Filing summary
Entity note: The supplied filing is for New York Mortgage Trust, Inc. (NYMT), not Adamas Trust, Inc. It is a Form 10-Q for the quarter ended June 30, 2015, filed August 6, 2015. Unless noted, amounts below are in U.S. dollars.
Business context and reporting period
NYMT is a REIT that acquires, finances and manages mortgage-related and other financial assets. Its portfolio includes agency mortgage-backed securities, distressed residential mortgage loans, multifamily commercial mortgage investments, and related investments. The company seeks to generate distributions through net interest margin and realized investment gains. Financial statements are unaudited.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Interest income | $84.4 million | $95.5 million | $173.4 million | $190.8 million |
| Interest expense | $64.1 million | $75.7 million | $131.5 million | $151.1 million |
| Net interest income | $20.3 million | $19.9 million | $41.9 million | $39.7 million |
| Income before tax | $25.8 million | $32.3 million | $49.6 million | $58.1 million |
| Net income | $24.6 million | $31.8 million | $48.2 million | $54.5 million |
| Net income attributable to common stockholders | $21.5 million | $30.3 million | $43.6 million | $51.6 million |
| Diluted earnings per common share | $0.20 | $0.34 | $0.41 | $0.63 |
| Net interest spread | 3.91% | 4.51% | 4.03% | 4.50% |
At June 30, 2015, total assets were $9.41 billion, total liabilities $8.49 billion, and stockholders’ equity $911.4 million. Cash and cash equivalents were $106.5 million, versus $75.6 million at year-end 2014. For the first half, operating cash flow was $15.1 million; investing activities provided $117.6 million and financing activities used $101.8 million, producing a $30.9 million increase in cash.
Portfolio financing arrangements were $585.5 million, including $121 million of Federal Home Loan Bank advances; distressed-loan financing was $236.9 million. Other reported debt included $6.93 billion of multifamily CDOs, $133.3 million of residential CDOs, $191.7 million of securitized debt and $45.0 million of subordinated debentures. The multifamily CDOs relate to consolidated securitization entities. Management reported overall leverage of approximately 1.2-to-1, excluding those multifamily CDOs and residential CDOs, and callable-debt leverage of approximately 0.9-to-1.
The common dividend was $0.27 per share for Q2. Series B and newly issued Series C preferred stock carry annual dividend rates of 7.75% and 7.875%, respectively. The board stated it expected to continue quarterly common dividends in the near term, but emphasized that future declarations are not assured.
Material changes versus comparable periods
- Common-stockholder net income fell by $8.8 million in Q2 and $8.0 million for the first half year over year; diluted EPS declined by $0.14 and $0.22, respectively.
- Net interest income increased modestly, supported by a larger average interest-earning asset base and higher distressed-loan income. This was partly offset by weaker Agency IO income, which management attributed mainly to higher prepayments, and lower multifamily income following asset sales.
- Total other income declined $5.4 million in Q2 and $5.8 million for the first half. Drivers included lower multifamily fair-value gains and increased realized derivative losses; gains from CLO sales and distressed-loan resolutions partly offset these items.
- General, administrative and other expenses rose $1.6 million in Q2 and $4.8 million in the first half, including higher management and incentive fees and higher distressed-loan servicing, workout and due-diligence costs.
- Total assets fell by about $1.1 billion from December 31, 2014, primarily following the sale of a first-loss multifamily security and the related deconsolidation of approximately $1.1 billion of multifamily loans and $1.0 billion of associated CDOs. This accounting change materially reduced reported gross assets and liabilities.
- NYMT issued $86.9 million net proceeds of Series C preferred stock and raised additional capital through at-the-market common stock sales. Common shares outstanding increased to 109.4 million from 105.1 million at year-end 2014.
Outlook, management commentary, risks and unusual items
- Management said existing cash, financing capacity and operating cash flows were expected to meet liquidity needs for at least 12 months. It also described plans to replace some repo borrowing with Federal Home Loan Bank advances, subject to collateral, creditworthiness and lender approval.
- Management characterized multifamily housing fundamentals as favorable but said tighter credit spreads made new investments in multifamily CMBS and distressed loans less attractive. It expected to remain selective and focus capital on credit-sensitive assets where returns rely more on asset selection than leverage.
- Management’s market discussion noted volatility in Treasury yields and anticipated that Federal Reserve rate increases could begin in the second half of 2015, while emphasizing uncertainty. Risks include interest-rate and spread changes, prepayments, credit losses, funding availability, margin calls, counterparty defaults, and changes to Fannie Mae and Freddie Mac.
- Short-term repurchase agreements are generally uncommitted and may be repriced, called or not renewed. At June 30, 2015, the company reported $49.6 million of amount-at-risk under repo agreements, and stated that adverse collateral values or funding conditions could force asset sales at a loss. A $236.9 million Deutsche Bank distressed-loan repo facility matures December 17, 2015 and is subject to margin calls and covenants.
- Fair-value accounting for multifamily securitization assets and liabilities generated substantial earnings volatility. Management’s valuation of significant Level 3 assets relies on models and unobservable assumptions; changes in assumptions could materially affect reported results and equity.
- Distressed-loan credit indicators warrant attention: 6.7% of the portfolio was more than 90 days delinquent at June 30, compared with 4.0% at year-end. Separately, the residential securitization-trust loan allowance was $4.1 million, or 291 basis points of principal.
- In July 2015, the company agreed, subject to conditions including completion of RMI’s IPO, to contribute its RBMI equity interests for 2,451,211 RMI shares and sell certain preferred-equity investments and a mezzanine loan for about $28.5 million. It also purchased distressed-loan pools with $81.2 million unpaid principal for $67.5 million.
- Management reported no litigation it believed would have a material adverse effect and stated disclosure controls were effective as of June 30, 2015. A newly highlighted risk concerns second mortgages, which are subordinate to first liens and carry higher potential credit losses. The filing also identifies risks tied to a potential RMI investment, its liquidity and NYMT’s REIT qualification.
Most important facts for investors to verify
- Confirm the intended issuer: this filing belongs to New York Mortgage Trust, Inc., not Adamas Trust, Inc.
- Review the drivers and sustainability of earnings, particularly fair-value gains, distressed-loan accretion and realized gains versus recurring net interest income.
- Assess funding and margin-call exposure, repo renewal risk, collateral haircuts, and the December 2015 maturity of the distressed-loan financing facility.
- Examine delinquency, recovery and valuation assumptions for distressed residential loans and Level 3 multifamily assets.
- Check completion and terms of the proposed RMI transactions, their effect on liquidity and earnings, and any implications for REIT compliance.
- Evaluate dividend coverage and capital needs in light of common and preferred distributions, share issuance and management’s conditional outlook.