NYMTN - NYMT: Trading Up The Capital Structure For Less Yield But Safer Assets

2023-09-27 09:00:00 ET

Summary

• New York Mortgage Trust offers common and preferred stocks, with four preferred stocks available for investors.
• NYMT's common stock is dependent on the company's ability to make a profit, which has not totally recovered from COVID.  The book value has taken a hit too.
• This article reviews both the common and all the preferred stocks and provides my opinion on which might be the best choice depending on the investor's goals.

Introduction

A classic case where yield seems to match the risk investors are taking is with the common and preferred stocks of the New York Mortgage Trust Company ( NYMT ). Along with the common shares, NYMT currently has four preferred stocks outstanding which offer investors choices in both current coupon and type, fixed or fixed-to-floating, and call protection dates. After a brief review of NYMT itself, each of the preferred stocks is covered and compared. I provide my analysis of which might best fit different goals investors might have.

Before continuing, let me pause to explain the title, as I know some might question its wording. The key is I used the word safer, not safe. The second choice would imply no risk, more so than the first choice and that the chances of losing money should not exist: safer is a relative term, only meaning that one asset is less risky than another. I think we all can agree that this applies to preferred stocks compared to the same issuer's common stock. Each investor has their own perception of what "safer" means.

New York Mortgage Trust Company review

Seeking Alpha describes this mREIT as:

New York Mortgage Trust, Inc. acquires, invests in, finances, and manages mortgage-related single-family and multi-family residential assets in the United States. Its targeted investments include residential loans, including business purpose loans; structured multi-family property investments, such as preferred equity in, and mezzanine loans to owners of multi-family properties; non-agency residential mortgage-backed securities ((RMBS)); agency RMBS; commercial mortgage-backed securities ((CMBS)); single-family rental properties; and other mortgage, residential housing, and credit-related assets. It was incorporated in 2003.

Source: seekingalpha.com NYMT

The safety of the common is anchored in the ability of the company to make a profit. If not, it could file for bankruptcy and common stockholders are at the end of the payout line. Looking at part of the Income statement, we see NYMT has not fared as well since COVID as it did before.

Looking at the same timeframe, part of the Balance sheet shows the Book Value/Share has dropped 45% since the end of 2018, not a good sign.

On the positive side, NYMT has reduced its net Debt by almost 75%! For a more in-depth look at NYMT, read the recently published Hard To Be Bullish On New York Mortgage Trust article by another Seeking Alpha analyst. Of course, the title gives away what the author thinks of the stock. The common shares incurred a 1-for-4 reverse split in March 2023.

Reviewing the Preferred stocks

While the first three are Fix/Float preferreds, all are still in the fixed coupon mode, so little protection while rates were climbing during some of this time.

After checking each Prospectus, I was able to confirm that the proceeds from NYMTL redeemed NYMTO, saving 100bps in coupon cost, and NYMTZ proceeds were used to redeem NYMTP, reducing the coupon there by 75bps. The following table summarizes the key points for the remaining issues.

All are cumulative, and that protected investors when the April'20 payment was skipped on NYMTM and NYMTN; it was paid three months later. None of the issues are rated nor qualify for the 15% tax rate. I am assuming the LIBOR will be replaced by SOFR since the latest issue was designed to use that replacement rate. Also, both retired issues carried a higher fixed coupon than NYMT had to offer to sell the new issues.

Portfolio strategy

There are several strategies depending on what is most important to the investor. Here I take a look at some of those possibilities.

Current Yield

NYMTZ has the highest current yield; 123bps above the lowest yield on NYMTM. All are protected by the cumulative feature.

Longevity

By that, I mean how much time exists before the first Call date for each issue. The pecking order would be NYMTN, NYMTZ, NYMTL, with NYMTM having the soonest Call date at just over one year from now. As a reference, the two that were Called in 2021, were eligible to be Called in 2020 ( NYMTO ) and 2018 ( NYMTP ).

The other way to evaluate this is which would NYMT want to Call first? Logic says the one with the highest eligible coupon at the time a Call is executed. It does not take a high SOFR rate to make any of the floating rate ones have a coupon bigger than NYMT. Since NYMTM has the highest add-on, until that one is Called, I would say the others are safe, with NYMTL most likely the second in line, then NYMTN, unless SOFR is below 131bps.

Yield-to-Call

Of course, this only applies if that event happens. The spread in YTC values is much wider than the current yield spread, with NYMTZ having the highest YTC by a wide margin. That top YTC does take over four years to achieve, assuming it is then Called. While having the second-best Yield, NYMTN is by far the worst one to own for investors solely focused on the YTC.

One reason NYMTZ might have the highest YTC is, as I see it, it has the lowest chance of being Called. With its fixed rate and the floating parts of two within 100bps, odds favor the floating ones to be Called first, unless we re-enter the 0% world again. The floating component on NYMTN is the lowest of the three and helps explain why it has the lowest YTC. To me, it is the second-to-last to be Called. First up and most likely to be Called is NYMTM as it will have the highest rate amongst the floaters.

My conclusion

Others might feel differently but if I did not already have a high exposure to mREITs (common, preferreds, and notes), I would pick up shares in NYMTZ first and if wanting floating exposure (which I do not have for mREITs), my choice would be NYMTL even though it has a lower yield and less Call protection based on its superior YTC.

Final thoughts

As bad as the financials might look, there have been recent events that indicate that Mr. Market doesn't see Chapter 11 in the near future. Twice in 2021 (read post COVID scare) NYMT was able to float a new preferred issue and retire an older one with a higher coupon. Looking at the last reported Balance sheet, Net Assets are over 3X the value of all the preferred stock outstanding. That's a lot of deterioration before these holders do not recover 100% in the event of bankruptcy.

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