New York Mortgage [NYMT] Conference call transcript for 2022 q2
2022-08-03 12:47:06
Fiscal: 2022 q2
Operator: Good morning, ladies and gentlemen and thank you for standing by. Welcome to the New York Mortgage Trust Second Quarter 2022 Results Conference Call. . This conference is being recorded on Wednesday, August 3, 2022. A press release and supplemental financial presentation with New York Mortgage Trust's second quarter 2022 results was released yesterday. Both the press release and supplemental financial presentation are available on the company's website at www.nymtrust.com. Additionally, we are hosting a live webcast of today's call, which you can access in the Events & Presentations section of the company's website. At this time, management would like me to inform you that certain statements made during the conference call which are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although New York Mortgage Trust believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release and from time to time in company's filings with the Securities and Exchange Commission. Now at this time, I would like to introduce Jason Serrano, CEO and President. Jason, please go ahead.
Jason T. Serrano: Thank you very much. Good morning. Thank you for taking the time to join our earnings call this morning. I am here joined with Kristine Nario, our CFO. We are excited to talk to you this morning about the developments in this market. We have seen the market actually transition to a buyerâs market for the first time in quite some time and the construction of our balance sheet will allow us to take advantage of these latest trends. But before we get into this letâs cover our second quarter highlights. In the quarter we incurred a loss of $0.22 per share. This was a function largely of an unrealized loss that we incurred on our balance sheet resulting in a negative 0.4% loss to our book value in the quarter. Now due to the increase of allocations is scratch and dent to, sorry, to a bridge loans over the course of the last 18 months as well as holding recourse leverage below one times we were able to limit losses given the extreme volatility we saw in the interest rate markets. Now after declaring a $0.10 dividend our quarterly economic return on undepreciated book value resulted in negative 2.5%. We also in the quarter saw an opportunity to repurchase some of our shares which is the first time we've done that in quite some time. We saw an opportunity to do so where we repurchased 2.8 million shares in the quarter and 0.9 million shares thereafter, slightly after the end of the -- beginning of the fallen quarter. We are able to do so at attractive pricing of 2.69 for the company and $2.73 per share. In the quarter we acquired in $890 million of investments. I'll be talking about how this was a tale of two quarters of activity given the latest news. The acquisitions was highly dominated in bridge loans and also started seeing an opportunity to look to sell and monetize some of our JV positions in multifamily equity which I'll talk about in a minute. In the quarter we also obtained 876 million of financing, 77% which was non-mark-to-market. This allowed us to continually -- to continuously increase our mark-to-market financing on our balance sheet and also allowed us to finance some of the acquisitions we made in that quarter. We ended the quarter with very low leverage at 0.7 times and on a recourse leverage ratio and portfolio basis at 0.6 times. $383 million of cash was held on the balance sheet and we should be -- we're expecting this number to increase over time as we are seeing opportunities to rotate our balance sheet into higher yielding assets. At this time, I'll pass the call over to Kristine to talk more thoroughly about our financials. Kristine.
