NYMTM - NYMTM: Price Loss In 2022 Makes This 7.875% Preferred Series Attractive

Summary

• NYMTM, a fixed-to-floating rate cumulative preferred share, generates strong and steady dividends, sometimes higher than fixed rate preferred shares.
• NYMTM has call protection until 15th January 2025, before which the issuer (NYMT) will not be able to buy back the preferred shares.
• Current macroeconomic environment has resulted in a price loss for NMYTM, which in turn has made this preferred series attractive.

~ by Snehasish Chaudhuri, MBA (Finance)

New York Mortgage Trust, Inc. 7.875% SER E PFD (NYMTM) is a preferred share of New York Mortgage Trust, Inc. ( NYMT ), a New York Based mortgage REIT (mREIT). NYMT has a market capitalization of over $1 billion, and a debt of nearly $5 billion. These E series preferred shares were launched just before the pandemic, and they have paid a quarterly dividend for 10 quarters with yield between 7 to 9 percent. Being a callable, fixed-to-floating rate cumulative preferred share, its dividends are almost assured. During 2022, NYMTM suffered a price loss of 13.2 percent. This price drop has made it quite attractive for income-seeking investors.

About New York Mortgage Trust Inc.

New York Mortgage Trust is a mortgage-related real estate investment trust. Its targeted investments include residential loans, second mortgages, and business purpose loans; structured multi-family property investments, such as preferred equity, and mezzanine loans to owners of multi-family properties, as well as joint venture equity investments in multi-family properties; agency RMBS; commercial mortgage-backed securities ((CMBS)); and other mortgage, residential housing, and credit-related assets. NYMT also deals in distressed residential assets such as residential mortgage loans sourced from distressed markets and non-Agency RMBS.

The company was incorporated in 2003 and is headquartered in New York. However, it does not hold a concentrated portfolio of mortgages in the state of New York. The name of NYTM sometimes creates such a false impression in the minds of investors. Besides NYMTM, there is another series of preferred shares for NYMT - New York Mortgage Trust, Inc. 8% RED PFD D ( NYMTN ). Two other series of preferred shares for NYMT, namely New York Mortgage Trust, Inc. 7.875 SR C PFD ( NYMTO ), and NYMTP New York Mortgage Trust, Inc. RED PFD B 7.75% ( NYMTP ), have recently gone defunct.

How are the Common Equity Shares of NYMT Performing?

Common equity shareholders of New York Mortgage Trust have enjoyed strong quarterly dividends since 2005. NYMT generated a four-year average yield of 14 percent, and a ten-year average yield of almost 15 percent. When the common equity shareholders are getting such a high yield, it makes sense to assume that the company will be able to pay its preferred shareholders. However, the price performance has been disappointing for NYMT's equity shares as it lost almost 37 percent during the past one year. Currently, NYMT is trading at $2.79. However, despite that low price, and that high yield, NYMT does not seem to see much of a demand.

How does Fixed-to-floating Preferred Shares Work?

Both NYMTM and NYMTN are fixed-to-floating rate preferred shares, whereas NYMTO and NYMTP were fixed-rate preferred shares. At the time of launching, fixed-to-floating rate preferred shares provide a higher initial coupon and after a period of 5 to 10 years, they convert into a floating rate preferred share. The spreads on fixed-to-floating rate preferred shares are generally higher than the pure floating rate preferred shares. The coupon rates on fixed-to-floating rate preferreds are determined by adding a spread over 3-month London Interbank Offer Rate (LIBOR). LIBOR is the global reference rate for unsecured short-term borrowing in the interbank market.

Fixed-to-floating rate preferred shares rank senior to common stock, and subordinate to company debt. These preferred shares generally provide higher income against rising interest rates, and thus provide a better price stability. Most fixed-to-floating rate preferred shares qualify for favorable tax treatment. However, if interest rate decreases and the shares remain outstanding, investors will have to accept lower income streams. The shares remain outstanding due to the call protection period offered at the time of launching this preferred series. Also, depending on market conditions, investors may incur capital loss, in case the preferred series is liquidated.

Quick Comparison: NYMTM vs NYMTN

Both NYMTM and NYMTN preferred series switch to floating rates but have several years of call protection at the time of their launch. They both offer investors a very high yield and both trade at a discount to call value. Both these preferred series are cumulative in nature. That means, if the preferred investor misses out on dividends in a particular financial year, these unpaid dividends are carried forward to the next financial year. Thus, despite the company incurring losses, the preferred stockholders are relatively assured of receiving their dividends, even at a later date.

However, NYMTN has call protection until 15th October 2027, whereas NYMTM only has call protection until 15th January 2025. Beyond the simple advantage of having call protection, the shares benefit from the floating rate not starting until the call protection ends. Call protection prohibits the issuer from buying it back for a pre-agreed period of time, and this period of call protection is regarded as deferment period or cushion. Most importantly, investors can gain that extra call protection at a lower cost. Investors need to pay $20.86 for NYMTN as against $21.9 for NYMTM.

Investment Thesis

Being a fixed-to-floating preferred series, NYMTM can generate strong and steady dividends. The spreads are also much higher than the pure floating rate preferred shares. The cumulative nature of such shares protects investors from credit risk to a certain extent. Moreover, high yield generated by the common equity shares instills confidence in the mind of preferred shareholders with respect to payment of dividends. The current macroeconomic environment has resulted in a price loss, which in turn has made this preferred series attractive. That is also the case with another preferred series from New York Mortgage Trust Inc. - NYMTN. NYMTN is even more attractive due to its trading at a higher discount, and longer call protection.

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