New York Mortgage Trust: Be Extremely Careful

| About: New York (NYMT)

Summary

NYMT was once one of my top picks in the mortgage real estate investment trust sector.

I discuss Q3 results and the dividend.

Use caution.

New York Mortgage Trust (NASDAQ:NYMT) was once one of my top picks in the mortgage real estate investment trust (mREIT) sector. The company had really fallen from grace, only to rebound strongly in the last few months. When the company cut the dividend a year ago, I authored a very popular piece comparing the action in the stock, my coverage and the outcome with a poker game in which I got outplayed. I invite you to review that piece. After letting the dust settle, I took a long hard look at the name. I decided that it needed to sell off following the news of the cut, but thought that if you could get into the name well under $6.00 you do so. Well it fell a lot more than that but I remained interested because I previously demonstrated the power of the dividend in this name. Now, the truth is that the dividend is still strong. But is it secure? Well, to that end we turn to performance.

Let me be clear, the company didn't do so great once again in its Q3 2016. In fact, NYMT's portfolio generated a net income of just $20 million, or $0.18 per share. This is down heavily year-over-year. On top of that, the net interest income was down year-over-year to $15.5 million. It also did not cover the $0.24 dividend that was paid out but is a GAAP measure (the company doesn't provide core income numbers). So what happened? Well, the company has been more defensive. NYMT continued to build out its portfolio of credit-sensitive assets. It has been shifting its holding in mortgage backed securities and diversifying to protect downside, but net income was still hit by this difficult market environment. Let's take a look at some of the key metrics of the company.

Book value

NYMT's book value had held up extremely well in Q3 despite the tough environment. When we factor in common stock issuance, dividends, hedges, etc, we see that the ending balance was $694.99 million with 109.57 million shares outstanding. Thus the company's book value came in at $6.34. The fact that it did not fall much is a huge sign of strength, as it entered the quarter at $6.38.

Constant prepayment rate

I have been worried about the prepayments sector-wide and with NYMT. And of course, prepayments impact net income every quarter. In Q3, I had predicted that the generally high constant prepayment rate experienced by the company would continue to rise. This turned out to be the case unfortunately as the fears of rate hikes are causing prepayments. The constant prepayment rate rose to 16.1%. While it has delivered tremendous gains, the non-agency RMBS it holds had saw prepayments hit 21%. Ouch. Agency ARMS jumped to 20.7% prepayments, while Agency IOs even rose to 18.2%. Agency fixed rates were about flat at 10%. The only decline was in residential securitizations which fell to 15.9% from 17.8%

Net interest rate spread

As you know, one of the key metrics for an mREIT is the interest rate spread. Many of the sector's spreads are well below 2%. NYMT's interest rate spread continues to dominate. NYMT's weighted average yield on interest-earning assets came in at 5.39%. At the same time, the cost to acquire those funds came in at 2.67%. Combined, these generated a net interest rate spread of 2.82%. This metric continues its downward trend, as two years ago the spread was well over 4%. Ouch. The pain continues.

Take home

I haven't covered the name much since selling the position earlier this year. I do expect the constant prepayment rate to stabilize from here. I continue to see book value holding firm. If you like the name long-term, pick your spots to add wisely. Remember, I stress the long-term. The price of shares has rebounded, but if you are looking to get in I think you need to wait longer and for a better price. I am not too comfortable with the dividend, even with income bouncing back some. All that said, use caution here.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time-sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

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.