ADAMAS TRUST, INC. quarterly report, Q3 FY2013

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Business context and reporting period

The supplied filing is New York Mortgage Trust, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2013; it does not appear to be a filing for Adamas Trust, Inc. New York Mortgage Trust is a REIT that invests in mortgage-related assets, including agency securities, multifamily commercial mortgage assets, and distressed residential loans. The company’s stated objective is to provide stable stockholder distributions through net interest income and realized gains.

Unless otherwise noted, dollar amounts below are in millions. The filing compares the three and nine months ended September 30, 2013 with the corresponding 2012 periods. Balance-sheet comparisons are with December 31, 2012.

Financial results and position

  • Third-quarter earnings: Interest income was $76.9 versus $43.9; net interest income was $15.3 versus $8.1. Net income attributable to common stockholders rose to $16.9 from $7.9, while diluted EPS fell to $0.27 from $0.30.
  • Nine-month earnings: Net interest income was $42.4 versus $20.2; net income attributable to common stockholders was $43.6 versus $18.9. Diluted EPS was $0.76 versus $1.01, reflecting a substantially larger weighted-average share count as well as preferred dividends in 2013.
  • Key earnings drivers: Results included $22.4 of nine-month unrealized gains on multifamily loans and related debt, and $8.3 of net realized losses on investment securities and related hedges. The company attributed substantial Agency IO strategy losses to interest-rate volatility and illiquidity, with some reversal in the third quarter.
  • Margins and expenses: Portfolio net interest margin was 3.59% in Q3 2013, compared with 4.70% in Q3 2012 and 3.48% in Q2 2013. Management attributed the year-over-year decrease primarily to greater capital allocation to levered Agency RMBS; the sequential improvement reflected a shift toward credit-sensitive strategies. Nine-month general, administrative and other expenses increased to $13.7 from $8.6, including $2.5 of distressed-loan-related expenses.
  • Assets and equity: Total assets were $8,450.0, up from $7,160.4; stockholders’ equity was $477.7, up from $322.0. The balance sheet includes consolidated VIE assets and liabilities. Management reported common book value of $6.32 per share at quarter-end, versus $6.50 at year-end 2012.
  • Debt and leverage: Repurchase financing was $794.2, down from $889.1, at a 0.52% weighted-average rate and with a 47-day average maturity. Other reported obligations included $164.8 of residential CDOs, $6,472.3 of multifamily CDOs, $254.0 of securitized debt and $45.0 of subordinated debentures. The multifamily CDOs and related loans are consolidated VIE balances; the company says its exposure to those VIEs is limited to its investment, rather than general obligations for their liabilities. Management’s overall leverage ratio, excluding Consolidated K-Series CDOs and residential CDOs, was approximately 2.3:1; short-term financing or callable-debt leverage was approximately 1.7:1.
  • Liquidity and cash flow: Cash and cash equivalents were $20.5, down from $31.8. Nine-month operating cash flow was $45.1, investing cash outflow was $145.6 and financing cash flow was $89.2, resulting in an $11.3 net decrease in cash. Management reported $68.8 of unencumbered securities, in addition to cash, and stated that existing cash and operating cash flows should meet liquidity needs for at least 12 months.
  • Distributions and capital: The common dividend was $0.27 per share for Q3, unchanged from the first two quarters of 2013. The company issued 13.6 million common shares in May, generating about $94.5 net proceeds, and issued $72.4 net proceeds of 7.75% Series B preferred stock.

Material changes versus prior periods

  • Growth in equity and the investment portfolio contributed to much higher interest income and net interest income. Average interest-earning assets increased by $888.1 for Q3 and about $1.0 billion for the nine-month comparison, according to management.
  • Multifamily loans held in securitization trusts increased to $6.7 billion from $5.4 billion, primarily following consolidation of an additional Freddie Mac K-Series securitization. The related CDO balance rose to $6.5 billion from $5.3 billion; these consolidated balances materially increase reported assets and liabilities.
  • Distressed residential mortgage loans grew to $258.3 from $60.5 in carrying value. The portfolio comprised 2,522 loans at quarter-end, compared with 513 at year-end 2012. The company completed three distressed-loan securitizations during Q3 and received approximately $136.6 net proceeds from those transactions.
  • Common shares outstanding increased to 63.8 million from 49.6 million at year-end 2012. Preferred stock was newly issued in 2013, adding a 7.75% dividend claim senior to common stock.
  • Available-for-sale securities declined to $936.1 from $1,034.7. Accumulated other comprehensive income fell to $7.1 from $18.1, including a significant increase in unrealized losses on Agency RMBS.

Outlook, commentary, risks and unusual items

  • Management said it expects to continue quarterly common dividends in the near term, but emphasized that dividends are not obligatory and may be adjusted based on earnings, liquidity, business prospects and REIT requirements. No specific earnings or dividend guidance was provided.
  • Management expected longer-term interest rates to rise as the economy improves, while noting uncertainty about Federal Reserve asset purchases and federal budget developments. It cited potential continued volatility in Agency RMBS and other fixed-income assets. The Federal Reserve had kept QE3 purchases unchanged at its September and October 2013 meetings.
  • Management expected refinancing-related prepayments to remain lower over time as rates rise, but said the post-September decline in mortgage rates could modestly increase prepayments in Q4. Faster prepayments can reduce yields on premium securities and adversely affect Agency IOs.
  • Key risks include rising rates and funding costs, changes in asset values and credit spreads, prepayment and credit losses, margin calls, counterparties failing to renew short-term repurchase financing, and constrained financing availability. Proposed bank capital rules could reduce lenders’ willingness to provide repo financing. A 12% clearinghouse margin increase on certain swap portfolios in October was subsequently rolled back.
  • Interest-rate sensitivity modeling estimated that a 100-basis-point increase would reduce portfolio market value by $34.6 and a 200-basis-point increase by $69.9; a 100-basis-point decrease would increase it by $17.3. The company’s separate 12-month net-interest-income sensitivity estimated increases of $3.0 and $1.1 for +100 and +200 basis points, respectively, and a decrease of $16.8 for −100 basis points. These are model estimates based on a static portfolio, not forecasts.
  • Fair-value estimation is significant: $6.8 billion of recurring fair-value assets were Level 3, principally multifamily loans, with related Level 3 multifamily CDO liabilities of $6.5 billion. The filing notes that valuation models use assumptions that may materially affect reported values.
  • The company reported no material adverse effect expected from current litigation and no loan repurchases during the nine-month period. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
  • As a subsequent event, the company said it expected to purchase a first-loss PO security in a new Freddie Mac multifamily K-Series securitization in November 2013, while noting completion was not assured.

Most important facts for investors to verify

  • Confirm the issuer identity: the provided document names New York Mortgage Trust, Inc., not Adamas Trust, Inc.
  • Assess earnings quality, including the contribution of unrealized multifamily fair-value gains, realized Agency IO-related losses and portfolio growth.
  • Review the effect of share issuance and preferred dividends on common EPS, book value per share and the sustainability of the common dividend.
  • Evaluate short-term repo renewal, collateral haircuts, margin-call capacity and the concentration of counterparty exposure; JPMorgan was the only repo counterparty with exposure above 5% of stockholders’ equity.
  • Examine distressed-loan credit assumptions and multifamily Level 3 valuation inputs, including loan performance, collateral values and discount rates.
  • Distinguish consolidated VIE balances from the company’s actual economic exposure, and verify the stated liquidity and leverage measures alongside the large securitization and CDO balances.