ADAMAS TRUST, INC. annual report, FY2013

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Business context and reporting period

Entity note: The request identifies Adamas Trust, Inc., but the supplied filing is New York Mortgage Trust, Inc. (NYSE/Nasdaq symbol NYMT), Form 10-K for the fiscal year ended December 31, 2013. This summary reflects the supplied filing.

NYMT is a mortgage REIT that acquires, finances and manages mortgage-related assets. Its portfolio includes Agency mortgage-backed securities (RMBS), multifamily commercial mortgage-backed securities (CMBS), distressed residential loans and other real-estate-related investments. The filing’s fourth-quarter figures are for the three months ended December 31, 2013; annual comparisons are against 2012.

Financial performance and position

  • Annual earnings: Net income attributable to common stockholders was $65.4 million, or $1.11 per diluted share, versus $28.3 million, or $1.08 per share, in 2012. Net income before preferred dividends was $69.0 million. The small per-share increase despite higher total earnings reflects substantial share issuance.
  • Fourth quarter: Net interest income was $18.2 million and net income attributable to common stockholders was $21.8 million, or $0.34 per diluted share. Quarterly interest income was $86.8 million and interest expense was $68.6 million.
  • Net interest spread: 4.10% in Q4 2013, compared with 3.33% in Q4 2012. Q4 2013 asset yield was 5.99% and cost of funds was 1.89% (excluding subordinated-debenture costs).
  • Other income and earnings quality: Annual other income was $29.1 million, including $31.5 million of net unrealized gains on multifamily loans and debt held in securitization trusts. Net realized losses on investment securities and related hedges were $10.7 million. Fair-value changes and hedging results contributed to earnings volatility.
  • Cash flow: Operating cash flow was $53.3 million; investing activities used $152.3 million; financing activities provided $99.0 million. Cash and cash equivalents were $31.8 million at year-end, essentially unchanged from 2012.
  • Capital and liquidity: Total stockholders’ equity was $480.7 million, including $75.0 million liquidation preference of Series B preferred stock. Common shareholders’ equity was about $405.7 million, or $6.33 per common share. The company reported $59.2 million of unencumbered securities in addition to cash and stated that available liquidity and operating cash flows were expected to meet requirements for at least 12 months.
  • Debt and leverage: Repurchase borrowings were $791.1 million, down from $889.1 million, with a 0.49% weighted-average borrowing rate and an average 7.8% haircut. Reported leverage was approximately 2.4:1 overall and 1.6:1 for short-term/callable financing, excluding consolidated K-Series CDOs and residential CDOs. Total liabilities of $9.42 billion include large consolidated securitization obligations; $7.87 billion of multifamily CDOs correspond to consolidated K-Series assets and are described as non-recourse to NYMT. These consolidated amounts should not be read as ordinary parent-level debt alone.
  • Dividends: Common dividends declared were $1.08 per share for 2013, paid at $0.27 per quarter. The company issued $72.4 million net from 7.75% Series B preferred stock, with a $25 liquidation preference per share.

Material changes versus the prior comparable period

  • Annual common-stockholder earnings rose from $28.3 million to $65.4 million, while diluted EPS increased from $1.08 to $1.11. Net interest income nearly doubled, from $31.4 million to $60.5 million, reflecting portfolio growth and higher-yielding credit-sensitive investments.
  • Capital allocation shifted toward multifamily and distressed residential credit assets: these categories represented 69% of allocated capital at year-end, versus 44% a year earlier. Distressed residential loan carrying value grew to $264.4 million from $60.5 million.
  • NYMT consolidated six Freddie Mac-sponsored K-Series securitizations, compared with four in 2012. This increased reported total assets to $9.90 billion from $7.16 billion, but much of the increase reflects consolidation of securitized loans and matching obligations, rather than an equivalent increase in unencumbered resources.
  • Common and preferred stock offerings generated approximately $166.8 million in aggregate net proceeds in 2013. Common shares outstanding increased to 64.1 million from 49.6 million at year-end 2012. A January 2014 common offering raised a further $75.8 million net.
  • Rising Treasury rates and market volatility in 2013 negatively affected Agency RMBS and the Agency IO strategy, particularly in Q2. Management said improved multifamily CMBS valuations and distressed-loan performance helped offset those effects. Slower prepayments later in the year also supported Q4 spreads.

Outlook, risks and unusual items

  • Outlook: No specific company earnings or dividend guidance was provided. Management expected to continue quarterly common dividends in the near term but emphasized that future distributions are at the board’s discretion. It anticipated longer-term interest-rate increases and believed fixed-income markets might be less volatile in 2014, while noting uncertainty around Federal Reserve tapering and housing finance reform.
  • Market and portfolio risks: Results are exposed to interest rates, yield-curve changes, mortgage spreads, borrower defaults, prepayments, property values and the availability and cost of financing. Agency IOs are particularly sensitive to faster prepayments. Management’s modeled portfolio sensitivity estimated a $81.2 million market-value decline under an instantaneous 200-basis-point rate increase and a $22.0 million increase under a 100-basis-point decline; actual results may differ materially.
  • Liquidity and financing risks: Repurchase agreements are generally short term, largely uncommitted and subject to margin calls, collateral haircuts and non-renewal. Securitization structures can restrict access to collateral cash flows and limit the ability to sell or modify assets. TBA transactions produced a $191.6 million payable for securities purchased at year-end.
  • Credit, valuation and concentration risks: First-loss multifamily CMBS absorb losses before senior tranches; distressed loans carry borrower, foreclosure and recovery risks. Significant Level 3 assets and liabilities use internal valuation models and unobservable assumptions. A change in assumptions or actual collateral performance could materially alter reported earnings and equity.
  • Other contingencies: NYMT relies on three external managers and disclosed potential conflicts, fee incentives, limited ability to redeem Midway-managed capital, and termination restrictions. REIT qualification and the Investment Company Act exemption are important operating constraints. Management reported no litigation expected to have a material adverse effect and no loan repurchases during the three years ended 2013. Disclosure controls and internal control over financial reporting were assessed as effective; the auditor issued unqualified opinions.
  • Subsequent events: In January 2014, NYMT sold distressed loans with a $29.4 million carrying value for $36.9 million, expecting a $7.5 million pretax realized gain. It also completed the $75.8 million net common-stock offering.

Important facts for investors to verify

  1. Confirm the issuer: the supplied document is NYMT’s 2013 Form 10-K, not an Adamas Trust filing.
  2. Review the audited statements and notes for the distinction between common equity ($405.7 million) and total equity ($480.7 million), and for the effects of preferred dividends and share dilution on common EPS.
  3. Assess how much reported earnings depended on unrealized fair-value gains, particularly the $31.5 million K-Series gain, and on the assumptions used to value Level 3 assets and liabilities.
  4. Examine the composition, recourse status, maturity and cash-flow restrictions of consolidated K-Series and other securitization debt; do not equate consolidated liabilities with parent-level recourse borrowings.
  5. Evaluate liquidity against short-term repo maturities, collateral haircuts, margin-call exposure and TBA obligations, and test whether the common dividend is sustainable under weaker spreads or credit performance.
  6. Check post-year-end results for the realized gain on the January loan sale, use of offering proceeds, portfolio performance and any changes to rates, prepayments, financing terms or REIT compliance.