ADAMAS TRUST, INC. quarterly report, Q2 FY2016

Business context and reporting period

The supplied filing is New York Mortgage Trust, Inc. (NYMT), not Adamas Trust, Inc.; the filing identifies NYMT as the registrant. This summary therefore covers NYMT’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016. NYMT is a mortgage-focused REIT investing in residential and multifamily mortgage-related assets. Unless noted otherwise, financial amounts below are in millions of dollars.

Financial performance and position

At June 30, 2016, total assets were $9.39 billion, total liabilities $8.52 billion, and total equity $867.0 million, including $864.0 million attributable to NYMT stockholders. Cash and cash equivalents were $49.9 million, down from $62.0 million at year-end 2015. Six-month operating cash flow was $24.0 million; investing activities used $17.4 million and financing activities used $18.6 million, producing a $12.0 million net decrease in cash.

Debt and financing included $618.1 million of portfolio repurchase financing, $174.8 million of residential-loan financing, $102.6 million of residential CDOs, $6.98 billion of multifamily CDOs, $244.0 million of securitized debt, and $45.0 million of subordinated debentures. The multifamily CDOs finance consolidated securitization trusts; NYMT states it has no claim to their assets or obligation for those liabilities other than its retained first-loss interests. NYMT reported overall leverage of approximately 1.3:1, excluding the Consolidated K-Series and Residential CDOs, and short-term financing leverage of approximately 0.9:1.

Material changes versus prior periods

• Common-stockholder net income fell 48% in Q2 and 43% for the first half year over year; net interest income declined $3.6 million and $7.6 million, respectively. The company attributed much of the decrease to the prior-year sale of CLO securities, lower average balances in certain portfolios, seasoning of distressed loans, and higher Agency IO financing costs.
• Other income fell $4.6 million in Q2 and $8.7 million year to date, chiefly reflecting smaller fair-value gains on multifamily securitizations than in 2015. A $5.0 million gain from remeasuring previously held interests in acquired businesses partly offset the decline.
• On May 16, NYMT acquired the remaining interests in RiverBanc, RBMI, and RBDHC, taking ownership to 100% and internalizing multifamily investment management. The acquisition added $24.8 million of provisional goodwill; the filing cites anticipated synergies. RiverBanc’s external management agreement was terminated.
• An April securitization issued $177.5 million of Class A notes against performing and re-performing seasoned residential loans. NYMT retained $25.5 million of Class M notes and a $79.8 million equity certificate and held 5% of the Class A notes.
• Multifamily capital allocation rose to 49.7% from 41.4% at year-end, while distressed residential allocation declined to 29.6% from 37.3%. Common book value per share was $6.38 at June 30, versus $6.54 at year-end.

Outlook, commentary, risks, and unusual items

Management said existing cash, financing availability, and operating cash flows were expected to meet liquidity needs for at least 12 months, and expected to continue quarterly common dividends in the near term. The board evaluates the dividend each quarter; the filing does not provide earnings guidance. The Q2 common dividend was $0.24 per share. Management described uncertainty over Federal Reserve rate policy, market volatility following the U.K. Brexit vote, and potential spread and hedging-cost effects. It expected modest near-term improvement in single-family housing and noted multifamily fundamentals remained stable, while valuation gains on multifamily assets had slowed.

• Liquidity risks include short-term, uncommitted repo financing, margin calls, lender nonrenewals, collateral haircuts, and possible forced asset sales. Repo borrowings averaged about 20 days to maturity; $566.4 million matured within 30 days. NYMT reported $82.8 million of aggregate repo counterparty exposure across six counterparties.
• The $250 million Deutsche Bank distressed-loan repo facility, with $176.2 million outstanding, expires December 15, 2016; management expected to refinance or roll it over. The company had repaid FHLBI advances after a regulatory change barred its captive insurer from continuing membership.
• Interest-rate sensitivity modeling estimated next-12-month net interest income changes of +$6.5 million for a 100-basis-point rate increase and -$12.2 million for a 100-basis-point decrease. Modeled portfolio market value changes were -$41.2 million and +$29.7 million, respectively. These are model estimates, not forecasts.
• Other key risks include prepayment and credit losses, valuation uncertainty in Level 3 assets, derivative counterparty risk, and possible changes to Fannie Mae and Freddie Mac. Distressed-loan cash-flow estimates and multifamily fair values depend on management assumptions. The acquisition’s asset and intangible valuations were provisional.
• NYMT reported no material adverse effect expected from current litigation, no loan repurchases during the six-month period, and no material changes to previously disclosed risk factors. It reported effective disclosure controls as of June 30, 2016.

Important facts for investors to verify

1. Confirm the intended issuer: the request names Adamas Trust, but the supplied filing is NYMT’s 10-Q.
2. Review the full filing’s notes and subsequent filings for refinancing or renewal of the December 2016 Deutsche Bank repo facility and the status of repo counterparties, haircuts, and margin requirements.
3. Assess whether recurring portfolio income supports the common dividend, separating recurring net interest income from acquisition-related and fair-value gains.
4. Review the final RiverBanc acquisition valuations, goodwill, integration costs, and realized cost savings against management’s expected synergies.
5. Examine the assumptions and sensitivity of Level 3 multifamily and distressed-loan valuations, credit performance, and prepayment rates.