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New York Mortgage Trust (NASDAQ:NYMT)

Q2 2012 Earnings Call

August 08, 2012 9:00 am ET

Executives

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

Analysts

Boris E. Pialloux - National Securities Corporation, Research Division

Calvin Hotrum - Sterne Agee & Leach Inc., Research Division

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust Second Quarter 2012 Results Conference Call. [Operator Instructions] This conference is being recorded on Wednesday, August 8, 2012. A press release with New York Mortgage Trust second quarter 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 & Presentation 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 the 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 will be available for questions at the end of this call.

The company released, as the market closed yesterday, it's press release. Included in the press release were several tables that I will be referring to during the call.

For the quarter, the company earned $5.1 million at $0.34 per common share for the quarter ended June 30, 2012 as compared to $4.2 million or $0.44 per common share for the quarter ended June 30, 2011. We had adjusted net income per common share of $0.18 after excluding $200,000 of net unrealized gains related to our Agency IO investment strategy and $2.2 million of net unrealized gains related to the fair value adjustment for the company's multifamily loans and debt held in securitization trust. Net interest income for the 3 months ended June 30, 2012 was $5.8 million, up approximately $500,000 for the same period of previous year but down approximately $400,000 from the previous quarter. If after giving effect to our fully funded CMBS portfolio for the entire second quarter, our net margin would have been approximately $1 million higher.

The company has net unrealized gains of approximately $2.2 million related to our CMBS portfolio as the market continues to improve. Core expenses remained relatively flat with changes in expenses directly related to management fees. Previous period had a large realized gains that resulted in increased management fees payout during the quarter ended June 30, 2011.

The company had a weighted average portfolio margin of 595 basis points for the second quarter of 2012, a decrease of 63 basis points from the first quarter of 2012.

The margin decrease is due to a 21 basis point decline in asset yields, primarily related to our agency ARM and IO portfolio and an increase of approximately 32 basis points in liabilities cost.

The majority of the increase of the liability cost is related to the permanent financing from our re-securitization that was completed in May of 2012.

The company ended the quarter with a book value of $6.51 per share, as compared to $6.49 per common share as of March 31, 2012.

Included in our press release is a detailed analysis of the book value transition from March 31 to June 30, 2012. The company has cleared and paid the second quarter dividend of $0.27 per common share. We purchased approximately $59 million in multi-family CMBS securities comprised of 2 different Freddie Mac transactions. The purchase included the first loss securities as well as third IO securities. The purchases were completed at the end of May and at the end of June of 2012. We completed our first multi-family CMBS re-securitization in May, resulting in $26 million in net proceeds of a permanent financing of approximately $47 million of securities deposited into a trust and those were issued in a bond equivalent yield of 9.5%. Permanent financing creates a net equity position of approximately $21 million with a return of approximately 18% without margin mark-to-market risks on financing net otherwise those securities.

We've received net proceeds of approximately $20 million from a public offering in May of 2012 and $33 million in July of 2012. The proceeds in May were used primarily to purchase multi-family CMBS securities and majority of the proceeds in July have been invested in Agency MBS securities. Included in our press release is a portfolio allocation table that displays our assets and liabilities by investment silo.

Both our Agency ARM and Agency IO portfolios remained relatively flat in terms of portfolio size during the quarter. Our Agency ARM portfolio CPR speeds increased from an average rate of 18 CPR to approximately 24% CPR during the second quarter. While our IO portfolio speeds remained flat at 19%, we did experience increased amortization costs as a composition of prepayments were not evenly distributed across the portfolio with the IO portfolio with higher premium inverse IOs experiencing faster pre-pays than the lower premium IOs.

