The preferred shares from New York Mortgage Trust (NYMT) have seen some very intense volatility this year. They’ve often been more sensitive to the overall economy, but they took a massive hit during the most intense part of the pandemic.
The four series are:
Source: Street Smart Edge
That chart shows that the price was quite steady before the pandemic, plunged off a cliff, rallied, plunged again, then roared back. Shares are still trading around $21.00, far below their normal range (around $25.00) from prior periods.
Using Volatility to Our Advantage
We’ve traded the preferred shares from NYMT over the last several years and we were most active earlier this year during the panic.
Below we are showing all of our trades in the NYMT preferred shares:
Source: The REIT Forum, on the “Returns Tab” within our “REIT Forum Google Sheets.”
Note: All of these positions are closed. We do not currently have open positions in NYMT or the NYMT preferred shares.
You can see that we recorded an absolutely massive loss on 3/24/2020 by “selling” shares of NYMTP near the bottom. However, we weren’t really closing out our exposure. We were buying shares of NYMTO at the exact same time. These transactions were tied together. We already were fully deployed, so we needed to sell existing positions to free up capital for new positions.
If the company went bust (unlikely, despite the $4 preferred price), having 1,234 shares of NYMTO was still better than having 1,145 shares of NYMTP. After all, we might get a little more back.
However, if the company survived (as we expected them to), we would have a much larger position. We disclosed these trades to subscribers of The REIT Forum with real-time alerts. This is the way we demonstrated our decision to trade NYMTP for NYMTO:
Source: The REIT Forum
Our volume of shares increased by 7.77%, which meant the total call value was higher by 7.77%. Consequently, we had more upside to reach call value.
Further, we would get a higher rate of dividend income. Since NYMTO carries a higher dividend rate (both are fixed-rate shares), we saw a 9.51% increase in projected income.
However, we traded that position again. On 4/27/2020 we saw an opportunity and grabbed it. We sold the shares of NYMTO to fund the purchase of shares of NYMTM:
Source: The REIT Forum
The trade gave us 9.89% more shares. Our “Upside to Call Value” increased by over 35%! Dividend income increased by another 9.89%, though shares of NYMTM eventually switch over to a floating rate.
These two trades combined to create a dramatic increase in the total value of our position. Without these two trades, we would’ve simply been holding onto 1,145 shares of NYMTP. Holding on would’ve been better than going into a panic and selling, but it wasn’t near as powerful as swapping between similar shares.
NYMT resumed payments of their preferred dividends. That in itself was a substantial positive development. However, their latest earnings release also was positive for the preferred shares. As a rule of thumb, when the book value of common equity increases, that’s generally positive for preferred shares. It means the preferred shares have more “coverage.” Since the common shareholder ranks below the preferred shareholder, the preferred shareholder has a better position. The preferred dividends were not “reduced,” they were “suspended.” When they (the preferred dividends) returned, they needed to be paid in full and in arrears. That means the preferred shareholder got their entire amount for the entire period.
Many of the mortgage REITs with exposure to credit assets had a relatively mundane quarter. NYMT’s increase in common book value per share was a positive factor for the preferred shares. It hasn’t been enough, yet, to reduce the risk rating on the preferred shares from a 4.0 to a 3.5.
The major metrics for each share are included below:
Source: The REIT Form
Given all these traits, I would currently view NYMTN as being less favorable than NYMTM. Between the two preferred shares which switch to floating rates, NYMTM carries a very similar stripped yield today and will carry a superior spread when the floating rates kick in. The advantage for NYMTN is that the floating rate won’t kick in until 10/15/2027, compared to 1/15/2025 for NYMTM. Since the floating-rate payments are expected to be lower than the fixed-rate payments (unless short-term rates move materially higher), having another 2.75 years before they start is nice.
We determine that the value of the higher spread on NYMTM (6.43% vs 5.70% on NYMTN) is valuable enough to offset the floating rate starting sooner. The gap in valuation isn’t huge, just enough to be worth mentioning.
If investors were focused on the highest yield a decade into the future, they would probably prefer NYMTO since it carries a fixed-rate coupon. The yield today is slightly lower than NYMTN and NYMTM, but the coupon remaining fixed-rate could easily make up for it.
We’ve seen many preferred shares rally into the neutral range over the last few weeks. That should be seen as a positive thing since it reflects accurate predictions about what investors should buy over the prior months. These shares still benefit from trading at substantial discounts to call value and carrying large dividend yields. However, they also still carry some significant risks as evidenced during the prior pandemic panic.
Want the best research? It’s time to raise your game. Get access to several features you won’t find on the public side.
You can get access to everything we have to offer right now. Try our service and decide for yourself.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.
Additional disclosure: We have positions in many preferred shares and some common shares of mortgage REITs and equity REITs. However, this article dealt exclusively with NYMT and the NYMT preferred shares. We do not have any open positions in NYMT or the NYMT preferred shares. This additional exclosure exists because we’ve occasionally had questions from readers who were confused about our “lack of positions in any stocks”.