New York Mortgage Trust, Inc.
Q2 2013 Earnings Call Transcript

Published: 7 Aug 2013

[Operator:]

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 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 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

[Operator:]

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

[David M. Walrod:]

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:]

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:]

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

[David M. Walrod:]

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.

[Operator:]

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

[Boris E. Pialloux:]

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

[Boris E. Pialloux:]

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:]

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:]

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:]

[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.

[Operator:]

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.