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New York Mortgage Trust, Inc. (NASDAQ:NYMT)

Q4 2013 Earnings Conference Call

March 5, 2014 9:00 AM ET

Executives

Steven Mumma – President and CEO

Analysts

David Walrod – Ladenburg

Richard Eckert – MLV & Co.

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust Fourth Quarter and Full Year 2013 Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. (Operator Instructions). This conference is being recorded on Wednesday, March 5, 2014.

A press release with NYMT’s fourth quarter and full year 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, maybe 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 Mumma

Thank you, operator. Good morning, everyone, and thanks for being on the call. The company released its earnings after the market closed yesterday, and included in the press release are several tables that I will be referring to during this call.

Our performance in 2013 validated the hard work we have done over the last three years, which is to develop a diversified credit focused portfolio strategy that we believed would help mitigate interest rate exposure if and when rate started to rise. The second quarter year this year was bad task [ph] where the market saw a 10-year treasury rate increase by over 100 basis points in six weeks, eventually topping 3% during the third quarter and ending the year at 3.02%. For the last six months of the year the market is down with a budget crisis, tapering, and the new Fed Chairman, all of which added volatility in midst for the market.

During this period, our book value remains very stable, falling less than 3% for the entire year and essentially flat for the last six months, while generating significant income for our shareholders. Our focus on credit strategy, both in multi-family sector and distressed residential loan prove to pay significant dividends in 2013, with the multi-family CMBS Securities substantially improving in value while delivering stable predictable returns. During the year we added $95 million in multi-family investments, including $72 million in first loss CMBS Securities, and $23 million in direct preferred and mezzanine debt financing and multi-family property.

In addition to our multi-family credit investments, we added $218 million in our distressed residential loans bringing our total investment to $265 million. Both of these strategies we believe will continue to deliver stable returns in 2014. We continue to pursue innovative way to finance our portfolio, focusing on structures that reduce and/or eliminate [ph] exposure back to the company’s liquidity. We completed three distressed residential loan and one CMBS structured financing, with total proceeds of $192 million during 2013, bringing total structured financing to seven over the last two years.

We are actively looking for new opportunities, investment opportunities in 2014 including ways to participate in the next generation of non-qualified mortgage loans or non-QM, multi-family opportunities through direct lending relationship, and other residential related investments. In addition, we are working on several financing solutions that we believe will reduce our direct lending exposure to financial banks and broker-dealers as the new Dodd–Frank rules that become effective in 2014 will bring leverage and capital pressure to many of our lending partners.

Now for some fourth quarter highlights. We had net income attributable to common stockholders of $21.8 million, or $0.34 a share for the quarter as compared to $9.4 million, or $0.19 per share for the quarter ended December 31, 2012. Our net interest income rose to $18.2 million for the quarter, an increase of $6.9 million over the quarter ended December 31, 2012, and a $2.7 million increase over the previous quarter ended September 30, 2013. Our portfolio net interest margin increased to 410 basis points from 359 basis points from the previous quarter, and 333 basis points from the fourth quarter of 2012. Book value per common share ended at $6.33 at December 31, 2013 as compared to $6.32 for the quarter ended September 30, 2013.

We invested $30.4 million in first loss PO Securities issued by Freddie Mac sponsored multi-family K-Series securitization, and we declared a fourth quarter dividend of $0.27 per common share that was paid on January 27, 2014.

For the full year 2013, I’d like to go through some highlights. Our net income attributable to common stockholders was $65.4 million, or $1.11 per share for the year ended December 31, 2013 as compared to $28.3 million, or $1.08 per share for the year ended December 31, 2012. Our net interest income rose to $60.5 million for the year ended December 31, 2013 as our earning assets averaged $1.6 million for the fourth quarter, a record for the company, which was an increase of approximately $300 million from the fourth quarter of the previous year.

We received net proceeds of approximately $100 million through common stock offering and our at-the-market program, as well as $72 million through preferred stock offering during the second quarter. We deployed substantially all these proceeds and credit related investments during the second and third quarter. We invested an aggregate of approximately $95 million in multi-family CMBS, first mortgage loan, mezzanine loan and preferred equity investment, and $218 million in distressed residential mortgage loans during the year. We financed a portion of these investments in the credit sensitive investments through three securitizations of distressed residential loans for approximate proceeds of $137 million, and one multi-family CMBS-backed three year privately placed term repo for approximately $55 million. We declared a total of $1.08 in dividends during 2013.

