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

Douglas Harter - Crédit Suisse AG, Research Division David M. Walrod - Ladenburg Thalmann & Co. Inc., Research Division Steven C. Delaney - JMP Securities LLC.

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust First Quarter 2014 Results Conference Call. [Operator Instructions] This conference is being recorded on Wednesday, May 7, 2014. A press release with NYMT's first 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 for 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 the 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..

Thank you, operator. Good morning, everyone, and thank you for being on the call. As the operator said, the company released its first quarter results after the market closed yesterday. Included in the press release are several tables that I will be referring to during this call.

Our first quarter performance continued on the success of 2013, generating $21.3 million net income attributable to common stockholders, including $8.2 million in realized gains related to our distressed residential loan strategy, and the continued valuation improvements in our CMBS strategy totaling $4.9 million in unrealized gains during the quarter.

Our focus on both the multi-family sector and distressed residential loans continues to pay significant returns as it has for the last 18 months. We closed 2 accretive capital raises, one in January, resulting in $76 million in proceeds to the company; and the second in April, resulting in approximately $110 million in proceeds to the company.

We continue to focus our investment strategies in distressed residential loans and the multi-family sector.

More recently, the focus in our multi-family strategy has been towards direct investing, as compared to the Freddie Mac K-Series credit securities, as the pricing and competition for these instruments has led to less attractive returns relative to other opportunities.

As I've discussed many times in the past, the importance for innovative financing solutions to fund our portfolio are critical components to our success, both in profitability and risk management.

To this end, we continue to seek new ways to complete structured financing, expand our counter-party exposure beyond traditional lenders, and continue to access fixed income public capital markets.

Asset gathering in the first quarter has been more difficult as an increased supply of investable capital focuses more and more on credit-sensitive assets, which has put upward pressure on pricing on certain of our investment strategies.

While this has a positive side effect for our existing portfolio, the incremental additions become more challenging. We believe, however, that our capable team of asset managers can prudently invest all of our excess liquidity into our core strategy with minimum pressure to our long-term returns. Now for some first quarter highlights.

We had net income attributable to common stockholders of $21.3 million or $0.29 per share for the quarter as compared to $15.4 million or $0.31 per share for the quarter ended March 31, 2013.

Our net interest income rose to $19.8 million for the quarter, an increase of $6.8 million over the quarter ended March 31, 2013, and $1.7 million increase over the previous quarter ended December 31, 2013. Portfolio net interest margin increased to 439 basis points as compared to 410 basis points the previous quarter ended December 31, 2013.

Book value per common share increased to $6.48 at March 31, 2014, from $6.33 per common share at December 31, 2013. The book value at March 31 does not reflect and include the 14.5 million shares issued subsequent to March 31, at a $7.36 net price to the company.

We declared a fourth quarter dividend of $0.27 per common share that was paid on April 25, our eighth consecutive quarter of $0.27 per share. Our net interest income was $1.7 million higher from the previous quarter ended December 31, 2013, with substantially unchanged average earning assets.

Our net margin improved by 29 basis points, comprised of a 41-basis-point increase in our asset yield, offset by a 12-basis-point increase in the cost of our liabilities net of hedging.

The increase in asset yields was due mainly to a decrease in CPRs in our RMBS portfolio, including the IO strategy, which resulted in decreased premium amortization and improved asset yields in our distressed residential loan portfolio.

Also, as we transition to our higher percentage of credit assets as compared to our lower-margin Agency portfolio, we would anticipate increasing margins offset by lower portfolio leverage. Included in our press release is a table listing CPRs by investment category for the last 5 quarters.

As can be seen in this table, our securities portfolio CPR average decreased below 10 CPR, which we have not experienced since the fourth quarter of 2011. Prepayment speeds in the second quarter continued to be muted as compared to historical standards.

The $6.8 million increase in net interest margin from the previous year's quarter is due to the growth in our equity capital and the corresponding increase in average assets.

Included in our press release is a table that details the last 5 quarters, including average earning assets, portfolio asset yields, liability cost, amount of hedging and net interest margin.

As you can see, the company has increased average assets by approximately $200 million while also increasing the net margin to 4.39% from 3.48% for the quarter ended March 31, 2013. Total net other income was $13.5 million for the quarter ended March 31, 2014.

The results included $8.2 million in realized gains from the sale of refinancing of certain loans in our distressed residential loan portfolio, $4.9 million in unrealized gains in our CMBS portfolio, primarily Freddie Mac K-Series securities, and net realized and unrealized gains from our IO portfolio of $300,000.

The sale of approximately $36 million of loans during the first quarter was our first substantial sale in 12 months, as our focus has been on accumulating -- on asset accumulation. Going forward, we anticipate a more systematic selling process, which should result in more consistent contributions to our earnings going forward.

Total general, administrative and other expenses were $7.6 million for the quarter ended March 31, 2014, as compared to $3.9 million for the quarter ended March 31, 2013.

The increase in expenses were primarily due to the growth in assets managed by our external managers, resulting in higher based management fees, incentive fees based on their successful performance, as well as increased servicing costs related to our distressed residential portfolio growth.

In addition, our salaries increased from the previous year's quarter as we have internalized the majority of our accounting function, which will to lead to better economies of scale going forward. We have included a comparative expense table with additional explanations in our earnings release for your review.

Also in our press release is our capital allocation table that details investments siloed by asset liabilities and equities as of March 31, 2014. We continue to focus on investing in credit assets.

As of March 31, 2014, the company was under-invested in our credit siloes as the investment closing pipeline has been extended due to increased competition. We do anticipate having all of our excess liquidity be invested in credit assets by the end of this quarter.

The company will continue to seek investment opportunities that complement our existing portfolio strategy while meeting our risk/return criteria. Prudence and discipline has served us well over the last 18 months, and we will continue not to sacrifice long-term objectives for short-term financial goals.

We thank you for your continued support and look forward to speaking in the future. Operator, if you could please open it up for questions. Thank you..

[Operator Instructions] Our first question comes from the line of Douglas Harter of Crédit Suisse..

Steve, I was hoping you could just clarify the comments you made about the -- any more challenges around sourcing product?.

Sure. So we've done a tremendous amount of investing both the Freddie Mac K-Series bonds and are probably, if not the largest single holder of them, one of the largest. And over the last 6 months, we've seen several of our competitors get involved in the Freddie Mac K-Series, and you've seen a significant decrease in yield of those assets.

And so those were larger chunks of assets that we have been investing in. We have participated in several auctions during the first quarter and were not successful in those auctions. So we've focused more of our energy towards direct lending into preferred and mezzanine financing on multi-family properties.

And while we think those assets will have similar or better returns than the Freddie Mac K-Series, it takes a little bit longer time to accumulate critical mass and go out and buying a BT [ph] for $60 million or $70 million. So that's something that we're going to transition into and have transitioned into.

And we'd anticipate more closings going throughout the year on a higher -- at a much higher pace. Secondly, the distressed residential loan portfolio, the re-performing loans that we invest in, we also saw an increase in participation from some of our competitors.

So the larger business that we typically would be active in have gone through very aggressive pricing levels, which has suited us well on the sell side. So we focused more of our energy in accumulating loans from smaller lists, which takes more time.

And we have one large list fall away from us that we thought we were going to close on in the first quarter. So we feel very good going into the second quarter. And we understand that price is a very important component when trying to generate long-term returns.

And so we've tried to -- spend a tremendous amount of time and focusing on sourcing the right assets..

I guess if you could just square that with the fact that you did raise capital earlier in the second quarter.

Kind of where -- what was the impetus behind that if the sourcing has become a little more challenging?.

Yes. I think at the time when we raised that capital, we had several large bids out to assets that we were going to buy. Several bids out for large asset purchases.

So in a perfect world, you'd love to buy the asset and then close on the capital, but unfortunately, it's better to have the capital than buy the assets then buy the assets and figure out how you're going to pay for it because the markets do change.

It's one of the times where we raised capital probably with less assets on the pipeline than we thought we were going to have. And we feel comfortable that we will get that capital deployed in the long term. It won't have any overbearing results to the company's financial performance..

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

Just clarify, your cash balances were a little higher this quarter.

Was that due to the timing of the distressed loan sales or are you just -- to what you were just speaking about -- just had a couple of deals fall through and that's why it's a little high?.

Yes. It's a combination of both, David. We sold the loans. We were -- we had front loans purchased and are settling. Those settlements are probably 6 weeks longer than you'd like to have them. And it just takes time, and they've been settling into the second quarter and it will continue to do so.

