For those of you unfamiliar with my preferred Investment philosophy, "The Basics: Underlying Investments Viewed Through the Eyes Of A Preferred Investor" will explain how and why I became a preferred investor. More important, it will provide you the information necessary to fully appreciate and understand the process I utilize to research and determine whether or not I will invest in a particular company's preferred equities. What follows is that process.
When considering the acquisition of NY Mortgage Trust (NASDAQ:NYMT) preferred shares, NYMTO, and NYMTP, it's necessary that we view that company through a different set of eyes than we would were we interested in acquiring its common shares.
Consequently, unlike its common cousins, it's necessary that we first study the offering prospectus of the preferred shares we are interested in acquiring. To accomplish this, let's visit my favorite preferred search site, Quantum Online, which I set to open to NYMT. Below is a snapshot of a slice of that page:
A quick review informs us that NY Mortgage Trust, is an internally managed REIT that invests in all forms of mortgaged-backed securities and the financial assets of residential, multi-family, and commercial paper.
Let's click "Find Related Securities: to examine any preferreds this company has to offer:
Here we learn that NYMT offers the preferreds, (NYMTO and NYMTP), which were initially offered at the respective interest rates of 7.875%, & 7.75%. I find it interesting that the initial interest rate offered was slightly higher than the following one, which might be a positive indication, or might be nothing of note.
Now let's click on NYMTO itself. Below is the screenshot:
- I like that this preferred is cumulative, meaning that in an event that payments are suspended, they accumulate and are owed to the shareholder, and will be repaid in full if and when the payments are restored. And they must be completely repaid before the common shareholder will be allowed to receive any further dividend payments. Additionally, there are probably more sanctions and restrictions placed on the company, and will remain so until the missed payments are repaid in full. As a rule, I only invest in cumulative preferreds. Although bank preferred dividends are usually secure, they are almost always non-cumulative, and consequently, I don't buy them.
- These shares are callable at the company's option in 14/22/20 at $25.00 plus any accrued interest owed.
- They pay a dividend of $1.96875 per share per year, or 0.4921875 per quarter, paid 1/15, 4/15, 7/15, 10/15 of each year.
- At the time of their IPO, these shares were unrated by Moody's or S&P, which really doesn't concern me, but might concern a more conservative investor.
- These shares have no stated maturity, meaning they can remain uncalled in perpetuity, which is fine with me. Pay me, pay my heirs, pay the heirs of my heirs for all I care. However, if called, it will be at their $25.00 call value plus any accrued interest owed.
- Dividends are NOT eligible for the preferential income tax rate of 15% or 20%. You should be aware of how these tax ramifications will affect your investment bottom line.
- As usual, upon liquidation, preferreds rank senior to commons and junior to debt, both secured and unsecured.
However, simply knowing and understanding the preferred issues of a company in no way allows one to gauge a company's long-term health or to fully comprehend its business model. To better accomplish this, a knowledgeable investor should be able to dig down into the numbers, and at least marginally understand a company's financial statements and conference calls.
Sounds reasonable, but extremely difficult for most investors, including myself. I often rely on interpretations by SA contributors who have proven more knowledgeable than myself. Unfortunately, the vast majority of their articles are written with the common shareholder's interests in mind, rather than those of the preferred shareholder - which, on occasion, might not be in alignment. Also, as I mentioned above, other SA members might view their conclusions in a different light. When this occurs, I simply try to figure out which argument sounds the most logical. Sorry, that's the best I have to offer.
Consequently, rather than attempting to digest and understand complicated financial statements, which I realize I won't be able to realistically accomplish with any degree of accuracy, I usually visit two websites to get an abbreviated, yet broad-based view of the particular company I'm considering making an investment in. They are Yahoo Finance and Finviz. I have cued each to open to the financials of NYMT.
Above is a screenshot of NYMT's 5-year chart, which, as far as I'm concerned, is the picture of a company that did pretty well until 2015 when their share price plummeted, only to rebound slightly since January. Furthermore, it has decreased its common quarterly dividend this January from 0.27 to 0.24. This is not positive, although not terribly negative.
Above is a screenshot taken from a Finviz view of NYMT's present financial highlights. The company's current market value is $610.43 It earned an income of $58.70 million, although its stock price over the past year has fallen by 29.97%, and risen by 13.93% during this last quarter. Year to date, it's up by 4.32%. I also find its long and short-term debt/equity is a troubling high 11.18.
According to the Yahoo chart above, NYNT placed close to the top of its peer group, all which underperformed the S&P. In fact, as a sector, these mREIT's have underperformed the S&P dramatically. The peer comparisons charted above are: Altisource Residential (NYSE:RESI), Silver Bay Realty Trust (NYSE:SBY), Apollo Residential Mortgage (NYSE:AMTG), Armour Residential REIT (NYSE:ARR), and Capstead Mortgage (NYSE:CMO).
The final chart illustrates the 1-year price movement of the preferred issue NYMTO we are interested in acquiring. This is the chart of a company preferred, which has not performed well except for a great buying opportunity at the end of last year that was followed by a price spring-back, followed by and upward trend since the beginning of the year, and a recent dip, probably as a result of the threatened Fed interest rate hike.
My bottom line decision is to look at charts of the past few years' performance of the company's common shares, coupled with whether or not said company is, over time, prospering or losing market value. Ultimately, I have to decide how safe this company is from an existential standpoint rather than how well its share price will perform over the next quarter or the following year.
Ultimately, I must decide whether or not I believe in the long-term survivability of NYMTO, which I view as questionable, especially considering their high amount of leverage when interest rates might be rising.
My advice is simply my opinion, and you know what they say about opinions and how everyone has one. It's your money, invest it with care. As a bonus for being a patient audience, I worked out the math below, which takes into account today's prices, although they might change tomorrow, and accordingly, the best choice might change too. You know the formula - it might be wise to do the math just prior to placing your bid.
A no-brainer. At this pricing the NYMTO is the best, but be certain of the prices of each before you place your bid, that's if you are inclined to bid on this questionable company, in my opinion. Others might have a different opinion, which I welcome.
Disclosure: I am/we are long NYMTO.
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.
Additional disclosure: Notice that I utilize the same format to determine whether or not, or how to invest in a particular preferred. I do this for several reasons: The primary reason is because this is the way I accomplish it most effectively. It's also easiest for me to write. But, best of all, it makes it easier for you, my repeat audience, to breeze through each article and painlessly absorb the valuable information, particular to each company, that will help you make your most informed investment decision.