Subsequent to year end, we completed a public offering of 11.5 million shares in January of 2014 resulting in net proceeds to the company of approximately $76 million. In addition, we sold a distressed residential mortgage loan pool that has a carrying value of approximately $29 million for aggregate proceeds of approximately $36.9 million in January, resulting in a net realized gain of approximately $7.5 million before income taxes.

As I previously mentioned, our net interest income was up substantially both, in terms of quarter-to-quarter and year-over-year. The primary reason for the improved margin in fourth quarter was a significant decrease in CPRs in our MBS and IO portfolio, as well as continued additions to our credit assets in the portfolio during the quarter. Included in our press release is a table that has CPRs by investment category and our securities portfolio for the last five quarters.

As you can see during the fourth quarter, the average portfolio CPR was 10% as compared to 15% from the previous quarter or down 33%, with a significant decrease coming in both, our Agency ARM and IO portfolio. The increase in the year-over-year net interest income was primarily due to the increase in overall earning assets of approximately $300 million and improved net interest margin as we continue to transition to more higher yielding, lower level credit asset strategy. Also included in our press release is a table for the last five quarters of our quarterly average running assets with a related yields on assets liability and net margin.

Total net other income was $11.6 million and $29.1 million for the quarter and year ended December 31, 2013 respectively. Results included $9.1 million and $35.1 million in unrealized gains related to our CMBS portfolio for the quarter and year ended respectively. Pricing and market conditions continued time throughout the year for our multi-family first loss CMBS Securities. This asset class resulted in being one of the top performing fixed income asset classes for the year of 2013.

In addition, we had $500,000 and $1.6 million in gains related to our distressed residential investments for the quarter and year ended December 31, 2013. This strategy involves components of both interest income and capital gains. Capital gains which is included in other income, and are derived from refinancing, workouts, and resale. The majority of the income included in 2013 was from loan refinancing.

As I previously mentioned, we sold loans for total proceeds of approximately $36.9 million resulting in a gross profit of $7.5 million in January 2014. These sales while profitable are far less predictable than the interest income and results in more volatile quarter-to-quarter earnings performance. However, as we grow this portfolio we believe these activities will become more regular unless volatile to our quarterly earnings on a go forward basis.

Our IO strategy had a negative contribution of other income of approximately $5.3 million loss for the 12 months ended December 31, 2013, but was flat in the most recent fourth quarter with significant improvements in the overall performance over the last six months. We continue to believe this strategy will benefit us in a wider rate environment.

Expenses were $6.3 million and $19.9 million for the quarter and year ended December 31, an increase of $3.3 million and $8.5 million as compared to the previous quarter and year end respectively. The majority increases in these expenses were due to management and fees and distressed residential loan activities. The management fees increased by $1.6 million and $3.1 million for the quarter and year ended December 31 as compared to the previous year. This is directly attributable to the growth in our equity base as we continue to invest the majority of those proceeds and credit sensitive strategies that are managed by RiverBanc and Headlands Asset Management.

[Indiscernible] as the loan expenses increased by $1.3 million and $3.9 million for the quarter and year ended December 31, 2013. This increase is related to significant growth in the investment during the year. The distressed residential loan strategy typically has higher cost as loan servicing resolution processing is more operationally intensive than performing loans. But given our purchase price, we believe these costs will be more than offset by the overall performance of the strategy.

Company ended the year with a book value of $6.33 per share, as compared to $6.15 per common share at December 31, 2012. While down is never good, the decrease of less than 3% of the year where many experienced double-digit decline is a testament to our investment strategy.

Also included in our press release is the capital allocation table that we’ve included now for several quarters that details our assets, liabilities and equity by investment silo. As you can see, our Agency RMBS portfolio, including ARMs, fixed rate and IOs decreased from 51% of the equity in December 2012 to 30% of the equity in December 31, 2013. Our credit sensitive investments, including multi-family and distressed residential CMBS, increased to 69% of our capital from less than 44% as of December 31, 2012. We believe these allocations shift better positions the company and navigate through these challenging economic times and will continue to – we will continue to pursue this transition in 2014.

