Business context and reporting period
Entity discrepancy: The supplied filing is for New York Mortgage Trust, Inc. (NASDAQ: NYMT), not Adamas Trust, Inc. It is the audited Form 10-K for the fiscal year ended December 31, 2012; quarterly figures below relate to Q4 2012.
NYMT is a mortgage REIT investing in Agency residential mortgage-backed securities (RMBS), interest-only securities, multifamily commercial mortgage-backed securities (CMBS), and residential mortgage loans, including distressed loans. It seeks distributions from net interest income and realized gains, using both short-term repurchase funding and structured financing.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Interest income | $137.5 million | $24.3 million |
| Interest expense | $105.9 million | $4.8 million |
| Net interest income | $31.6 million | $19.5 million |
| Net income attributable to common stockholders | $28.3 million; $1.08/share | $4.8 million; $0.46/share |
| Dividends declared per common share | $1.06 | $1.00 |
| Cash from operating activities | $29.1 million | $13.4 million |
Q4 net income attributable to common stockholders was $9.4 million, or $0.19 per share, versus a $1.9 million loss, or $0.16 loss per share, in Q4 2011. Q4 net interest spread was 3.33%, down from 6.20% in Q4 2011; the filing attributes the lower spread in part to the changing size and composition of the portfolio.
At year-end, total assets were $7.16 billion, liabilities $6.84 billion, stockholders’ equity $322.0 million, and book value $6.50 per share, compared with $6.12 a year earlier. The balance-sheet expansion chiefly reflects consolidation of multifamily securitizations: $5.44 billion of multifamily loans and $5.32 billion of related CDOs. These are consolidated for accounting purposes; NYMT states its maximum exposure to loss from the Consolidated K-Series was its $123.3 million net carrying value.
Cash and cash equivalents were $31.8 million. Cash flows were $1.07 billion used in investing activities and $1.05 billion provided by financing activities, leaving a $15.2 million net increase in cash. Management believed available cash, borrowing capacity and operating cash flows would meet liquidity needs for at least 12 months.
Year-end funding included $889.1 million of repurchase borrowings, $181.0 million of residential CDOs, $117.6 million of securitized debt and $45.0 million of subordinated debentures, in addition to the consolidated multifamily CDOs. Repurchase borrowings carried a 0.54% weighted-average rate and averaged 39 days to maturity. Overall leverage was approximately 3.3-to-1, excluding the Consolidated K-Series and residential CDOs; short-term or callable leverage was 2.8-to-1. The company reported $80.1 million of unencumbered securities in addition to cash.
Material changes versus prior periods
- Four public equity offerings raised approximately $231.6 million net in 2012; shares outstanding increased from 13.9 million at year-end 2011 to 49.6 million at year-end 2012.
- NYMT expanded Agency RMBS and acquired multifamily CMBS and distressed residential loans. Year-end carrying values included $1.03 billion of available-for-sale securities, $194.5 million of multifamily CMBS exposure, and $60.5 million of distressed residential loans.
- Annual net income rose to $28.3 million from $4.8 million. Drivers included higher net interest income and a $6.7 million unrealized gain on consolidated multifamily loans and debt; results also reflect fair-value accounting for the consolidated securitizations.
- Annual dividends increased to $1.06 per share from $1.00. The Q4 dividend was $0.27 per share, paid in January 2013.
Outlook, commentary, risks and unusual items
Management described the operating environment as supportive of Agency RMBS funding and hedging costs, with very low short-term rates and Federal Reserve asset purchases. It expected rates to remain low while economic growth was modest, but anticipated rates could rise over the longer term. No specific earnings or dividend guidance was provided; future dividends remain at the Board’s discretion.
- Elevated mortgage prepayments, including those associated with HARP II and low mortgage rates, may accelerate premium amortization and particularly harm Agency IO cash flows and value.
- Interest-rate, yield-curve, spread and fair-value movements can affect earnings, book value and hedging effectiveness. The company’s modeled 12-month net interest income sensitivity showed a $15.0 million decline under an instantaneous 100-basis-point rate decrease and a $0.8 million increase under a 100-basis-point increase. Modeled market value declined $19.3 million for a 100-basis-point increase.
- Short-term, largely uncommitted repo funding exposes the company to renewal, counterparty and margin-call risk; a decline in collateral values could require additional collateral or asset sales.
- Multifamily first-loss securities bear substantial credit risk. Several assets and liabilities are valued using Level 3 models and significant unobservable inputs, making reported values sensitive to assumptions.
- External-manager fees, incentive structures, allocation conflicts, and limits on withdrawing capital from the Midway-managed account are additional risks. The March 2013 RiverBanc agreement changed fee calculations to be based on equity rather than invested capital.
- Other material considerations include maintaining REIT and Investment Company Act status, mortgage-market and property credit risk, and dependence on access to capital. The filing reports no litigation expected to have a material adverse effect. Auditors issued an unqualified opinion and found internal control over financial reporting effective as of year-end.
Important facts for investors to verify
- Confirm the issuer identity: this filing is NYMT’s, despite the request metadata naming Adamas Trust.
- Review the audited statements and notes for the Consolidated K-Series accounting, maximum loss exposure, and the effect of fair-value changes on reported earnings.
- Assess liquidity against repo maturities, collateral haircuts, margin requirements, and the amount of genuinely available unencumbered assets.
- Track net interest spread, prepayment speeds, Agency IO performance, and the sensitivity of earnings and book value to rate and spread changes.
- Evaluate dilution from the 2012 equity issuance, leverage and funding costs, first-loss multifamily credit exposure, external-manager arrangements, and the sustainability of dividends.