Kristine R. Nario-Eng: Thank you Jason. Good morning everyone and thank you again for being on the call. In discussing the financial results for the quarter I will be using some of the information from the quarterly comparative financial information section included in slides 24 to 35 of the supplemental presentation. Our financial snapshot on Slide 9 covers key portfolio metrics on a quarter-over-quarter comparison. The company had GAAP loss per share of $0.22 and undepreciated loss per share of $0.13. We paid a $0.10 per common share dividend which was unchanged from the previous quarter. GAAP book value per share was 4.06 and undepreciated book value per share ended at 4.24, down 4.7 from March 31st and translated to a negative 2.5% economic return on depreciated book value during the quarter. Our undepreciated book value decline during the quarter included $0.18 per share of unrealized losses primarily due to credit spread widening and increase in interest rates that resulted in a decline in the fair values of our residential loans and first loss securities we owned and consolidated SLST. Our portfolio net interest margin for the quarter was 3.48%, a decrease of 39 basis points from the previous quarter. Rising interest rates in the second quarter impacted our portfolio of financing costs resulting in an increase of 28 basis points from the prior quarter. We also experienced a 11 basis point decrease in our portfolio yield on average interest earning assets driven by a lower yield on our investment and consolidated SLST and to a lesser extent as a result of the overall composition of our BPL bridge loan portfolio with a quarter end weighted average coupon of 8.41%, down from 8.53% at March 31st. The company's recourse leverage ratio and portfolio leverage -- portfolio recourse leverage ratio remained low at 0.7 times and 0.6 times respectively. Slide 10 details our financial results and Slide 25 details the components of net interest income. Our portfolio net interest income increased by 1.9 million during the quarter primarily due to the following; first, we have portfolio interest income of 61.8 million, an increase of 9.3 million as compared to the previous quarter which is due to our continued investment in higher yielding BPL bridge loans. This increase was partially offset by an increase in portfolio interest expense of 7.4 million primarily due to increased utilization of our warehouse facilities to fund purchases of single family investments during the quarter. Total net interest income which includes interest expense related to our corporate debt and mortgage payable on real estate decreased to 26.1 million as compared to the previous quarter. As you can see on Slide 25, the increase in non-portfolio related interest expenses is due to an increase in interest expense related to mortgages payable on real estate of 6.6 million from the previous quarter. This increase is due to the full quarter impact of multifamily joint venture investments consolidated in the previous quarter, additional multifamily joint venture investments entered into and consolidated in the current quarter, and an increase in interest rates affecting 70% of the mortgage payable balance related to real estate or approximately 884 million of unpaid principal balance that is floating rate debt. We have non-interest related losses of 20.2 million mostly from net unrealized losses of 67.7 million as a result of increases in interest rates and credit spreads widening during the quarter. This loss was partially offset by a 2.4 million of net realized gains from residential loan prepayment activity, 5.7 million of preferred returns generated by our mezzanine lending investments accounted for as equity and 3.5 million of other income. The other income is primarily comprised of redemption premiums recognized from early repayment of mezzanine lending investments during the quarter and unrealized gains recorded on an investment entity that originates residential loans. We also generated 35.9 million of income from real estate which includes income related to consolidated multifamily apartment properties in which the company has equity investments in the form of preferred equity or common equity and are single family rental portfolio. As discussed earlier, our real estate properties incurred interest expense of 13.2 million and also incurred other expense of 70.8 million. The other expenses incurred by these properties during the quarter are primarily related to depreciation expense and amortization of lease intangibles totaling 52.4 million. After reflecting the share of the losses to the minority partners of 18.9 million in total, our investments in real estate properties incurred a GAAP net loss of 29.1 million for the quarter. Excluding the company's share and depreciation and lease intangible amortization expenses, these properties generated 4.1 million and 9.6 million of undepreciated earnings in the quarter and year-to-date respectively. It is important to note that we pursue these investments for the potential participation and value appreciation of the underlying real estate, which is realized only upon sale of the multifamily assets in the future. As Jason mentioned earlier, we are continuing to consider opportunities to monetize the appreciated value in this portfolio. As detailed on Slide 28, you'll see that both income from and expenses related to real estate increased in the second quarter. These changes consistent with our expectations are primarily related to the full quarter impact of multifamily joint venture investments made in the previous quarter as well as additional multifamily joint venture investments made during the current quarter which required consolidation in our financial statements. We had total G&A expenses of 3.2 million which decreased compared to the previous quarter due to a decrease in commission expenses. We had portfolio operating expenses of 12.7 million which increased primarily due to the growth of our investment portfolio. I will now turn it over to Jason to go over the marketing strategy update. Jason.
