Business Context and Reporting Period
This Form 8-K was filed by New York Mortgage Trust, Inc. (the "Company") on July 26, 2010. The filing reports the entry into a material definitive agreement and the termination of a prior agreement. The Company, along with its subsidiaries Hypotheca Capital, LLC and New York Mortgage Funding LLC, entered into an Amended and Restated Advisory Agreement with Harvest Capital Strategies LLC ("HCS"), a wholly-owned subsidiary of JMP Group Inc.
Key Financial Metrics and Agreement Terms
The filing details the financial structure of the new advisory relationship rather than reporting period-specific operating results. Key financial terms include:
- Base Advisory Fee: For "Managed Assets," HCS receives a quarterly fee equal to 2% of one-quarter (1/4) of the amortized cost of such assets.
- Incentive Compensation (Managed Assets): HCS is eligible for 35% of GAAP net income attributable to Managed Assets exceeding a 13% hurdle rate based on average equity invested.
- Annual Consulting Fee: HCS receives a fixed annual fee of $1 million, payable quarterly, subject to reduction if JMP Group Inc.'s equity investment falls below a certain level.
- Incentive Compensation (Legacy Assets): For assets held prior to the agreement, HCS earns 25% of GAAP net income exceeding a hurdle rate of the greater of 8% or 2% plus the ten-year treasury rate.
- Termination Fee: If the Company terminates without cause, a fee equal to 1.5 times the sum of the average annual base advisory fee (preceding 24 months) and the annual consulting fee is payable.
- Asset Holdings: As of the effective date, the Company owned no Managed Assets and approximately $0.4 million of Scheduled Assets.
Material Changes Versus Prior Period
The primary material change is the replacement of the Prior Advisory Agreement dated January 18, 2008, with JMP Asset Management LLC (predecessor to HCS). The new agreement restructures compensation for new program assets and establishes a fixed annual consulting fee. Ownership of the Company's common stock by HCS and JMP Group Inc. was approximately 16.7% and 12.1%, respectively, as of the filing date.
Guidance, Outlook, and Risks
Outlook: The Company anticipates that new program assets will include non-rated residential mortgage assets, commercial mortgage-backed securities, commercial real estate loans, and collateralized loan obligations. The agreement has an initial term expiring June 30, 2012, with automatic annual renewals.
Risks and Contingencies: The Company faces potential termination costs if it elects to end the agreement without cause. Additionally, the annual consulting fee is contingent on the equity investment level of JMP Group Inc. and its affiliates. The filing notes that the description of the agreement is qualified by reference to the full text of the agreement attached as Exhibit 10.1.
Important Facts for Investor Verification
- Verify the full text of the Amended and Restated Advisory Agreement (Exhibit 10.1) for complete definitions of "Managed Assets" and "Scheduled Assets."
- Confirm the current equity investment level of JMP Group Inc. to assess the potential reduction of the $1 million annual consulting fee.
- Monitor the classification of future acquisitions to determine if they qualify as Managed Assets subject to the 2% base fee and 35% incentive structure.
- Review the specific conditions under which the Company may terminate the agreement without incurring the 1.5x termination fee.