Business context and reporting period
The supplied filing is New York Mortgage Trust, Inc.’s Form 10-Q for the quarter ended September 30, 2014; it does not identify Adamas Trust, Inc. as the registrant. New York Mortgage Trust is a REIT that invests in mortgage-related and financial assets, including multifamily CMBS and loans, distressed residential mortgage loans, and Agency RMBS. Results are unaudited; amounts below are in millions unless stated otherwise.
Financial performance and position
- Third-quarter results: Interest income was $94.9, interest expense $75.6, and net interest income $19.3, up from $15.2 in Q3 2013. Net income was $39.7 versus $18.4; income attributable to common stockholders was $38.3 versus $16.9. Basic and diluted EPS were $0.42 versus $0.27.
- Nine-month results: Net interest income was $59.0 versus $42.1; net income was $94.2 versus $45.7; and net income attributable to common stockholders was $89.9 versus $43.6. EPS was $1.06 versus $0.76. Common dividends declared were $0.27 per share for the quarter and $0.81 for the nine months, unchanged from 2013 periods.
- Drivers and earnings quality: Q3 other income was $33.1, including a $16.5 realized gain on a multifamily CMBS sale and $18.1 of net unrealized gains on multifamily loans and debt. The sale-related $3.4 debt-extinguishment loss partly offset the gain. Nine-month net income also included $43.1 of net unrealized multifamily valuation gains. These items and realized gains materially contributed to earnings growth.
- Margins: The reported net interest spread was 4.28% in Q3 2014, compared with 3.59% in Q3 2013 and 4.60% in Q2 2014. Management attributed the sequential decline primarily to higher Agency MBS prepayments.
- Cash flow: For the first nine months, operating activities provided $28.7, investing activities provided $146.9, and financing activities used $178.9. Cash declined $3.3 to $28.5. Financing cash flows included $186.1 of common-stock proceeds and $66.6 of dividends paid on common and preferred stock.
- Balance sheet and liquidity: Total assets were $10.05 billion and stockholders’ equity $708.4 at September 30, 2014, versus $9.90 billion and $480.7 at year-end 2013. Common book value per share was $6.98, versus $6.33 at year-end. The increase in equity primarily reflected $186.7 of net proceeds from common-stock offerings and accumulated earnings/OCI. Cash was $28.5; the company also reported $208.4 of unencumbered securities and additional restricted cash available for certain margin needs.
- Debt and leverage: Repurchase borrowings were $627.9, down from $791.1 at year-end, at a 0.42% weighted-average rate. Other reported obligations included $148.3 of residential CDOs, $8.01 billion of multifamily CDOs, $237.4 of securitized debt and $45.0 of subordinated debentures. The multifamily CDOs finance consolidated securitization trusts; the company says it has no claims on their assets or obligations for their liabilities other than its retained first-loss interests. Excluding those CDOs and residential CDOs, overall leverage was approximately 1.3-to-1 equity; callable-debt leverage was approximately 0.9-to-1.
Changes, outlook, and risks
- Net income and EPS increased substantially year over year, supported by higher net interest income, security-sale gains, distressed-loan gains, and positive multifamily fair-value changes. Common shares outstanding increased to 90.7 million from 64.1 million at year-end following two public offerings that raised $186.7 million net.
- In September, the company repurchased $52 million of notes and terminated a 2012 multifamily financing, releasing approximately $182.5 million of collateral. It then sold a multifamily CMBS security for $41.4 million of proceeds and a $16.5 million gain. Management cited the sale and released collateral as liquidity and portfolio-yield opportunities.
- No earnings or investment guidance was provided. Management expected to continue quarterly common dividends in the near term, subject to quarterly Board review, and said it would remain selective in sourcing credit-sensitive investments amid tighter spreads and challenging returns on new assets. It viewed multifamily housing conditions as favorable, while expecting slower single-family housing gains and mortgage originations.
- Management stated existing cash, financing availability and operating cash flows should meet liquidity needs for at least 12 months. Key exposures include interest-rate and spread movements, mortgage prepayments, credit losses, fair-value estimation, repo renewals and margin calls, counterparty failure, and changes to Fannie Mae/Freddie Mac or REIT-related rules. A modeled 100-basis-point rate increase reduced projected next-12-month net interest income by about $7.1 million; a 100-basis-point decrease reduced it by about $17.5 million. The filing cautions that modeled outcomes may differ from actual results.
- Residential loan credit indicators included 33 delinquent loans with approximately $18.0 million unpaid principal; 30 were over 90 days delinquent. The allowance for residential loan losses was $3.4 million. Management reported no current litigation expected to have a material adverse effect and no material change to previously disclosed risk factors.
- Subsequent to quarter-end, the CEO’s amended employment agreement raised annual base salary from $500,000 to $700,000 effective November 1, 2014, among other changes. Disclosure controls were assessed as effective at September 30, 2014.
Important facts for investors to verify
- Confirm the registrant identity: the filing is for New York Mortgage Trust, not Adamas Trust.
- Review how much reported earnings and book-value growth depended on unrealized fair-value gains and asset-sale gains, and how those gains may change.
- Assess repo rollover, collateral haircuts, margin-call capacity, and the distinction between corporate obligations and consolidated securitization liabilities.
- Track prepayment speeds, net interest spread, credit performance of distressed loans, and the assumptions behind Level 3 multifamily valuations.
- Confirm dividend sustainability against recurring earnings, liquidity requirements, and REIT distribution obligations.