Jason T. Serrano: Thank you Kristine. So the market clearly undergoing a seismic shift. We laid out on Page 12 a diagram that describes the evolution of where this market and the transmission mechanism that is happening today. Starting with 2021 and up to basically the first quarter of 2022, as we all know that the market had extremely efficient financing, assets were trading at par plus from origination pipelines, and the securitization market was very robust. During this time period we selected to focus on shorter duration loans where securitization financing is while helpful, is not absolutely necessary to execute the strategy. As we've talked about earlier, we did complete securitizations and take advantage of that funding that was available to us. But really in the second half of the second quarter, market started changing quite a bit. The market became a discount market and new originated assets, given the rate changes, were trading at discounts and the financing became inefficient. Inefficient in ways of the rate moved higher and also the buyer base related to these securitizations thinned out. So with respect to that, we saw this pattern starting developing, we became very cautious, even related to the short duration bridge opportunities which don't necessarily need securitization financing to execute the strategy. Going to 2023, we see a market where we believe there'll be likely deep discount assets available to be purchased, where the market shifts from a financing spread model to a ROA or return on asset with no financing required in some of these sub sectors that we're looking at. It will be important at this time to have a portion of the unrestricted cash that will be available to access this market and we believe this will end up being a market where liquidity and cash availability on an unrestricted basis will lead the opportunity and outperform the market as a whole. At this time, we look to become aggressive, looking for opportunities where our asset management team could really be deployed to unlock value there. So the flexibility that we have on our -- with the assets we have in our balance sheet that have high turnover related to fix and flip loans, also with monetization of certain strategies such as our multifamily equity portfolio, we were able to rotate these assets to higher yielding returns in a buyer's market. And we believe that the timing of this is the most important aspect of it. It's impossible to time it perfectly and hit the target but what we're trying to do here is really just hit the side of the barn as it relates to the timing of the strategy. We're watching opportunities unfold and seeing portfolios from previously originated loans trade at discounts, but we believe that the market will offer a better value over time. So with this selective approach we expect to be able to drive value and also earnings relates to our interest income and realized gains over time as the strategy continues to unfold. Now turning to Page 13, market themes are very similar but the way we're executing and the way we're thinking about involving ourselves in market is a bit different. So in the residential housing markets we're obviously seeing a slowdown a bit in existing home sales. That's also related to a drop of the existing inventory. We've been at a historically low inventory levels and the latest changes in inventory levels have really been a function of the new home builds which are not at the same price points as existing homes and are showing a sequential increase in volume and units available for sale. But given the still very low units in the market on an existing basis less than million units, it's definitely stabilized markets against the rate increases. In this space and single family, we're looking to selectively add here. This is not yet a full market opportunity where we're seeing basically sales at any price, really it's liquidity concerns. But we believe at some point we will be able to recognize and earn returns based on that particular market construct. So today we are selectively adding more of a whole basis and letting our portfolio rotate and mature and allowing that to redeploy into future opportunities. On the originator side, we're definitely seeing strains in the market. Obviously we've all seen a couple of originators file for bankruptcy. We believe there's more to come. We're in early innings here and given the stress we've seen to this date, we have seen portfolios trade in the scratch and dent space as 30-point discount. Now this is a loan that would be originated and sold into market at 102.5 but three to five months later is sold at three points loss. Now, these are -- when you see these types of activities this is obviously a desperate measure for liquidity and obviously an opportunity for us to provide that liquidity to the origination market and particularly in the non-QM space that we're seeing some of that opportunity there. So we're not at a point where now we're seeing warehouse lines being fully liquidated or anything similar to that matter, but we believe that there'll be a time period in not too distant future where that could be available to us. And we're hanging around the hoop for that opportunity. In the multifamily space, the rent walls and property appreciation is still very strong, particularly in the South with the still positive migration trends and solid job markets. So with that said, it's an opportunity for us to take some gains we had built in the portfolio and we look to do so in the short term. In the medium term, we definitely see an opportunity to provide Gap funding for opportunities where the sponsor had a property, particularly on a bridge loan, which we see more than $100 billion of