Business context and reporting period
Issuer discrepancy: The filing is for New York Mortgage Trust, Inc. (NYSE? No: NASDAQ ticker NYMT), not Adamas Trust, Inc. It is a Form 10-K for the fiscal year ended December 31, 2015; the filing also reports fourth-quarter results.
NYMT is a mortgage REIT investing in Agency mortgage-backed securities, residential loans (including distressed and second-lien loans), multifamily commercial mortgage-backed securities, and related real estate investments. Its stated objective is to deliver long-term stable distributions through net interest income and realized gains. The reported balance sheet consolidates large securitization entities; much of their debt is non-recourse and does not represent ordinary parent-company borrowings.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Interest income | $336.8 million | $378.8 million |
| Interest expense | $260.7 million | $301.0 million |
| Net interest income | $76.2 million | $77.8 million |
| Other income | $45.8 million | $105.2 million |
| Net income attributable to common stockholders | $67.0 million | $130.4 million |
| Basic and diluted earnings per common share | $0.62 | $1.48 |
| Common dividends declared per share | $1.02 | $1.08 |
| Net cash provided by operating activities | $36.3 million | $37.6 million |
| Cash and cash equivalents at year-end | $62.0 million | $75.6 million |
| Stockholders’ equity | $880.5 million | $817.9 million |
The reported 2015 net interest spread was 3.68%, compared with 4.40% in 2014. Overall assets were $9.06 billion and liabilities $8.18 billion at year-end, including $7.1 billion of multifamily loans and $6.8 billion of associated multifamily CDOs from consolidated securitizations. Excluding those CDOs and residential CDOs, management reported overall leverage of approximately 1.1-to-1 and callable-debt leverage of 0.9-to-1.
Fourth-quarter 2015 net income attributable to common stockholders was $1.0 million, or $0.01 per share, versus $40.5 million, or $0.42 per share, in fourth-quarter 2014. Fourth-quarter net interest income was $16.0 million, down from $18.8 million a year earlier. Fourth-quarter common dividend declared was $0.24 per share.
Material changes versus the prior comparable period
- Annual common earnings fell by $63.4 million, with EPS declining from $1.48 to $0.62. Net interest income was comparatively steady, down $1.7 million; the larger decline reflected lower other income, particularly fewer realized multifamily security gains and weaker fair-value gains as credit spreads widened.
- Distressed residential loan interest income rose as the average portfolio grew; management cited average interest-earning assets of $572.8 million in 2015 versus $249.0 million in 2014. Realized gains on distressed loan sales were $31.3 million, compared with $14.4 million.
- Net interest spread contracted from 4.40% to 3.68%. Agency IO and Agency RMBS net interest income declined, with management citing reduced average assets and higher prepayments.
- Common dividends declined from $0.27 per quarter in the first two quarters of 2015 to $0.24 in the second half. The annual declared dividend of $1.02 exceeded reported common EPS of $0.62; these measures differ, and REIT taxable income and cash availability are not the same as GAAP EPS.
- Year-end common book value per share was reported as $6.54, down from $7.07. The company issued $86.9 million net through Series C preferred stock and $31.9 million net through common-stock at-the-market offerings.
Outlook, management commentary, risks and unusual items
- Management said it remained defensive through much of the second half of 2015, holding more cash and using lower leverage amid market volatility and widening credit spreads. It expected modest near-term improvement in single-family housing and continued strength in multifamily, while warning that further spread widening could reduce asset values. No specific earnings or dividend guidance was provided; management expected to continue quarterly common dividends in the near term, subject to Board review.
- The Federal Reserve raised its target rate by 25 basis points in December 2015 and signaled further increases, though the pace remained uncertain. The company’s model estimated that an immediate 100-basis-point rate increase would reduce market value by $52.5 million, while a 200-basis-point increase would reduce it by $101.1 million. Modeled next-12-month net interest income sensitivity was positive $5.6 million for either a 100- or 200-basis-point increase, but negative $14.1 million for a 100-basis-point decrease; actual outcomes may differ.
- Liquidity risks include short-term, generally uncommitted repurchase financing, collateral haircuts and margin calls. At year-end, the company reported $62.0 million cash and $147.2 million in unencumbered securities available to address collateral needs. Management believed liquidity resources would meet requirements for at least 12 months.
- After year-end, a Federal Housing Finance Agency rule made captive insurance companies ineligible for Federal Home Loan Bank membership. The company repaid its subsidiary’s $121 million FHLBI advances in January 2016, primarily by replacing them with repurchase financing.
- Valuation and earnings are sensitive to credit spreads, defaults, prepayments, interest rates, and model assumptions. The company’s first-loss multifamily CMBS are subordinated and absorb losses before senior tranches; distressed and second-lien residential loans also carry elevated credit risk. Consolidated K-Series and other Level 3 assets and liabilities use significant unobservable valuation inputs.
- Other material risks include refinancing and counterparty exposure, potential restrictions on asset sales, reliance on external managers and associated conflicts of interest, REIT qualification and Investment Company Act exemption requirements, and potential changes to Fannie Mae and Freddie Mac. Management reported no legal proceedings expected to have a material adverse effect and effective disclosure controls and internal control over financial reporting. The independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the issuer identity and ticker: this filing names New York Mortgage Trust, Inc. (NYMT), despite the request metadata naming Adamas Trust, Inc.
- Review the drivers of the earnings decline and whether the unusually weak fourth-quarter common result reflects recurring performance or primarily fair-value, realized-gain, and preferred-dividend effects.
- Assess dividend sustainability against cash flows, REIT taxable income, preferred dividend obligations, and the gap between 2015 common dividends declared ($1.02 per share) and GAAP EPS ($0.62).
- Examine liquidity and refinancing after the January 2016 repayment of FHLBI advances, including repo terms, collateral requirements, and the company’s capacity to withstand margin calls.
- Evaluate credit performance in distressed residential loans and first-loss multifamily CMBS, including the reported increase in distressed-loan delinquencies and the assumptions underlying Level 3 valuations.
- Separate parent-company exposure from consolidated securitization balances, and verify how non-recourse obligations, preferred capital, and new share issuance affect leverage and common book value.