We continue to believe long-term speeds will remain in range and ultimately stem back to the mid-teens. However, with record low mortgage rates, we'll continue to weigh both on CPRs, as well as valuations in the marketplace over the near-term. As previously mentioned, we funded approximately $59 million in additional Freddie Mac CMBS securities, bringing our total investment to approximately $108 million. We own approximately $86 million in 5 first loss securities, as well as approximately $22 million in IO securities. These investments are partially funded with our first re-securitization that resulted in $26 million in permanent financing or advanced rate of 55% versus the value of securities placed into the trust. In addition, the remainders were funded with short-term financing and general corporate working capital. The company will continue to pursue long-term alternative funding for our current CMS positions as well as future purchases. While we own $108 million in CMBS securities, our balance sheet and income statement reflects far greater activity.

We own 100% of 3 first loss securities, which due to accounting regulations, require us to consolidate the entire trust activities, resulting in significant assets, liability, interest revenue and interest expenses being recorded in our financial statements. However, the net effect of these consolidation requirements reflect the outright ownership of the securities that we own of $108 million. There is a footnote explanation to the portfolio allocation table on our press release, as well as a lengthy discussion on our Q that fully describes the impact in our financial statements for these consolidations. We had approximately $196 million of residential mortgage loans held in securitization trust finance of approximately $191 million of collateralized debt. These loans had an average yield of 2.87% for the second quarter with a corresponding financing cost of 63 basis points or net spread of 224 basis points. The company had approximately $59,000 during the quarter for our loan-loss reserves bringing the total of $2.6 million or 132 basis points of the outstanding loans or approximately 15% of the loans in the greater than 60 days delinquent category. The portfolio continues to perform well as delinquency appeared to have abated or at least slowed down. In addition, it appears that the property valuations in the areas of our exposure have stabilized. In some cases, started to show signs of improvement, reducing some of the pressure on our reserving requirements.

Our CLO securities continued to contribute nicely to our net interest margin, delivering interest yields on amortized cost bases of over 40%.

We continue to believe we have upside potential evaluations as the overall market improves and the overall performance of the collateral sink rate outperforms its peers.

The company has approximately $1.5 million remaining in our distressed residential loan portfolio, down from $5.1 million at the end of the first quarter. As we approach the exit of this transaction, we continue to monitor other opportunities in the special loan markets and anticipate committing additional funds in the future. As the company heads into the third quarter and the second half of the year, it has this to look back we've raised approximately $50 million in additional capital, substantially reducing the fixed cost over on a per share basis while deploying these policies in asset classes that we believe will deliver more stable long-term results over a wider interest rate environment. And we completed our first re-securitization of our CMBS securities, resulting in $26 million in no risk permanent financing. We will continue to focus on residential and multi-family credit investment opportunities that we'll rely more on credit decisions and less on market leverage. And we believe we'll deliver mid to high-teen risk-adjusted returns over the long-term. 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 now would like to take any questions you may have. Operator, if you'd please open up for questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from the line of Chris Benoit [ph] from Sandler O'Neill.

Unknown Analyst

I just had a couple of clarification things. I'll make sure I'm looking at things the right way. On the table of your portfolio asset yields, when I see the CMBS coupon at 8 basis points, is that reflecting the timing of the funding of the CMBS?

Steven R. Mumma

No. When you look at our securities in the CMBS, we have 2 components. We have an IO component and the first loss pieces are principal only components. So when you look -- so the coupon is calculated over the current par value. So obviously, the IOs have a very large term par value relative to the cash they generate. So we end up buying -- the IO strips that we buy are related to our first loss pieces are typically between 10 and 17 basis points of strip. So a very low coupon in nature. But relative to the size of the investment, it generates about a 4.5% to 5% coupon in the overall investment. So that's why you see a very low coupon relative to the $108 million carrying value. And really, the yield is a better indication of the overall return of that investment.

Unknown Analyst

Right, okay. Because as I look back to your first quarter, the similar table there and the CMBS was only $21 million. So, okay.

Steven R. Mumma

Exactly. And because they're in the first quarter, one of the investors that we own had no IO cash flow. It was just the first loss piece. So the majority investment was in POs. But the relationship of the IO relative to the investment was a little bit higher there. The purchases that we did in the second quarter had a much dollar -- much larger dollar price in the POs than the IOs. But the IOs itself -- the IOs just that we invested in the quarter were 10 basis points both. So a little bit lower cash flow.

