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

Steven C. Delaney - JMP Securities LLC, Research Division Samuel Choe 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's Third Quarter 2014 Results Conference Call. [Operator Instruction] This conference is being recorded on Wednesday, November 5, 2014. A press release with New York Mortgage Trust's third quarter 2014 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 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 like to introduce Steve Mumma, chief officer -- Chief Executive Officer and President. Steve, please go ahead..

an increase in realized gain on investment securities and related hedges of $13.7 million and $28.8 million for the 3 and 9 months ended September 30, 2014, as compared to the same periods in 2013.

The company sold a single multifamily CMBS security in the third quarter, resulting in a realized gain of $16.5 million for both the 3- and 9-month period. This realized gain was partially offset by a $3.4 million loss on early extinguishment of debt related to a CMBS securitization. That securitization included a security that we sold for the gain.

In addition, realized gains in the company's Agency IO portfolio declined by $2.8 million for the 3 months ended September 30, but has increased $12.3 million for the 9 months ended September 30, 2014, as compared to the same periods the previous year.

An increase in net unrealized gains on multifamily loans and debt held securitization trust of $11.8 million and $20.7 million for the 3- and 9-month periods ended 2014, respectively, as compared to the previous-year period, which is due primarily to improved pricing on our multifamily CMBS securities, driven by greater market demand for this product.

An increase in other income of $1.3 million and $1.5 million for the 3 and 9 months ended September 30, 2014, respectively, as compared to the same periods in 2013, which is due primarily to the increase in income related to our 20% ownership in RiverBanc.

We had a $6.5 million increase in expenses, which includes G&A expenses, management fees and expenses related to our distressed residential portfolio.

This was largely attributable to a $5.5 million increase in management fees mostly due to the increase in incentive fees related to -- paid to RiverBanc related to the gain on sale of the CMBS security. Keep in mind that NYMT owns 20% of RiverBanc, which directly relates to the increase of our other income category.

Expenses related to our distressed residential loan business increased by $440,000 as compared to the previous year's quarter, which was primarily due to an increase in growth of the portfolio. Included in our press release is a capital allocation table that details our asset, liabilities and equities by investment silo as of 9/30/2014.

We -- as you can see, we continue to focus on investing in credit assets, including multifamily loans, securities, residential loans and other possible residential opportunities as they represent approximately 64% of our current invested capital.

The company's decreased leverage in our MBS Agency portfolio is a result of utilizing our excess liquidity. Over time, as we continue to build out our credit portfolio, we would expect that leverage to increase to about 7.5x of allocated equity. Recapping our results.

It's important to focus on the entire return of the portfolio and not on the individual components. We have said many times that our business is not a net interest margin-focused business, but a strategy that rely both on net interest income as well as realized gains from our credit investment opportunities.

We believe this strategy allows our portfolio to better navigate the changing economic and interest rate environments. We have and will continue to maintain a disciplined approach to new investments.

That has served us well over the course of the last several years as we build out our credit-sensitive asset portfolio by deploying capital to assets that satisfy our longer-term investment objectives. Thank you for your continued support.

We expect our third quarter will be on file on or about November 7 with the SEC and will be available on our website thereafter. Operator, you can now open the call up for questions..

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

So you went through the CMBS sale in great detail. I won't belabor it, but I wanted to focus on the $141 million, and I assume that's fair value, of bonds that you still own out of that same K-series. Could you generally comment on -- like, you sold the first loss piece, so these are lower-rated retained bonds.

Could you just describe the nature of the remaining $141 million of bonds?.

Sure, Steve. So we started accumulating the K-series first loss pieces in 2011, and in 2012, we did a securitization. And then in 2012, primarily the purpose of the securitization was to allow us to accumulate a larger amount of assets relative to the capital of the company by deploying in fairly safe long-term securitization.

At the time, we locked up about $83 million in market value of first loss pieces versus $52 million in debt. So those securities that initially were deposited, $83 million, have increased in value to $183 million -- $182 million. So we have 1 year left to go on the securitization, which was at 6.5%.

We felt like the rates at which we could securitize the securities were about 100 to 150 basis points lower today than they were in 2012 and the amount of fair market value that was locked up in that securitization, $183 million, versus the financing of $52 million, was a tremendous amount of liquidity that was locked up and not being utilized.

In addition to that, we were able to partner with another firm that owns 50% of the security that we ended up selling and generated a very attractive exit price on that particular security. So all the securities that remain in the $141 million are first loss K-Series bonds. They're just now not financed and locked up into a trust.

So that gives us flexibility to either do another sale, if it seems appropriate, or to create another securitization that will give us one, higher proceeds against the fair market value versus where it was in 2012; and two, a lower all-in rate to finance those securities..

Right. And you mentioned that cost on that initial 2012 securitization was about 6%..

6.5%..

6.5%.

And did I hear you say you think you can improve that by a couple of hundred basis points?.

100 to 150 basis points, given the same type of terms, which is a 3....

100 to 150 lower? Okay..

Right. Which is a 3-year financing..

All right. Got it. So I mean in addition to the obvious, the gain that you recognized, it seems like you're freeing up potentially a lot of capital by....

We probably have -- we've probably freed up another $100 million of liquidity net after the sale. So if you think about $140 million left, you probably get approximately $68 million advanced rates, $70 million. That puts you close to $100 million at a capital cost that's around 5%. So that will obviously help once....

Okay, great. It sounds like we'll hear more about the actual structure and all on your next quarterly earnings call. It sounds like you're pretty far down the road in terms of putting something in place..

I think it's something that we would monitor as we look at capital transactions to invest in as an alternative source of investing -- of financing that asset purchase..

Okay. And then shifting gears a little bit to -- beyond the K-Series, but into the -- sort of this new opportunity you're trying to pursue with RiverBanc, both on multifamily, mezz lending and equity investments.

Can you just talk a little bit about how that effort is proceeding? Have you funded anything yet? What type of pipeline do you see over the next couple of quarters in that venture?.

Sure. We have funded several assets in the vehicle. The vehicle itself has both the component of common equity and preferred equity, and some of the preferred equity was placed with a private investor.

The goal is to get the company to critical mass of $100 million, and then, at which time, we would entertain possibly seeking public market execution on some capital. We would anticipate that happening sometime in the next 3 to 6 months in terms of asset size. The company is focused on both mezzanine financing and JV equity.

It brings -- it sort of fills out our capital allocation for the company as in total. New York Mortgage Trust focuses on particular types of mezzanine financing.

With this vehicle, we'll take more downstream risk in JV equity-type investing, which allows us to go to an investor and really give him all the capital spec that they need to complete their purchase..

Got it.

So a more senior loan may go on NYMT's book and the more equity-oriented tranches may go in this new fund?.

That's right. And the first loan would more than likely be placed in the Freddie Mac securitization. That would not be originated by us, but would be introduced by us. So that's the way that we would currently deliver that capital to the potential investor..

And our next question comes from the line of Samuel Choe of Crédit Suisse..

I'm calling on behalf of Doug Harter. I just wanted to get more detail on why you made a sale of the CMBS this quarter. Just sort of a little more color on that, please..

Now look, I think when we invest in any investment, especially investment related to a credit-sensitive asset, there's a life cycle of these assets, right? And this particular asset had a life cycle that we felt, given the execution and exit price, was substantially within the range of our target price to exit over time.

And we felt that we could better deploy those proceeds into assets that, over the next 3 to 5 years, will give us a better return profile than the exit price of that particular security. We don't actively look to sell any of these securities. However, we are monitoring the market and monitoring where demand is for various aspects of products.

This particular asset that we've sold had some investment characteristics that, I think, at the time the market likes a lot, and we felt like we would take advantage of that..

I see.

So do you see this kind of investment opportunities in the coming quarters?.

No. Look, I think it depends on where we can reallocate capital, and it depends on the execution of the exit price. Look, most of the assets that we're investing in are 10-year assets. Some of those assets were done in 2008, so their maturity lives are starting to shorten.

And I think when you look at the life cycle of these credit assets, there's a point in time when you want to exit. And based on where the price is and if yields start to get to a point where we can take those proceeds and reinvest to what we think are similar risks at higher yields, I think we're supposed to do that trade..

Okay. I just have a general question.

So where do you see the most attractive return opportunities today? And what are the outlooks for gains going forward?.

I think for gains, it's hard to predict, right? These are opportunistic.

I don't want to say -- I think we've said, over time, that when you look at the company's performance over a 12-month horizon, we would expect both the net margin component as well as the realized gain component, and that component can be a 65-35, 60-40, 70-30, depending on timing of when we have these capital transactions and other opportunities.

We still like looking at credit-sensitive investments for a couple of reasons. One, they're higher-yielding, lower-levered, all-in strategy. Two, we think some of the investments that we're putting our money into will better perform as the rate environment starts to improve, assuming that the economy is improving.

Many of our strategies that we put in place are trying to protect the portfolio in the event that rates rise because we are anticipating that rates will rise because the economy is improving. So that's part of the internal portfolio hedge that we're trying to put in place in that aspect.

Now given the cycles of where our various credit assets are, we are better sellers and better holders depending on that particular cycle..

[Operator Instructions] And our next question comes from the line of David Walrod of Ladenburg..

Just one, I guess, quick additional question on this transaction. You mentioned that the management fees increased about $5.5 million, partially due to the incentive component of this.

Can you give us some color as to how much was the incentive component and how much is due to increased investment with your outside managers?.

Sure. The -- I would say, David, the $5.5 million -- I don't have the exact number in front of me, I apologize, I should. I would say about 80% of that increase is related to the incentive fee, if not a little bit higher. We did have an increase in base management fees as some of the asset classes have increased over time.

Again, if you think about the -- our incentive fee structure, they get a 35% carryover and 12% return after deducting the base management fee. Our expectation on these managers is that when you have these outside gains, you're going to have a bump in the incentive fee. Remember that New York Mortgage Trust owns 20% of RiverBanc.

So essentially, 20% of the fee that we paid them comes back to us through their earnings. So it is a large number. It is not a number that surprises us. It's a number that -- look, when we get into these transactions, the benefit of picking the right asset and having a massive growth in pricing over a very short period of time results in these gains.

We would think -- our expectation when we first got into the CMBS transaction that a lot of the appreciation would be through accretion to maturity when, in fact, you've had a massive decrease in yield, from our purchase yield relative to the market yield today, which has allowed for a large market capitalization.

In that particular asset that we sold, we felt like the actual exit price was even inside where the current market values were, in our opinion. And so given the maturity of that asset that we sold and given the exit price and given our expected exit price that we would earn over time, we felt it was better to sell the asset than hold it to maturity..

Understood, understood.

Can you, I guess, talk about what you're seeing in the distressed loan environment today?.

Sure. I mean, the distressed loan environment is very active. There is large pools trading weekly. The large pools are more problematic to buy. I mean, we can buy them, we just have to be the highest bidder. The large pools trade in the high 80s. The smaller loan accumulation trades in the low 80s or high 70s. And so we focus on some of the smaller pools.

We are working on ways to securitize the larger pools to try to get -- to try to put us in a position where we can pay a higher dollar price and still generate a higher return. We still think there is ample supply of distressed residential loans out in the marketplace, and you just -- you got to be diligent in going through and reviewing..

And I'm showing no further questions at this time. I would like to turn the call back over to Mr. Steve Mumma for any closing remarks..

Thank you, operator, and thank you, everyone, for being on the call. We appreciate it. We continue to build our portfolio and look forward to closing out the year. We think it's going to be a very good year for the company. And thank you very much for your support..

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