New York Mortgage Trust, Inc. (NASDAQ:NYMT) hasn’t even come close to covering their dividend payment with earnings or cash flow
SmallCapPower | July 28, 2017: New York Mortgage Trust, Inc. (NASDAQ: NYMT) is a real estate investment trust (REIT), which is in the business of acquiring, investing in, financing, and managing mortgage-related and residential housing-related assets and financial assets. The Company’s assets include agency and non-agency mortgage-backed securities, high credit quality residential adjustable rate mortgage loans, commercial mortgage loans, and other financial assets.
Over the past few years New York Mortgage Trust has made it their objective to exit their low-margin agency securities and redeploy the capital into more profitable multi-family and distressed residential mortgages. This is best seen by the Company acquiring the remaining 80% of RiverBanc on May 16, 2016, for $53.5mm. RiverBanc manages investments in multi-family apartment properties. New York Mortgage Trust expects to achieve $25.2mm of cost synergies from RiverBanc. So far, they have been able to derive ~$3mm of these as seen in increased margins in their multi-family portfolio, which has been partially offset by a ~$1mm increase in SG&A due to increased headcount as a result of the acquisition.
Even if the Company’s efforts to increase net interest margins succeeds, it is unreasonable to think they can sustain such a high dividend payment (15% yield), given their constant inability to generate enough earnings, or cash flows to cover the $89mm ($0.8 per share) dividend. First, New York Mortgage Trust has paid out over 100% of their earnings and operating cash flow for nine straight quarters. Second, the Company must successfully allocate all their agency funds into multi-family mortgages, and achieve their desired synergies, which carries risks of its own.
Over the past nine quarters, New York Mortgage Trust hasn’t even come close to covering their dividend payment with earnings or cash flow. This has resulted in a decrease in the Company’s book value per share. The arithmetic is simple: New York Mortgage Trust has paid out more cash than it has taken in from its business operations, forcing them to cover the cash shortfall by some other means. In this case, the Company has to draw from their retained earnings, decreasing the value of equity on the balance sheet. Furthermore, New York Mortgage Trust has compounded this problem by issuing new equity, resulting in a material decrease in the Company’s book value per share. This is, therefore, an unsustainable dividend policy that has three possible outcomes. First, New York Mortgage Trust continues to cover the shortfall with equity, which will dilute both the dividend investors receive and the Company’s EPS, and continue to shrink the book value of New York Mortgage Trust. Second, the Company will increase their earnings to the point where they can reliably cover the dividend payment. Given the current state of New York Mortgage Trust the chances of the former are far greater. Lastly, the Company could slash their dividend to more sustainable levels, stabilizing their book value, yet decreasing their share value.
New York Mortgage Trust Dividend Analysis:
Source: Ubika Research
The chances of New York Mortgage Trust increasing their earnings to the point where they can sustain their current dividend levels are low. Annualizing the Company’s Q1/2017 performance shows they would make $0.63 per share, which is less than their $0.80 per share annualized dividend. New York Mortgage Trust would need a net income margin of 23% to cover their dividend with earnings, however, this says nothing about cash flow, which has historically been lower than earnings.
FY Earnings Projections:
Source: Ubika Research
It is possible for New York Mortgage Trust to sustain their high dividend, especially if they can successfully transfer their agency funds into multi-family assets. This does not come without a significant amount of risk, however, given their history of overpaying with their dividend. We believe the odds are in favor of a dividend cut, and the risk does not justify the 15% annual reward.
Disclosure: Neither the author nor any of the principals at Small Cap Power, or their family members, own shares in any of the companies mentioned above.
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