Unknown Analyst

Okay. And then just thinking about your adjusted portfolio net interest margin of 595 basis points, is that reasonable run rate in the environment? I would...

Steven R. Mumma

I think if you look at the portfolio and you look at the size of our company and you think about that we added $59 million of that approximately $35 million was done at the end of June and those assets that were put on in June probably had an average return of 14%. The portfolio margin is going to -- should trend upward. There was some pressure from the portfolio prepayments on IOs but as the CMBS portfolio and other parts of the company start to represent a larger portion of the overall interest earning assets, that net margin should stabilize at a level that's at this level or slightly higher going forward.

Operator

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

Boris E. Pialloux - National Securities Corporation, Research Division

I'd like 2 questions. One is more modeling question is can you give more color on the agency RMBS you're investing in? You investing a deposit [ph] of your July offering of that fixed rate, whay type of leverage? Are you using swaps if you already have an IO portfolio? And second is can you talk more about the delay in the CMBS deal that may have impacted your -- just the net income in Q2?

Steven R. Mumma

Sure, yes. So when we go out and -- so first question is Agency RMBS. We've invested in longer-term ARM securities to date 7 ones and 10 ones and the majority of the assets that we've added, we had -- we do utilize interest rate swaps to a lesser extent than we typically would've done, taking in consideration our IO portfolio. We've also utilized some swaptions more so to reduce the duration sensitivity to the portfolio on a longer-term basis, not as much as hedging short-term liability movements. As it relates and as we continue to look at an investment opportunity where we will look out the 7 to 10 year ARM sector, as well as probably the 20 year fixed-rate sector. As it relates to the CMBS purchases, as we go out and source these credit investments, they typically have a 60 to 90 day window. One of the investments we bought in the second quarter was a secondary purchase we anticipated closing for the front, in the early part of June. However, it was delayed back to the latter part of June for circumstances outside of our control. Those assets are something that require a lot of time of due diligence. So what we do and what we typically will do going forward as we raise capital, we would invest in agency securities that allow us to deploy the capital more quickly and then sell some of those securities as we see the CMBS come into play. We did not do that in the second quarter because we felt like the securities were going to settle towards the beginning of June and didn't want to put a trade on it and take it off immediately 5 days later. But that trade-in that's getting delayed a couple of weeks which should put a little bit of pressure on the earnings momentum. Going forward, we're very comfortable with the portfolio.

Boris E. Pialloux - National Securities Corporation, Research Division

Flexibility, the difference in terms of adjusted net income between Q1 and Q2 was not for your cash drag. Am I correct? Due to a delay in funding?

Steven R. Mumma

Yes.

Boris E. Pialloux - National Securities Corporation, Research Division

Cash drag because you had raised money in April and you invested at the end of June. Am I correct?

Steven R. Mumma

That's right. You had a slight decrease in net margin from the IO portfolio but the majority really -- so the slight decrease was probably -- would've put the portfolio at flat to the previous quarter. But if you included the fully funding of the portfolio, then the net margin would've been substantially higher.

Boris E. Pialloux - National Securities Corporation, Research Division

Okay. And also last question is in order to understand the -- your new Agency RMBS portfolio -- can we -- if you look at on your oiling [ph] revenue you'll get on your RMBS is about 1.5% and would that be -- does that also mean you would get in your new investments?

Steven R. Mumma

Yes, the ARM portfolio -- so our ARM portfolio is relatively small. So when you look at the number of securities that we own or our CPR speed went from 18 to 24 and really when you look across the portfolio, there were 2 ARM securities that traded very fast out of 10. As we build out the portfolio, that very building will be reduced just because of pure numbers. But I would anticipate the net margin, as you go out, as many people have talked about, depending on which ARM sector, where you're investing it, is between 150 and 200 basis points. Clearly, as you go in a wider margin, you're dealing with either longer-term assets or assets that you have a different view on how to hedge them. But I would say the opportunity is between 150 and 200 basis points.

