Three Reasons To Buy This 16% Yielder
Adnan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Formed in 2003, New York Mortgage Trust (NASDAQ: NYMT) operates as a debt REIT which seeks to invest in traditional types of mortgage related investments, such as Agency ARMs and Agency IOs. The company primarily aims to invest in distressed markets like PennyMac Mortgage (NYSE: PMT). However, later on non-Agency residential mortgage backed securities; Agency RMBS consisting of ARM and hybrid adjustable-rate RMBS, multi-family CMBS and distressed residential single family loans were also made part of the companies target portfolio.
NYMT is more asset sensitive compared to its peers like Annaly Capital (NYSE: NLY) and American Capital Agency (NASDAQ: AGNC) as a larger chunk of NYMT’s portfolio is in LIBOR-adjusting business loans, which yield more as interest rates increase. For American Capital and Annaly Capital, however, this is not true. Their spreads get compressed when rates increase. NYMT is making new investments in heavily collateralized loans. The loan-to-value ratios are below 50%, however, the ROEs are within the range of 15 - 20%.
The company employs lesser debt as represented by its total debt to asset ratio of 36%, compared to 83% for AG Mortgage Investment (MITT), 84% for AGNC and 86% for Armour Residential (NYSE: ARR). This low leverage at NYMT implies low interest rate risk for the company. Mortgage REITs earn a spread between the long term rates at which they have invested and the short-term rate at which they have borrowed. This spread is then magnified four to eight times using leverage to generate higher yields. When the long-term rates come down (or in other words the yield curve flattens) this strategy backfires. In particular, when the QE3 is in action, one can expect further flattening of the yield curve. Therefore, NYMT is better positioned as it has reduced its interest rate risk by employing lesser debt in its capital structure.
Additionally, NYMT has partnership with Midway Group, the best-in-class expertise on residential mortgages. Returns have been low for its residential investments. On the commercial side, NYMT has a partnership with Riverbanc LLC. Riverbanc is considered to have extensive experience in commercial real estate loans and private equity.
NYMT offers an elevated dividend yield of 16.05% in an environment where the 10-year treasuries are offering 1.89%. The quarterly dividend of $0.27 per share increased 8% in June 2012. This is in sharp contrast to the dividend cuts of 10% each by Annaly Capital and Armour Residential. Therefore, under this ultra-low interest rate environment, NYMT presents an excellent opportunity for income focused investors.
NYMT is currently trading at 10% premium to its third quarter book value, which makes the company an attractive investment opportunity. Its closest peers, PennyMac, American Capital Agency, Armour Residential and Invesco Mortgage are trading at 46%, 13%, 5% and 32% premiums to their respective third quarter book values. In contrast, Annaly Capital is trading at an 8% discount.
In conclusion, I am bullish on the NYMT on the following three reasons.
The company has a diverse assets portfolio which is more asset sensitive than interest rate sensitive as it employs less leverage. Besides, this cheaply valued company has not only been able to maintain its dividend distribution but also increased it during the prior year. Therefore, investors looking to invest in PMT, AGNC, NLY and ARR are recommended to consider NYMT in their high dividend portfolio.
equityfinancials has no position in any stocks mentioned. The Motley Fool owns shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!