Filing summary
Entity discrepancy: The request identifies ADAMAS TRUST, INC., but the supplied Form 10-Q is for NEW YORK MORTGAGE TRUST, INC. (NYSE: NYMT). The summary below reflects the filing provided, for the quarter ended September 30, 2018, and unaudited nine-month results.
Business context and reporting period
NYMT is a REIT investing in mortgage-related and residential housing assets. Its portfolio includes multifamily loans and securities, preferred equity and mezzanine investments, distressed residential loans, and agency and non-agency mortgage securities. The company’s stated objective is to provide long-term stable distributions through net interest margin and realized gains.
Financial performance and position
- Third-quarter results: Interest income was $110.2 million and interest expense was $90.6 million, producing net interest income of $19.6 million, up from $13.3 million a year earlier. Net income attributable to common stockholders was $28.0 million, versus $24.6 million; basic EPS was $0.21, versus $0.22.
- Nine-month results: Net interest income was $56.9 million, versus $42.9 million. Net income attributable to common stockholders was $75.5 million, versus $51.7 million. Basic EPS was $0.63, versus $0.46.
- Other income and margins: Total other income was $24.3 million for the quarter and $65.3 million for the nine months. Portfolio net interest margin was 2.55% for the quarter and 2.61% for the nine months, compared with 2.81% and 2.88%, respectively, in 2017.
- Cash flow: For the nine months, operating activities provided $19.1 million and investing activities provided $141.2 million; financing activities used $200.7 million. Cash, cash equivalents and restricted cash ended at $65.8 million, down $40.4 million from the start of the period. Cash and cash equivalents alone were $57.5 million.
- Balance sheet and debt: Total assets were $12.33 billion and total liabilities $11.22 billion at September 30, 2018. Stockholders’ equity was $1.11 billion. Major balances included $1.13 billion of portfolio financing arrangements, $177.2 million of residential-loan financing, $9.50 billion of multifamily CDOs, $130.3 million of convertible notes, and $45.0 million of subordinated debentures. The company reported overall leverage of approximately 1.4:1, excluding certain consolidated securitization debt as described in the filing.
- Liquidity: Management reported $57.5 million of cash and $429.4 million of unencumbered securities available to meet margin or valuation requirements, equal to 43.1% of portfolio financing arrangements. It believed existing resources and expected cash flows would meet liquidity needs for at least 12 months.
- Book value and dividends: Common book value was $5.72 per share at September 30, compared with $6.00 at year-end 2017. The quarterly common dividend was $0.20 per share; preferred dividends were also declared and paid as scheduled.
Material changes versus the prior comparable period
- Higher net interest income reflected growth in multifamily and agency RMBS interest-earning assets; distressed residential assets contributed less to nine-month net interest income.
- Nine-month other income rose, notably with $31.9 million of net unrealized gains on multifamily loans and debt in securitization trusts, compared with $5.2 million in 2017. These fair-value gains are not necessarily recurring or realized.
- The company recorded an $11.8 million net realized loss on investment securities and related hedges for the nine months, including losses associated with exiting its Agency IO strategy. Available-for-sale securities also recorded a $40.9 million year-to-date OCI decline, primarily reflecting Agency RMBS valuation losses.
- Common shares outstanding increased from 111.9 million at year-end 2017 to 141.2 million at September 30, 2018. The company raised $86.0 million net in an August public offering and $89.0 million net through its ATM program during the first nine months.
- Preferred equity and mezzanine investments grew to $198.3 million from $138.9 million at year-end. Distressed residential loans at carrying value declined to $260.8 million from $331.5 million.
Outlook, commentary, risks and unusual items
- Management said it expects to continue quarterly common dividends in the near term, subject to board review of financial condition, liquidity, earnings prospects, business outlook and REIT requirements. No quantitative earnings or dividend guidance was provided.
- Management intends to focus on residential and multifamily credit assets and reported acquiring $301.2 million of residential and multifamily credit assets during the first nine months. It noted tightening credit spreads supported asset values but made current returns on new investments more challenging.
- Key exposures include rising interest rates and funding costs, spread and fair-value movements, borrower defaults, prepayments, and short-term repurchase financing and margin calls. The company warned that inability to renew repo funding or meet collateral calls could force asset sales at a loss. It reported $1.1 billion of portfolio repo borrowings, with an average 29-day maturity.
- The Federal Reserve raised its target range to 2.00%–2.25% in September 2018; management cited uncertainty about further tightening and potential market volatility. Its model estimated that an immediate 100-basis-point rate increase would reduce next-12-month net interest income by about $9.6 million; a 200-basis-point increase by about $19.2 million.
- A $2.1 million impairment was recorded on real estate under development in a consolidated VIE; $1.0 million was allocated to non-controlling interests. Riverchase Landing’s property sale and redemption led to deconsolidation in March 2018. The Clusters property remained held for sale at quarter-end.
- Headlands was notified that its management agreement will not be renewed when it expires June 30, 2019. The filing reported no material changes to previously disclosed risk factors, no material litigation expected to adversely affect the company, and effective disclosure controls.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is NYMT’s, not Adamas Trust’s.
- Review how much reported earnings depended on fair-value gains, realized asset sales and other potentially variable income.
- Assess repo renewal, counterparty concentration, collateral haircuts and capacity to withstand margin calls; confirm refinancing plans for the residential repo agreements, including one expiring November 24, 2018.
- Track the impact of common-share issuance on per-share earnings and book value, and whether distributions remain supported by recurring earnings and cash generation.
- Monitor Agency RMBS unrealized losses, credit performance of distressed loans and multifamily collateral, and progress on selling The Clusters property.