Dividend Payer New York Mortgage Trust's Diversification Paying Off In Outperformance

| About: New York (NYMT)

New York Mortgage Trust Inc. (NASDAQ:NYMT) is an internally managed hybrid mortgage REIT that acquires and manages primarily real estate related assets. These assets include: Agency ARMs, Agency Fixed Rate RMBS, Agency IOs (interest only) including TBAs, CMBS, distressed residential loans, residential securitized loans and CLOs (collateralized loan obligations). NYMT employs RiverBanc, The Midway Group and Headlands Asset Management to provide investment management services expertise for certain specific asset classes.

As you can tell from the above description NYMT is a diversified mortgage REIT, and this is what has helped it excel in 1H 2013. In Q1 2013, when most mortgage REITs lost book value NYMT actually gained $0.05/share in book value. In Q2 2013 when many mortgage REITs lost 10%-20% of their book values, NYMT lost only $0.30/share in book value (-4.58%) as its book value fell from $6.55/share to $6.25/share as of June 30, 2013. This was a bad result for investors; but it was significant outperformance by NYMT over the many mortgage REITs that lost a lot more. The table below shows a few of NYMT's peers for comparison.


Stock Price at the close on September 12, 2013

Book Value Loss in Q2 2013

Book Value % Loss in Q2 2013

Book Value As of Q2 End 2013






Invesco Mortgage Capital (NYSE:IVR)





Armour Residential REIT (NYSE:ARR)





Annaly Capital Management (NYSE:NLY)





IVR and NLY are both somewhat diversified, so they provide a standard against which NYMT can measure itself. ARR is a small mortgage REIT that is in NYMT's relative size range. NYMT outperformed all of these by a wide margin. That makes it a stock that you should strongly consider for investment. It you think the NYMT book value loss was bad, consider that you actually just about broke even for one quarter (17%/4 = +4.25% which is very close to the -4.58% book value loss in Q2 2013). In Q1 you got the 17% dividend (about +4.25% per quarter) plus the small book value increase. This performance far outperformed bonds, which have no hedging. It outperformed other mortgage REITs. The Q2 2013 performance shows NYMT in a very good light.

For those who think there is a simple answer to NYMT's success, there is not. Net income attributable to common stockholders was $11.2 million (or $0.19 per common share) for Q2 2013. Net interest income was $14.0 million. This was an increase of $8.1 million from the year ago quarter. However, this was largely due to the expansion of the portfolio over that time. The net interest margin averaged 348 bps. This was the same as in Q1 2013, but it was substantially lower than the 595 bps in Q2 2012.

The decrease here was largely due to the company's decreased emphasis on its IO strategy as a percentage of invested equity and an increased position in its levered Agency fixed-rate and Agency ARM strategy. However, the decreased emphasis on IO strategy also saved it from larger book value losses in Q2 2013. The IO losses alone were -$7.6 million in Q2 2013. They were offset by +$6.8 million in unrealized gains on multi-family and debt held in securitization. Plus credit spreads on CMBS improved in Q2 2013. I won't bother with all the details, but suffice it to say that NYMT's juggling act is quite complex, and the company (and its three different teams of experts) seem to be quite adept at it. With this company you have to have faith in the management, or you shouldn't invest. However, the record speaks for itself, and the consistent dividends show in the graph below do too.

The graph only shows through Q1 2013, but the dividend for Q2 2013 was also $0.27 per common share. Plus NYMT has already declared a $0.27 Q3 2013 dividend. This is a much better performance than bonds, especially when you consider the yield (currently about 17%).

The outlook going forward is a little murky. NYMT raised $94.5 million from an issue of 13.6 million common shares and $72.4 million from an issue of 3.0 million 7.75% Series B Cumulative Redeemable Preferred Stock in Q2 2013. The average amount of this deployed in Q2 2013 was only about $75 million of the $166.9 million. This means that NYMT should benefit in Q3 2013 from an increased amount of average earnings assets. Further the market and NYMT management believe the net interest margin should go up in Q3 2013. This should help the net interest income earnings on a per share basis.

