I’ve been looking at the closed-end fund as well as mortgage REIT space recently. In the March COVID-19 drawdown, this sector got hammered into oblivion. The sector ETF, which I reviewed here, went down over 60%+ at some point. The Fed came through with a lifeline announcing it would buy an unlimited amount of mortgage-backed securities. When COVID-19 wasn’t as bad as it could have been in the summer, the sector started recovering from the value destruction (panic selling, etc.) that took place in March. Most mortgage REITs haven’t fully recovered, although there are some that performed exceedingly well.

When I came across New York Mortgage Trust, Inc. (NYMT), I had to take a look. I’ve picked up on something of a New York is a dead city vibe. People arguing everyone is moving to the suburbs, office space won’t recover etc. When a name involves New York and mortgages, chances are it’s getting dinged for fears like this.

In history, major cities have shown to be extremely resilient. The Black Death killed about 40% of Europe’s population between 1347 and 1352. There’s an interesting study showing most cities recovered within a hundred years. Cities with more substantial existing infrastructure and other resources did better.

on August 6 and 9, 1945, the United States detonated nuclear weapons above the Japanese cities of Hiroshima and Nagasaki, killing between 129,000 and 226,000 people and leaving only a few ruins standing in the case of Hiroshima. In Nagasaki, the hills shielded part of the city from the blast. It took Hiroshima nine years to exceed its pre-war population, and both cities are much larger today.

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File:Nagasaki City view from Hamahira01s3.jpg

Image: Nagasaki (Wikipedia)

This mortgage REIT does mostly residential mortgages. The company is headquartered in New York.

I’m leaning towards residential vs. commercial mREITs, given the pandemic’s impact. The company’s assets include $2.8 billion, of which 80% is single-family credit and 20% is multi-family credit.

The company has been lowering its dividend recently as per the graph below. But I think it will be able to get back to a $0.1 quarterly, given some time.

Source: Seeking Alpha

The company has been de-risking since March and is holding an unusually high $600 million in cash as management expected election volatility and is still worried about the COVID-19 pandemic. They are identifying a lot of opportunities but are only gingerly executing against these. Per management, at a recent event:

“Investment opportunities to put our cash to work increased dramatically in recent months. With a markedly lower level of competition, we sourced and reviewed over $6 billion of new opportunities in Q3. We have taken a highly selective approach to this market and only advanced on approximately 6% of transactions reviewed. Although we are excited about the strong housing fundamentals bolstering housing demand, particularly in the South and Southeast of the U.S., we believe a patient approach sympathetic to the tense geopolitical environment is the right approach at this time. We believe more attractive entry points will be available in the near-term and are encouraged by the flexibility that our balance sheet can provide in helping us to capture this opportunity in a significant way for our shareholders

Of course, I’m worried about the creditworthiness of the borrowers. But things are shaping up better than I’d have expected back in March. Per the recent earnings call:

On Page 16. Performance of our portfolio has absolutely outperformed our expectations. At the end of the 9/30, we had just 2% of our entire residential loan portfolio under a COVID-19 assistance plan, that level for our distressed loans noted as the RPL sector in table to the right is shopping, ALL.

Source: company earnings presentation

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Given the current share price and recent dividends, it is not unreasonable to expect an 8% dividend yield going forward. I believe earnings yield is actually quite a bit higher around 12% and expect, over time, distributions go up further. If I contrast NYMT to some peers, it looks like it is trading at the lower end of P/E and price-to-book ranges.

Source: Seeking Alpha

The company brought its leverage ratio down a bit. It was already relatively low compared to peers. The average loan to value for the company is about 74%. That makes it hard for borrowers to walk away from their mortgages.

Source: company website

In terms of dry powder, the company could theoretically plow another $1.2 billion in the space. If the company would obtain similar financing, it could theoretically expand the long-term distribution by around 50%. It seems safe to hold off until there are renewed government assistance programs issued by the Biden administration. Although employment numbers have surprised positively so far and the pandemic has been relatively mild, the situation of borrowers could deteriorate quickly under the wrong circumstances.

The company itself thinks it can get to $0.29 in earnings per quarter. That translates into $1.26 per year. In other words, a 2.2x forward earnings multiple. That seems a bit overly optimistic to me. But things don’t need to turn out that well, for this to work out.

All things considered, this looks like an attractive mREIT to me. Certainly not without risk. Especially in the limbo of the Trump Biden transition. Ultimately, I think it is discounted too much.

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I write the Special Situation Report. I look at special situations like spin-offs, share repurchases, rights offerings and a lot of M&A events. The point is to make money with risks under control. Check it out here. Follow me on Twitter here or reach out through email at dehaas.bram@gmail.com.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NYMT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



Via SeekingAlpha.com

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