New York Mortgage Trust Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 8.13 | About: New York (NYMT)

New York Mortgage Trust (NASDAQ:NYMT)

Q1 2013 Earnings Call

May 08, 2013 9:00 am ET

Executives

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

Analysts

Steven C. Delaney - JMP Securities LLC

Boris E. Pialloux - National Securities Corporation, Research Division

David M. Walrod - Ladenburg Thalmann & Co. Inc., Research Division

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust First Quarter 2013 Results Conference Call. [Operator Instructions] This conference is being recorded on Wednesday, May 8, 2013.

A press release with NYMT's first quarter 2013 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 that the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that 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

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 earnings after the market closed yesterday. Included in the press release were several tables that I will be referring to during this call.

The company earned $15.4 million or $0.31 per common share for the quarter ended March 31, 2013, as compared to $5.8 million or $0.42 per common share for the period ended March 31, 2012.

Our net interest income rose to $13.1 million for the quarter, an increase of $1.6 million from the quarter ending December 31, 2012. Our portfolio net interest margin averaged 348 basis points during the quarter, an increase of 15 basis points from the previous quarter.

We declared and paid a first quarter dividend of $0.21 per common share -- $0.27 per common share. Our book value ended at $6.55 at March 31, 2013, compared to $6.50 as at December 31, 2012, or an increase of $0.05 per share.

Subsequent to March 31, the company issued 13.6 million shares of common stock, raising approximately $94.5 million in proceeds.

Now I'd like to go through some additional details regarding our quarterly performance, as well as our future plans.

Our net interest income for the 3 months ended March 31, 2013, was $13.1 million, up approximately $6.8 million for the same period the previous year, and up approximately $1.6 million from the fourth quarter of 2012. The increase in net interest income was primarily due to an increase of $1.1 billion in average earning assets at March 31, 2013, as compared to the first quarter of 2012.

The increase in average earning assets was due to the deployment of net proceeds totaling approximately $232 million from 4 public equity offerings we completed in 2012 and increases in our borrowings under repurchase agreements that we used to acquire additional Agency RMBS.

The company's portfolio net margin was 348 basis points for the -- during the quarter ended March 31, 2013, as compared to a net margin of 333 basis points for the quarter ended December 31, 2012, and a 658 basis points for the quarter ending March 31, 2012. The increase in net margin in the first quarter of 2013 from the fourth quarter was attributable to our investments in our credit assets. The decrease in net margin from the period ended March 31, 2012, was largely attributable to a decreased emphasis in our Agency IO strategy as a percentage of our invested equity, as well as an increased position in our levered Agency RMBS strategy and increased investments in other levered investments.

The increase in other income includes a $5 million increase in net unrealized gains in our multi-family loans and debt held in securitization trusts, an increase in unrealized gain on our investment securities and related hedges of $3.3 million, which was partially offset by an increase in realized loss on investment securities and related hedges of $4.2 million that's primarily related to our Agency IO portfolio.

The increase in unrealized gains from our investment in multifamily loans and debt held in securitization trusts was due to improved credit spreads, as well as significant increase in our investment and -- in this asset class as compared to the previous period. Credit spreads on these assets benefited from improved market conditions, as well as greater demand by investors, resulting in significant increase in valuations for our investments.

The increase in expenses is due to an increase of $0.5 million in other expenses and $0.5 million in management fees, as well as an increase of $100,000 in salaries, benefits and directors' comp and approximately $100,000 increase in professional fees. These increases in all categories are largely the result of the growth of equity of the company. And as a percentage of equity, our expense ratios continued to decline.

The company, as I said before, ended with a book value of $6.55 as compared to $6.50. Included in our press release is a detailed analysis of the book value transition for the period.

Also included in the press release is a portfolio allocation table. A detailed assets and liabilities by investment silo from March 31, 2013. The company did not have material changes in those allocations during the quarter. However, on May 3, the company closed on an equity offering, raising approximately $94.5 million, and we expect to invest approximately $41 million in first loss K-Series deal, including both the PO and IO securities in May.

