(This article was co-produced with Hoya Capital Real Estate)
Let me start by saying I am not an expert on the residential mortgage sector or REITS in general, though I do own both and use several of their Notes in my Fixed Income ladder. I will turn to experts on the subject when I review the issuer of the Preferreds covered in this article, New York Mortgage Trust (NYMT). I do know that NYMT is in good enough financial shape to allow it to replace higher coupon Preferreds with a pair of lower coupon Preferreds, one 100bps lower, the other at a 75bps reduction. NYMT was also able to place a $100 private Senior notes due in 2026 at only 5.75% (press release). Compare that to New Residential Investment (NYSE:NRZ.PA) having to pay 7% of their recent NRZ.PD issue.
The newest issues are the New York Mortgage Trust, Inc. 7% SER G PFD (NYMTZ), issued in the fall of 2021, and the New York Mortgage Trust, Inc. 6.875% PFD SER F (NYMTL), issued in the summer of 2021. Notice, by the fall, investors demanded a slightly higher coupon. Higher overall rates, slightly disappointing 3rd quarter NYMT report, and a different feature of NYMTZ probably all played a part in that.
A brief look at New York Mortgage Trust
Seeking Alpha describes this REIT 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, second mortgages, and business purpose loans; structured multi-family property investments, such as preferred equity in, and mezzanine loans to owners of multi-family properties, as well as joint venture equity investments in multi-family properties; non-agency residential mortgage-backed securities (RMBS); agency RMBS; commercial mortgage-backed securities (CMBS); and other mortgage, residential housing, and credit-related assets. NYMT started in 2003 and is organized as a REIT.
Source: Seeking Alpha
At the end of the 3rd quarter, their portfolio allocation was
NYMT lists three prongs in their earnings growth strategy:
- Focus: We are focused on loan portfolio opportunities in markets where the Company sees a competitive advantage and competition is less due to operational barriers to entry.
- Safety: We found certain loan sectors attractive due to new financing arrangements that can be structured with non-mark-to-market features or term financing available through the securitization market. In other cases, financing is unnecessary due to the high projected return on the investment.
- Execution: We continue to close attractive new loan arrangements within the Multifamily and Single- Family sector, including flow and bulk purchases, allowing for a return opportunity in the teens after financing.
NYMT also lists three key elements in their investment strategy:
- We take a patient approach to balance sheet growth through a proprietary mix of single-family and multifamily direct investments.
- We opportunistically acquire other types of assets that meet our investment criteria.
- We sell certain assets within our portfolio when realized gains and the reinvestment potential for the sale proceeds are consistent with our long-term return objectives.
Analysts, who are paid to be mREIT experts, are forecasting slow growth thru the end of 2023.
The 3rd quarter 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 Buy rating.
Examining the New York Mortgage Trust, Inc. 7% SER G PFD
While NYMT has four Preferreds outstanding, NYMTZ is the only one that was done without a future conversion to a floating rate. NYMTZ has the second lowest coupon (7.00%) and the second longest time before it can be called (1/15/27). Most features are the same across all the preferreds; one being they all rank the same in case of default and all are cumulative, meaning missed payments must be made up before common shareholders can received any dividend payments. That feature saved NYMT’s preferred stock holders as NYMT skipped the April’20 payment (made up in July’20).
A November press release indicated how the proceeds would be applied:
The Company intends to use the net proceeds of the offering to fund the redemption of all of the outstanding shares of its 7.75% Series B Cumulative Redeemable Preferred Stock, $0.01 par value per share (the “Series B Preferred Stock”). In addition, the Company intends to use any remaining net proceeds from the offering for general business purposes, which may include, among other things, acquiring its targeted assets, including both single-family and multi-family residential assets, and various other types of mortgage-, residential housing- 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 Stock or any other existing series of the Company’s preferred stock.
Source: NYMT press release
This “exchange” was one Fixed-rate PFD for a higher coupon Fixed-rate PFD. NYMTZ is the issue that stays with its fixed coupon after it becomes callable.
Examining the New York Mortgage Trust, Inc. 6.875% PFD SER F
NYMYL’s major features align with the other two NYMT preferreds, other than the fact its floating component is not LIBOR, but the new benchmark rate, SOFR. With recent SOFR rates below LIBOR, that might explain why the fixed component, once the rate floats, is very close to the current fixed rate (6.13% vs 6.875%).
A June press release indicated how the proceeds would be applied:
The Company intends to use the net proceeds of the offering to fund the redemption of all or a portion of the outstanding shares of its 7.875% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share (the “Series C Preferred Stock”). In addition, the Company intends to use the remainder of the net proceeds from the offering for general business purposes, which may include, among other things, acquiring its targeted assets, including both single-family and multi-family residential assets, and various other types of mortgage-, residential housing- and credit-related assets that it may target from time to time, the redemption of all or a portion of additional series of its preferred stock and general working capital purposes. This press release does not constitute a notice of redemption of such Series C Preferred Stock or any other existing series of the Company’s preferred stock.
Source: NYMT press release
Unlike the fall “exchange”, this was a Fixed-to-Floating PFD replacing a Fixed-rate PFD.
Comparing all four NYMT Preferreds
Here are the other two active Preferreds issued by NYMT.
NYMTM is the first of the preferreds to become callable, at just under three years from now.
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 floating rate, NYMTN will take the biggest hit to 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-floating, that change starts on the callable date listed. Based on the after-callable cost to NYMT, disregarding issue size, in my opinion, the issues would be called in order of the callable dates, even if not done immediately.
Investing in a callable issue that never matures means investors need to really ponder where interest rates are going during their investment horizon.
- Are you okay with what your yield-on-cost would be by investing now until it’s callable and then the estimated coupon when it starts to float? Owning NYMTZ negates the second part of that question.
- How much do you think rates will increase by each issue’s call date? I see NYMTN at the least risk of being called if rates don’t climb more than the combined Fed boosts, but that means the investor would be earning less than investors in the other issues. Also, it would not take much of an increase in LIBOR/SOFR rates to push NYMTZ to the first to be called, assuming none were called by then.
Another strategy would be getting a 10% yield by investing in New York Mortgage Trust common stock instead. Instead of mainly having interest-rate risk, you take on missed dividend payments and potential of larger loss if NYMT files for bankruptcy. Hoya Capital recently posted ‘Mortgage REITs: High Yield Opportunities,’ which reviews this market segment. Hoya Capital Income Builder lists almost 70 Preferred in the Residential mREITs sector alone.
Final Comment: LIBOR vs SOFR
For new issues, LIBOR in the US ended on 12/31/21. Rewriting existing contracts for outstanding issues has been given more time. On March 5, 2021 the Financial Conduct Authority announced the future cessation or non-representativeness of the 35 LIBOR benchmark settings:
Existing USD LIBOR-based loan agreements have until the end of June 2023 to update their benchmark rates. This rate parallels the Fed Funds rate, so tracking Fed actions give a clue where it is going.
Since, the above chart ended in 2016, this how the 3-Mo LIBOR has moved over the past year.
LIBOR’s most recent peak, just before COVID struck, was about 2.5%. You have to go back before the GFC of 2008-09 to see LIBOR over 5%, and seldom has it been above 6%. The current SOFR 3-Mo rate is under 5bps! Here are five differences between the two rates: