New York Mortgage Trust Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 7.13 | About: New York (NYMT)

New York Mortgage Trust (NASDAQ:NYMT)

Q2 2013 Earnings Call

August 07, 2013 9:00 am ET


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


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

Boris E. Pialloux - National Securities Corporation, Research Division


Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust Second Quarter 2013 Results Conference Call. [Operator Instructions]

This conference is being recorded on Wednesday, August 7, 2013. A press release with NYMT's second quarter 2013 results was released yesterday. The press release is available on the company's website at 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 this conference call, which are not historically made, be deemed forward-looking statements within the meaning of 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 it's 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, for opening remarks, I would now like to introduce Steve Mumma, Chief Executive Officer and President. Steve, please go ahead.

Steven R. Mumma

Thank you, operator. And good morning, everyone, and thank you for being on the call. Fred Starker, our CFO, will be present as always at the end available for questions. The company released its earnings after the market closed yesterday, and included in that press release are several payables that I will, again, be referring to during this call.

Before I go through some details, I'd just like to go over what occurs during the second quarter from a market standpoint. The 10-year treasury hit an all-time low or hit a year low of 1.62% on May 2, and then went an all-time high 2.62% on June 24, or an increase of 100 basis points that puts significant pricing pressure on our bonds, including the MBS securities. If you combine that with the overall left liquidity across all market makers and you have one of the most trying markets in the last 15 years. I say this because our portfolio of strategy over the last few years has been focused on building out a portfolio that we believe will have less performance volatility in these exact types of markets.

That being said, let me review our performance. The company earned $11.2 million or $0.19 per common share for the quarter ended June 30, 2013, as compared to $5.1 million or $0.34 per share for the period ended June 30, 2012. Our net interest income rose to $40 million for the quarter ended June 30, 2013, as compared to $5.9 million for the same period quarter ended June 30, 2012, and $13.1 million for the quarter ended March 31, 2013.

Our portfolio net interest margin averaged 348 basis points for the quarter, unchanged from the previous quarter. We declared and paid the second quarter dividend of $0.27 per common share. Book value as of June 30 was $6.25 as compared to $6.55 as of March 31, 2013, or a decrease of 5%. While disappointing in absolute terms, we believe exceptional given the market conditions.

On May 3, the company issued 13.6 million shares of common stock for net proceeds of $94.5 million. And on June 4, the company issued 3 million shares of 7.75 preferred stock, resulting in net proceeds of approximately $72.4 million, bringing the total capital rates for the quarter to approximately $167 million.

The company invested a majority of these proceeds in 2 credit transactions: $41 million in first loss PO and certain IO securities issued by a Freddie Mac-sponsored multi-family securitizations, bringing our total exposure to this asset class of approximately $269 million. The company also purchased $132 million in distressed residential loans, bringing our total investment to this asset class of approximately $190 million as of June 30, 2013. Subsequent to June 30, 2013, the company secured ties approximately $100 million of the $132 million we just recently purchased, resulting in a permanent financing and the net proceeds back to the company of $75 million.

Let me go to some more specifics on our statement of earnings. Our net interest income for the 3 months ended June 30 was approximately $14 million, up $900,000 from the previous quarter. The increase in net interest income was less than otherwise would be expected from additional capital raised during the quarter, but we elected to be underinvested while we finalize our credit purchases. The third quarter will get the full benefit of asset purchases that occurred in the second quarter.

Average interest earning assets of $1.5 million for the quarter ended June 30, 2013, or up $1.1 million as compared to the $400 million running assets at June 30, 2012. The $1.1 billion increase was due to the additional capital raised over the same period, which has contributed to significant growth to the company over the last 12 months.

As we were underinvested in the second quarter, our average earning assets only increased by $75 million when compared to the first quarter of 2013. Again, we would expect this number to increase significantly when giving the full benefit of the asset purchase during the second quarter. The company's portfolio net margins, as I said, is 348 basis points for the quarter ended June 30, unchanged from the previous quarter. The company continues to focus on credit-sensitive investments that we believe will deliver more stable returns and a rising rate and improving economy.

Total net other income was $2.7 million for the quarter ended June 30, 2013, as compared to $2.2 million for the same period in the previous year and $6.4 million for the quarter ended March 2013. The June 30, 2013, quarter included a net loss of $7.6 million related to our IO strategy, which was offset by a $9 million unrealized gain in certain of our CMBS securities accounted for in a consolidated basis.

