New York Mortgage Trust (NASDAQ:NYMT) was recently trading at a staggering 36% to 40% discount to last reported book value. Since then shares have rebounded sharply to trade at about a 23% discount to last reported book value. In my previous work I explained why discounts to last reported book value require some significant adjustments to create meaningful estimates. This time I'm going to demonstrate the changes that I believe NYMT could make to substantially improve their share price. I want to stress that these changes don't involve a major change to the portfolio, but they should impact the level of returns investors require.
Does that sound a little strange? When some mREITs trade at substantially larger discounts than others it suggests that investors (as a group) are concerned about the mREIT and are demanding larger returns. One way to solve the discount is to convince shareholders that the mREIT should be treated similarly to peers.
With a 23% discount to book value NYMT is only trading at a moderately larger discount to Q4 book value relative to peers, but it still isn't the kind of strong pricing power they demonstrated in previous years.
Take the Perspective of the Shareholder
The first thing that management needs to do is put themselves in the perspective of an educated shareholder. Since you're reading this article, you probably fall into that group. Educated shareholders are the ones that are holding the company and have researched the assets in the portfolio and the performance of the company in at least a couple prior periods.
For NYMT the retail shareholder is the most common type and their portion of ownership is increasing:
The low level of institutional ownership is problematic. The institutional investors are the ones that should have better access to quality research. The company has a difficult challenge because they are one of the most complex mREITs and the investors most likely to understand them are not holding the shares. The solution is to make the portfolio dramatically easier for shareholders to analyze.
How Can They Make It Easy?
On the earnings call an analyst asked management about their first loss tranche positions. When asked about the loan to value ratios, management's response was:
"Yes, it's public information. If you look at the Freddie Mac website, and we own many of the K-Series bonds, if you look at the typical LTV across that portfolio. So we own the first log piece of seven securitizations I believe, which totals about a little over $7 billion in lendings to multifamily properties. That typical LTV is just slightly below 70 CLTV, so we're monitoring that."
It is precisely true that an investor or analyst can use the Freddie Mac website to try to pull up the individual K-series allocations, but you'll need to be ready to browse through a few filings to try to gather all the necessary information and accept a material risk of failure. When I started covering NYMT one of the things I did was go looking for the individual K-series numbers so I could look up the series on the Freddie Mac website to check for defaults in the portfolio to determine how well the tranches were performing.
Technically as long as the company mentioned the IDs in any filing or public statement, it would be public information. While that is "technically" the case, this isn't what I would consider readily available information. I spent some time scanning the latest 10-K and found plenty of references to the K series, but I didn't see each individual position listed. The document is around 140 pages, so I will readily admit that I could have missed something. When I browsed other statements previously (months ago) in an attempt to build a better model, I could only find 1 to 2 of the individual numbers (for looking up specific tranches) listed in quarterly or annual filings.
It didn't take long to realize the payoff just wasn't there. Without having a huge payoff for finding all of this information and building the right models, it just isn't worth the days it would take.
There is an easy way for NYMT to solve this issue. If they intend for the positions to be public information, they can provide the numbers clearly on their website and near the top of each quarterly and annual filing. Then they can go one large step further. Each time Freddie Mac's website is updated, NYMT should post a new presentation to their website. It doesn't need to be long, just a couple slides that indicate each position, the presence of any defaults, and estimates on recovery in the event of default. This would dramatically reduce the uncertainty and create a huge incentive for buyers to step in. To reduce the advantages of institutional buyers that would have better (and faster) tools, management could automate the posting of any defaults listed by Freddie Mac and then follow up after the market closed (to prevent flash trading) with their estimates on the economic loss.
This mREIT was considered by some analysts to be a "Best of Breed" contender and they traded at better valuations than most of the sector for a long time. There are a few ways that management can address the discount that should resonate with shareholders and encourage a higher share price.
I temporarily liked NYMT when shares were trading right around $4. When shares moved up to around $4.50 I still saw a huge discount, but the picture was less compelling. Now that shares are over $5 I don't see the same kind of risk adjusted returns. However, I would see the potential for NYMT to move their discount to book value to be smaller than average if they emphasized these shareholder-friendly techniques.
Disclosure: I/we 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.
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