New York Mortgage Trust (NASDAQ:NYMT) announced their latest dividend at $.24. This sustains the earlier rate and seems fairly interesting to me since the yield on book value looks thoroughly unsustainable. Some shareholders may believe that I've simply lost my mind and that the company sustaining the dividend is proof that everything is going great. If the credit markets remain strong on the quarter, they may have another opportunity to celebrate. The credit sensitive assets in the portfolio should be doing quite well during the quarter, but I wouldn't want to jump on the hype train.
NYMT's dividend is yielding around 14.8% on trailing book value. That kind of dividend is very difficult to support in this environment and even credit sensitive assets will have limits on the returns that can be expected. With the S&P 500 just a couple days off the high marks for the year it seems like a difficult time to suggest that most of the optimism has not already been priced into the stock.
Since mortgage REITs won't be retaining their earnings, the only way for book value to rise is for valuations of existing assets (or hedges) to increase or for either new shares to be issued at a premium to book or old shares to be repurchased at a discount to book value. While those last two techniques don't create a large economic cost, the increase in fair values already seen in the credit portfolio should make reinvesting at the same yields more problematic.
Since NYMT purchased one of their external managers, the head of that company became the president of NYMT. Since there aren't many people needed to manage a small mortgage REIT, there are plenty of great titles to go around. I wouldn't be surprised if he was a big fan of the idea of sustaining dividends. He did recently buy a large volume of shares in the company and cutting the dividend shortly afterwards would have jeopardized the impression of everything going right inside the mortgage REIT.
I've got some deeper work in progress for digging into that transaction and I think readers will find it very interesting.
If 15% yields on book value were sustainable, investors really have to ask why the other mortgage REITs wouldn't be doing it. Do investors believe that American Capital Agency Corp. (NASDAQ:AGNC) simply lacks the motivation to create such a yield? Do they think Annaly Capital Management (NYSE:NLY) doesn't care about providing larger dividends?
If it is simply a function of taking on credit risk, then perhaps the question is why Blackstone Mortgage Trust (NYSE:BXMT) is happy producing a yield of less than 10% on book value?
Outlook on NYMT
I've been bullish on NYMT. Most notably when shares were around $4, I said:
"Near the end of trading on February 24th, 2016, shares were at $4.03. Based on that price, I expect NYMT to outperform the sector in share price over the next few weeks unless there is another huge sell off in junk bonds. The discount to end of Q4 book value would show up as 38.3%. In my opinion, the discount to unreported book value is likely smaller because I believe book value has declined further. There is only one attractive thing about NYMT right now and it is the size of the discount relative to peers."
They did exactly as I projected and delivered great returns, but they also soared right past my estimates of fair value and kept right on climbing. There is no fundamental justification for shares of NYMT to trade under $4 and very little justification for them to trade over $6. Academics and shareholders can argue until they are blue in the face about shares deserving to trade at book value, but investors still have to decide which mortgage REITs to buy and there are peers offering much larger discounts.
I still expect a dividend cut within a year and I still expect to see share prices decline materially. This looks like a bubble to me.
For the NYMT bulls, the day is yours. NYMT was up another 2.5% to $6.55 yesterday in after-hours trading.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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