Business context and reporting period
The supplied filing is New York Mortgage Trust, Inc.’s Form 10-Q for the quarter ended June 30, 2013—not a filing for Adamas Trust, Inc. New York Mortgage Trust is a REIT investing primarily in mortgage-related assets, including Agency mortgage-backed securities, multifamily commercial mortgage-backed securities and distressed residential loans. Financial statements are unaudited; dollar amounts below are in millions unless otherwise stated.
Financial results and key metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Interest income | $68.9 | $25.0 | $128.1 | $44.2 |
| Net interest income | $14.0 | $5.9 | $27.0 | $12.1 |
| Net income | $11.9 | $5.0 | $27.3 | $10.9 |
| Net income attributable to common stockholders | $11.2 | $5.1 | $26.6 | $11.0 |
| Common EPS, basic and diluted | $0.19 | $0.34 | $0.49 | $0.75 |
| Common dividend declared per share | $0.27 | $0.27 | $0.54 | $0.52 |
- Q2 portfolio net interest margin was 3.48%, down from 5.95% a year earlier and unchanged from Q1 2013. Management attributed the year-over-year decline mainly to a smaller equity allocation to Agency IOs and a larger levered Agency fixed-rate and ARM position.
- At June 30, total assets were $8.56 billion, total liabilities $8.09 billion and stockholders’ equity $473.3 million, compared with $7.16 billion, $6.84 billion and $322.0 million, respectively, at December 31, 2012. Consolidated multifamily securitizations account for much of the balance sheet and include matched loan assets and debt.
- Cash and cash equivalents were $53.3 million. For the first six months, operating cash flow was $28.2 million, investing cash flow was negative $116.1 million and financing cash flow was positive $109.5 million; cash increased $21.5 million to $53.3 million.
- Portfolio repurchase borrowings were $855.2 million at a 0.56% weighted-average rate, typically with short maturities; the reported average maturity was 23 days. The company also had $40.0 million of short-term borrowing against distressed residential loans at 5.20%, repaid after quarter-end.
- Other reported debt included $171.0 million of residential CDOs, $6.57 billion of multifamily CDOs, $117.8 million of securitized debt and $45.0 million of subordinated debentures. Multifamily CDOs are obligations of consolidated securitization entities; the company stated it has no obligation for those liabilities beyond its investment exposure in those entities.
- Management reported leverage of approximately 2.2-to-1 for short- and long-term financing excluding the consolidated multifamily CDOs and residential CDOs, and approximately 1.9-to-1 for short-term financing or callable debt. Available liquidity included $64.6 million of unencumbered securities in addition to cash; management said these resources and operating cash flows were expected to meet liquidity needs for at least 12 months.
- Common shares outstanding rose to 63.75 million from 49.58 million at year-end. Common and preferred offerings generated approximately $98.4 million and $72.4 million of net proceeds, respectively. Common book value per share was reported as $6.25 at quarter-end, down from $6.55 at the beginning of Q2.
Material changes versus the prior comparable period
- Net interest income more than doubled year over year, primarily reflecting growth in average interest-earning assets of about $1.1 billion. Net income attributable to common stockholders rose to $11.2 million from $5.1 million, but quarterly EPS fell to $0.19 from $0.34, reflecting the substantially larger weighted-average share count and preferred dividends.
- Multifamily loan and debt balances increased following consolidation of a fifth Freddie Mac K-Series securitization in Q2. Multifamily loans held in securitization trusts rose to $6.76 billion from $5.44 billion at year-end; related CDOs rose to $6.57 billion from $5.32 billion.
- The company acquired a distressed-loan pool for about $132.4 million in May. Distressed residential loan carrying value, including loans held in securitization trusts, reached $189.9 million, versus $60.5 million at year-end.
- Agency RMBS market weakness drove significant unrealized losses: Q2 other comprehensive loss was $16.3 million, compared with comprehensive income of $5.4 million in Q2 2012. The six-month decline in accumulated other comprehensive income was $15.4 million, leaving a $2.7 million balance at June 30.
- Q2 realized losses on investment securities and related hedges were $8.5 million, while unrealized gains on those securities and hedges were $2.1 million. Management said Agency IO results were affected by rate volatility and illiquidity in the inverse IO market, producing larger-than-expected losses.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance was provided. Management said it expected to continue quarterly common dividends in the near term, subject to quarterly Board review and factors including earnings, liquidity, financial condition and REIT requirements. The Board declared $0.27 per common share for Q2.
- Management described sharp increases in longer-term rates during Q2 amid expectations that the Federal Reserve might taper asset purchases. The 10-year Treasury yield rose from an early-May low of 1.63% to 2.49% at quarter-end; Agency RMBS prices declined. Management expected market uncertainty to continue affecting Agency RMBS and said it may adjust investment and financing strategies.
- Management reported that weaker Agency RMBS valuations were largely offset at the overall portfolio level by improved valuations in multifamily CMBS and distressed residential loans. These fair-value changes, particularly on multifamily assets and liabilities, can materially affect reported earnings.
- Key risks include interest-rate and spread movements, prepayments, credit losses, short-term repo renewal and margin calls, counterparty default, valuation uncertainty for Level 3 assets, and changes in government housing policy. The filing notes proposed legislation to revoke the Fannie Mae and Freddie Mac charters and states that its effects on existing Agency RMBS and mortgage markets were uncertain.
- Repurchase agreements were largely short term and uncommitted. The company warned that reduced collateral values, lender non-renewals or margin calls could force asset sales at disadvantageous times. It reported approximately $71.1 million of aggregate counterparty exposure under portfolio repurchase agreements.
- On July 12, 2013, the company completed a distressed-loan securitization: Class A notes generated about $75.3 million gross proceeds, and the company retained approximately $12.5 million of subordinated Class M notes. The transaction enabled repayment of the $40 million distressed-loan repo borrowing outstanding at quarter-end.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It said current litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the issuer identity: the supplied document is New York Mortgage Trust, Inc., despite the request metadata naming Adamas Trust, Inc.
- Review the drivers and sustainability of net interest income growth, including the decline in net interest margin and the impact of share issuance on per-share earnings and book value.
- Assess sensitivity to interest rates, spreads and prepayment assumptions, including the reported model estimates of a $37.4 million portfolio market-value decline for a 100-basis-point rate increase and a $74.9 million decline for a 200-basis-point increase.
- Evaluate short-term financing rollover, collateral haircuts, margin-call exposure and the post-quarter-end refinancing of distressed loans through securitization.
- Review credit quality, loan-loss estimates, distressed-loan performance and the assumptions supporting Level 3 multifamily valuations.
- Check the effect of dividends, preferred-stock priority and future equity issuance on common-stock returns and distributions.