ADAMAS TRUST, INC. quarterly report, Q1 FY2016

Business context and reporting period

The supplied filing is New York Mortgage Trust, Inc. (NYSE: NYMT), a mortgage-focused REIT—not Adamas Trust, Inc. It is an unaudited Form 10-Q for the quarter ended March 31, 2016; comparisons are with the three months ended March 31, 2015 unless noted.

NYMT acquires, finances and manages mortgage-related assets, including agency mortgage-backed securities, multifamily investments and distressed residential mortgage loans. It aims to support distributions through net interest income and realized gains. Results are not necessarily indicative of full-year performance.

Key financial metrics

Cash from investing activities was $47.3 million, while financing activities used $87.9 million; cash decreased $22.0 million during the quarter. The company declared a $0.24 common dividend per share for Q1, payable April 25. Preferred dividends were also declared and paid after quarter-end.

At March 31, financing arrangements for portfolio investments were $589.9 million, with a weighted-average rate of 0.84%; distressed-loan financing was reported as $216.6 million on the balance sheet. Other material liabilities included $7.0 billion of multifamily CDOs, $110.0 million of residential CDOs, $83.5 million of securitized debt and $45.0 million of subordinated debentures. Much of the reported balance-sheet scale reflects consolidated securitization entities; the filing says NYMT’s exposure to Consolidated K-Series is its retained securities, not a general claim on or obligation for the entities’ assets and liabilities.

Material changes versus the prior comparable period

• Common-stockholder net income fell $8.4 million and EPS declined from $0.21 to $0.13. Net interest income fell $4.0 million, largely due to the prior-year CLO security sale and lower average earning assets in agency and distressed-loan portfolios; multifamily net interest income increased.
• Other income declined $4.2 million. A $12.8 million reduction in net unrealized multifamily loan/debt gains was partly offset by a $5.5 million realized gain on a distressed-loan pool sale and improved marks in the Agency IO portfolio.
• General, administrative and other expenses decreased $1.5 million, primarily because RiverBanc earned $3.2 million of incentive compensation on a multifamily security sale in Q1 2015. Distressed-loan expenses increased $1.3 million due to workout and appraisal costs.
• Available-for-sale securities increased to $794.5 million from $765.5 million, including purchases of non-Agency RMBS and CMBS. Distressed residential loans declined to $537.6 million from $559.0 million.
• During January, NYMT repaid all $121.0 million of FHLBI advances, primarily using repo financing, following a regulatory change that ends captive insurers’ eligibility for FHLB membership. In February, it repaid $31.9 million of outstanding notes from 2013 distressed-loan securitizations.
• Accumulated other comprehensive income improved to $4.1 million from a $2.9 million loss, reflecting higher fair values on available-for-sale securities, partly offset by cash-flow hedge losses.

Outlook, commentary, risks and unusual items

Management said first-quarter U.S. economic growth was weak and described uncertainty about the timing of further Federal Reserve rate increases. It expected modest improvement in single-family housing and continued strength in multifamily housing, while noting that volatile rates and credit spreads can affect asset values, financing costs and hedging costs. No numerical earnings or full-year financial guidance is provided.

Management said existing cash, financing availability and operating cash flows were expected to meet liquidity requirements for at least 12 months. It also expected to continue common dividends in the near term, but emphasized that the board reviews the policy quarterly and dividends are not guaranteed.

• Key risks include short-term, uncommitted repo funding; collateral margin calls and refinancing risk; interest-rate, spread, prepayment and credit risk; and counterparty default. At quarter-end, $589.9 million of portfolio financing had an average 8.0% haircut, and $55.3 million was the aggregate amount at risk under repo agreements.
• NYMT reported $39.9 million of cash and $171.4 million of unencumbered investment securities available to meet collateral or valuation requirements. Its stated overall leverage ratio was approximately 1.1-to-1, excluding Consolidated K-Series and Residential CDOs; short-term financing leverage was approximately 0.9-to-1.
• Interest-rate sensitivity modeling estimated next-12-month net interest income changes of +$5.3 million for a 100-basis-point increase and −$10.1 million for a 100-basis-point decrease. A separate fair-value model estimated portfolio market-value changes of −$48.0 million for +100 basis points and +$35.8 million for −100 basis points. Management cautioned that modeled outcomes depend on assumptions and may differ from actual results.
• Fair-value estimates for significant multifamily assets and liabilities rely partly on Level 3 inputs and management assumptions. Actual cash flows, credit losses, prepayments or market yields could differ materially.
• After quarter-end, NYMT completed a securitization on April 15, issuing $177.5 million of Class A notes and receiving about $167.7 million in gross proceeds from notes sold, while retaining subordinate notes and an equity certificate. On May 3, it agreed to acquire the remaining 80% of RiverBanc for approximately $24 million, subject to closing conditions; completion was not assured.
• Management reported no material adverse effect expected from current litigation, no material changes to the risk factors in its 2015 Form 10-K, and effective disclosure controls as of March 31, 2016.

Most important facts for investors to verify

• Confirm the filing identity: the supplied document is NYMT’s 10-Q, although the request identifies Adamas Trust, Inc.
• Review the causes and sustainability of the year-over-year declines in net interest income, common earnings and EPS, and the sensitivity of results to fair-value gains.
• Assess whether liquidity and collateral resources remain adequate if repo lenders demand more collateral, do not renew borrowings, or market values fall.
• Examine credit performance in distressed residential loans and first-loss multifamily securities, including delinquency trends, loss assumptions and Level 3 valuations.
• Verify the post-quarter securitization’s final economics and whether the RiverBanc acquisition closed, including its cash cost, financing and expected effect on fees and earnings.
• Consider whether the common dividend is covered by recurring earnings and cash generation, rather than asset sales or valuation changes.