However, the company allocated a significant amount of the new monies to its IO (interest only) holdings, and these were among NYMT's worst performing assets in Q2 2013. Given the further increases in US Treasury long bond yields and mortgage rates during Q3 2013, the increase in holdings in this area may hurt results in Q3 2013. All told Q3 2013 might be a bit better than Q2, but I would not expect a great quarter.

For those who like to judge for themselves, the table below shows NYMT's portfolio break out as of June 30, 2013.

The table below shows the breakout of NYMT's portfolio as of March 31, 2013. Readers who are knowledgeable enough can make their own assessments of the prospective performance due to the changes.

As you can see, the tables do not show the change in IOs, but the most recent conference call notes them. Perhaps some were done after the end of Q2. If the performance of IOs in Q3 is anywhere near as bad as their performance in Q2 2013, this could turn out to have been a bad move by NYMT at least in the short term.

The chart of the 30-year US Treasury Bond Yield below provides a measuring stick for how the interest rate rises compare to those seen in Q2 2013.

On April 1, 2013 the yield was at 3.07%. It hit a Q2 high of 3.58% on June 25, 2013. Then it finished the quarter at 3.50% on June 28, 2013. From there it has risen to a high in Q3 of 3.92%, and it is currently at 3.83% as of this writing on September 13, 2013. My impression is that interest rates are going roughly sideways at this time. However, the current yield is still 33 bps above the Q2 end yield. Most mortgage REITs will still feel book value pressure, and I worry that the newly increased IO holdings will impair NYMT's earnings. Further the $132.4 million in distressed residential mortgage loans purchased could suffer if the housing market suffers a serious lowdown due to increasing rates. However, the discount on these is so large that the possibility of actual overall losses to the portfolio is much smaller than many would think.

With the current expectation of a "tapering light" by the Fed, interest rates seem likely to steady somewhat. They may even fall. When you factor in IMF head Christine Laggard's warning to the Fed about the effects of a stronger USD on emerging market currencies (due to increased yields in US Treasuries), you really have to think the prospects of a large tapering by the Fed soon are virtually nil. The Fed has to taper. There will be fewer US Treasuries sold in 2H 2013 due to the sequester cuts and to the increased tax revenues from the payroll tax reinstatement In January 2013, etc.

Also there has been a substantial slowdown in the amount of new housing loans (and hence new MBS for the markets). The Composite Index (the combination of the Purchase Index and the Refinance Index) is down -49.7% year over year with much of the drop in recent months (see below). This virtually mandates a Fed tapering just so its buying doesn't dislocate the markets. We will likely find out the Fed's plans next week, September 15-21, 2013.

As you can see from the chart, there has been a huge recent drop in the number of new mortgages made. This drop correlates well with the rise in the mortgage rates. Part of this was spurred on by the threat of a large or complete tapering of the Fed's QE bond buying programs in the near future. With the threat diminished, the rates seem likely to stabilize for the near term.

Overall NYMT's newly increased IO holdings present a risk in the near-term market. Since NYMT is priced very near its book value already (see table far above), I would wait for the Q3 results before buying more. It might perform relatively badly in Q3 2013 due to the new IOs. If such a performance causes a sell off on the earnings report, that may be a good time to buy NYMT. Overall it does appear to be a well managed company, and it pays a great dividend.

The two year chart of NYMT provides some technical direction for this trade.

The slow stochastic sub chart shows that NYMT is overbought. This tends to reinforce the idea of not buying right away. The main chart shows that NYMT has been in a downtrend for several months. It looks like it may be starting to emerge from that downtrend. However, I would not be overly eager to buy it until after I see the Q3 2013 earnings report. If it falls on that report, I would be inclined to buy it on the dip.

NOTE: Some of the fundamental financial information above is from Yahoo Finance.

Good Luck Trading.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.