This was a landmark year for the company. We achieved a critical equity capital – with a market cap of approximately $500 million at year end, and now over $600 million after giving, in fact, the most recent capital raise. For 2013, our investment strategy delivered solid earning, stable book value, $1.08 dividend to our shareholders, all of which we’re very proud of. We continue to pursue opportunities both in asset selections, as well as financing that we believe will complement our current portfolio strategy.

Thank you for your support. And operator, you can now open it up for questions. And before she opens it up, our 10-K will be filed on/about March 7 with the SEC, and it will be available on our website thereafter. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question is from David Walrod with Ladenburg. Your line is open.

David Walrod – Ladenburg

Good morning, Steve.

Steven Mumma

Hey, good morning David.

David Walrod – Ladenburg

The capital raise in January, I’m assuming that initially deployed into basic [ph] strategy, can you talk about how quickly you anticipate deploying it into some of the more credit sensitive strategies?

Steven Mumma

Yes, I mean we would – where we use – some of those proceeds have been deployed in, and credit residential and we would anticipate to remain in that, be invested in credit assets as we go through the first quarter. We’re not really following some of that in agency as a preliminary; we’re really looking to allocate that capital directly into credit strategies as we’re not 100% comfortable with mitigating the potential risk of loss in a short period of time.

David Walrod – Ladenburg

Okay. I mean you’re saying into residential, so are you really focused on the more distressed loan category or is that across the multi-family as well?

Steven Mumma

Both, the stress residential as well as multi-family direct lending. We continue to look at some other opportunity. Now I think 2014 will be the year when the non-QM investing will become important to many rates here, and right now the market is just getting defined and what that looks like, and as we get comfortable in terms of what the rating agencies will look at from a securitization standpoint and what those loans will look like, we’ll begin to make in those investments.

David Walrod – Ladenburg

Okay. And then the last question, you’ve recognized some losses – some realized losses, could you talk about what goes through that line item?

Steven Mumma

Yes, that’s really just – I mean you look at the IO strategy, the IO strategy – and when you look at our – there are two lines in the other income which is investments, as unrealized and realized gains in investment securities, primarily those are related to our IO strategy activity. So they have combinations, so they are an active manager in terms of hedging risk in the IO strategy, so they are constantly in and out of future’s market and TBA markets. So they are generating both, realized and unrealized gains in that sector, as well as unrealized and realized gains in the IO portfolio, so it’s a combination of all that.

David Walrod – Ladenburg

Okay. Thanks so much. Have a good day.

Steven Mumma

Thanks.

Operator

(Operator Instructions). And next question is from Richard Eckert with MLV & Co., your line is open.

Richard Eckert – MLV & Co.

Hi Steve, thanks for taking my call. Just had a couple of quick questions, what kind of pricing are you seeing on multi-family assets? It seems like it’s getting kind of broad fee [ph] right now.

Steven Mumma

I mean obviously Rich, you can tell by the unrealized gains that we’ve had in the past year that no question of pricing in there significantly since we started investing in this in 2011. And it’s something that we are looking at in 2014 and have not yet participated. We are looking to participate but there is a level that we will stop participating and think that we can deploy capital elsewhere. So they’ve come down significantly, these assets that we invest in trade on a yield, and the yields have come in substantially from the mid-teens to the low teens for last [ph].

Richard Eckert – MLV & Co.

Okay. And on the sales of distressed single-family residential loans, can we expect to see those – I hate to say, regularly or periodically but at least one or two dispositions a quarter?

Steven Mumma

Our goal would be to start to have more regular dispositions on a quarterly basis.

Richard Eckert – MLV & Co.

Okay.

Steven Mumma

Does that mean more than one? I don’t know at this time but the goal would be to start to generate as we’ve built out the portfolio to a size that we can now start to workout. I think that you will start to see more regular activity.

Richard Eckert – MLV & Co.

Okay, fair enough. Thanks again for taking my questions.

Steven Mumma

Thanks, Rich.

Operator

(Operator Instructions). I’m not showing any further questions at this time.

Steven Mumma

Okay operator, thank you very much, and thank you for everyone on the call. We look forward to talking about our first quarter earnings in early May. Thank you very much.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone have a great day.

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