In addition, the company anticipates ultimately the deploying the remaining proceeds into distressed residential loans or other multi-family credit-sensitive assets. As we accumulate significant credit-sensitive assets, we will continue to seek alternative financing solutions similar to our 2012 transaction, which we believe enhance the yields, while creating more permanent financing, reducing callable leverage risk back to our company.

Our portfolio of speeds were largely unchanged, with a weighted average CPRs for the first quarter at 12.9% versus 12.5% for the previous quarter. Our Agency ARMs portfolio's speeds increased to 20.8% from 14.5%, our Agency fixed rate portfolio's speed increased from 3.8% -- to 3.8% from 2% the previous period, but overall, it's an even increase. Our IO portfolio remains largely unchanged at 21.6 CPR percent and this rate is essentially unchanged over the last 6 quarters.

Our multi-family Freddie Mac K-Series investments remained largely unchanged during the quarter with $209 million invested in CMBS assets. Our balance sheet and income statement reflect much larger balance received activities due to GAAP accounting requirements related to consolidation rules, as certain of these investments, due to ownership percentages and special servicing rights, require us to consolidate. Included in our earnings press release, as well as our 10-K, our discussions including financial tables, as well as footnotes disclosing the impact of this requirement. It should be noted, the company has no additional risks outside of our actual investment of $209 million other than accounting disclosure requirements.

As I mentioned earlier, we intend to fund approximately $41 million in May of similar type securities.

Late in the fourth quarter of 2012, we closed on approximately $60 million in distressed residential loans that we financed through a securitization. The intention of this investment is to generate both net interest income, as well as capital gains, with the material portion of the return coming from capital gains. As these loans were newly boarded onto our platform, the first quarter saw very little in capital gains. However, we anticipate this transaction, as well as potential future transactions, to contribute significantly to the company's performance in the coming quarters.

We continued to benefit from the equity ownership in 3 legacy residential securitizations, which are backed by approximately $181 million of residential mortgage loans and financed with approximately $175 million in collateralized debt obligations. These loans had an average yield of 2.89%, with the corresponding financing cost of 66 basis points, or a net interest margin of 233 basis points, which we retain as the company holder of the equity. The company added approximately $283,000 to our loan loss reserve related to this activity, bringing our total reserves to $3.2 million or 175 basis points of outstanding loans, but more importantly, 18% of our loans that are delinquent more than 60 days.

Our CLO securities remain a solid investment with the continued market valuation improvement.

Over the past 18 months, we've constructed a portfolio of diversified financial assets that we believe will benefit from the improving credit metrics. This strategy will focus on the total rate of return rather than strictly net interest margin. Since first implementing the strategy, we have invested approximately $157 million or 48% of our equity capital as of March 31, 2013, into credit-sensitive assets such as the multi-family CMBS issued by the Freddie Mac K-Series securitization, as well as distressed residential mortgage loans that we believe are capable of producing strong returns for the company's portfolio as U.S. economic conditions improve.

During the 2013 first quarter, this strategy has produced solid quarterly earnings of $0.31 per share despite a challenging environment for Agency RMBS. Of the $31 (sic) [$0.31] in net income per share for the quarter, $0.14 per share was contributed by unrealized gains of our multi-family CMBS strategy which benefited from the improved valuations driven by credit spreads tightening during the quarter.

In addition, although not a significant contributor to the earnings in the first quarter, we believe the valuations on the pool of distressed loans which we acquired in December 2012, have improved during the past 4 months, and we anticipate that these assets will contribute in a meaningful way to our total return in 2013.

For the balance of 2013, our focus will be on continuing to build out the investment portfolio with credit-sensitive assets that rely on asset selection rather than leverage to generate the significant part of the return.

Our 10-Q will be filed on or about May 10 with the SEC. It will be available on our website thereafter.

Fred, right now, I'd like to take any questions that you may have. And operator, please take the first question.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Chris Donat from Sandler O'Neill.

Unknown Analyst

This is actually Rob Hatter[ph] filling in for Chris this morning. I just wanted to ask a few quick ones here. So with 48% of your equity capital now in credit-sensitive assets, is there a limit or -- on how high if you want to take this percentage?

