Stock In The Spotlight

Today’s spotlight stock is from the preferred sector. Preferred stocks can best be described as a hybrid between a stock and a bond, and make up a part of the “fixed income” segment of your portfolio, along with those boring old bonds. Bonds occupy the highest priority with regard to the payment of scheduled interest and the return of principal. Bondholders must be paid the prescribed amount on the stated dates for the duration of the issue period, with the full face value of the bond (usually $1,000.00) to be paid in full at maturity. Unless the issuing company goes bankrupt and defaults on the bond, you are guaranteed this interest and principal. default rarely happens unless you are investing at the bottom of the bond ratings barrel. Even in the higher risk corporate bond arena, default is quite uncommon. Bond prices will fluctuate above and below the $100.00 level. Keep in mind that the final cost of the bond will be 10X the quote, so you will be spending somewhere around that $1,000.00 mark for the bond.

Preferred stocks hold the second spot in the payment priority ladder, ahead of the common stocks. The commons bear the highest risk of loss, albeit the highest potential gain due to their theoretically unlimited capital appreciation and dividend growth. Common dividends can not be paid until the preferred shareholders receive their dividends. Preferred shares may move in correlation with the underlying common issue although are bound to a fixed dividend payment and will ultimately trade somewhere near par at the call date as the value stabilizes at the call price. Between now and the call date, the price will be subject to some movement which can net some additional yield if you keep your eyes open for it. It may trade above or below par at any time. Under extreme conditions, extreme values can be found.

Preferred stocks are offered by many companies as a way to raise capital without issuing additional common shares, thus diluting the common shares and voting rights of those shareholders. Additionally, most preferred shares are “callable” on a certain date, giving the issuers an opportunity to essentially “refinance” the debt under the terms of the agreement by paying the holder the full “par” value per share, usually $25.00. Shares are issued at a stated interest rate based on the par value. Shares rarely trade at the par value, and will be bought at a “premium or discount to par” This determines your actual rate of return or “yield to market”. For example, if a preferred share ABCX is offered at a “coupon” (stated interest rate) of 8%, that would equate to the annual fixed interest payment of $2.00 per share based on the $25.00 par value, paid in quarterly installments of $0.50. If, however the preferred issue had fallen out of favor and was available at a price of say $22.00 per share, the same fixed $2.00 payment would be equivalent to a yield of 9.1%. Again, upside on price is limited, but preferred issues often pay very attractive yields and provide a level of comfort relative to the security of the investment and income. That’s the benefit offered to the investor in these types of shares. There are many types of preferred shares, including those with fixed, and floating rates with various terms and conditions, issued by companies in all industries. Make sure you review all the terms and conditions of the security including call date, and what happens after the call date if the shares aren’t redeemed. Do your own due diligence and make sure your choices fit your plan. Fixed income should play a significant role in your retirement plan but is often overlooked as boring. I’ll take a boring 9% anyday.

So what’s not to like about NYMTN?

NYMTN is the series D preferred offering from New York Mortgage Trust Click Here

New York Mortgage Trust, 8.00% Series D Fix/Float Cumulative Redeemable Preferred Stock
Ticker Symbol: NYMTN     CUSIP: 649604881     Exchange: NGSSecurity Type:   Traditional Preferred Stock

This Fixed to Floating Rate Cumulative Redeemable Preferred Stock pays $2.00 per share quarterly and has a call date of 10/15/2027. If not redeemed on the call date, the rate will convert to a floating rate, which was originally based on the 3 month LIBOR (London Interbank Overnight Rate) + 5.695% per the prospectus. As of June 30, 2023, the unsecured LIBOR will have been phased out in favor of the more accurate data based SOFR (Secured Overnight Funding Rate) The new law stipulates that preferred stocks linked to 3-month LIBOR will be replaced with SOFR + 0.262%. The fractional percentage adder is to overcome the tendency of SOFR to trend slightly below LIBOR. Here’s how the change affects the yield at the call date if that day were today.