Our IO strategy suffered one of the most difficult things in the markets in the last 15 years, which resulted in less liquidity and difficult pricing market for the IO portfolio. We continue to believe that this strategy, over time, will deliver consistent mid-teen returns as it's done historically for us. The IO negative performance was offset by our CMBS portfolio, which continues to benefit from increased demand for credit-sensitive securities created off from multi-family collateral. This market continues to experience significant spread tightening during the quarter.

In addition, included in other income for the quarter was also a loan loss reserve for approximately $400,000, which is primarily due to our legacy prime mortgage securitizations, as well as $100,000 reserve we took for our new distressed loans that we purchased in the fourth quarter of last year. The increase of $2 million in expenses is due primarily to an increase of $500,000 in external management fees and an increase of $1.1 million in expenses related to our distressed loan activity. The increased demands and fees is directly related to the growth of our company's equity capital and the corresponding increase in assets under the external managers.

Our distressed loan strategy will result in an increased expenses, as the handling and resolution process is much more operationally intensive than performing loans. But given our initial purchase price, we believe these costs will be more than offset by the eventual outcome of disposing of the these loans.

In addition, when purchasing a distressed residential loan pool, significant due diligence costs are incurred are upfront. Those costs are required to be expense in the period incurred and not capitalized to the asset purchase price of the loans. Our first -- our most recent purchase that we close in the second quarter, resulted in a onetime expense of approximately $400,000 in the second quarter.

The company ended the quarter with a book value, as I said, of $6.25 per share as compared to $6.55. Included in our press release is a detailed analysis of the book value transition for the period. Also, included in our press release is our investment allocation table that details assets and liabilities by investment as of June 30, 2013.

After giving effect for the 2 capital raises of $92.4 million in common stock and $72 million in preferred stock and the $167 million in credit-sensitive assets purchased during the quarter and really for the for 6 months of the year, our equity allocation has changed as follows as compared to December 31, 2012. Our Agency RMBS portfolio has decreased from 32% of equity in December to 15% as of June 30, 2013. Our IO strategy is decreased to 15% of equity from 20% in December. Our multi-family CMBS strategy has increased to 38% in June from 36% in December 2012. And more significantly, our distressed residential loan portfolio has increased to 25% of equity, up from 8% in December. We believe these allocation shifts will better position the company as we go forward in the challenging interest rate environment.

Now for some specific comments on our investments. Our portfolio CPR speeds were up -- were 15.4% for the quarter ended June 30, as compared to 12.9% from the previous quarter, up slightly. Our Agency ARM portfolio was mostly unchanged coming in at 22.2% for the quarter as compared to 20.8% from the previous quarter. While our agency fixed rate portfolio increased to 6.5% from 3.8% from the previous quarter. The IO portfolio speeds continue to be very consistent coming in at 29.6% CPR as compared to 21.6% from the previous period, essentially unchanged and have been within its range since the fourth quarter of 2011.

We settled in our ninth purchase in the multi-family CMBS securities portfolio for approximately $41 million during the quarter, bringing our total investment to $269 million. Our balance sheet and income statement reflect much larger balances and these activities would otherwise suggest, due to the GAAP accounting requirement related to consolidation rules. Third of these investments that we own 100% and/or a majority ownership require us to consolidate and included in our earnings press release, as well as our 10-K -- as well as our 10-Q as discussions including financial tables disclosing the impact of these requirements.

However, it should be noted that the company has no additional risks outside of our actual investment of $269 million, other than accounting disclosure. The company anticipates additional purchases in the second half of the year as well as completing another financial securitization that should enhance the net return of the company, but reducing overall financing risk.

During the quarter, we purchased another $132 million in distressed residential loans, bringing our total investment to $190 million. We have already securitized $60 million of those loans. And in July of 2013, we closed our second securitization, securitizing $100 million in secured -- in distressed residential loans resulting in $75 million in proceeds coming back to the company.

We're anticipating completing another purchase in securitization during the third quarter of 2013. This strategy is intended to generate both net interest income as well as capital gains, with the material portion of the return coming from capital gains. We anticipate our last 2 purchase will have a greater impact on earnings over the last second half of this year and into 2014. Both our legacy residential securitizations that we completed in 2005, as well as the CLOs securities that talked about many times in the past 3 years had no material changes in performance and continue to perform outstanding, relative to the risk we have in those investment securities.

For the balance of 2013, our focus will be to continue to build out the investment portfolio of credit-sensitive assets that rely on asset selection on leverage to generate our targeted returns. The company continues to invest in the multi-family space, including CMBS Securities and to a lesser extent, direct lending through mezzanine and preferred equity investments. In addition, we will continue to pursue distressed residential loan investing, coupled with securitizations that we believe will generate mid-teen returns with minimal financial exposure and movement of interest rates in the marketplace.

We look forward to continue to build out this strategy, we think the markets will be difficult going into the next 6 to 12 months with a lot of uncertainty given when the federal reserve is going to start to taper or decrease the purchases MBS securities. However, we think that the portfolio we have will be less impacted by many of these moves relative to some of the investments that we otherwise could be investing in.

Our 10-Q will be filed on or about August 8 with the SEC and will be available on our website thereafter. Fred and I will now be available for any questions you may have. Operator, if you could please go ahead and take the first question.

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of David Walrod with Ladenburg.

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

To start off, you said you were underinvested for a part of the second quarter. Is that to say that you raised the capital and then rather than put it into the agency market, which was pretty volatile, you only just kind of sat on that capital until you were able to close some of your other transactions?

Steven R. Mumma

Exactly, Dave. We had -- so we raised the capital, really, at the beginning of May. And the intention was to initially put it into agency securities and then unwind those transactions that the credit rate settled. But given what we thought would be -- when we felt uncomfortable in the market rate environment, we hit the low, we touched the low right around that same time. And we're concerned that the probability of rates going higher, not so much in May, but just in general, and higher in the coming periods were significant enough that we felt like the cost of underinvesting was well worth our quarterly hit relative to taking a mark-to-market write-down, which ultimately proved out to be the right strategy. And we didn't have any idea that the market move will be as significant as the curve. And that's really what led to that.

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

Right. Can you -- I guess, second topic that I'm kind of delve into -- or maybe just a little bit more to what happened with the IO book?

Steven R. Mumma

Sure. The IO -- so from a technical standpoint, given the rise in interest rates, generally would live itself to improved pricing and IO securities. We also own inverse IO securities, which are the derivative of fixed rate instruments. And you've got a lot of price action movement -- negative price action movement in the inverse IO market, in our opinion, do more towards liquidity issues from certain holders of these securities that we're selling into the marketplace at May and we stopped put undue pressure on the collateral. We would expect that pressure is mostly alleviated. We think going forward, prepayment speeds will be more muted. The Fed has talked about keeping short interest rates flow for an extended period of time. And as you know an inverse IO securities of fixed rate coupon, less 1 month LIBOR movement, so we would anticipate in that fixed rate coupon is typically 150 to 200 basis points above a traditional MBS security. So we think we have -- we'll generate significant net margin income if we can get the price movements more in line with historical norms. We think the portfolio will perform very well. If the price movement was outside of historical norms, our external manager hedges it to a net duration exposure. And when you get these outside movements, you have some tracking issues with your hedging and therefore, resulting in unexpected losses or outside losses.

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

Okay. That's helpful. And then finally, you're fully invested today?

Steven R. Mumma

We are fully invested today. We completed the securitization. We used the proceeds of the securitization, really, to go out and fund some investments we are making in the CMBS, as well as in initial purchase and distressed residential loans that we will again turn right into another securitization. So the goal would be to, for every dollar of distressed residential loans that we invest then ultimately, it will get financed with about $0.60 to $0.75 of securitized debt. That generates a 3:1 leverage ratio to the equity, which allows us to what we believe generate mid- to high-teens returns on net investment asset over time, without bringing any more risks back to the company's financials from a mark-to-market and margin requirement standpoint.

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

Are you still seeing attractive opportunities in the CMBS and distressed loan market?

Steven R. Mumma

Yes. There's no question that we bought the -- and you can see in the financials, the purchase price of the loans we bought in the fourth quarter were in the 60s. The purchase price in the last second quarter were in the low-80s. Clearly, that's not 100% comparable just related to the marketplace, the pool that we purchased in the second quarter has a higher coupon and some more favorable facts. But in general, the market improved at least by 10 points, in our opinion, in pricing. So the price has gone higher. The securitizations allow us, and the efficiency of the securitization market, has allowed us to continue to generate better returns because we're getting a higher leverage against our equity relative to what we could do a year ago in the securitization market. So we would monitor those prospects relative to not only the asset pricing, but we're we think we can securitized those assets in the marketplace.