bridge loans produced over the last two years with three-year type of durations. Unfortunately, in this market, you've had LTVs on senior financings come down anywhere from 10% to 15% on LTV basis and that presents an opportunity for us to provide Gap funding at teens returns with very low LTVs. So that is an opportunity that's building not here today. The maturity wall of that schedule looks to start coming to fruition in later part of this year, but really earnestly in the beginning of 2023. So that is definitely an opportunity and part of the reason why we want to clear cash for what we think is going to be a very sizable market there. Now, turning to Page 14, the portfolio acquisition. I said earlier we had $890 million of acquisitions in the quarter, but this was really a tale of two quarters. We had pretty strong proprietary flows in the first half and unfortunately for us, we saw the market not moving coupons up with lockstep, with funding costs. It was a pretty frustrating environment for us in the back half of the second quarter. And for that reason we significantly slowed our acquisition pace down there. And it seemed like the originators were really favoring volume versus attractively priced assets, which is the reason why we were seeing discounted sales thereafter and particularly into the third quarter. So with the market resetting and we'll talk a little bit later about the coupons increasing in these various asset classes, it presents an opportunity for us to jump back in. With that said we $304 million of prepayments redemptions. Again, this is related to the fact that we have a very short duration portfolio. And within the multifamily space, particularly with respect to our assets we have, we're seeing redemptions there that after significant buildup of rent rolls and appreciation in homes, not surprising that we're being taken out of some of our prepositions given the ability to recap our position or also sell the property. Turning to Page 15. On the portfolio financing side, we mentioned earlier that we increased the mark-to-market financing, if you see there 756 million in that graph on the right side. That is a, obviously is a continued focus for us. We want to build availability, to extent that, we're looking for these short-term opportunities to invest in this market, to have the availability of non-mark-to-market financing. And we have about -- basically about $600 million of unutilized financing lines today to access this market. So we feel a pretty good position there, we think the market is going to reposition into more of an ROA opportunity where financing is likely not needed. So, I think incrementally for us, we don't see a big need to continue increase our financing lines there. But we do look for opportunities to take out assets in the securitization market today, and we're looking for opportunities there. Now, on Page 16, we added this slide in, I think it helps explain a lot of our positioning situations and also our end strategy. We've had a number of questions through the quarter and our attempt here was to answer some of these questions that came up inter quarter and it's really kind of address our positioning. So on the left side of portfolio assets, again, 35% of our assets are in BPL bridge, 12-18 month durations there, fast reinvestment, high turnover expectations at high coupons. This is an asset that you wouldn't like to have to roll for two to three years and continuing trying to keep the portfolio elevated. But again, we entered into this strategy over 18 months ago with the expectation that at some point, we'd move the rotation, we move the asset rotation into longer duration assets at discounted prices. And, that strategy, while again, not currently available today, we believe that is building and our strategies will be executed. Going back down on the joint venture portfolio, again, focus recycling. Some of their cash, the 389 million of capital we have in equity investments there, and as well as on the cash side 383 million covers 41% of our mark-to-market debt, because of the high turnover over $300 million per quarter. We're expecting to grow that cash position for the opportunities that we see coming. On the right side, this is I think part of the story here that is really helpful to kind of dig in. On the securitization side, with $1.1 billion of securitization debt, 100% fixed rate debt there. One thing that may not be obvious to everyone on the call, is that we do not fair market value these liabilities, if we did we would see a 3.7% increase to our book value. The reason why we don't do that, while many of our peers do is simply while rates are higher, and our cost of debt is fairly cheap at 2.77%, we still have the obligation of paying debt off at par. And therefore, taking a valuation increase on that liability, we think is inappropriate for us to do for balance sheet purposes, which is the reason why we keep it at par. But that would be a nice pickup if we were to change accounting measures there. Also, maybe not as quite obvious is that our debt outstanding on the corporate side is very low. We have one bond issue outstanding due 2026, close to $100 million of notes outstanding at five and three quarter. That's something we refinanced previously and we're able to step down our financing cost there. And two trust preferred outstandings, very favorable financing there with a maturity of 2035. The reason why I point this out is that, it's not just the cash we have on our balance sheet that is available but also there's the whole backs related to corporate financing that we need to do for maturity payoffs. And in looking at a very challenged market in the corporate bond space, it's not something that we have