Current LIBOR 11/722 Week 4.46% + 5.695% = 10.155%

Current SOFR 11/7/22 3.78% + .262% + 5.695% = 9.737%

So we lose a little bit based on the conversion, but at today’s price of $19.00, we’re locking in a yield of 10.5% for the next 5 years with a built in premium at call of $6.00 per share, or 31.5% if liquidated. Keep in mind that LIBOR was at 3.94% a month ago and at .15% a year ago. Interest rates are still on the rise now, but I’m not placing any bets as to what they are going to be like in 5 years. Remember also that the FED is responsible for setting the SOFR so any number of permutations may be possible between now and then. Regardless, I’m quite happy to be accumulating a position yielding in excess of 10% for the next 5 years, and if it gets called that’s fine, if it doesn’t and pays a dividend that is more attractive than that which is available at that time, then fine also (if this is the case, it will most probably be called unless still trading at a big discount to par), and if something is more attractive then that would also be fine. l’ll sell it for a profit and move on to something else. Seems like not much to worry about until then except to collect my preferred payments……..unless…something goes drastically wrong at New York Mortgage Trust that would necessitate a suspension of both the common and preferred dividends.

The big Q3 miss didn’t fill investors with much confidence. Management cited extreme volatility in interest rates coupled with heightened inflationary fears as the main drivers of poor performance across the fixed income sector. Also, cash from divestitures and other cash position enhancement strategies look to provide capital for some quick and desirable opportunities as they come available in the rising rate environment.

With earnings estimates improving significantly looking ahead to 2023, and with a special dividend being declared for the common shares, it wouldn’t appear that a suspension of the common dividend is on the way, rendering our preferred dividend safe. Although the common dividend is floating around 15%, it is more the norm for the dividend to be in the low to middle teens rather than to be in single digits. NYMT has been known to cut the dividend in the past on the common units, but as long as they are paying something on the common, the preferred is paid. Additionally, NYMTN is a cumulative preferred, which means that if there was a suspension in the dividend, the preferred dividends, including omitted payments must be made in full prior to the reinstatement of any common share dividend.

I’m comfortable in continuing to build toward a full position in NYMTN, dollar cost averaging all the way in and taking advantage of the discount. The closer the price gets to $23.00, or a 8.6% yield, the less I like it, yet even at par value it’s an 8% yield, which is nothing to sneeze at. At this level, we would start to look for other opportunities and closely evaluate the continued investment relative to other opportunities. As long as it continues to fit the criteria established for the overall construction of the portfolio however, I will sit back and enjoy the income until the call date.

About New York Mortgage Trust from Corporate Website

FOUNDED 2003

INVESTMENT PORTFOLIO VALUE $4.2b*

NASDAQ NYMT

HEADQUARTERS New York, NY

ANNUALIZED DIVIDEND YIELD 17.1%*

*Data As of 09/30/2022

New York Mortgage Trust is a real estate investment trust (REIT) that acquires, invests in, finances and manages primarily mortgage-related assets and financial assets.

We’ve built a diversified portfolio of investments that includes certain credit sensitive assets, and in recent years, investments sourced from distressed markets that create the potential for capital gains, as well as more traditional types of mortgage-related investments that generate interest income.

We use a combination of net interest margin and net realized capital gains, and an investment portfolio diversified among interest rate and credit risks, to deliver stable distributions to our stockholders over various economic cycles.Our proven investment strategy of targeted assets currently includes residential mortgage loans such as re-performing, bridge, and performing S&D loans and preferred equity and joint venture equity investments in, and mezzanine loans to, owners of multifamily properties.Subject to maintaining our qualification as a REIT, we also opportunistically acquire and manage various other types of mortgage-related and financial assets that compensate us appropriately for the risks associated with them.

Our focus

Utilizing a Strong Balance Sheet to Capture Superior Market Opportunites

Opportunites

• Maintain low portfolio leverage
• Take advantage of proprietary opportunities across the Single Family and Multifamily markets
• Continue to grow a pipeline of high return asset opportunities in less competitive markets
• Focus on assets that benefit from a high touch, active management approach to unlock value

Conclusion

• Fixed Income Securities should have a prominent position in your income portfolio.
• Fixed Income investing does not limit you to paltry inflation lagging returns. Double digit returns are available if you just look for them.
• NYMTN New York Mortgage Trust Preferred Series D paying 10.5% at a 24% discount to par with 31.5% upside. What’s not to like?
• New York Mortgage Trust has taken its share of bumps and bruises from the FED, but the preferred dividend is safe so far with the 2023 outlook improving.
• Start building the fixed income portion of your portfolio today.

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