ADAMAS TRUST, INC. quarterly report, Q1 FY2017

Business context and reporting period

The supplied filing is New York Mortgage Trust, Inc. (NYMT), a mortgage and real-estate investment REIT, for the quarter ended March 31, 2017. This does not match the request metadata naming ADAMAS TRUST, INC.; verify the issuer before relying on this summary.

NYMT invests in residential mortgage loans and securities, multifamily mortgage assets, distressed residential loans, and related real-estate investments. The unaudited quarterly results are not necessarily indicative of full-year performance.

Financial highlights

Net interest margin on interest-earning assets was 2.70%, versus 3.33% a year earlier. At March 31, cash and cash equivalents were $73.0 million; the cash-flow statement reports $143.6 million of cash, cash equivalents and restricted cash combined. Management cited $273.6 million of unencumbered securities and $26.9 million of overnight deposits available for liquidity support. Its reported overall leverage ratio was approximately 1.4:1, excluding specified consolidated securitization debt and other items.

Material changes and key drivers

• Common-stockholder income increased $2.2 million year over year, while net interest income fell $3.7 million. Higher other income—especially realized gains on distressed residential loan sales—more than offset the net-interest decline.
• NYMT sold distressed residential loans with a carrying value of about $50.9 million for $62.6 million, recognizing an approximately $11.7 million realized gain before tax.
• Multifamily net interest income rose approximately $3.6 million, supported by larger average investments and lower average funding costs. This was partly offset by lower income from distressed residential loans and Agency IOs, and higher financing costs.
• Total assets and liabilities rose substantially, primarily because NYMT consolidated another Freddie Mac multifamily K-Series securitization. The K-Series contributed $8.4 billion of assets and $8.1 billion of CDO liabilities at quarter-end; these consolidated balances do not mean NYMT has claims to all underlying assets or obligations for all the debt.
• In January, NYMT issued $138 million principal amount of 6.25% senior convertible notes due 2022, receiving approximately $127 million net proceeds. The initial conversion price was about $7.01 per share; the notes were dilutive in Q1 EPS calculations.
• Q1 investing activity generated $42.1 million of cash and financing activity used $45.2 million; the combined cash, cash equivalents and restricted cash balance increased $4.0 million.

Outlook, commentary and risks

Management said it intends, subject to market conditions, to continue reducing Agency RMBS and redeploying capital toward credit-sensitive assets. It cited improving residential and multifamily conditions and tighter credit spreads, while noting uncertainty around economic growth, government policy, Federal Reserve tightening and housing-finance reform. Management expected existing cash, financing availability and operating cash flows to meet liquidity needs for at least 12 months. It expected to continue common dividends in the near term but emphasized that the board reviews the policy quarterly and payment is not assured.

• Funding and liquidity: Portfolio repurchase agreements totaled $702.3 million, had an average maturity of 17 days, and were generally callable or subject to renewal and margin requirements. A separate distressed-loan repo balance was $173.3 million and matures December 2017; management expected to refinance or roll it over. Failure to renew funding or meet margin calls could force asset sales at a loss.
• Interest-rate and prepayment exposure: The Federal Reserve raised its target range to 0.75%–1.00% in March. Management’s modeled 12-month net interest income sensitivity was +$2.1 million for a 100-basis-point rate increase and −$5.2 million for a 100-basis-point decrease. Modeled portfolio market value fell $41.2 million under +100 basis points and rose $33.6 million under −100 basis points; actual results may differ.
• Credit and valuation: Distressed loans, first-loss multifamily securities, mezzanine loans and preferred equity expose NYMT to borrower defaults and property values. Significant assets and liabilities use Level 3 valuation inputs and management estimates; changing assumptions can materially affect reported earnings and equity.
• Other items: Consolidation of Riverchase Landing and The Clusters on March 31 added $62.3 million of operating real estate and $54.9 million of VIE mortgages and notes payable. The mortgage obligations of those entities are not obligations of NYMT, according to the filing. Management reported no litigation expected to have a material adverse effect and no material changes to previously disclosed risk factors.

Most important facts for investors to verify

1. Confirm the filing issuer: the supplied text is for New York Mortgage Trust, Inc., not ADAMAS TRUST, INC.
2. Assess whether gains from distressed-loan sales and fair-value changes are repeatable, given the decline in net interest income and portfolio margin.
3. Review repo maturities, lender renewal terms, collateral haircuts, margin-call exposure and the refinancing plan for the $173.3 million distressed-loan facility.
4. Distinguish NYMT’s economic investment and recourse exposure from the large consolidated K-Series and other VIE balance-sheet totals.
5. Evaluate the convertible notes’ interest burden and potential share dilution, and the sustainability of common and preferred dividends against cash generation.
6. Consider sensitivity to interest rates, prepayments, credit deterioration and Level 3 valuation assumptions; modeled scenarios are not forecasts.