to contend with. And therefore, when you look at our cash, we truly do have the flexibility to invest into this market. And as I said before, there's opportunities to further reduce our debt to equity, as well, which is very low level 1.4 times versus our pure average of the 3.7 times debt level. And to further recourse the leverage outstanding there. Now turning to Page 17, just on the single family portfolio, I did allude to earlier that we're seeing opportunities to invest in wider yields here. On the BPL bridge side, we're seeing about a 2% increase in total asset coupons. Again, this is not an opportunity that was a very short duration opportunity that we were investing in, this market was slow to react to rate increases, primarily because of the short duration, which you'd expect. But we're finally seeing that market capitulate with increasing coupon there. There's also been a lower demand base that has been pulling assets through that market. So the contention of other market participants in this market has obviously thinned out quite a bit. And there's significant opportunity for us to grow. As long as we continue to see coupons grow there we will be active. On the BPL rental side, again this has been one of the markets where we thought rates should have increased faster. We didn't see it, we slowed our production purchasing there from production from originators. Today we're not a buyer into this market, waiting for the kinds of settling out of the securitization market, which again, I said earlier, is very thin and unstable. So this doesn't present an opportunity for us to sort of buy in and securitize into this market, which is why we're on hold there. In the scratch and dent space, building liquidity constraints with respect to originators, this is going be a big opportunity for us. There is small pockets trading at 30 points discounts as I said earlier. The market is anywhere from 70 to 90, depending on the assets and also the timing of when those coupons were struck. But we think there's more pressure there and better opportunity over time. On the RPL space, there's nothing really to say. We've talked about this as a market we've moved on from quite a bit over a year ago. We have 96% of our assets that are in this strategy that are already in term securitization structures, where we earn an equity return, and that name is stable to the securitization. Delinquencies in this portfolio and across our entire book had been very -- has been very stable. In fact, we're now below kind of 2019 pre-COVID levels on total delinquency base and most of the strategies that we are focused on, particularly in the RPL strategy, this is high season assets, typical origination age of these loans were pre-financial market meltdown in 2007. So lots of seasoning here, very low LTVs, lots of borrower alignment with us as the owner of the loan. And this is going to be we believe a stable portfolio going through time. Turning to Page 18, again given the size of our business purpose loan strategy, it's important to highlight the characteristics of these loans. And, what we're looking at is, we focused on high bar experience where the bars on our portfolios has had at least 11.5 projects, on average, actually for previous experience before we lend to them. Delinquencies here is low at 5% on a short duration book. Typically, this is extension issues where the home is listed for sale or the marketing or the construction timeline to completion has extended. But given the low LTV at 73% at the cost of the home or after repair of 66%, we expect full recovery on that pool. And also very important we have the project rehab costs. As you can see at least a third of our portfolio has actually very little to no rehab costs. We've focused on that point to really keep the duration short and avoid extension risk issues and therefore, why we think we'll have consistent asset turnover. It is really to keep the duration short and avoid extension risk issues and therefore, why we think we'll have consistent asset turnover. I said earlier 300 million per quarter we expect to continue given the short duration book. Now moving over to multifamily, as I said earlier, we're on a hold position for the mezz lending opportunities. We have a fantastic book, plenty of equity built up in here. We'll talk about it in a second. But, the 12% coupon, have never experienced a loss in this asset class since we started originating loans in this space many years ago, and this is an opportunity that we think is growing. On the joint venture, good opportunity. We stepped into this opportunity to catch the tail winds of the migration changes that were happening in the Southern part of the United States. We thought there were better value to be held as an equity position versus a mezz position, particularly in the Southern part of United States. And therefore we started looking at this equity opportunity back into late 2020 or early 2021. We think we hit the market well with respect to timing and we look forward to monetize part of this portfolio. Turning to Page 20, just to give more detail on our portfolio as it relates to multifamily. A lot of questions have come up on this point. As you can see, on the top left corner as it relates to the portfolios or the properties behind our mezz loans, 95% are occupied. Rent growth has been extremely strong. 