Business context and reporting period
Filing identity: 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, 2017; comparisons are with the third quarter and nine months ended September 30, 2016, and with December 31, 2016 for balance-sheet items. NYMT is a mortgage REIT investing in mortgage-related and residential-housing assets. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Interest income | $91.4 million | $79.5 million | $263.7 million | $240.9 million |
| Net interest income | $13.3 million | $15.5 million | $42.9 million | $49.8 million |
| Other income | $24.9 million | $16.6 million | $49.8 million | $35.6 million |
| Net income attributable to common stockholders | $24.6 million | $20.0 million | $51.7 million | $45.0 million |
| Basic / diluted EPS | $0.22 / $0.21 | $0.18 / $0.18 | $0.46 / $0.45 | $0.41 / $0.41 |
- Q3 portfolio net interest margin was 2.81%, versus 2.82%; nine-month margin was 2.88%, versus 3.04%. The filing’s portfolio margin measure excludes interest costs on subordinated debentures and convertible notes.
- Nine-month cash from operations was $26.2 million, down from $44.6 million. Investing activities provided $299.2 million and financing activities used $329.0 million; cash, cash equivalents and restricted cash ended at $136.0 million, versus $143.9 million at the start of the period. Cash and cash equivalents on the balance sheet were $101.9 million.
- At September 30, total assets were $10.265 billion and total liabilities $9.419 billion; total equity was $846.0 million. Common book value was $6.05 per share. Assets and liabilities include consolidated VIEs, principally multi-family securitizations.
- Major reported liabilities included $608.3 million of portfolio repurchase financing, $160.6 million of residential-loan financing, $8.0 billion of multi-family CDOs, $98.4 million of securitized debt, and $128.3 million carrying value of convertible notes. Management reported overall leverage of approximately 1.2:1 and short-term financing leverage of 0.9:1, using definitions that exclude specified VIE debt.
- Management cited $101.9 million cash, $8.9 million of Agency IO overnight deposits, and $243.1 million of unencumbered securities as available liquid resources; together, these were 58.2% of portfolio repurchase financing. The filing says existing resources and expected operating cash flows should meet liquidity needs for at least 12 months.
Material changes versus prior periods
- Common-stockholder income increased, but net interest income fell by $2.2 million in Q3 and $6.9 million year to date. Higher multi-family earnings were offset by weaker distressed-loan and Agency portfolio spreads and $2.6 million of Q3 ($7.2 million year-to-date) convertible-note interest expense.
- Other income rose by $8.3 million in Q3 and $14.2 million year to date. Drivers included realized gains on distressed-loan sales, multi-family fair-value gains, investment gains, and income from newly consolidated real estate entities. Some comparisons are affected by a $5.0 million remeasurement gain recognized in 2016, not 2017.
- Total assets rose from $8.952 billion at year-end 2016, largely because NYMT consolidated an additional Freddie Mac multi-family K-Series securitization in 2017. Consolidated K-Series loans increased to $8.399 billion and related CDOs to $7.991 billion; these are largely matched securitized assets and liabilities.
- Distressed residential mortgage loans declined to $369.7 million from $503.1 million. Multi-family capital allocation increased to 58.7% of total capital from 46.4%, while Agency IO allocation decreased to 4.7% from 9.0%.
- Common dividends were reduced to $0.20 per share for each 2017 quarter from $0.24 per share in 2016 quarters. Series B and C preferred dividends remained at their stated rates.
Outlook, commentary, risks and unusual items
- Management said it expects to continue pursuing credit assets, while retaining flexibility to invest in non-credit assets. It expects to continue quarterly common dividends in the near term, subject to quarterly Board review; this is not a commitment. No quantified earnings or investment guidance was provided.
- Management described economic and housing conditions as generally supportive and credit spreads as tighter during Q3. It noted Federal Reserve balance-sheet normalization and possible rate increases could increase market volatility, widen spreads, lower asset values, and increase hedging costs.
- Key exposures include interest-rate and spread changes, mortgage prepayments, borrower defaults, Level 3 valuation estimates, short-term repo renewals and margin calls, and counterparty risk. All $608.3 million of portfolio repurchase financing was contractually due within 30 days at quarter-end. A separate $140.3 million distressed-loan repo facility was due December 13, 2017; management expected to refinance or roll it over.
- Interest-rate sensitivity models estimated a $6.2 million reduction in next-12-month net interest income for a 200-basis-point rate increase and a $2.2 million reduction for a 100-basis-point increase. Modeled portfolio fair value declined $64.0 million and $33.6 million, respectively, under those shocks. Actual outcomes may differ materially.
- In March 2017, NYMT became primary beneficiary of Riverchase Landing and The Clusters and consolidated them, including their real estate and debt. Both properties were classified as held for sale, with sales anticipated in 2018; no classification gain or loss was recorded. The company states it has no obligation for their mortgage liabilities.
- After quarter-end, NYMT issued Series D preferred stock for approximately $130.4 million net proceeds and purchased $36.7 million of multi-family securities. The company reported no material change to previously disclosed risk factors, no material adverse effect expected from current litigation, and compliance with repurchase-agreement covenants as of November 7, 2017. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for New York Mortgage Trust, not Adamas Trust.
- Assess how much reported income depends on realized gains, fair-value movements, and consolidation effects versus recurring cash interest earnings.
- Review repo maturities, refinancing availability, collateral haircuts, margin-call capacity, and the December 2017 facility rollover assumption.
- Examine the sensitivity of Level 3 multi-family and mortgage valuations to assumptions about credit losses, discount rates, prepayments, and collateral values.
- Evaluate the sustainability of the $0.20 common dividend against reduced net interest income, cash flows, leverage, and the subsequent preferred-stock issuance.