Rising Rates And Intensifying Competition Will Squeeze Mortgage Spreads

Key Takeaways

• Higher funding costs, inflation, and regulatory burdens threaten profitability and limit New York Mortgage Trust's growth flexibility.
  
• Demographic shifts and intensifying competition constrain demand for mortgage products, reducing future investment opportunities and straining shareholder value.
  
• Portfolio diversification, acquisitions, operational efficiencies, and robust investor demand strengthen revenue growth, asset quality, and profitability, positioning the company for stable long-term performance.

Catalysts

Acquires, invests in, finances, and manages mortgage-related single-family and multi-family residential assets in the United States.

• Persistently rising interest rates and elevated inflation threaten to push NYMT's funding costs higher for the foreseeable future, compressing net interest margins and reducing the company's ability to generate profitable spreads, which may result in weaker earnings and pressure on revenue growth.
  
• Ongoing demographic changes, including slowing population growth, declining homeownership rates, and shifts in housing preferences among younger generations, risk reducing the long-term demand for mortgage origination and refinancing, leading to fewer attractive investment opportunities and constraining NYMT's future asset base expansion.
  
• Intensifying competition from large banks, fintech lenders, and new market entrants in mortgage origination and business purpose loans is likely to compress yields and limit NYMT's ability to originate and acquire high-return assets, which could directly undermine long-term returns on equity and net margin stability.
  
• Continued reliance on equity offerings to fund acquisitions or support the dividend increases the risk of shareholder dilution and sustained declines in book value per share, eroding overall shareholder value and putting sustained pressure on future per-share earnings.
  
• Regulatory pressure and tighter capital requirements in the financial sector are set to raise compliance costs and restrict capital allocation flexibility for non-bank mortgage lenders and REITs, impeding NYMT's ability to scale its platform efficiently and exerting sustained downward pressure on profitability and long-term earnings growth.

New York Mortgage Trust Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on New York Mortgage Trust compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming New York Mortgage Trust's revenue will decrease by 0.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.5% today to 46.0% in 3 years time.
• The bearish analysts expect earnings to reach $95.3 million (and earnings per share of $1.06) by about August 2028, up from $17.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.9x on those 2028 earnings, down from 36.7x today. This future PE is lower than the current PE for the US Mortgage REITs industry at 13.9x.
• Analysts expect the number of shares outstanding to decline by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

New York Mortgage Trust Future Earnings Per Share Growth

Risks

• Ongoing expansion and diversification of the portfolio, especially into Agency RMBS and business purpose loans, have contributed to recurring earnings and reduced volatility, which can support long-term revenue growth and more stable net margins.
  
• The acquisition of Constructive, combined with a capital-light origination and distribution model, positions NYMT to benefit from strong tailwinds in the growing non-QM and rental mortgage market, potentially boosting fee income and earnings over time.
  
• NYMT's active capital allocation strategy, supported by increased leverage flexibility and ample liquidity, allows the company to take advantage of favorable market opportunities, which could improve net interest margins and drive higher earnings.
  
• The company is achieving notable operational efficiencies through restructuring and expense management, as evidenced by declining general and administrative expenses, which may contribute to improved long-term profitability and bottom-line growth.
  
• Investor demand for BPL rental loans and Agency RMBS remains robust, with stable credit performance and strong debt service coverage ratios, indicating potential for sustained asset growth and protection of collateral quality, which could underpin book value and support future revenue stability.

Valuation

• The assumed bearish price target for New York Mortgage Trust is $6.75, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of New York Mortgage Trust's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $24.0, and the most bearish reporting a price target of just $6.75.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $207.3 million, earnings will come to $95.3 million, and it would be trading on a PE ratio of 8.9x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $7.06, the bearish analyst price target of $6.75 is 4.6% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.