New York Mortgage Trust: Issuance of new PFD, withdrawal of old (NASDAQ: NYMT)
(This article was co-produced with Hoya Capital Real Estate)
Let me start by saying that I am no expert in the residential mortgage industry or REITs in general, although I own both and use many of their notes in my fixed income ladder. I will turn to experts on the subject when reviewing the Preferreds transmitter discussed in this article, New York Mortgage Trust (NYMT). I know that NYMT is in a good enough financial position to allow it to replace the high coupon preferred stocks with a pair of lower coupon preferred stocks, one lower by 100 basis points, the other at a discount of 75 basis points. NYMT was also able to place private $100 senior notes due 2026 at just 5.75% (Press release). Compare that to New residential investment (NYSE: NRZ.PA) having to pay 7% of their recent NRZ.PD number.
The most recent issues are New York Mortgage Trust, Inc. 7% SER G VFI (NYMTZ), issued in the fall of 2021, and the New York Mortgage Trust, Inc. 6.875% DFP SER F (NYMTL), issued in the summer of 2021. Notice that in the fall, investors demanded a slightly higher coupon. Higher overall rates, a slightly disappointing 3Q NYMT report and a different NYMTZ feature likely all played a part in this.
A Brief Overview of New York Mortgage Trust
Seeking Alpha describes this REIT as
New York Mortgage Trust, Inc. acquires, invests, finances and manages single-family and multi-family residential mortgage-related assets in the United States. Its focused investments include residential loans, second mortgages and business loans; structured multifamily real estate investments, such as preferred stock and mezzanine loans to owners of multifamily properties, as well as joint venture equity investments in multifamily properties; residential non-agency mortgage-backed securities (RMBS); Agency RMBS; commercial mortgage-backed securities (CMBS); and other mortgages, residential housing and credit-related assets. NYMT started in 2003 and is organized as a REIT.
Source: Alpha Research
At the end of the 3rd quarter, their portfolio allocation was
NYMT lists three prongs in its earnings growth strategy:
- Focus: We focus on loan portfolio opportunities in markets where the Company sees a competitive advantage and where competition is less due to operational barriers to entry.
- Security: We have found certain lending areas attractive due to new financing arrangements that may be structured with non-market value features or term financing available in the securitization market. In other cases, financing is not necessary due to the expected high return on investment.
- Execution: We continue to secure new attractive lending deals in the multi-family and single-family sector, including stream and wholesale purchases, enabling an opportunity for teen return after financing.
NYMT also lists three key elements in its investment strategy:
- We take a patient approach to balance sheet growth through a proprietary blend of single-family and multi-family direct investments.
- We opportunistically acquire other types of assets that meet our investment criteria.
- We sell certain assets in our portfolio when realized gains and the potential for reinvestment of proceeds from the sale are consistent with our long-term return objectives.
Analysts, who are paid to be mREIT experts, predict slow growth through the end of 2023.
The Q3 report provided investors with the following highlights.
Another Seeking Alpha contributor, Daniel Varga, posted his review in December: New York Mortgage Trust: Good opportunity for growth investors, not so much for long-term income investors, where he gave NYMT a rating of ‘purchase.
Review of New York Mortgage Trust, Inc. 7% SER G PFD
While NYMT has four Preferreds outstanding, NYMTZ is the only one that has made no future conversion to a variable rate. NYMTZ has the second lowest coupon (7.00%) and the second longest time before it can be called (01/15/27). Most of the functionality is the same for all bookmarks; one being that they all rank equally in default and are all cumulative, meaning that missed payments must be made up before ordinary shareholders can receive dividend payments. This feature saved NYMT preferred stockholders as NYMT skipped the April 20 payout (rewarded July 20).
A November press release outlined how the product would be applied:
The Company intends to use the net proceeds of the offering to fund the repurchase of all outstanding shares of its 7.75% Series B Cumulative Redeemable Preferred Shares, par value $0.01 per share (the “Series B Preferred Shares”). In addition, the Company intends to use any remaining net proceeds of the offering for general business purposes, which may include, among other things, the acquisition of its targeted assets, including single and multi-family residential assets. , and various other types of mortgage, residential, and credit-related assets that it may target from time to time. This press release does not constitute a notice of redemption of the Series B Preferred Shares or any other existing series of preferred shares of the Company.
