Description

New York Mortgage Trust has a fairly secure net asset value of about $1.90.  The company simplified its assets to the point where it is an attractive vehicle for an outside party wishing to develop a real estate business, with or without current management.  I believe the current valuation presents a very favorable risk/reward balance for anybody willing to wait until the strategic direction becomes clear.

RECENT HISTORY

New York Mortgage intended to copy the business model of Thornburg Mortgage Asset (TMA) - it seemed like a good idea in 2004.  The key steps taken in 2007 to preserve value are:

1)      Sale of the origination platform to Indymac Bank closed 3/31/07.  NMTG received minimal consideration, but disposed of a business that was losing money, required substantial capital, and Indymac assumed all lease and personal costs.

2)      In 2Q07 NMTG disposed of all loans originated prior to the Indymac sale.  NMTG says it has retained only $6.2mm of high quality performing loans that would be included in a future securitization.

3)      In 2Q07and 3Q07, NMTG has been resolving repurchase requests on loans originated prior to the Indymac sale.  As of 9/5, only $5.8mm of requests remained unresolved and the company believes that it has adequately reserved against the associated losses.

4)      In early July NMTG sold nearly all of its “AAA” private label CMOs and replaced them with a portfolio of agency bonds.

Tangible BV has fallen from $91mm at 12/31/05 to $37mm at 6/30/07 so NMTG has had a poor record as a public company.  However I believe that the remaining management (David Akre and Steve Mumma) has done a good job this year of salvaging some value for NMTG shareholders.  I encourage anybody who is interested in this idea to contact them at 212-792-0107.

CURRENT BALANCE SHEET

The following simplified balance sheet shows my estimates of the impact of activity in July and August (amounts in $mms):

It’s not beautiful, but at this point it’s simple.  The tangible BV per share is about $1.92.  The company has promised stability for several recent quarters, but the rapid deterioration of the mortgage market led to lower than expected proceeds from asset sales.  At this point I think there’s not much left to go wrong and the current share price provides a large margin of safety.

LIQUIDITY

v     Agency securities.  NMTG purchased floating rate REMICs in order to park cash in an instrument with minimal duration risk.  If credit spreads for agency securities expand significantly then NMTG could be in trouble.

v     Non-Agency securities.  NMTG owns AAA securities backed by prime mortgages, not Alt-A.  NMTG says that it is confident in the value of these securities and that repo counterparties are comfortable with them as collateral.

v     Net Investment in Securitizations.  Performance of the trusts has been excellent.  Original balance of $891mm has paid down to $471mm.  Cumulative losses are only $47K and the trusts held no REO at 8/31, but the company took a $900k reserve against the trust valuation in 2Q07.  30% of loans are in NY, 18% in MA, and 9% in CA.  98% of loans had LTV below 80.  I believe that in 3Q07 the company sold or permanently financed $28mm of certificates that had been retained at 6/30.

v     Lease Assignment.  In 3Q07, NMTG will receive $3mm from sublease of its former Manhattan office space to Lehman Brothers. 

v     Mortgage Servicing Rights.  NMTG is servicing the loans in its trusts and could sell the MSRs for $2-3mm.

v     NMTG has no significant contractual obligations.

Liquidity appears to be adequate unless there is significant deterioration in the ability to finance agency securities.

STRATEGIC ALTERNATIVES

NMTG is too small to operate efficiently in a loan securitization business like TMA and RWT or as an agency portfolio investor like ANH, MFA, CMO and NLY.  Investors will only realize full value for their NMTG investment through the strategic alternatives process.

NMTG has nearly completed its transformation into a clean platform for development of a real estate related business.  It offers a strategic partner:

v     $35mm of equity capital (assuming about $2mm loss in 3Q).  The company will steadily reduce the balance in the trusts and recover the over collateralization (2005-1 has already paid off 77%).

v     $45mm of trust preferred debt.  $20mm yields 8.35%, $25mm yields LIBOR+375.  In the current mortgage market these are extremely attractive financing terms.

v     Current management and administration could be removed at an all-in cost of $5-6mm

v     $29mm of deferred tax asset

v     Established SEC reporting company with current financials

NMTG reminds me of SFO that I posted last year.  The original business plan was no longer viable and the company arranged a RTO with Alesco Financial.  The valuation received by SFO in the transaction was low due to SFO's foolish investment in high-risk commercial mezzanine loans, however it still allowed SFO holders to exit at a substantial profit above the price when I posted the idea.  In comparison I believe that NMTG is a much simpler story without problem assets.  A similar transaction should generate a value of $1.50-$1.75 per share after severance expense and assuming no value for the deferred tax asset.

Catalyst