Steven R. Mumma

I think it would depend on the type of investment, right? To the extent that we invest in these first loss Freddie Mac K-Series, which are largely backed by PO securities that generate less cash with solid GAAP earnings. There is a limit in terms of how much that percentage would represent at our overall company balance and that limit is probably between 30% to 35%. As it relates to the distressed residential loan transaction, that transaction currently represents less than 10% of the equity. We can see that transaction going -- growing substantially to 25% to 30%, 40% of the company overall as long as we can continue to source loans at levels that we think make sense for the company.

Unknown Analyst

Got it, that's helpful. And then, I know you guys really don't give specific guidance or probably can't, but on -- I just want to ask questions on the net interest margin here. So should we expect the margin to keep rising throughout 2013 like it did in the first quarter as you continue to deploy capital into these higher-yielding credit-sensitive assets? Or is there -- or should we expect sort of a leveling off here?

Steven R. Mumma

I think when you look at the transition of the spreads, and keep in mind, the portfolio margin you have to take with the leverage in the company, right? So the net portfolio margin, as we transition from a net margin of probably 140 to 150 basis points in an Agency trade to a net margin in a credit trade that's substantially higher, yes, it will transition upwards. So I think in 2012, when we grew rather rapidly, we did put a significant portion of the raise in the midsummer into agencies, and that's why the spreads dropped substantially. But I think, going forward, as we focus on credit, you would expect the portfolio margin to remain in this level or increase over time.

Operator

Our next question comes from Steve Delaney from JMP Securities.

Steven C. Delaney - JMP Securities LLC

So look, after what we've seen in the first quarter with some problems people having on book value marks on Agency MBS, it's encouraging to see the steady progress into credit as opposed to duration risks, so congrats on having the vision to do that. I wanted to get into a couple of things and -- maybe on the credit assets, following up on what Rob had asked about. I just want to understand, with your distressed loan pools, that's pretty obvious that those are whole loans, and I'm assuming you see those as good assets for the SEC '40 Act test, am I correct on that?

Steven R. Mumma

That's correct, because we also are acquiring the servicing along with those loans.

Steven C. Delaney - JMP Securities LLC

Right, right. And so you're obviously in the first loss control position. So those are good assets. And the more you do there, the less you have to move capital into the agency market where you're competing with the Fed and running that risk. But now I'm not quite as clear on the K-Series structure. GAAP requires you to put $5 billion of loans on your books. You're grossing them up, but obviously, as you show your investment of about $200 million, how should we think about the SEC '40 Act treatment of the multi-family loans underneath those K-Series?

Steven R. Mumma

It would be similar to the way that we treat our residential securitizations, which would tell you that you're allowed to count forward your '40 Act whole pool treatment for those first loss positions that you have direct cuts to the law. So in the event of our securitization, even though we had -- and for the consolidated loans, really, the first loss fees that we own 100% on counts as a whole pool. If we don't own 100% of the first loss piece, then, we don't count that as a whole pool security. So there are 4 transactions that we own less than 100%, which we don't include, and it's 4 transactions that we deal on 100%.

Steven C. Delaney - JMP Securities LLC

Okay. So the 5 -- and those -- we've got to look farther behind the $5.4 billion. Some of those, you would be able to include the loans, and some you would not, is that what you're saying?

Steven R. Mumma

And that's correct. But also keep in mind, from a '40 Act standpoint, you're not consolidating all those loans on your balance sheet either for the test. Right? So we're not bringing -- we're not -- we don't -- we can't count $5 billion. Since all those pools that we're consolidating we own 100% of, we're not getting the benefit of $5 billion of loans of being high -- whole pool. We're only showing the net benefit of the net investment we have in the transaction.

Steven C. Delaney - JMP Securities LLC

Okay. And then, Steve, the last thing I just would ask about, and this is just in a very general sense, how -- help me understand how the board used the dividend policy with respect to your dividend payout, sort of how you look at setting the dividend? Clearly, the $0.31 in GAAP EPS covered the dividend this quarter, but as you pointed out that you benefited from some realized gains. So just how should we think about the dividend and what type of return elements in addition to, like, core spread income is the board looking at in setting -- in setting the dividend rate?