Source: NYMT press release
This “exchange” consisted of a fixed rate PFD for a higher coupon fixed rate PFD. NYMTZ is the remaining problem with its fixed coupon after it became redeemable.
Review of New York Mortgage Trust, Inc. 6.875% PFD SER F
NYMYL’s key features align with the other two NYMT favorites, other than the fact that its floating component is not LIBORbut the new reference rate, SOFR. With recent SOFR rates below LIBOR, this could explain why the fixed component, once the rate is floating, is very close to the current fixed rate (6.13% vs. 6.875%).
A June press release outlined how the product would be applied:
The Company intends to use the net proceeds of the offering to fund the repurchase of all or a portion of the outstanding shares of its 7.875% Series C Cumulative Redeemable Preferred Shares, par value $0.01 per share (the “Series C Preferred Shares”). In addition, the Company intends to use the remainder of the net proceeds of the offering for general business purposes, which may include, among other things, the acquisition of its targeted assets, including single-family residential assets and multifamily, and various other types of mortgage, residential and credit-related assets that it may target from time to time, the redemption of all or part of additional series of its preferred shares and for general working capital purposes. This press release does not constitute a notice of redemption of such Series C Preferred Shares or any other existing series of preferred shares of the Company.
Source: NYMT press release
Unlike the fall “exchange”, this was a fixed-to-float PFD replacing a fixed-rate PFD.
Comparison of the four NYMT Preferreds
Here are the other two active Preferreds issued by NYMT.
NYMTM is the first of the favorites to become redeemable, in just under three years.
NYMTN has the highest fixed coupon of the four, but of the three Fixed-to-Floating, the smallest post-floating fixed component; Thus, of the three issues subject to a variable rate, NYMTN will be the most affected by its coupon rate.
The two older issues have a distinct yield advantage over the two newer issues, but the YTC for the set is much narrower. For the three fixed-to-float, this change begins on the specified reminder date. Based on after call cost to NYMT, regardless of show size, in my opinion shows would be called in order of call dates even if not done immediately.
Investing in a redeemable issue that never matures means investors need to really think about how interest rates will move over their investment horizon.
- Do you agree with what your return on cost would be investing now until it is redeemable and then the estimated coupon when it starts to float? Owning NYMTZ negates the second part of this question.
- By how much do you think the rates will increase on the date each number is called? I see NYMTN at the slightest risk of being called if rates don’t climb more than the Fed’s combined hikes, but that means the investor would earn less than investors in the other issues. Also, it wouldn’t take much of a rise in LIBOR/SOFR rates to push NYMTZ on the first call, assuming none have been called at the time.
Another strategy would be to earn a 10% return by investing in New York Mortgage Trust common stock instead. Instead of having primarily interest rate risk, you take on missed dividend payments and the potential for a bigger loss if the NYMT files for bankruptcy. Hoya Capital recently published “Mortgage REIT: High Yield Opportunities,” which reviews this market segment. Hoya Capital Income Builder lists nearly 70 select ones in the residential mREIT sector alone.
Final Comment: LIBOR versus SOFR
For new issues, US LIBOR ended on 12/31/21. Rewriting existing contracts for outstanding issues was given more time. On March 5, 2021, the Financial Conduct Authority announced the future termination or non-representativeness of the 35 LIBOR benchmarks:
Existing USD LIBOR-based loan agreements have up to end of June 2023 update their reference rates. This rate parallels the Fed Funds rate, so tracking the Fed’s actions gives some idea of its direction.
Since the chart above ended in 2016, this is how the 3 month LIBOR has evolved over the past year.
The most recent spike in LIBOR, just before COVID hit, was around 2.5%. You have to go back before the 2008-09 GFC to see LIBOR above 5%, and it has rarely been above 6%. The current 3-MB SOFR rate is less than 5bps! Here are five differences between the two tariffs: