New York Mortgage Trust Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 6.13 | About: New York (NYMT)

New York Mortgage Trust (NASDAQ:NYMT)

Q3 2013 Earnings Call

November 06, 2013 9:00 am ET


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


Steven C. Delaney - JMP Securities LLC

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


Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust Third Quarter 2013 Results Conference Call. [Operator Instructions] This conference is being recorded on Wednesday, November 6, 2013. A press release with NYMT's third 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 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 now 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 this morning. 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 throughout the call. The third quarter began where the second quarter left off. Concerns for higher rates, the impact of the impending tape decision by the Fed in the September FLMC meeting and the overall health of the U.S. economy.

The 10-year treasury rate peaked at around 3% in early September, up from a low of 1.62% in May, and remained at elevated levels up until the Fed meeting announcement on September 18, where in that meaning they announced the continuation of their purchasing program in delaying any decision on the tape rate. Subsequent to that meeting, the treasury market rallied approximately 40 basis points, back to levels very close to where they ended at June 30, 2013.

As we head into the fourth quarter, we still have many macro issues on the horizon. An unsettled 2014 U.S. budget and debt ceiling limitations discussions; long-term economic impact of the shutdown in Sydney; and the economic -- and overall health -- economic health of the global economies; and finally, when and if the government will begin to taper and reduce the financial stimulus that they have been providing to our markets. That being said, we believe we have properly positioned the company's portfolio to navigate in these tumultuous times, as can be seen by our latest earnings release.

The company earned $16.9 million or $0.27 per common share for the quarter ended September 30, 2013, and $43.6 million or $0.76 per common share for the 9 months ended September 30, 2013. Net interest income rose to $15.3 million for the quarter ended September 30, 2013, as compared to $7.2 million for the quarter ended September 30, 2012, and a 10% improvement or $1.4 million over the previous quarter ended June 30, 2013.

Our portfolio of net interest margin averaged 359 basis points for the quarter, an increase of 11 points from the previous quarter, 11 basis points. Our book value as of September 30, 2013, was $6.32, an increase of $0.07 from June 30, 2013. We declared and paid a third quarter dividend of $0.27 per common share. That's 6 quarter in a row of stable dividend payments. The company acquired $72.8 million in distressed residential loans and originated approximately $21.3 million in multifamily debt and equity investments during the quarter. We completed 3 structured financings for our distressed residential loan portfolio, resulting in total proceeds of approximately $136 million to the company. These structured financings resulted in a 3- to 4-year fixed term debt at attractive rates with no liquidity costs [ph] back to the company.

Now let's talk about more specifics in the statement of operations. As I said, net interest income for the third quarter ended September 30, 2013, was $15.3 million, up approximately $1.4 million from the previous quarter. The third quarter got the full benefit of our asset purchases in the latter part of the second quarter of 2013. Average interest earning assets were $1.6 million for the quarter, up approximately $63 million from the previous quarter.

In addition, the company purchased another $72 million in distressed residential loans in September of 2013.

As I said, the company's net portfolio interest margin was 359 basis points, an increase of 11 basis points from the previous quarter. And as we continue to deploy our excess working capital into credit-sensitive assets that are generally higher-yielding and typically financed with term debt resulting in net spreads greater than our Agency RMBS portfolio strategy and also allowing us to rely less on callable financing from financial firms like Wall Street banks and brokerage firms.

Our total net other income was $8.3 million for the quarter ended September 30, 2013, as compared to $3.6 million for the same period the previous year, and $2.8 million for the previous quarter ended June 30, 2013.

Quarter ended September 30, 2013, saw a significant recovery in our IO strategy, delivering a net gain of $1.8 million in realized and unrealized activity versus a net loss of $6.4 million in realized and unrealized activity for the previous quarter ended June 30, 2013.

As I spoke about this last quarter, we felt this strategy would perform well over time, but had difficulty in performing in markets where we're experiencing rapidly changing rates, which was exactly the situation in the quarter ending June 30, 2013.

A portion of our CMBS portfolio accounted for fair value, so our earnings payment contributed another $6.3 million in unrealized gains for the quarter ending June -- September 30, 2013, and bringing the total unrealized gains for the year to $22.4 million. We believe this investment class will continue to deliver long-term benefits to the company, and we'll continue to invest in this strategy.

The increase of $1.9 million in expenses was due primarily to the increase of $0.5 million in external management fees and $1.1 million in expenses related to our distressed loan activity. The increase in management fees is directly related to the increase in the equity that we raised in the company and the corresponding increase in assets under the external management guidance.

The increase in distressed loans is directly related to the significant investment increase in the strategy during the year. And we will make the comparative numbers to 2012 somewhat misleading as there was very little distressed loan investments during that time period. This distressed loan strategy typically has a higher cost, as servicing and loan resolution processing is more operationally intensive than performing loans. But given our purchase price entry-level and where we believe these costs will be more than -- we believe these costs will more than offset underperformance of the strategy over time.

The company ended the quarter with a book value of $6.32, as compared to $6.25 as of June 30, 2013, and included in our press release is a detailed analysis of the book value transition for the period.

Also included in our press release is a capital allocation table that details assets and liabilities by investment silo as of September 30, 2013. As you can see, our Agency RMBS portfolio, including ARMs fixed rate and IOs decreased from 52% of equity in December of 2012, to 34% of equity of September 30, 2013. And our credit-sensitive investments, including multifamily and distressed residential loans, increased over 60% of our investment capital from less than 45% in December 31, 2012. We continue to believe this allocation shift better positions the company to navigate through these challenging economic times.

Specific performance -- portfolio performance statistics. The mortgage investment overall portfolio of CPR speeds were 15.3% for the quarter ended September 30, 2013, virtually unchanged from the June quarter, which averaged 15.4%. Our agency ARM portfolio speeds decreased to 16.8% from 22% from the previous quarter. And more importantly, our October speeds for the agency ARMs dropped to 7.6%.

Our agency fixed rate portfolio speeds increased to a quarterly average of 8.5% for the September quarter ended, versus 6.5% for the June quarter ended.

The IO portfolio speeds were virtually unchanged at 20.3% versus 21.9% in the previous quarter, again, more meaningful -- again, we experienced a meaningful decrease in our IO speeds in October dropping to 13.2%.

As our net margin is impacted by our premium amortization, any slowdown at CPR is generally positive for our net spreads in these asset classes.

The company complemented the CMBS portfolio during the quarter with approximately $21.3 million in directly originated loans and equity investments. Included in listed total was a seed capital investment for an equity fund focused on a multifamily sector. The fund will be managed by RiverBanc, our external manager, a company we currently own a 20% management stake in. The fund will provide direct equity capital for multifamily transactions, completing the capital segment into multifamily investors provided by NYMT and its affiliates.

NYMT will focus on direct investments and mezzanine-preferred equity opportunities, while we will indirectly participate in equity investments through this equity fund. We plan to contribute up to $10 million or 10% of the initial projected fund size. We expect to purchase another Freddie Mac K-Series first loan fees during the fourth quarter, and we also expect to close another long-term repo financing transaction on certain of these Freddie Mac K-Series securities, including the one we plan to purchase in the fourth quarter.

In September, we purchased another $72.8 million in distressed residential loans, bringing our total investment to $258 million. We completed 3 financing transactions during the quarter, bringing the total financing to $175 million or approximately 67% of the purchase value of the distressed loan portfolio. This strategy, as I've said before, is intended to generate both net interest income, as well as capital gains, with a material portion of the return coming from capital gains. As these investments season, we would anticipate greater earnings contributions from the gains on loan resolutions in the coming quarters.

