2023-09-05 20:18:33 ET
Summary
- New York Mortgage Trust has a history of underperforming and losing money for investors, with its stock price down -97% since its IPO.
- Mortgage REITs like NYMT use a lot of leverage, making their losses much larger during black swan events.
- NYMT has cut its dividends multiple times, leading to a significant decrease in income for investors, especially retirees.
New York Mortgage Trust ( NYMT ) is a mortgage REIT that mostly focuses on financing of residential properties including single-family and multi-family residentials. The company has an almost two decade long history of underperforming and losing money for investors even after reinvesting its dividends. Since its IPO, the stock's price is down -97% and its total return is down -71%.
Some people might say that it's unfair to look at the whole period since the company's IPO because it includes a "black swan" event like the 2008 recession which was driven by a crash in residential real estate. I think this argument assumes that we will never have another black swan event again which is doubtful. Investors should be prepared for a possible "worst case scenario" in every investment which includes another 2008-like event. Having said that, if we just focus on the last 10 years alone, the company's results still leave a lot to be desired with stock price being down -60% and total return after reinvestment of dividends is only 45% which is less than 4% annually compounded while the overall market had much better results than this.
One of the biggest issues with mortgage REITs is that they have to use a lot of leverage in order to pay those rich dividends. In the last decade we've seen many mortgage REITs pay dividend yields like 10-15% while mortgage rates were around 3-5% for the most of the decade because they use a lot of leverage. When things are good this leverage can be beneficial but at the first sign of trouble, it will work against you and it will be incredibly difficult to make up for those losses. If you use no leverage and your portfolio is down -20% in a black swan event, you need to gain 25% to reach breakeven. If you are using 50% leverage and your stocks drop -20%, your loss is actually -30% and you will need to gain almost 45% to reach breakeven. There is a big difference between having to gain 25% and having to gain 45% to reach breakeven after a sharp drop. This is why mortgage REITs rarely recover their losses because their leverage makes their losses much larger when those rare black swan events strike.
I get that there are different types of investors who have different types of goals. Not everyone invests their money for capital appreciation. There are many investors whose main focus is generating income and they don't care what happens to their stocks' price as long as those dividends keep coming. They look at their stocks purely as an income generating machine and they are even happy when their stocks drop in price because it gives them more "opportunity" to buy this income generating vehicle at a cheaper price. Well, the problem with companies like New York Mortgage is that sooner or later dividends get cut too. As a matter of fact, this company cut its dividends multiple times in the last decade. First from about $1.30 per share to below $1.00 and then below $0.90 and then to $0.80. Fast forward to today and you will see that the dividend per share shrank from $1.30 to $0.30 in the last decade or so, which means income investors took a 77% haircut on their income even without factoring in the effects of inflation. After inflation, we'd be looking at close to 90% haircut.
Imagine being a retiree who invested their money into a stock like NYMT to generate steady high income but your income will actually shrink significantly from year to year until not much is left. If you had invested $100,000 into NYMT in 2012 to generate income for your retirement your first year's income would have been a respectable $14,300. By 2022, your annual income from this investment would have dropped to $5,700, a fraction of your original income. This would have surely disrupted your retirement plans and you'd need to make some deep cuts in your spending. At this rate, your annual income would have dropped further to about $2,000 in less than a decade even without a black swan event. A black swan event could virtually totally wipe out all of your income except for some pocket change.
NYMT dividend income over time (Portfolio Visualizer)
From a valuation standpoint, the stock appears to be cheap, trading at a price to book value ratio of 0.75, which indicates a 25% discount on the company's book value. Considering that the company generally traded at a price-to-book value of 1 to 1.2 range in the last decade, this looks like a great buying opportunity. Then when we look at how the company's book value actually trended in the last decade, we see a different picture and realize why it's trading at such a large discount to its book value because its book value has been on a constant decline. After looking at both charts below, it's hard to call this a compelling valuation even at a 25% discount to its book value.
The company has announced its quarterly results last month where it posted a loss of $0.41 per share and a drop of almost -4% in its book value quarter over quarter (or -7% in adjusted basis). It was able to post an interest income of 45 cents from interest income and other sources but this was more than offset by depreciation, general expenses and operating expenses of its real estate assets. Despite posting a loss, the company announced a dividend of 30 cents per share (down from last quarter's 40 cents) but if these losses and erosion of the book value continues it might have to cut the dividend some more in the future. It looks like the company will be working on strengthening its balance sheet for the remainder of the year as the management prepares for a possible recession driven by rate hikes and yield curve we've been seeing in bond yields and we will find out how well-prepared it is for a slowdown. I am a bit skeptical because if the company struggled this much in the last 10 years while the real estate market was so strong, how will it perform well when this particular market starts showing signs of weakness?
NYMT Q2 Results (NYMT)
Those who've read my past articles know that I am generally not a big fan of mortgage REITs in general because many of them don't make money in the long run and many of them end up losing money for investors due to being highly leveraged. Many times people say that MREITs are virtually risk-free because many of them only own agency-backed assets that are guaranteed by the government. The problem is that the government doesn't guarantee that those assets won't drop in value significantly. The government only guarantees that mortgages will be repaid one way or another. This means if a mortgage package's market value drops by 50% and a fund is leveraged 100% on it, the fund could get totally wiped out even if the mortgage continues to perform. Government offers no guarantees in that regard and investors lose money.
Many times investors are enticed by 10-15% yields offered by mortgage REITs but they lose 50-60% of their capital when things get tough. We've seen how many mortgage REITs lost so much value in 3 short weeks in 2020 during the COVID crash and how most of them didn't recuperate their losses 3 years later while most other stocks made multiple new highs during this period. In the chart below you will see how quickly the S&P 500 index ( SPY ) recovered from the COVID crash in 2020 and made new highs while NYMT and the overall mortgage REIT index never fully recovered since then and most likely won't for a very long time even after reinvesting dividends.
There are better places for investors to put their money than companies like NYMT. Index funds are one of such places. Sure, index funds don't offer rich dividend yields like 10-15% but they outperform by a large margin in the long run and investors make far more money in index funds as compared to mortgage REITs such as NYMT. Even if you sell about 5% of your portfolio every year to generate extra income, you will still outperform NYMT as shown below.
NYMT vs SPY with 5% withdrawals (Portfolio Visualizer)
It's very important for investors to understand what they are investing their money into, how it generates income and what its main risks are. Even if one is a purely dividend and income investor, they still need to pay attention to metrics like book value and share price appreciations. Also, most investors would be much better off invested in an index fund in the long run as proven many times in the past.
For further details see:
Hard To Be Bullish On New York Mortgage Trust