New York Mortgage Trust to Benefit From Lower Interest Rates
There are two catalysts that should help energize mortgage real estate investment trusts (mREITs) like New York Mortgage Trust Inc (NYSE:NYMT): slowing inflation and lower interest rates. Falling interest rates and less restrictive monetary policy should provide tailwinds.
Lower rates make it cheaper to borrow and help mREITs refinance existing debt at better rates. They can also help consumers pay off their mortgages more quickly, and then these mortgages are replaced by other mortgages, albeit at lower values.
That’s why it’s important to look for an mREIT with a strong balance sheet and a diversified debt portfolio. And that’s what you get with New York Mortgage Trust Inc.
The company acquires, invests in, finances, and manages primarily mortgage-related assets and financial assets in New York City, N.Y., Los Angeles, California, and Charlotte, North Carolina. The company has built a portfolio of credit-sensitive assets that provide risk-adjusted returns throughout changing economic conditions. It does this by targeting mortgage-related and single-family-housing-related assets with elements of credit risk and interest-rate risk.
New York Mortgage Trust’s $5.9-billion portfolio is primarily made up of residential mortgage loans, including business purpose loans, followed by structured multi-family investments, agency residential mortgage-backed securities (RMBS), non-agency RMBS, and commercial mortgage-backed securities. (Source: “Second Quarter Financial Summary,” New York Mortgage Trust Inc, last accessed September 25, 2024.)
$934.0 Million in New Investments
For the second quarter ended June 30, 2024, New York Mortgage Trust reported a net loss of $26.0 million, or a loss of $0.29 per share. This was an improvement over the second-quarter-2023 net loss of $37.2 million, or a loss of $0.41 per share. (Source: “New York Mortgage Trust Reports Second Quarter 2024 Results,” New York Mortgage Trust Inc, July 31, 2024.)
Interest income increased 57% to $90.7 million, while net interest income was up 26% at $19.0 million. The book value at the end of the second quarter was $9.69 per share, with an adjusted book value per share of $11.02. The company’s shares closed out the second quarter at $5.84 per share.
During the quarter, the mREIT acquired $934.0 million in new investments, including:
- $467.5 million worth of agency RMBS, with an average coupon of 6.0%
- $420.7 million in residential loans, with an average gross coupon of 10.42%
Commenting on the second-quarter results, Jason Serrano, New York Mortgage Trust’s chief executive officer, said, “Recent interest rate market activity is falling in line with moderating inflation and an expected slowing of the economy, as evidenced by a 29-basis point decline in the 2-year Treasury yield from its second quarter peak.”
In anticipation of these events, Serrano said that the mREIT continued its capital rotation plan to divest from lower current yield portfolio assets while simultaneously utilizing excess liquidity to raise recurring income. This resulted in second-quarter adjusted Interest Income of $84.0 million, a 63% increase from the same period in 2023.
With potential excess liquidity of $424.0 million, or 42% of NYMT stock’s market capitalization at the end of the second quarter, New York Mortgage Trust management said that it is “focused on meaningfully raising current income in subsequent quarters.”
Second-Quarter Dividend of $0.20/Share Declared
As an mREIT, New York Mortgage Trust needs to legally distribute at least 90% of its taxable income to shareholders. Since its June 2004 initial public offering (IPO), the company has declared a total of $1.4 billion in common stock dividends. For reference sake, its total market capitalization is $605.5 million.
In September, the company declared a third-quarter dividend of $0.20 per share, or $0.80 per share on an annual basis, for a forward dividend yield of 11.97%.
In addition to returning value to shareholders with an ultra-high-yield dividend, New York Mortgage Trust also does so through share buybacks. In the second quarter, the mREIT repurchased 587,347 shares of common stock for approximately $3.5 million at an accretive average repurchase price of $5.95 per common share.
NYMT Stock Has 67% Upside Potential
High-yield, rate-sensitive mREITs were some of the worst-performing real estate investment trusts (REITs) during 2022 and 2023. That’s when the Federal Reserve starting hiking interest rates in response to surging inflation. Higher interest rates make it more expensive to borrow, cut into profits, and reduce free cash flow.
But, over the last number of months, optimism about the Fed’s recent big interest rate cut has helped fuel mREITs. And New York Mortgage Trust is no exception. While NYMT stock is down 18% year to date, it is up 10% over the last three months.
As of this writing, (September 25), NYMT is trading at $6.57, well below its 52-week high of $8.88 per share in December 202. That said, conservative Wall Street analysts expect the stock to surpass that level over the coming quarters with an average 12-month share price target of $7.70 and a high estimate of $11.00. This points to potential gains in the range of 17% to 67%.
There’s even more room for growth. In December 2004, NYMT hit a record high of $38.82 per share.
Chart courtesy of StockCharts.com
The Lowdown on New York Mortgage Trust Inc
New York Mortgage Trust Inc is an mREIT with a diversified portfolio of residential-backed mortgage assets. It also has a strong balance sheet and liquidity position. Thanks to its diverse portfolio, the mREIT’s finances have improved even within an high-interest-rate environment.
Its investment portfolio grew from $4.0 billion in the second quarter of 2023 to $5.9 billion in the second quarter of 2024. Over the same period, the company’s net interest income climbed from $0.17 per share to $0.21 per share. New York Mortgage Trust’s cash position also increased from $223.0 million to $227.0 million.
More recently, the mREIT reported solid second-quarter net income and net interest income growth. The future remains bright; analysts expect New York Mortgage Trust’s earnings to improve from a loss of $0.99 per share in 2023, to a loss of $0.75 per share in 2024, and then to earnings of $0.42 in 2025.
Looking ahead, New York Mortgage Trust continues to grow its investment portfolio with the goal of generating higher recurring net interest income. This strategy is clearly working; in the second quarter of 2024, the company’s net interest income was up 26% year over year at $19.0 million.
Moreover, New York Mortgage Trust’s recent acquisitions have been primarily concentrated in the more liquid agency RMBS and shorter duration bridge loans.