Over the last 2 quarters, our diversified portfolio of strategy has delivered solid results in a very difficult environment. Looking out into the fourth quarter and next year, we will continue to focus on credit-sensitive assets, including multifamily opportunities, as well as residential -- as well as several opportunities in the residential loan landscape.

Our 10-Q will be filed on November 8, on or about November 8 with the SEC. It will be available on our website thereafter.

Fred and I will now be available to take any questions. Operator, if you'd please like to open it up for questions. Thank you.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Steve Delaney from JMP Securities.

Steven C. Delaney - JMP Securities LLC

I think so far NYMT is the only mortgage REIT to report in the third quarter that showed both an increase in book value and earnings, which covered the dividend. So you're in a pretty small group there, so congratulations. I think the transaction in the third quarter that fascinated me the most was that 8-K on September 25. And I know this isn't the first time that you've done this, but given where we are in the REIT cycle and everything, this just -- it amazes me, I guess, that we're seeing home prices rise in -- 20% in California, 15% maybe in some markets in Florida, yet you still seem to be able to find flow in these, I guess, we shouldn't call them distressed, but underperforming or reperforming pools. And it looks like you've got $97 million. Is this something -- in your expectation, if we look out over the next year, can you continue to grow this? Are you still seeing opportunities? And how high could that equity allocation go from the current 20%?

Steven R. Mumma

I think, Steve, two things. One, we do feel confident that we can continue to source these loans. We typically try to source these loans with smaller-sized purchases, as opposed to large-bid pools, and you do see weekly, in the marketplace, large pools being offered out by banks. We do think that the banks have an extensive amount of loans like this that they would like to sell, and we think that they have a program in place that over time, they will continue to sell these into the marketplace. So it's important to -- we spent a lot of time trying to find loans that fit our -- that suit our needs. Our loans are not NPLs or non-performing loans. Our loans, as you said, are distressed or reperforming loans. Typically, 90-plus-percent of our borrowers are making a payment on a monthly basis. The majority of the borrowers that we're investing in have some type of financial difficulty as a credit aspect, and in many cases, their homes are under water. So while you see statistics across the country and MSAs, where property values have increased significantly, I think some of those statistics are masked by very specific zip codes on what's done very well and by and large, as many zip codes throughout the country where the real estate evaluations are still under pressure, or at least have not recovered fully from where they were in 2005. So we like the opportunities. And when you couple the asset selection with our ability to secure ties, if you think about a loan securitization, where we're creating a funding, essentially, all we're doing is creating floating-rate debt and attaching it somewhat [ph] to in creating a fixed rate debt. But the beauty of these transactions and the reason why we like these transactions is we don't have any mark-to-market exposure from these loans, so we deposit the loans into a trust. We get an advance against those loans, and there's no future mark-to-market against those loans. So as we work out those loans, the debt is paid down and we end up with about 33% of the equity of the trade coming to us. So we have a very stable funding source. We have a fixed cost, so we don't have any exposure to rising rates as it relates to those funding. It allows us to focus on generating loan activity, where we're contributing about 30% equity for every dollar of loan invested. And if you think about our investment attachment point, is it around $0.70 on $1? We're pretty comfortable. So we're funding a $0.70 on $1 purchase, which represent a discount to what we believe is a current BPO, and they were getting about 70% advance rate on it, 70% purchase price.

We have a nice attachment point of risk, or the investor and the security that we're selling as loan financing has a nice attachment point, and we end up with a very stable, in our opinion, investment that has -- is less susceptible to direct interest rate movements on a day-to-day basis. The majority of the borrowers in this investment have interest rates that are much higher than the current market rate. So even though rates may go up, we still believe there's ample opportunities to deliver financial resolutions to the borrower that we can improve their conditions and still be a profitable transaction to the company.

Steven C. Delaney - JMP Securities LLC

So just to be clear, did you say you're paying, on average, 70% of BPO or 70% of UPB?

