New York Mortgage Trust: No Disruption To The 12.7% Yield (NASDAQ:NYMT)

New York Mortgage Trust (NASDAQ:NYMT) is up 20% year-to-date to build on a rally that has seen the shares of the mREIT recover from lows of around $2 in September. The fears then were pertinent as the US economy potentially faced a marked slowdown on the back of rising Fed fund rates which continues to disrupt the residential and commercial mortgage market.

NYMT invests in residential mortgage loans, non-agency residential mortgage-backed securities (MBS) and commercial MBS. The company also had a 34% allocation to structured multifamily investments as of the end of its last reported quarter and has announced its intention to exit its joint venture equity interests in multi-family properties. Critically, NYMT’s assets are mainly driven by the health of the economy and the ability of homeowners to service their mortgages. Hence, interest rates, unemployment, and economic growth all influence the underlying direction of the cash flow the mREIT derives from its portfolio. Non-agency RMBS are also not backed by mortgages issued by government-sponsored agencies like Fannie Mae or Freddie Mac, hence the mREIT is very much a higher risk play on the US mortgage market.

A Mortgage Driven Double-Digit Yield

NYMT last declared a quarterly cash dividend payout of $0.10 per share, in line with the prior payout, for a 12.66% yield against the current price of the commons. The payouts have had a volatile history, most recently being cut to near zero during the pandemic but have recovered since.

The internally managed mREIT, founded in 2003, last reported earnings for its fiscal 2022 third quarter that saw it bring in a total net interest income of $14.22 million. This was down 54.2% from the year-ago quarter and a miss by $12.76 million on consensus estimates. The mREIT’s total investment portfolio was valued at $4.2 billion as of the end of the third quarter to drive an overall book value per share of $3.65, down from $4.06 per share in the sequential quarter and from $4.74 per share in the year-ago comp. Mortgages face pressure from rising interest rates, which were just hiked by 25 basis points and set for two more similar hikes.

Home sales are predicted to drop this year to their lowest level since 2011 with a 16% decline on the back of higher mortgage rates and a potentially weaker economy. The 30-year primary mortgage rate at 6.09%, whilst down from highs north of 7%, still sits at its highest level since 2008.

The dual pressure of rising Fed fund rates and an economy tussling between a soft landing and a deep recession will likely continue to exert weakness on NYMT’s portfolio. The payouts are what matter and the risk here is that the mREIT is yet again forced to institute a cut in response to broader macroeconomic factors. Interest rates will likely remain elevated through the second half of 2024, a prospect that will depend on inflation coming back down to the Fed’s 2% target this year.

The mREIT’s net interest spread is compressing due to higher financing costs, falling to 2.18% to drive an EPS contribution of $0.08 for its last reported quarter. NYMT’s yield on average interest-earning assets rose by around 27 basis points from 6.39% in the year-ago comp whilst its average financing costs rose to 4.48%. During the earnings call for the last reported quarter, management stated that their $0.10 quarterly payout will be in place for the next year and a half with realized gains from property sales set to provide a buffer to their overall cash position even as the dividend coverage comes under pressure.

The Series D Preferreds Form A Strong Alternative

New York Mortgage Trust 8.00% Series D Fixed-to-Floating Rate Cumulative Preferred Stock (NASDAQ:NYMTN) pays out a $2 annual coupon in quarterly installments for a yield-on-cost that currently works out to be 9.4% against a price of $21.29 for the Series D. Whilst the payout was briefly suspended at the onset of the pandemic, the likelihood of this happening again is low.

Bears would of course point to other mREIT preferreds like Chimera’s (CIM) Series B as potentially being more stable as they didn’t cut their distributions during the pandemic, but this view would be far too retrospective.

2023 is set to bring a level of economic disruption, but likely nothing on the scale of 2020. The preferreds have a higher priority than the commons on NYMT’s earnings and their safety over the next few years until their October 15, 2027 redemption date is somewhat assured. Further, the Series D include a cumulative clause which means any unpaid distributions accrues to be eventually paid back at a redemption event.

I like the relatively safe 9.4% yield here, the 15% discount to par that they currently trade on, and the still long lead time until their possible redemption. The $2 coupon will also change to a floating rate equal to the aggregate of three-month LIBOR plus a 5.695% spread after the redemption date. To provide some context, the current three-month LIBOR stands at 4.81% but was as low as 0.3% a year ago. Overall, whether to go for the preferreds over the commons should be based on your appetite for risk against what’s likely set to be a year of economic uncertainty and discombobulation. I’m neutral on the commons as whilst their yield looks partially safe this year, a near-term history characterized by payouts essentially in decline reduces their overall attractiveness.