And it's just -- it's a runway that -- it's much less predictable than buying a security. I can go out and buy $100 million of MBS and settle them in 2 days. I know exactly what I'm buying and when it's going to happen. But we like the return profile of these securities and we like the pricing points that we're able to source these assets.

And we think longer-term, the -- for being under-invested for 30 -- or 60 days will be offset by the price entry levels that we're getting on the assets that we're putting on the balance sheet..

Do you just feel there's too much volatility to risk putting that capital to work in the Agency space given the liquidity?.

Look, the Agency space investment did not suit people well back in May, investing liquidity of last year. In hindsight, it looks great. Yes, we could have invested some money at the beginning of the year in the market rally, then we would have done fine.

But it's easy to make investments looking in the rearview mirror, and we like to think that the short-term loss in some under-investing is not going to be offset by the possibility of a market turn..

Last question, you commented about you expect more consistent, I guess, gains through the distressed loan sales.

Can you give us any color on that?.

We have about over $250 million of loans. The rotation of that portfolio is about an 18-month life, but -- from a holding period of those loans. And that's either through refinancing or resale. And so as we've accumulated, you get better execution in sales when you can do decent-sized pools of sale.

And so as we've now gone through the loans and figured out an exit strategy of all the loans in the portfolio, we'll start to put those strategies in place and maximize the return of those portfolios. So I think we're in a position now to start generating returns. Will we sell $36 million every quarter? I don't think we know the exact number.

We will be active selling in every quarter..

[Operator Instructions] Our next question comes from the line of Steve Delaney of JMP Securities..

You've touched on a theme that I think we're hearing from every mortgage REIT this quarter. And that is the challenges in deploying capital given where asset prices have moved, spreads have tightened. Just a couple of questions along that same theme.

We saw a notice or a release about Freddie Mac in late April that they were going to begin to securitize manufactured housing properties in a fashion similar to multi-family. I don't know whether they're going to use the K-Series. I think I read something which said they were going call this the M-series.

I'm just curious whether you and Kevin at RiverBanc have looked at that? And given that, that is a -- would be a new program that investors may not be quite as comfortable with, I'm just curious if that might present a more attractive opportunity than the K-Series once it gets running?.

We are looking at that. We'll tell you in the first quarter when Freddie Mac issued their first floating rate security that was backed by 100% of assisted living properties. Historically, they would have a smattering of those properties in the K-Series deals, but probably less than 5%.

So there was a deal that we had looked at and tried to participate in buying that asset and we missed miserably on the yields on that asset. So we were shocked at where the levels of those yields traded. And we will look at this multi-family property and go through the economics to make sure it makes sense.

But I think our specialty lies around multi-family and we think we still can get that decent mezzanine debt execution. But we will monitor the manufactured housing. And we did see that. We had looked at making loans to properties individually historically, but did not get comfortable with the exposure, to be honest with you..

Got it. Got it. And then I guess the last point on that. You've been a very efficient deployer of capital using your sub-advisors and finding niches in the market.

Just curious, looking back to the history and roots of New York Mortgage Trust, I mean, at some point, do you feel that it's appropriate where you would start to rebuild your own sort of dedicated new credit production platform of some type, whether it's multi-family, whether it's in the resi side, some sort of a NQM-type product.

I guess what I'm getting at is at what point do you feel that you're going to have to, instead of going to the market for product, try to put a platform in place where you can actually directly touch the consumer, the borrower and create your own credit?.

Sure, I think that if you look at -- so and as it relates to our managers, we do own 22% of the RiverBanc management team. And I think that we have a good relationship with their other managers and it's worked out very well for us.

But when you talk about the non-QM world, that's something that we would probably internalize and not look for an external manager, as one example. I think other investments in residentials, be it servicing, there's components of that, that we would do in-house and maybe, with the combination of Midway as a hedger, utilize them.

But yes, as we grow the company, we will look at ways to either increase our ownership, our relationship with our managers to possibly internalize. But some of the investments, I think it suits us very well, Steve, quite frankly.

And I'm not so sure by internalizing some of those costs, Steve, how much economies of scales you get because as you build these teams, and if you look at the expertise that we have handling our portfolios, to hire that expertise is very costly.

And while I can hire an individual person to run a book, I'm not sure I'm getting the same result as having a team of people running the book..

No, I hear you. I think the sub the external -- sub-advisors have served you very well..

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

Thank you very much for being on the call, everybody. We look forward to talking about the second quarter results in early August. Thank you very much..

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