Steven R. Mumma

I would say that we're paying -- we're looking to pay about between 70 -- depending on the coupon -- it depends, right? There's a range. I mean, we've paid as low as 65% and as high as the low 80s, that would be dictated by the coupons and the underlying collateral and the makeup of that collateral. But it's typically you're looking to pay a percentage of BPO. Somewhat -- the UPB is interesting, but it's really what the property is worth relative to the -- all right...

Steven C. Delaney - JMP Securities LLC

Yes, I understand. Because that other money is lost. You just want to know where you're going to get your return, and you're going to get that off the BPO.

Steven R. Mumma


Steven C. Delaney - JMP Securities LLC

Okay. And you're still -- you're -- all of this activity is being, through your Headlands relationship, and they're doing the special servicing for you there?

Steven R. Mumma

Right. Well, we -- they -- we haven't -- we use an external provider of servicing. It's a firm called BSI. So it held most of the loans. And there's a detailed process with the resolution of the loans, and we use an external special servicer to actually process that servicing.


Our next question comes from the line of Dave Walrod from Ladenburg.

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

Just a couple of things. You kind of muffled when you were talking about the other income. You said there were $6.3 million. Can you go through what that was again?

Steven R. Mumma

Sure, Dave. The big change in other income, really, from core, from -- that impact of the year-to-date and especially the third quarter was the turnaround in the IO strategy, the strategy run by the Midway group. They had a loss last -- a net loss of $6.4 million in the second quarter, and we had a net gain of $1.8 million in the third quarter. We felt like the second quarter was very punitive to some of the assets and their strategy and more simply, the inverse IOs. And I think, as the market settled down in the third quarter, even though rates were rising initially, as a market volatility started to come out of the marketplace and people got comfortable to the new rate levels, you started to see some price recovery in those securities that was really not related to market moves in the first place. So we were pretty confident that, that would occur in which it did occur, and that was really the substantial recovery of that.

The other component of that was an unrealized gain in our CMBS portfolio of $6.3 million. That's something that's done very well for us over the course of the year. The yields on the first loss pieces have continued to grind tighter. It's a combination of two things: one, the multifamily space is probably -- continues to be one of the best-performing spaces across all credit classes; and two, the demand for the first loss piece has increased substantially as more investors have looked at this investment as a possible solution for some of their yield issues. So where we thought -- typically, we were taking down 3 to 4 securities in a year. Our hope is to have 2 securities over a 12-month cycle possibly. We just -- and the competition that we're dealing with in these securities is much greater and the yields are getting tighter and at some point, we'll probably look to invest in other parts of the multifamily sector, which is one reason why we're making direct loans to the sector now. That's financing.

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

Okay. That kind of -- you kind of answered a portion of my second question. It looks like you, you mentioned that you did, or you expect to close on another K-Series in the fourth quarter. It looks like your capital allocated to that segment increased in the third quarter? And it sounds like what you're telling me is that the demand is really picking up and that going -- so in the third quarter, the returns -- the expected returns are still decent, but going forward, you think they're going to be squeezed?

Steven R. Mumma

So we think that at some level -- and again, as we look to buy these investments, we're also looking at where we can securitize these investments. So as the yields have come in on the asset side, the cost of funding these assets has also come down. So the net yield is still attractive to us, but we are constantly monitor these opportunities, and we will continue to look at other possibilities in the multifamily sector, such as mezzanine financing and preferred equity investments. Going forward into 2014, we will actively participate. And looking at these K-Series deals, it's just a matter where they ultimately end up creating from a yield standpoint. So it does hurt incremental dollars invested, but it does help us for the actual assets that we own today from a valuation standpoint.


[Operator Instructions] And this does conclude the question-and-answer session. I'd like to hand the program back to Steve for any further remarks.

Steven R. Mumma

Thank you, operator, and thank you everyone for being on the call. We've had a -- what we believe is a very good quarter for the company. We believe we're positioned very nicely going into the fourth quarter and the new year and look forward to talking about our results as we get done with the year. Thank you very much.


Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!