New York Mortgage Trust Priced For Perfection With An Offering In The Mix

Sep.25.13 | About: New York (NYMT)

New York Mortgage Trust Inc. (NASDAQ:NYMT) is a real estate investment trust (REIT). It primarily invests in agency residential adjustable-rate, hybrid adjustable-rate, fixed-rate, interest only and inverse interest only, and principal only mortgage-backed securities, and multifamily commercial mortgage-backed securities.

NYMT has filed for a very large shelf - $500 million. In my opinion, NYMT will tap this shelf within a couple of days. The management of NYMT has openly stated that they are interested in growing the company and has been issuing capital aggressively to build its investment portfolio. From the 2nd Quarter Conference Call:

For the balance of 2013, our focus will be to continue to build out the investment portfolio of credit-sensitive assets that rely on asset selection on leverage to generate our targeted returns. The company continues to invest in the multi-family space, including CMBS Securities and to a lesser extent, direct lending through mezzanine and preferred equity investments. In addition, we will continue to pursue distressed residential loan investing, coupled with securitizations that we believe will generate mid-teen returns with minimal financial exposure and movement of interest rates in the marketplace.

This makes sense as they currently use external asset managers due to their relatively smaller size, and significant growth will allow them to take the investment function in-house. I like this company on the long side for many reasons, which are summarized well here. But I recently liquidated my position, and have shorted some as well, with the idea that I can buy it back at much lower prices when the offering comes out. If you look at the history, after each offering the stock price drops down to under the offering price as many offering participants liquidate at the offering price or a couple of cents lower.

Second, the company is low on cash. The 8-K shows minimal of cash as of June 30 2013, and the company has been continuing to buy securities since then, as discussed on the quarterly conference call. In my opinion, it will delay a little further, because it is about to pay another dividend. It won't issue stock right before the dividend, because that would only send more money out the door. However, in my opinion, the company will do a deal immediately after the ex-div date, which just occurred. Management has openly stated they want to aggressively grow the company and have been doing so over the past year. They will continue. The more they grow, the more they can pay themselves.

Third, the valuation has gotten excessive. At a recent price of 6.5, the stock is 104% of stated book and 107% of my estimate of current book (6.12). This is way out-of-line with the company's history and with other mortgage REITs. A sampling of some other REITs and their Price/Book ratios is listed below.

Fourth, I believe that there is an obvious reason the company has continued to maintain its 27 cent dividend in the face of lower earnings. Have you noticed that every other mortgage REIT has been cutting its dividend? Now, NYMT does not have a total Agency Portfolio, but it does (in my opinion) have about half of its cash in agencies. Now if you were CEO of this company and it was your goal to continue to raise money above book value, wouldn't you keep your dividend way above your core earnings level? Basically, (again in my opinion) the company has been raising money just to pay that money back to the owners of the stock. It's a crazy system that at some point may hit a wall. Hopefully, the company is self sustaining by then and it will have no need for future capital raises under book value. I believe that a sustainable common dividend for this company is 18 cents quarterly.

Now NYMT is somewhat unique among REITs in that it takes on a combination of credit risk and interest rate risk whereas most REITs focus on interest rate risk alone. But the problem with credit risk is that it doesn't show up right away. Debt instruments do not default immediately after they are issued. It takes awhile for a problem to show up and turn a loan bad. But NYMT buys the riskiest loans to get the highest yield. Any small problem could jeopardize the principal. For example, in the 2012 Year-End conference call, Steve Mumma, President, said

We closed on 3 Freddie Mac K Series multi-family investments during the quarter, including a floating-rate first loss security issued by Freddie Mac, their first, bringing the total investment at the end of the year to $195 million. Company owns 8 first loss securities, including 100% of 4 of these securitizations, requiring the company to consolidate the underlying loans and related by liabilities, resulting in $5.4 billion of financial assets and $5.3 billion of financial liabilities being recorded in our financial statements.

These K Series loans are first loss. Any hiccup anywhere in the entire pools will hit these tranches first. NYMT has purchased the riskiest tranches in order to obtain the highest yield. The yield looks great now because the risk may falsely appear low since the loans are brand new - but remember a default doesn't happen immediately after a loan is issued. It may happen down the road, and any problem in these pools will hit these tranches first. These are high-risk, high-yield.

NYMT's risk appetite is further displayed on the interest rate risk side. In my opinion, $100 million of IOs is a lot for a company of this size. Like the other REITS, NYMT invests in Agency RMSs and utilizes leverage to juice the yield and take on interest rate risk. But NYMT has essentially doubled its leverage over the past year. It takes on more risk than its competitors so it can juice the yield higher.

In the conference call, Steve Mumma said:

This portfolio is financed in part by $806 million in repurchase agreements, bringing the year-end leverage ratio to approximately 7.8 to 1 for this investment silo.

Here is a listing of the discounts to book value that all the other mortgage REITS are trading at. NYMT sticks out like a sore thumb!

Price/Book Ratio

Armour Residential (NYSE:ARR)


Anworth (NYSE:ANH)


CYS Investments (NYSE:CYS)


Annaly (NYSE:NLY)


Hatteras (NYSE:HTS)


MFA Financial (NYSE:MFA)


American Capital (NASDAQ:AGNC)


Invesco (NYSE:IVR)


N.Y. Mtg Trust


Click to enlarge

a. I believe that when this quarter is released the book value will be 6.12 down from 6.3, based on my assessment of the agency bonds and mortgages the company owns. With the stock at 6.5 today having just gone x-dividend, an offering could be executed at a large premium to stated book, even with a discount to the current price and a cut to the broker. This is the perfect time to raise capital and the perfect price. It's not a question of if but of when NYMT will pull the trigger

Disclosure: I am short NYMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may cover my nymt at anytime and plan to buy stock after any offering