Last week, I posted on NYCB’s on-going disaster (Weekend thoughts: $NYCB and regretting sweetheart deals). I got tons of inbounds on it, and there was a decent bit of news on NYCB during the week. Given that combo, I figured a follow up was in order. There are four things I want to touch on in this update:
Hi Andrew, as a fellow investor and Substack writer, wanted to tell you I really admire you for being honest with your readers and admitting you were wrong.
My publication does not make market calls; rather, I analyze situations and let readers make their own conclusions, but you are a big inspiration to me!
Andrew, Stock picking can be a very humble business. Great when you are right and horrific when wrong. I know as a wealth advisor for 40 years. You always learn from your errors and the first rule into take ownership which you have. NYCB in my mind is a crapshoot and while the downside could be $5 the upside is not $10. I personally don't like the odds and would not play it. Too many other value names in the ocean. Truly you are an honorable man.
Awesome note. If the real estate behind those loans are not worth as much as we think they were, shouldn’t NYCB only be in trouble if the loans became delinquent? I suppose it depends on the credit profile of the lendee?
There is no reason to assume the rates reset because these loans typically have 30yr amortizations. NYCB says so in its report 10-K. A small % of the book is I/O for first two years, and the underwriting assumes full amortization. Your example seems to assume an I/O structure with a bullet at end, similar to a corporate bond. FWIW those structures are also common in other CRE markets such as offices buildings. But they don’t apply to NYCB’s rent-stabilized MF loan book. And the DSCR also includes principal payments, so the typical borrower’s NOI covers interest and principal which is more conservative than what you assume. To the extent borrowers are experiencing stress reflects a deterioration in NOI; there is no reason to assume they need new financing otherwise.
Btw this is just another example of how, despite what everyone seems to think, Fed rate hikes actually support inflation: higher rates force property owners to raise rents to generate sufficient NOI to support debt service for new loans.
NYCB sub bonds due 28 yield around 15%, cheaper than they were at anytime in 2023 likely due to forced selling from credit investors who can’t hold sub-IG securities. The current yield (11%) exceeds the 10% yield for the series A prefs, despite a more senior position in the capital structure. Assuming no failure, those bonds are money-good.
I recognized this as being dramatically overdone and bought a large position at 3.87. I see no reason to sell, now sitting on sizable gains. Excellent write up
Since the implied cap rate of the multifamily loan book can be calculated as C = DSCR x LTV x i , where i is the assumed loan interest rate, then for DSCR = 1.64, LTV = .6 and i = .04, the implied cap rate C would be 3.9%. I think assuming a currently cap rate of 8% for these same assets is overly pessimistic. I think an increase closer to the current NYC multifamily average of around 5.5% would be more accurate. If you do assume a current cap rate of 8%, then it would be likely that the cap rate at loan origination would be closer to 6.4% (assuming same net change in cap rates). This would imply an interest rate at origin of 6.5%, not 4%.
Back in the March timeframe, the biggest tell that there were great bargains in the banking sector was widespread insider buying. Today, scant few banks have insiders buying
Hi Andrew, as a fellow investor and Substack writer, wanted to tell you I really admire you for being honest with your readers and admitting you were wrong.
My publication does not make market calls; rather, I analyze situations and let readers make their own conclusions, but you are a big inspiration to me!
> I had several friends reach out to me when they read that and walk me through the math of the portfolio, and I was flat out wrong.
Being able to say “I was wrong” shows a lot of maturity. Kudos to you.
Citrini on Forward Guidance also emphasized the need for generalist investors to talk to many experts. Thank you for sharing their insights.
Andrew, Stock picking can be a very humble business. Great when you are right and horrific when wrong. I know as a wealth advisor for 40 years. You always learn from your errors and the first rule into take ownership which you have. NYCB in my mind is a crapshoot and while the downside could be $5 the upside is not $10. I personally don't like the odds and would not play it. Too many other value names in the ocean. Truly you are an honorable man.
Awesome note. If the real estate behind those loans are not worth as much as we think they were, shouldn’t NYCB only be in trouble if the loans became delinquent? I suppose it depends on the credit profile of the lendee?
Hi Andrew,
There is no reason to assume the rates reset because these loans typically have 30yr amortizations. NYCB says so in its report 10-K. A small % of the book is I/O for first two years, and the underwriting assumes full amortization. Your example seems to assume an I/O structure with a bullet at end, similar to a corporate bond. FWIW those structures are also common in other CRE markets such as offices buildings. But they don’t apply to NYCB’s rent-stabilized MF loan book. And the DSCR also includes principal payments, so the typical borrower’s NOI covers interest and principal which is more conservative than what you assume. To the extent borrowers are experiencing stress reflects a deterioration in NOI; there is no reason to assume they need new financing otherwise.
Btw this is just another example of how, despite what everyone seems to think, Fed rate hikes actually support inflation: higher rates force property owners to raise rents to generate sufficient NOI to support debt service for new loans.
Hope that helps.
Well written and informative. 🙏🏽
NYCB sub bonds due 28 yield around 15%, cheaper than they were at anytime in 2023 likely due to forced selling from credit investors who can’t hold sub-IG securities. The current yield (11%) exceeds the 10% yield for the series A prefs, despite a more senior position in the capital structure. Assuming no failure, those bonds are money-good.
I recognized this as being dramatically overdone and bought a large position at 3.87. I see no reason to sell, now sitting on sizable gains. Excellent write up
Since the implied cap rate of the multifamily loan book can be calculated as C = DSCR x LTV x i , where i is the assumed loan interest rate, then for DSCR = 1.64, LTV = .6 and i = .04, the implied cap rate C would be 3.9%. I think assuming a currently cap rate of 8% for these same assets is overly pessimistic. I think an increase closer to the current NYC multifamily average of around 5.5% would be more accurate. If you do assume a current cap rate of 8%, then it would be likely that the cap rate at loan origination would be closer to 6.4% (assuming same net change in cap rates). This would imply an interest rate at origin of 6.5%, not 4%.
Back in the March timeframe, the biggest tell that there were great bargains in the banking sector was widespread insider buying. Today, scant few banks have insiders buying
Off the PT. What is your take on cable stocks esp chtr?