Steven R. Mumma

Sure. So we have several strategies. Well, we have 2 strategies, I think. The Agency IO strategy, I would characterize as a total rate of return strategy, as well as our distressed loan, is a total rate of return strategy. So when we park and meet as a board to set the dividend policy, we are not looking at a quarter-to-quarter movement of our earnings, we're looking at a 12-month period that we're going to report taxable income. And as we make assessments on where we think we're going to monetize potential capital gains in these portfolios and how these portfolios are performing, we would look to adjust that dividend policy as we go through the year. But when we set our policies, it's the expectation that the -- as well as we can see in the immediate future, that would be an expected run rate that we would anticipate to hit over time. We're not looking at our net margin, and saying, "Okay, our net margin is x, and therefore, that's the only time we can pay out as dividend." No, because our -- and especially in the distressed residential loan transactions, a lot of these gains are going to be realized over time. In our financial statements, for example, we carry the loans at lower cost to market, so you have no benefit of appreciation and price that's reflected either in the earnings or in the book value on an AOCI basis. But in fact, these ARM prices have increased significantly. So we know we have trapped gains in these loans that we'll work through during the coming quarters and we know that we're going to be monetizing those gains.

Steven C. Delaney - JMP Securities LLC

So in the -- I understand what you're saying about the total return approach on the actively -- kind of the actively managed portfolio, and what you're saying, in sort of the core Agency portfolio, unrealized depreciation would go into OCI and that would only factor into your payout calculus if you actually harvested those gains by selling the bonds?

Steven R. Mumma

That's right. And we're looking really -- we're not really looking at the unrealized gains in the PO portfolio to really support a dividend payout because we don't carry these securities on a long-term basis, but we are looking to harvest gains for the other strategy to generate dividend income because we know there is going to be turnover in those typical strategy.

Operator

And our next question comes from Boris Pialloux from National Securities.

Boris E. Pialloux - National Securities Corporation, Research Division

I had 2 quick questions. The first one is, when your -- in the Agency IOs, do you count the IOs of the K-Series or is that somewhere else? The second question is to have your opinion on the new risk sharing programs of the finance and Freddie Macs for the summer?

Steven R. Mumma

Yes. When you say that we don't include the Freddie Mac K-Series IOs as an Agency IO strategy, that's strictly a residential IO strategy. The IO related to the K-Series is included in the K-Series bylaw, if that's what you're asking.

Boris E. Pialloux - National Securities Corporation, Research Division

You mean to say that $128 million of Agency IO is on the residential, no K-Series IOs?

Steven R. Mumma

That's correct. And if you look in our 10-K or 10-Q -- well, the 10-K and the 10-Q will be coming out shortly, you'll see -- there's a table on there that will allocate the POs and IOs of Freddie Mac K-Series so you'll get a sense of what that is also. And as it relates to Freddie and Fannie, we continued to monitor -- look, we're doing a loss sharing, basically, in the Freddie Mac multi-family program right now, buying it privately. We'd like to participate in those transactions, it's an ever-evolving process. It's going to be interesting how QM impacts originations, and we'll see how that unfolds as we go through the summer months. So we watch it closely and make sure that we understand the risks. And long-term, we think there will be a transition of this risk to the private marketplaces where we think there's going to be opportunities for us to participate.

Boris E. Pialloux - National Securities Corporation, Research Division

And also, like -- a quick question about the mortgage residential, how do you view the mortgage residential in some markets like Seattle or Washington DC? You have lots of supply coming. Do you think at one point it's going to have an impact on some of the CMBS K-Series deals or they're too diversified and it wouldn't really matter?

