 10-K. But I mean, these are loans -- these are performing and re-performing loans with higher LTVs. They are purchased at a discounted price. These are credit disadvantaged borrowers. There's many solutions in trying to assist these borrowers in working up to current situation. And really, it's our ability to source these loans from institutions that may not have a direct line of business around these loans and trying to match these loans with potential investors and/or improve the underlying borrowers' financial condition, thereby refinancing the mortgage itself.

Operator

[Operator Instructions] As there appear to be no further questions in queue, I would like to turn the call back over to Mr. Mumma for any closing remarks.

Steven R. Mumma

Thank you, operator, and thank you, everyone, for being on the call and supporting the company during 2012. We're very excited heading into 2013, and we look forward to speaking to you after the first quarter results. Thank you.

Operator

Thank you, sir, and thank you, ladies and gentlemen, for your participation. That does conclude your program. You may disconnect your lines at this time. Have a great day.

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