2021 underlying properties at 8% rent growth, in 2022 those were at 12%. This is a portfolio we expect to at some point to be redeemed on most of these on the 28th with different positions over time. And in the quarter, we had two loans that were outstanding of $10 million were paid off. What we like about this strategy is with the coupon and 11.8% there's upside opportunity here as we have minimum prepay multiples once the asset is paid off, in this case 1.4 times multiple, given the increase of rents. And in value of properties, we do expect to continue seeing these prepaid multiples increasing given the early prepayment trends that we're seeing in our book. And again, very strong performance, only one loan currently is delinquent at 1.5% of the entire position. We expect this asset given the LTV to pay off at par. Now turning to Page 21. This again is a new page, a little bit more disclosure here on our JV equity position. These are obviously 20 assets here that we are in equity position on that -- where there's no cross collateralization with respect to the underlying asset. So these 20 assets own outright, as you can see, on the second to the last column on the right, gives our equity position in these properties anywhere from 70% to kind of 95% ownership position. We gave the vintage of one of the assets were acquired, particularly to show where some of the buildup in rent growth has happened. As I've noted here in 2021, we've had rent growth of 16% and then 17%, respectively 2022. We thought we -- we think we timed the market well here, particularly in the markets that we are involved in. Most are in the Southern part of the United States and some secondary markets such as Oklahoma City that has been kind of a -- have been receiving some strength from some of the Dallas growth that's been there and pricing -- markets Oklahoma City as an example. But this is an asset with high occupancy where there's a transition story that we initially saw available to us to move rents off particularly related to CAPEX expenses or management changes. And we've been looking to execute that strategy across the $255 million of equity that we have outstanding in this market. The market rallying in the Southern part and the thesis that we'd see demand there back in 2020, has really paid off. And we were really excited about the opportunities we have to either monetize the portfolio or look at a corporate kind of structure opportunity here. So we're looking at all different opportunities here to monetize this book. And finally on this last page here, we're as I said earlier, in the face of a market transition that's clearly unfolding. The luxury that we have and has been built over the past year and a half has been being able to have a highly high asset rotation portfolio where we can redeploy our cash that is truly unrestricted into this market at higher yielding opportunities. In an environment where deployable capital will be truly what differentiates us from the market and we'll be available to provide liquidity to the market in various areas, we are excited about this opportunity and talk to you further about it. So at this time, I'd like to pass the call over to the operator for questions.
Operator: Thank you. . And our first question comes from the line of Doug Harter with Credit Suisse. Your line is open.
Douglas Harter: Thanks and good morning. Just on the multifamily JV portfolio, can you talk about where you might -- what type of embedded gains you might have on that and remind us that asset is mark-to-market on the balance sheet?
Jason T. Serrano: Yeah, so I'll start with the mark-to-market. We -- these assets are held at cost basis less depreciation and amortization on a depreciated basis and obviously, that is below our cost basis. So that's where we currently hold these assets on our balance sheet today. We are looking at -- we've had some reverse inquiry on our portfolio and other kind of corporate transaction opportunities. We look forward to sharing more about that in the upcoming quarter. But at this moment, this is still in kind of preliminary stage. I mean, we're showing here some of the rent growth that can help understand the valuation increases that we've seen in our portfolio. But that's not something we're going to comment on this call.
Douglas Harter: Alright. And then, as you think about the potential for some sort of monetization of that, I guess, how do you think about the timing of wanting to do that to line up with the opportunities that, I guess you see building over the coming months, I guess just how do you think about kind of matching up the timing?
Jason T. Serrano: Yeah, so I mean we have enough cash in cash, that is coming through our BPL portfolio to access that opportunity. So it necessarily doesnât depend on rotating or multifamily equity both for that. We think that, while if we just keep it within the multifamily sector, the opportunity for what I just described earlier, which is that kind of that bridge lending, Gap funding capital that will be -- we think will be necessary more in 2023 is a more of a medium term opportunity for us while we think the monetization of components of this portfolio or a corporate transaction is more of a short-term opportunity.
Douglas Harter: Great, appreciate it. Thank you.
Operator: Thank you. And our next question comes from the line of Jim Metzger from FactSet. Your line is now open. Jim Metzger, your line is now open.
Jason T. Serrano: I guess, we can move to the next question.
Operator: Our next question is from the line of Christopher Nolan from Ladenburg Thalmann. Your line is now open.
Christopher Nolan: Thank you. Can you hear me?
Jason T. Serrano: Yes.
Christopher Nolan: Oh, I didn't hear my name announced. Thanks for the detail on the intro here. Just a bunch of questions. And related to the strategy, should we -- I know you mentioned Gap funding in your terminology. I mean, should we look at that as hard money lending or are you directly investing in additional common equity into these properties, I mean, what sort of strategies are you looking to invest in?