Boris E. Pialloux - National Securities Corporation, Research Division

And you're using repos?

Steven R. Mumma

Yes, we are using repos, absolutely.

Boris E. Pialloux - National Securities Corporation, Research Division

Our next question comes from the line of David Wallid [ph] from Ladenburg Thalmann.

Unknown Analyst

You kind of touched on it a little bit but the last capital raise that you talk about, how you deployed it all into agencies. Is that a temporary thing as you're waiting for more CMBS deals to present themselves or is this more permanent, this is how we want to position the portfolio?

Steven R. Mumma

No, we will -- so the combination of that answer would be: One, we are building out the Agency ARM portfolio and Agency MBS portfolio in general but we will use that portfolio as a short-term investment vehicle until we bring on additional CMBS securities. We are currently in the marketplace, reviewing the transaction that if we go through the final review we'd anticipate that closing for the end of the third quarter and we are actively pursuing other opportunities in the CMBS. Unfortunately, the way those investments are sourced, there is a 60 to 90 day window from beginning to end.

And that's where some of value comes about. But we think when we look at that while they may put near-term pressure on a quarter, we think that long-term, those yields which we typically have invested in the 10-year program as the Freddie Mac K series, which are loans that don't have any prepayment ability to them. So we believe that, that return is a nice offset to some of the other prepayment sensitive securities that we invest in, in portfolios such as the IO portfolio. And so, we think that's going to be a nice stabilizing effect to the net interest margin as we go into the future. But we would anticipate deploying funds in the Agency RMBS strategy and we would take those funds and either put them into a CMBS credit strategy and we are also pursuing a distressed loan strategy along with the structure financing transaction that were think can generate some very attractive returns that we hope to close sometime in the third quarter if possible.

Unknown Analyst

Okay. The other question, you had talked before about increased competition in the CMBS market, more folks bidding on these K series. Can you address that in regards to the transactions you're looking at today?

Steven R. Mumma

Yes, the one transaction that we're looking to close in the third quarter is something that we've -- we are in the process of reviewing closing without competition. So we've already gone through the preliminary analysis but until we go through into a little more detailed analysis, it wouldn't be a formal commitment and we are in the process of doing that. As we go out and bid on these transactions, a year ago, we probably had 2 to 6 counterparties bidding on these transactions and that number has increased. So the difficulty of bidding on these transactions is these investments are typically backed by 70 to 100 individual loans that we go out and do these diligence reviews on the majority of them. And In many -- and for the net investment of $20 million to $25 million, that is a lot of work for many investors to commit to capital and go after that transaction. So we are pursuing other avenues of possible investments that may be away from -- that will be away from the Freddie Mac K Series program. Although it will have the same kind of credit characteristics of multi-family to supplement that.

Operator

[Operator Instructions] Our next question comes from the line of Calvin Hotrum from Sterne Agee.

Calvin Hotrum - Sterne Agee & Leach Inc., Research Division

Can you give a little more color on what invest -- what you guys are looking at as far as the distressed OREO? And I guess a little more specifically if you guys are taking a look at the PFC OREO [ph] rental program.

Steven R. Mumma

Actually, when we talk about distressed loans, we're looking at in loan form, not property form. Today, we have not chosen to participate in the OREO form. We think that we have better opportunities in the distressed loans format and we probably would not, in the short-term or in the near-term, see any reason to pursue the distressed OREO avenue.

Operator

And I am showing no questions in queue. I'd like to turn the conference back over to management for any closing remarks.

Steven R. Mumma

Thank you very much for being on the call. The company is very happy with the portfolio it has in place today. We anticipate a nice growth rate in the portfolio. We think there's excellent opportunities out there in the credit space and CMBS and residential will continue to force those assets. We will continue to look at permanent financing solutions that enhance our yields without putting pressure on the balance sheet and look forward to talking about these results as we get to the third quarter. Thank you very much for your interest and have a good day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of the day.

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