Seize The Opportunity If The Secondary Knocks New York Mortgage Trust Down

| About: New York (NYMT)

New York Mortgage Trust Inc. (NASDAQ:NYMT) is a hybrid mortgage real estate investment trust (mREIT) that acquires and manages primarily real estate related assets. The portfolio is more diverse than my darling agency mREITs like Annaly Capital (NYSE:NLY) and American Capital Agency (NASDAQ:AGNC). I have been following NYMT for some time now, though I often write about NLY and AGNC. NYMT primarily invests in agency adjustable rate mortgages, agency fixed rate residential mortgage backed securities, agency interest only securities, commercial mortgage backed securities and other mortgages/loan products. Hybrid REITs have been among my favorites since AGNC and NLY first started bleeding out in 2013. And NYMT may be one of the best. In this article I will discuss why those considering or holding AGNC and NLY may want to consider taking a chunk of that investment and also owning NYMT, or a similar hybrid mREIT. That said, a pullback is coming for the stock based on the latest news the NYMT is going to raise some cash with a secondary offering.

Recent Performance Strong

NYMT outperformed a lot of the other mREITs, including NLY and AGNC during the fiasco for the sector that was Q2 2013. The stock suffered into September 2013 along with all others, but has since rebounded. The recent Q3 2013 report was pretty strong. While AGNC and NLY were getting their book values shredded during Q3 NYMT actually booked gains of over 1% to its book value quarter over quarter. At the same time, NLY lost 2.5% while AGNC lost 4.0% and further increased its net interest rate spread from 3.48% to 3.59%. This is one of the most key metrics I look for in all of the mREITs. What about earnings? NYMT reported net income of $0.27 per common share which was just enough to cover the quarterly dividend. I would like to see a little more on the earnings side so the coverage ratio is more favorable, but all in all it was a great Q3. Should income not rise, a dividend cut could occur, though NYMT management sees this as unlikely given their recent dividend for Q4 2013 was also $0.27.

This dividend is not the absolute highest in the sector (that belongs to Western Asset Mortgage (NYSE:WMC) ) but pays a fantastic yield that is adequately being covered. At $0.27 per quarter, $1.08 in dividends is paid annually per share. At $7.00 per share this translates to a 15.4% yield. How does this compare to AGNC and NLY? NLY's dividend announcement revealed yet another cut to $0.30 down from the Q3 2013 dividend of $0.35. This is down nearly 50% from this time last year. I believe NYMT will maintain their dividend going forward but what 2014 will bring is tough to predict accurately. For NLY, the cuts are likely done, but there could be a Q1 2014 cut to the dividend down to $0.27-$0.28 per share. More likely we will see the dividend be maintained at $0.30. The story is similar for AGNC whose earnings have been hit along with book value. As such another cut came in Q4 2013. AGNC declared a cash dividend of $0.65 per share for Q4 2013 which was a cut of $0.15 or 19% from the last payout of $0.80. Pretty heft cuts when you consider that AGNC's dividends were twice as high a year ago.

Like NLY and AGNC, NYMT is anticipating a rising interest rate environment longer term. But they are not nearly as levered as AGNC and NLY were. AGNC and NLY have been working to lever down while NYMT carries a respectable 2.5times debt to equity ratio. But, in an effort to raise some cash while the stock is at a premium to book, the company is conducting this offering. There is some risk here for current shareholders as the dilution of equity will occur, and more shares will be on the market requiring dividend payment. NYMT plans to offer of 10,000,000 shares of its common stock. NYMT also expects to grant the underwriters an option to purchase up to an additional 1,500,000 shares of common stock. This could lead to the $0.27 being unsustainable, however, NYMT intends to use a majority of the net proceeds of this offering to acquire distressed residential loans and the remainder of the net proceeds to invest in multi-family CMBS, mezzanine loans to and preferred equity investments in owners of multi-family properties and certain of its other targeted assets. NYMT may also use a portion of the net proceeds for general working capital purposes, including the repayment of indebtedness. This in turn could lead to a stronger stream of revenues. Ideally, the company would start a buyback down the road to rebuild shareholder equity.


So what do you do? If you are holding NYMT, I am not recommending a sell, though I could see why the dilutive effect could make a sale tempting especially since NYMT trades at a premium to book. If you are like me and have been waiting for a pullback in the name, then this could be the opportunity to get in. NYMT has gone up nearly linearly in Q4, but shares are down 4% after hours as I write on this news of the secondary. My recommendation is to initiate a position around $6.75 and add at $6.50 and again at $6.00 should the stock get there to complete the position. That's how I will play it. As I have been diversifying within the mREIT sector outside of two large AGNC and NLY positions for the last 6 months, I am intrigued here. With a 15% plus yield that seems sustainable, along with positive momentum in the book value, I think the selloff offers an excellent opportunity to get long.

Full Disclosure: I am funding these purchases with proceeds from the recent WMC special dividend.

Disclosure: I am long AGNC, NLY, WMC. 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. I may initiate a position in NYMT in the next 72 hours

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