New York Mortgage Trust: Consider Buying This 8.0%-Yielding Preferred Stock

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Achilles Research
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Summary

  • New York Mortgage Trust issued preferred stock, which is an alternative to the riskier common stock.
  • The Series D preferred stock combines fixed-rate with floating-rate dividend payments.
  • The Series D currently sells for about liquidation preference value.
  • An investment in the Series D preferred stock yields 8.0 percent.
  • I discuss the pros and cons of investing in NYMT's preferred stock layer.

New York Mortgage Trust, Inc. (NASDAQ:NYMT) is a high-yield mortgage REIT for investors with a very high risk tolerance. That said, though, the mortgage REIT also issued preferred shares which allow investors to lower their investment risk while still securing respectable dividend income. In particular, I think New York Mortgage Trust's 8.00% Series D Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (NASDAQ:NYMTN) is an attractive alternative to the mortgage REIT's common shares and offers attractive value for investors with a low risk tolerance.

New York Mortgage Trust - Preferred Stock Alternative

New York Mortgage Trust is a mortgage real estate investment trust with an equity value of $1.4 billion. The company invests primarily in residential mortgage loans, distressed residential loans, multi-family commercial mortgage-backed securities, mezzanine loans, and preferred equity.

Like most mortgage REITs, New York Mortgage Trust relies on debt in order to make a profit on its mortgage investments. Mortgage real estate investment trusts are often highly leveraged and have volatile earnings, which makes them unsuitable investment vehicles for investors with an average or below-average risk tolerance.

Based on New York Mortgage Trust's latest 10-Q filing with the SEC, the mortgage REIT has had a moderate leverage ratio of 1.8:1 at the end of the June quarter.

Here's NYMT's latest balance sheet.

Source: New York Mortgage Trust 10-Q SEC Filing

Mortgage REITs don't just seek out debt capital in order to invest in mortgage securities, however. Lots of mortgage REITs, including New York Mortgage Trust, also issue preferred stocks as a way to diversify their capital structure and funding sources, which offer value for investors that want to dial down investment risk. And, that is where New York Mortgage Trust's Series D preferred stock comes into play.

Preferred stocks typically have seniority in the capital structure, meaning preferred stockholders have to be paid off before common stockholders will see any money in the event of financial trouble. According to the offering prospectus (here), New York Mortgage Trust's Series D preferred stock is senior to the mortgage REIT's common stock which translates into a higher degree of principal safety:

The Series D Preferred Stock will rank, with respect to rights to the payment of dividends and the distribution of assets upon our liquidation, dissolution or winding up, (1) senior to all classes or series of our common stock and any other Junior Stock we may issue in the future; (2) on a parity with our Parity Stock; (3) junior to any Senior Stock we may issue in the future; and (4) effectively junior to all of our existing and future indebtedness (including indebtedness convertible into or exchangeable for our common stock or preferred stock) and to the indebtedness of any of our existing or future subsidiaries. Please see the section entitled "Description of the Series D Preferred Stock-Ranking."

Indeed, the Series D preferred stock has held up nicely compared to the mortgage REIT's common shares since it was issued two years ago.

Source: Tickertech.com

Payment Features

A key feature of New York Mortgage Trust's Series D preferred stock is that the mortgage REIT will make both fixed-rate and floating-rate payments to shareholders over the life of the security.

According to the offering terms, the Series D will pay dividends at a fixed rate of 8.00 percent annually (based on the $25.00 liquidation preference value) until, but not including, October 15, 2027. From and including October 15, 2027, fixed-rate payments will convert to floating-rate payments based on three-month LIBOR plus a spread of 5.695% per annum of the $25.00 per share liquidation preference. Hence, buyers of the Series D have extraordinary dividend visibility until the fixed-rate period ends in 2027.

The Series D pays a fixed dividend of $0.50/share quarterly, or $2.00/share annually, for a total dividend yield of 8.00 percent. Since the Series D trades at $24.96 at the time of writing, near its liquidation preference value of $25.00, the coupon rate effectively equals the dividend yield of 8.00 percent.

The first redemption date for the Series D is October 15, 2027.

Shortcomings

The Series D, as I explained above, offers investors a high degree of dividend visibility over the fixed-rate period of the security and better principal protection due to the higher ranking in the capital structure. But there are a couple of shortcomings, too, investors need to know about:

1. The Series D preferred stock dividends do not qualify for preferential tax treatment;

2. The preferred stock dividends will not grow whereas New York Mortgage Trust's common stock dividend could theoretically grow in perpetuity;

3. The Series D has limited upside potential due to its lower associated risk and seniority.

What To Look Forward To

I consider the Series D to be quite a boring "fixed income security" that should continue to trade around the $25.00 liquidation preference value +/- a couple of percentage points. Preferred stockholders should get their quarterly dividends over the fixed-rate period unless the mortgage REIT runs into major financial trouble, or, worst case, goes out of business.

Financial challenges for New York Mortgage Trust's common stockholders, however, can arise from a sudden and significant change in interest rates that could negatively affect the portfolio values of NYMT's mortgage securities.

Source: New York Mortgage Trust

In order to manage risk, I recommend to not invest more than 3 percent of total portfolio assets into New York Mortgage Trust.

Your Takeaway

Preferred stocks such as the fixed-to-floating security discussed in this article offer income investors without a high risk tolerance a pathway of investing into mortgage real estate investment trusts. New York Mortgage Trust's Series D preferred stock makes a compelling value proposition for investors that seek stable, long-term dividend income, but that don't want to accept the high risk and income uncertainty that is typically associated with common stocks of mortgage REITs. Buy for income.

This article was written by

Achilles Research profile picture
34.81K Followers
I am a dividend investor and look for undervalued investments in the stock market. I identify misunderstood and undervalued equity investments and hold those securities until their price approximates my estimate of intrinsic value. I am a long-term investor only. I am building a $100,000 high-yield income portfolio. I am running this portfolio as an experiment to see if long-term sustainable income can be generated from a diversified pool of high-risk, high-yield securities. I am willing to accept high risk in order to meet my performance goals.

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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