New York Mortgage Trust: Updating Our Allocation As The Company Derisks

seekingalpha11-08

We take a look at the mortgage REIT NYMT and its preferreds.The company continues to derisk its portfolio, moving away from multifamily properties into Agency MBS.The relative value in the preferreds ...

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Justin Paget  In this article, we take a look at the mortgage REIT New York Mortgage Trust (NASDAQ:NYMT), specifically from a bond / preferreds holder perspective. We continue to hold the company's senior securities and have recently added to our position. One of the key factors we look at when allocating to preferreds and bonds is book value stability. On this front, NYMT looks pretty terrible, as the following chart shows. We need to understand what drove such poor book value performance and what the company is doing about it.   Systematic Income Historically, NYMT has been a credit-focused mortgage REIT. Several years ago, the company made a strategic shift towards outright multifamily homeownership with its Joint Venture Equity strategy. This entailed equity ownership of a number of multifamily properties alongside an operating partner, primarily in the South and Southeast. The target IRR of the strategy was 13-17% with income coming from rental revenue and sales after improvements. This strategy has performed poorly and is largely responsible for the significant drop in book value both in absolute terms as well as relative to other mortgage REITs over the last couple of years, as shown below.   Systematic Income The losses were driven by a fall in valuations on the property portfolio - a consequence of higher cap rates in the market. As interest rates have risen over the last couple of years, so have cap rates. Secondary factors appeared to be a deceleration in rent growth, a large delivery of additional units (management called this a \"supply glut\") driving up vacancy rates as well as lower than expected property income. A loss in transactional activity in the multifamily market has further pressured valuations. In retrospect, getting into multifamily properties at ultra-low interest rates / cap rates alongside a spike in construction that was going to deliver new supply 2–3 years down the road was not a good move. If there is good news, it's that the strategy is at the end of its life. It now represents less than 1% of portfolio assets and less than 5% of equity. Over this past quarter, the company sold two more multifamily apartment holdings, both for a net gain, further reducing its property holding. In its place, the company has been growing its Agency portfolio, which was mostly acquired at attractive spreads over Treasuries and has supported book value. Going forward, it should also significantly lower book value volatility and drawdowns, as well as provide liquidity for any collateral requirements on the credit portfolio. The portfolio allocation of the company has changed in a big way, as the following diagram shows. Management guided that the Agency allocation will continue to grow over time. Despite a sizable Agency allocation, the company's recourse leverage remains modest at 2.5x.   NYMT Another important element of the company's strategy has been reduced reliance on mark-to-market repo for its credit securities. The key lesson of 2020 has been that the combination of lower prices, a lack of liquidity and mark-to-market margining can be a recipe for disaster. A number of mortgage REITs, including NYMT, missed margin calls in 2020 because of this issue. Since then, however, the company has reduced its reliance on mark-to-market repo in its credit portfolio, cutting it by over 80% from 2019 and replaced it with securitization financing. The benefit of securitization is its non-mark-to-market and non-recourse nature. The lenders on the securitization do not have recourse to the rest of the company's assets outside the given securitization, and they cannot make margin calls. Although this makes securitization often a more expensive source of financing, there are huge benefits to the company's preferreds and bondholders. Specifically, it ensures that the remaining assets of the company are not seized and sold down to make margin calls.   NYMT Taking a look at the company's financing profile, the large repo line (repos got mREITs in trouble in 2020 as these were daily marked-to-market and drove a negative feedback loop of asset sales, price falls and further collateral calls) referring to Agency securities is not a cause for concern. One, Agencies remain relatively liquid even in serious market malfunctions, as was the case in 2020. They have no credit risk, so there is much more clarity about their value. And two, even if traders are not willing to transact Agencies, the Fed will be. In 2020, the Fed bought Agencies outright. Because interest rates fell sharply during the COVID crash, Agencies actually rose in value. This means that the negative feedback loop of margin calls, forced sales, lower prices and more margin calls is much less likely. The company's recourse leverage on its credit portfolio is 0.8x - low by mortgage REIT standards. The Agency allocation gives it enough liquidity and portfolio ballast in a crisis to derisk its credit portfolio - something few other hybrid mortgage REITs can fall back on. The equity / preferreds coverage ratio is below the median level at 2.7x and this is a metric we would watch as it would be nice to pull that higher over time. There are few levers the company has outside of organic book value growth and preferreds redemptions to increase it, however as additional equity issuance with a sizable book value discount is dilutive. NYMT preferreds yields in the broader mREIT preferreds sector are fairly attractive, particularly on a reset basis, shown with orange lines below.   Systematic Income This is what the NYMT preferreds suite looks like.   Systematic Income Preferreds Tool The forward yield profile is shown below. We currently favor NYMTM within the suite. It is expected to step up to an 11.3% yield on the first call date in January, unless redeemed. If it is redeemed, it will be a capital gain of around 1%. Until then, its yield is around 8%.   Systematic Income Preferreds Tool Common vs. Preferreds The company's preferreds have outperformed the common over the last 7 years or so, particularly in the last couple of years. The common continues to struggle as many investors have lost faith in the stock given its multifamily strategy debacle.   Systematic Income Preferreds Rotation Strategy We first allocated to NYMT preferreds in early 2021, going with Series D (NYMTN), then rotating to Series E (NYMTM) in June of the following year then moving to Series F (NYMTL) and now back to NYMTM. This is what the allocation timeline looks like.   Systematic Income If we plot total returns from the start, they look like the following. The rotation strategy has come out ahead in the suite.   Systematic Income Takeaways  We continue to like NYMT senior securities. Recently, we rotated into NYMTM as our previous holding NYMTL outperformed and now offers less of a reset yield pickup over the rest of the suite. The company's high Agency allocation, low level of recourse leverage and high yields make the preferreds attractive. On a lower risk spectrum, we also like the company's 2029 bond (NYMTI) trading at a yield just north of 9%.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2481714077"}