ADAMAS TRUST, INC. quarterly report, Q3 FY2011

Business context and reporting period

Entity discrepancy: The supplied filing is New York Mortgage Trust, Inc. (NYSE: NYMT), not Adamas Trust, Inc. It is a Form 10-Q for the quarter ended September 30, 2011; the financial statements are unaudited.

NYMT is a REIT investing in mortgage-related assets. It was diversifying beyond legacy residential mortgage loans into Agency mortgage-backed securities, interest-only securities, and commercial and multifamily investments, generally using lower leverage than it had previously targeted.

Financial performance and position

Amounts below are in millions unless otherwise stated.

Q3 net interest spread was 7.15%, versus 3.63% a year earlier. The company attributed the higher spread largely to the Midway portfolio. Q3 general and administrative expenses were $0.717 million, compared with $2.222 million; the filing attributes much of the decline to lower incentive management fees. The quarter’s $8.027 million unrealized loss on investment securities and related hedges drove the net loss to common stockholders. Nine-month other income/expense included $8.762 million of unrealized losses.

At September 30, total assets were $524.5 million, versus $374.3 million at December 31, 2010; stockholders’ equity was $75.4 million and total equity, including noncontrolling interest, was $76.4 million. Management reported book value of $6.75 per common share, down from $7.27 at year-end 2010 and $7.44 at June 30, 2011 on an adjusted basis.

Nine-month operating cash flow was $7.5 million; investing activities used $81.4 million and financing activities provided $66.3 million. Cash declined by $7.7 million to $11.7 million. Repurchase financing was $111.5 million at a 0.61% weighted-average rate, with borrowings generally maturing within 30 days. Longer-term debt included $203.1 million of CDOs at a 0.62% weighted-average rate and $45.0 million of subordinated debentures at a 4.2% average rate. The company reported $37.4 million of unencumbered securities and $11.0 million of restricted cash available for repo-related margin calls.

Material changes versus comparable periods

• Q3 common-stockholder results shifted from $1.6 million of income in 2010 to a $15,000 loss in 2011, despite net interest income rising $4.0 million. The principal offset was the new, mark-to-market loss on Midway securities and hedges.
• Nine-month common-stockholder income rose to $6.7 million from $5.8 million, while net interest income increased to $14.0 million from $8.3 million.
• Investment securities available for sale increased to $170.4 million from $86.0 million; repo borrowings rose to $111.5 million from $35.6 million. The company also reported $79.6 million payable for securities purchased at quarter-end.
• Common shares outstanding increased to 11.18 million from 9.43 million at year-end, following a July offering of 1.725 million shares that generated $11.9 million in net proceeds.
• The allowance for losses on securitized mortgage loans increased to $3.3 million from $2.6 million. Delinquent loans totaled $22.0 million across 41 loans, compared with $25.1 million across 46 loans at year-end; 82% of delinquent balances were under modified payment plans.

Outlook, risks, contingencies, and unusual items

Management said existing cash, financing arrangements, and operating cash flows were expected to meet liquidity needs for at least 12 months. It expected to continue quarterly dividends in the near term, subject to Board review and the company’s financial condition, liquidity, earnings outlook, and REIT requirements. No specific earnings or dividend guidance was provided.

Subsequent to quarter-end, the company committed approximately $15.1 million to first-loss and interest-only securities from the Freddie Mac Multifamily Loan Securitization 2011-K015, expected to settle in November 2011 and funded with working capital and term financing. Management also described HARP II as a potential source of faster mortgage prepayments, which could hurt Agency securities, especially interest-only positions. Other cited risks included volatile credit spreads, U.S. and European sovereign-debt uncertainty, interest-rate and hedging exposure, short-term repo refinancing and margin calls, mortgage credit losses, and possible SEC changes to the Investment Company Act exclusion relied upon by similar mortgage-investment firms.

The company recorded $2.0 million of unresolved legacy loan repurchase requests considered reasonably meritorious and held a reserve of approximately $0.3 million. Management did not expect current litigation to have a material adverse effect. The filing also notes that an ownership change limits use of approximately $58 million of tax-loss carryforwards to $660,000 annually, potentially leaving a significant amount unused; the taxable REIT subsidiary was undergoing an IRS examination for 2009.

Most important facts for investors to verify

• Confirm the issuer identity: the filing supplied is for New York Mortgage Trust, not Adamas Trust.
• Review the composition and valuation sensitivity of the Midway portfolio, particularly the $8.0 million Q3 unrealized loss and exposure of interest-only securities to prepayments and spread changes.
• Assess the short maturity and collateral terms of repo funding, available liquidity, margin-call capacity, and the effect of the $79.6 million unsettled securities payable.
• Track delinquency, loan-loss reserves, geographic concentration in New York and Massachusetts, and the legacy repurchase-request reserve.
• Verify settlement, financing, and performance of the planned $15.1 million K-015 investment, and monitor HARP II implementation and related prepayment effects.
• Reconcile reported dividends with earnings and REIT distribution needs; the Q3 dividend was $0.25 per share while Q3 common-stockholder results were slightly negative.