Our next question comes from the line of Boris Pialloux with National Securities.

Boris E. Pialloux - National Securities Corporation, Research Division

First question. You're mentioning that -- what's going to have a big impact in the second half of the year is the duration of loans in your distressed residential mortgage loans. What do you mean by that? What do you expect to do, actually?

Steven R. Mumma

Sure. So we're buying these loans at a discount. So the first aspect of return on these loans is you're buying a loan at some percentage of the UPB. The majority of borrowers under the distressed pools that we're buying are making a payment on a monthly basis. So it does generate some net interest income to the company, which is very attractive on a levered basis in our securitizations. And then the ultimate resolution of these loans really comes from a couple of facts: One, the borrower would like to refinance on its own. Two, the borrower would like to refinance because we've introduced the borrower to refinancing options that otherwise haven't been given to that borrower through the discounted price that we own the loan. We can present them with opportunities to refinance, whereby they're lowering their mortgage payments through either a reduced rate interest rate or a combination of reduced rate and principal amount that generates -- so that borrower refinances. We come to the table with some form of economic incentive, they end up with a better mortgage, we end up with the return of our capital at a price higher than our entry-level. And then the third resolution is we repackage some of these loans and resell them to an interested party in a local market that they have interest in a loan. So we take a very detailed analysis of these loans on the very local basis and try to, in some cases, marry a loan sale into a local bank, where the borrower is performing and maybe higher LTV loan, but we can offer that loan any discount that generates returns to the bank in a favorable way that returns a nice return to us, as well as to the bank. And it's a win-win situation.

Boris E. Pialloux - National Securities Corporation, Research Division

So when you have strategy, does it mean that you're concentrating in one geographic area like, say, the New York area or...

Steven R. Mumma

Typically, it depends. So we buy -- we have bought historically pools of loans of $10 million or less. And those are typically, generally, geographically concentrated. And then most recently, we closed at a much larger pool, which was more broadly based from a geographic standpoint. We tried to stay away from states that have significant issues around refinancing or have had historical issues with refinancing, such as Georgia and Texas. We're definitely aware of judicial states. So there is a lot of analysis and that's where the due diligence expense come in play in the offset when you're bidding on these pools. There's a lot of analysis and strategies on what we think the ultimate resolution will be in each individual loan that we're buying.

Boris E. Pialloux - National Securities Corporation, Research Division

So you're also very opportunistic, and some of your peers have not only bought distressed loans, but they're also buying MSRs. What's your take on MSRs in your portfolio?

Steven R. Mumma

We've looked at that investment. We liked the investment. I think some of the peers that we're competing with have a lower dividend hurdle than we have, traditionally. It's hard for us to see how we can generate a mid-teens return owning MSRs. You would have to introduce what I would consider a significant amount of leverage on that asset class. And to the extent that we could get comfortable that we could generate some type of leverage that was not callable back to the company. I think we would take a -- we would consider investing in an asset class. But today, we think we can generate better returns that are more stable to us relative to an MSR investment.

Boris E. Pialloux - National Securities Corporation, Research Division

Okay. And then last question is, given the performance of the IO portfolio, does that -- do you have a chance in strategy regarding the IOs or are you still going to keep a large IO portfolio?

Steven R. Mumma

I think when you say larger IO portfolio, if you look at the percentage of the portfolio relative to the company, it continues to decrease. I think that we will maintain that exposure. We like that exposure. I think the second quarter was just like the third quarter of 2011. Both quarters were significant moves in rates or significant changes in attitude, which put undue pressure in the marketplace outside of historic norms, which generates tracking error. Taking those 2 quarters out of the equation and historically, if you look at this investment, it's done very well in a marketplace. And we think there's still opportunity for upside in this strategy. Going forward, we think we will probably -- as a percentage, it will represent a lesser amount of our equity balance. But we'll still continue to maintain an investment in that strategy.


[Operator Instructions] And now, I'd like to turn the call over to Steve Mumma for any further remarks.

Steven R. Mumma

Thank you, operator. Thank you, everyone, for being on the call. This has been a trying quarter not only for our company, for many of our peers. We look forward to demonstrating our portfolio strategies as we go through the rest of the year, and look forward to speaking to you in November. Thank you very much.


Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may now all disconnect. Have a good day everyone.

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