EPS Miss by This 15% Yielding mREIT
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New York Mortgage Trust (NASDAQ: NYMT), which has a market cap of just over $350 million, disclosed its performance for the fourth quarter today. The performance remained behind expectation as the EPS of $0.19 remained $0.06 shy of the consensus mean expectation. This investment thesis aims to review the fourth quarter results and see how its diversified portfolio has affected the results.
The Business Model
New York Mortgage Trust started operations in the year 2003 when it was formed as a vertically integrated mortgage origination and portfolio investment manager. However, later it exited the mortgage origination business after facing an increasingly challenging environment in 2007. Currently, the company operates as a mortgage REIT with Agency residential mortgage backed securities consisting of hybrid adjustable-rate RMBS, adjustable-rate and multi-family commercial mortgage backed securities as its target assets.
Recent Quarter’s Performance
For the quarter ended Dec. 31, 2012, NYMT reported interest income of $49.6 million, up six-fold from the interest income of the same quarter of the prior year. The surge in interest income was a result of a surge in interest received from investment securities and multi-family loans held in securitization trusts. During the same quarter, the interest expense of $38.2 million climbed from $1.3 million a year ago. Much of the increase was blamed on the interest expense the company paid on its multi-family collateralized debt obligations.
As a result, the company earned $11.4 million in net interest income. This is double the net interest income of the fourth quarter of 2011. During the quarter, the company reported a significant decline of 137 bps in its net interest rate spread. The decline was largely due to the deployment of the proceeds from the equity offerings in August and October 2012 into Agency RMBS.
During the quarter, other expenses resulting from unrealized loss on investment securities and related hedges increased 53% over the prior year to $1.37 million. The company also realized gain on investment securities and related hedges of $0.6 million, against $2.3 million in realized losses a year ago. NYMT managed its general and administrative expense well during the recent quarter as they fell 28% year over year to $2.9 million. As a result, the company reported net income of $9.4 million, against a $1.9 million loss at the end of the fourth quarter of 2011.
Compared to this, Newcastle Investment (NYSE: NCT) and PennyMac Mortgage (NYSE: PMT) reported 80% decline and 22% growth in their respective bottom lines during the fourth quarter of 2012. Both the companies are mortgage REITs with similar business models and investments.
Investment Portfolio
The graph above gives a clear picture of the company’s holdings at the end of the fourth quarter. Agency residential mortgage backed securities, which are 61% of the entire holdings, are the largest type of asset NYMT holds. Commercial mortgage backed securities are 13% of the company’s portfolio. They yielded 11.94% during the quarter, which qualify them as the highest yielding assets. Agency Interest Only securities yielded 10.83% during the quarter but experienced the highest prepayments of 21.8%.
Dividends
New York Mortgage is currently yielding 15% based on its quarterly dividend distribution of $0.27 per common share. The company increased its dividend 8% at the beginning of the prior year. This is despite the challenging macroeconomic environment, where most of the pure play REITs were forced to cut their shareholder distributions. PennyMac and Newcastle also increased their dividends during the prior year by 3.6% and 10%, respectively.
Valuations
The stock is currently trading at a 10% premium to its book value, according to Reuters. Compared to this, PennyMac Mortgage and Newcastle Investment are trading at 25% and 92% premiums to their respective book values. Therefore, among the mortgage REITs that also invest in distressed securities, New York Mortgage Trust is trading at cheap multiples.
Conclusion
Despite an earnings miss, I am bullish on the stock and recommend investors buy NYMT to benefit from its elevated dividend yield and attractive relative valuations.
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