After my most recent weekly mortgage REIT preferred stock update (here), I was asked my opinion of New York Mortgage Trust (NASDAQ:NYMT) preferred stock. There are currently two series of preferred stock issued by NYMT; the Series C (NYMTO) and the Series B (NASDAQ:NYMTP). I own NYMT Series C preferred (NYMTO) and occasionally check to see if it is still the preferable of the two series. It has been a while, so I thought I would take a look for my benefit and, hopefully, yours. All data for the charts and tables, unless otherwise noted, were compiled by the author from sources believed to be reliable.
New York Mortgage Trust, Inc. is an internally managed real estate investment trust, or REIT, which invests in residential mortgage loans, including loans sourced from distressed markets, multi-family commercial mortgage-backed securities, direct financing to owners of multi-family properties through mezzanine loans and preferred equity investments, and Agency residential mortgage-backed securities.
I consider this to be of the hybrid variety of mortgage REIT as it encompasses all types of mortgage loans. The diversification can work for and against investors. Due to the higher yields available within the non-agency MBS space, less leverage is needed to make the economics work. If, however, the market experiences a liquidity dislocation, these types of loans freeze, then drop the fastest.
NYMT also has "hybrid" management, where portions of the portfolio are managed internally and portions are managed externally. NYMT internally manages a portion of the portfolio, including Agency ARMs, fixed-rate Agency RMBS, non-Agency RMBS, residential securitized loans, second mortgage loans, multi-family CMBS and preferred equity and joint venture equity investments in, and mezzanine loans to, owners of multi-family properties. The mREIT also utilizes certain external investment managers to manage specific asset types that they target or own. Accordingly, Headlands Asset Management, LLC provides investment management services with respect to investments in certain distressed residential loans, and The Midway Group, L.P. provides investment management services with respect to investments in Agency IOs.
In other words, not your typical mortgage REIT.
Then again, not your typical mortgage REIT returns either:
And definitely not your average yield:
Thing is, not everybody likes to live in the fast (and volatile) lane. This is where the preferred shares play a role.
As stated earlier, NYMT has two Series of preferred shares outstanding:
- Series C (7.875% NYMTO)
- Series B (7.75% NYMTP)
Current pricing on the preferred:
The table above shows that NYMTO has the lower price and the higher current and stripped yield. Case closed, right? Maybe for some, but closing the case right now wouldn't allow me to use more charts, and I do like to use charts, so let's keep moving.
The prices of the common and preferred:
The prices of the three instruments trend together. The prices then lead to the yields of the three instruments:
Again, and as expected, the prices follow the same path.
This makes me want to see how each preferred series has looked versus the common over the last few years.
The yield spread between the two is solidly positive (over 5% on average), meaning you are paying up for the "lower volatility" of the Series C preferred. Yes, using quotes, because as we saw earlier, the preferreds are not all that stable.
Next, the Series B:
The spread difference between the Series B and the common is typically greater than the Series C, averaging over 6%.
Using the two charts above, the Series C tends to cost investors less (in terms of yield spread) for the "stability" (I know, again with the quotes).
Eliminating the equity yields, the comparison between the Series B and C preferred stripped yield:
As the chart above shows, the Series C ("NYMTO") almost always has a higher yield than the Series B ("NYMTP"). Again, case closed, right? Not so fast.
Having a little time on my hands tonight, I decided to dig in to MS Excel stats and see what that yielded. The results were interesting:
The correlation between NYMTO and the equity was quite a bit lower than the correlation between the NYMTP and the equity. In other words, if you are worried about the volatility of the equity, the NYMTO has a lower correlation and should, therefore, not be affected as much when the common is more volatile.
The regression was interesting, but spot checking versus historical levels (if the common was $X, the preferreds were $Y and $Z) shows some deviation, as one might expect. For those fans of regression equation estimates, however, I include the following:
Bottom line: I like the NYMTO due to its consistently higher yield and the lower correlation to the equity. This is reassuring, as I am long the NYMTO.
Of course, there has to be some value versus alternatives. The following table compares the two series to preferred stocks of the following issuers (from the "optimal list" in the weekly):
- AG Mortgage Investment Trust (NYSE:MITT),
- Annaly Capital (NYSE:NLY),
- Invesco Mortgage Capital (NYSE:IVR),
- ARMOUR Residential (NYSE:ARR),
- Dynex Capital (NYSE:DX), and
- MFA Financial (NYSE:MFA).
Only ARMOUR has a similar yield, so the yield is in the right zip code.
Bottom Line: The NYMT preferred stocks are comparable to their mREIT preferred peers, and of the two series, the Series C is the better buy.
Disclosure: I am/we are long NYMT, NLY.
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.