ADAMAS TRUST, INC. quarterly report, Q1 FY2015

Business context and reporting period

Entity discrepancy: The request identifies ADAMAS TRUST, INC., but the supplied Form 10-Q is for New York Mortgage Trust, Inc. (NYMT). This summary reflects the filing provided, for the quarter ended March 31, 2015; confirm the intended registrant.

NYMT is a mortgage-focused REIT investing in mortgage securities and loans, including Agency RMBS, multifamily CMBS, and distressed residential mortgage loans. It seeks to support stable stockholder distributions through net interest income and realized gains. The quarter’s financial statements are unaudited.

Key financial metrics

Cash increased $13.4 million during the quarter: $109.1 million provided by investing activities and $6.0 million by operations, offset by $101.7 million used in financing. The company declared a common dividend of $0.27 per share and a Series B preferred dividend of $0.484375 per share. Common book value was reported at $7.03 per share at March 31, down from $7.07 at December 31.

Material changes versus the prior comparable period

• Net interest income rose $1.8 million, but the net interest spread narrowed from 4.48% to 4.15%. Management attributed growth chiefly to a larger distressed residential loan portfolio; Agency IO prepayments and lower Agency RMBS balances weighed on results.
• Common earnings increased $0.8 million, while EPS fell from $0.29 to $0.21. Weighted-average common shares increased to 105.5 million from 74.5 million, reflecting substantial equity issuance.
• Total expenses increased $3.3 million to $10.8 million, mainly from higher management and incentive fees ($6.9 million versus $3.8 million) and distressed-loan expenses.
• Other income was broadly lower by $0.4 million. Higher multifamily fair-value gains and a $1.5 million gain on sale/deconsolidation were offset by lower realized gains on distressed loans and Agency IO-related losses.
• Assets and liabilities fell largely because a February sale of a multifamily first-loss security caused deconsolidation of approximately $1.1 billion in loans and $1.0 billion in related CDOs. This accounting change should not be read as an equivalent reduction in ordinary on-balance-sheet operating activity.
• The company sold 2.70 million common shares through at-the-market programs for approximately $21.1 million net proceeds. It also established new equity distribution agreements with up to $75 million of aggregate securities available for issuance.

Outlook, management commentary, risks and unusual items

• Management said it expected to remain selective and opportunistic in sourcing new credit-sensitive investments over the next couple of quarters, given tight credit spreads and challenging returns on new multifamily CMBS and distressed-loan investments. It anticipated allocating more capital to assets whose returns depend on asset selection rather than leverage.
• Management expected the multifamily sector to remain relatively strong and residential housing to improve modestly, while noting that first-time buyer hesitation and constrained mortgage access could limit housing gains. It expected lower portfolio margins as distressed-loan investment grows, partly offset by a slight increase in leverage.
• The filing states that existing cash, financing availability, and operating cash flows were expected to meet liquidity needs for at least 12 months. This depends in part on access to short-term, largely uncommitted repurchase financing and the ability to meet collateral and margin calls.
• Interest-rate, spread, prepayment, credit, valuation, and counterparty risks are significant. The company reported modelled next-12-month net interest income changes of +$6.6 million for a 100-basis-point rate increase and negative $17.0 million for a 100-basis-point decrease; modelled market value changes were negative $51.1 million and positive $34.6 million, respectively. Actual outcomes may differ materially.
• A material new risk concerns GLIH’s Federal Home Loan Bank of Indianapolis membership. The subsidiary did not meet eligibility requirements in an FHFA proposed rule; a final rule could require membership termination and prompt repayment of advances. The company guaranteed GLIH’s obligations. GLIH had no advances at quarter-end, but received a $121 million advance in April 2015 secured by Agency RMBS.
• Subsequent to quarter-end, NYMT raised approximately $87 million net from a Series C preferred stock offering and raised another $10.8 million net through its at-the-market program. The preferred shares carry a 7.875% dividend rate.
• Fair-value results rely substantially on Level 3 estimates for multifamily loans and CDOs, using management models and significant unobservable assumptions. Q1 included a $13.6 million net unrealized gain on multifamily loans and debt; such valuation changes can be volatile and are not equivalent to realized cash earnings.
• The company reported no material adverse effect expected from current litigation and no loan repurchases during the quarter. It said disclosure controls were effective and reported no material change in internal control over financial reporting.

Important facts for investors to verify

• Confirm that NYMT, rather than ADAMAS TRUST, INC., is the issuer whose filing was intended.
• Reconcile the filing’s unencumbered securities disclosures: one passage reports approximately $196.2 million, while another reports $192.6 million.
• Assess recurring earnings separately from unrealized fair-value gains, deconsolidation effects, realized loan-sale gains, and changes in share count.
• Review repo maturities, collateral haircuts, margin-call capacity, counterparty exposure, and the December 2015 maturity of the $238.2 million distressed-loan financing.
• Monitor the FHFA rulemaking and the availability, terms, and repayment implications of FHLBI advances, including the company guarantee.
• Evaluate credit performance and concentration in distressed residential loans, including delinquency trends, geographic exposures, and assumptions underlying accretable yield and loan-loss reserves.
• Verify the sustainability of common and preferred dividends against taxable income, cash flows, leverage, and future equity issuance.