Business Context and Reporting Period
Company: New York Mortgage Trust, Inc. (NYMT), a self-advised Real Estate Investment Trust (REIT).
Reporting Period: Quarterly period ended June 30, 2010 (Form 10-Q).
Business Overview: NYMT acquires and manages residential mortgage-backed securities (RMBS), including Agency (Fannie Mae, Freddie Mac) and non-Agency RMBS, as well as prime adjustable-rate mortgage (ARM) loans held in securitization trusts and Collateralized Loan Obligations (CLOs). The Company is currently repositioning its portfolio from leveraged Agency RMBS to a more diversified mix with reduced leverage and increased credit risk exposure.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2010 | As of June 30, 2010 |
|---|---|---|---|
| Net Interest Income | $2.69 million | $6.10 million | - |
| Net Income | $1.54 million | $4.21 million | - |
| Basic EPS | $0.16 | $0.45 | - |
| Total Assets | - | - | $438.9 million |
| Total Liabilities | - | - | $374.0 million |
| Stockholders' Equity | - | - | $65.0 million |
| Cash and Cash Equivalents | - | - | $34.0 million |
| Net Interest Spread | 370 bps | - | - |
| Dividends Declared (Common) | $0.18/share | $0.43/share | - |
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased by $1.0 million (39%) for the quarter and $0.4 million (8%) for the six months compared to the same periods in 2009. This was primarily driven by a reduction in net interest income due to a smaller average earning asset base ($206.7 million decrease in average assets for the quarter) and increased amortization of premiums caused by Fannie Mae/Freddie Mac delinquent loan buyback programs.
- Realized Gains: Realized gains on investment securities increased significantly to $1.29 million for the quarter (from $0.14 million in 2009) and $2.10 million for the six months (from $0.26 million in 2009), partially offsetting the decline in net interest income.
- Expense Increase: General, administrative, and other expenses rose by $0.5 million for the quarter and $0.8 million for the six months, largely due to increased management fees (base and incentive) associated with the redeployment of assets into alternative strategies.
- Portfolio Repositioning: Investment securities available for sale decreased from $176.7 million to $116.0 million, reflecting the sale of Agency RMBS and a shift toward non-Agency RMBS and CLOs.
Guidance, Outlook, and Risks
- Outlook: Management expects Agency prepayment speeds to return to a normal range of 18% to 22% in the third quarter of 2010 as government buyback programs decline. The Company anticipates interest rates and financing costs to remain historically low until economic data confirms sustainable improvement.
- Liquidity: The Company maintains $34.0 million in cash and $79.7 million in unencumbered securities. Management believes existing cash balances and operating cash flows will meet liquidity requirements for at least the next 12 months.
- Redemption Obligation: $20.0 million of Series A Preferred Stock (classified as a liability) matures on December 31, 2010, requiring redemption at $20.00 per share plus accrued dividends.
- Key Risks:
- Interest Rate Risk: Sensitivity analysis indicates a +100 basis point rate increase could reduce net interest income by $0.27 million.
- Prepayment Risk: Accelerated prepayments due to government buyback programs increased premium amortization, reducing yields.
- Counterparty Risk: Exposure to margin calls on interest rate swaps and repurchase agreements if collateral values decline.
- Regulatory Risk: Potential impact of the Dodd-Frank Act and future reforms regarding Fannie Mae and Freddie Mac.
Investor Verification Checklist
- Series A Preferred Stock Redemption: Verify the Company's plan to fund the $20 million redemption due December 31, 2010, given the current cash balance of $34 million.
- Prepayment Speeds: Monitor Constant Prepayment Rates (CPR) to confirm the return to the 18-22% range and the subsequent impact on premium amortization and net interest income.
- Non-Agency RMBS Performance: Review delinquency and loss severity rates for the non-Agency RMBS portfolio, which carries higher credit risk than Agency securities.
- Advisory Agreement: Note the new advisory agreement with Harvest Capital Strategies (HCS) effective July 26, 2010, which introduces a $1 million annual consulting fee and new incentive structures for "new program assets."
- Repurchase Agreement Haircuts: Confirm the stability of the 5.7% average haircut on repurchase agreements, as widening haircuts could constrain leverage and liquidity.