Steven R. Mumma

It will always matter because we are in a first loss position, so $1 loss is $1 loss to us. We have significant diversification now. We own approximately $8.5 billion of loans backing these multi-family projects. And as you say, there are end markets that are getting -- there is a lot of construction in some of these markets. We do a lot of due diligence and try to -- and I think the Freddie Mac program, in general, is fairly conservative, and that's one of the reasons why we like their securities. So we think that gives us some sense of protection but there's no question every margin goes through cycles. And as it gets overbuilt, it comes under pressure. However, if you look at the last 5 years, the amount of apartment multi-family construction has been under trend, and is now above trend. But still, if you look at the cumulative units under construction, it's still below demand, as you can tell by the occupancy rates, it's still low. So we like that factor. The other statistics that recently was reported last week is home ownership continues to decline, which we still believe is going to be a factor, going forward, where the aging population will seek to be a renter as opposed to a home owner to continue their lifestyle. So we still like those dynamics. We look at these transactions. The yields have come in significantly. We start doing these investments so that's a factor in our investment strategy and there may be a point in time where we think the yields have gone too tight and we step away from the transactions. But yes, we've started investing in 2008, we own 2008 securities, 2009, '10, '11 and '12, so we have a nice spread of properties from an appreciation standpoint. But we do -- are keenly aware of the deal that we are settling in May has slightly tighter ratios than the previous -- than the deals that we did in -- from 2008, so we do monitor that.

Operator

[Operator Instructions] Our next question comes from David Walrod from Ladenburg.

David M. Walrod - Ladenburg Thalmann & Co. Inc., Research Division

A couple of things. Obviously, a lot has been asked already. You commented that you deployed $41 million -- or you're going to be deploying $41 million in the K-Series by the end of the month. What's the timing of deployment of the rest of the capital that you raised? And if you could kind of give us an idea -- I know you kind of briefly touched on it, but maybe flesh out a little bit what opportunities you're seeing for deploying that excess capital?

Steven R. Mumma

Look, we'd like to -- these credit build -- the one difference between the credit strategy and the Agency strategy is, Agency strategy, we can deploy very quickly. And the credit strategy, we look at trying to line up capital raising with credit opportunities, so we'd like to think that our credit opportunities are going to be deployed reasonably close to when we raise capital and reasonably close is defined within -- in my opinion, within 30 to 90 days, and we'd like it to be shorter than the 90 days. But these credit transactions, while you think you have your handle on them, sometimes when you get to the close, it takes a little handholding. But we have a pretty good runway of thought in terms of what we can put on the balance sheet from a credit standpoint and we'd like to put the majority of that capital as quickly as possible in the credit-sensitive assets.

David M. Walrod - Ladenburg Thalmann & Co. Inc., Research Division

Do you think the end of the quarter is realistic or do you think it will stretch through the third quarter?

Steven R. Mumma

If you're trying to pin me down on a date, I can't...

David M. Walrod - Ladenburg Thalmann & Co. Inc., Research Division

I'm not trying to pin you -- I'm just trying to get a feel for it.

Steven R. Mumma

I'd like to say the temperature will still be warm when we get to the securities -- invest in the credit assets. But now we would like to think that we would have a substantial part of that invested by the end of the quarter.

David M. Walrod - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And you're thinking K-Series, distressed loans or any thoughts there?

Steven R. Mumma

Yes. I mean, the K-Series have a much farther horizon, so we'll probably just settle this one K-Series on the primary market, it's possible that we may source a secondary piece. But the rest will be generally in -- either in distressed residential loans or in direct lending to multi-family, which we started doing at the end of the fourth quarter, and did 1 loan in the first quarter. That's a little bit of slower ramp-up, but I could see putting $5 million to $10 million to work in direct lending into the multi-family space in a preferred equity position.

David M. Walrod - Ladenburg Thalmann & Co. Inc., Research Division

Okay, great. And then, the margins in the K-Series, I mean, is it safe to say that they're depressing a little bit from where they were 6 or 12 months ago?

Steven R. Mumma

Absolutely. Well, it's safe to say that they've compressed since the year-end just from a -- just general credit spreads have come in, and I think we've seen more competition looking at these asset classes, which has driven in spreads. And yes, they have come in. No question, they've come in.

Operator

And I'm showing no further questions at this time.

Steven R. Mumma

All right, operator, that's fine. Thank you very much for everybody on the call. I appreciate your questions. We look forward to talking about our story at the end of the second quarter, and we will continue to judiciously deploy the capital and assets that we think will benefit the shareholders. Thank you for being on the call.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may now disconnect and have a wonderful day.

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