Jason T. Serrano: Yeah, we think the opportunity is going to circle around, when we say gap funding what I mean by that, in particular, is that we -- senior lending in the multifamily space was mid to high 70s. And we're seeing regional community banks, etc. cut back their LTV in this market environment to anywhere from 50 to 65, even less into the low 70s. So we think there's about 10% to 15% minimum of kind of where -- if you were going to refinance a particular asset, which is going to be a bridge loan, that's coming up for maturity, that you'll need some additional capital to get that asset recapitalized. And then that's where we can come in and we've seen -- and that's where we see the opportunity. So it would be in the form of lending and not equity and the opportunity from a duration standpoint, we believe that loans will be quite short. And really attempting for allowing the unlike sponsor to access probably more favorable funding through this -- through this time period, particularly in kind of 10 year fixed funding that is available through the agencies. So, what is -- what we little discuss here is that the fact there's a very strong agency senior financing market for multifamily properties across this country within Fannie and Freddie Mac, and that has very much stabilized the funding source of the opportunity for underlying sponsors. And while we believe that this mark will outperform through this next cycle, simply because that funding is strong. And, with respect to Fannie and Freddie, they have budgets for financing availability that they're going to provide to the market. And, they've consistently been kind of under budget, particularly as the market has slowed. So, there's plenty available funding for good assets with good stories behind good managers, and those are the assets that we want to help support in this new cycle.
Christopher Nolan: As a follow up, are you looking -- it sounds like the sponsors are coming from a point of weakness and, I mean, are they being compelled by their banker or Fannie Mae to raise the equity? And if that's the case do you have any protections in terms of the sponsor sort of going belly up, I mean, are you putting the title of the property in ESCROW or something, it's because you're sort of going into potentially dangerous waters that time and just little clarification would be helpful?
Jason T. Serrano: Yeah, so I mean, the opportunity is a case where there's no real requirement coming from Fannie or Freddie, for this purpose, it's really a function of the debt structures that were produced back in 2022, 2021, which were for the most part, 100 billion plus of short duration, two to three year senior financing. So there's a maturity wall that is in front of many sponsors across the United States. And the question is, how do they get through that. And get through it, meaning if they're not going to sell the property and they want to recapitalize this, this is the opportunity for us. So this is not necessarily coming from a distressed point of view and that the property has gotten -- where DSCR ratio has dropped below one times, this is coming from strength of the sponsor, and that they want to continue holding these assets. They don't want to liquidate today. But they've obviously seen, a buildup in rental rate increases and property value through their holding period from when they struck these loans back a couple of years ago. So the opportunity for us is to be that lender, where they can access that senior paper at or senior fixed rate paper with 10 year maturities, which is obviously very stable for them so they can continue on with their planning -- their business plan with the property. That's where we see the opportunity today. Obviously, a lot to change from now until then. We wanted to highlight that for the rotation that we're looking at with respect to our portfolio is not in continuing in the equity strategy, but more on the lending side is what we're looking to allocate in the future.
Christopher Nolan: And then finally, are you seeing with more your sponsors where their cap rates, where they invest in these properties is now their funding costs are now higher than their cap rates?
Jason T. Serrano: So when you talk about cap rates, there's many ways to look at it. And the interesting point about cap rates in this market is, you typically don't have the types of rental increases that we -- that I just described earlier in these markets. So when you look at a cap rate at a purchase cap rate, typically you have inflationary type of rent rolls, well here you're having double digit rent rolls. So if somebody entered in a property at a four and quarter cap rate in the market is five and a quarter today, that is off of assumption that the four and quarter you haven't had rent rates, and have any income gains in the portfolio as the rental rate increases. And so while the cap rates have moved out, up to 100 basis points, you do also have rent raises, I've also offset some of those costs, and therefore could support higher coupons in this market. So it's really a function of where that asset is located and what kind of rent growth they've seen, where you're pointing -- your driving which is how could they fund these properties when the costs are greater than their return, it could be offset. So it really depends on the market. Typically, what we're seeing in the South is that they're -- the gains on the portfolio has outstripped the increased funding costs. And, that's keeping the opportunity very much in focus for those sponsors.
Christopher Nolan: Great, thank you.
Operator: Thank you. Our next question is from the line of Eric Hagen with BTIG. Your line is now open.
Eric Hagen: Hey, thanks. Good morning, guys. Maybe just a couple from me. When you talk about this being a buyersâ market, would you say that the hurdle rate you're aiming to achieve has also changed or would you say that the hurdle rate has changed specifically for the bridge product? And then in the SLST portfolio, can you repeat what the mark-to-market changes were last quarter? And based on the way the asset is financed there, can you re-lever that debt or is that not releverable? Thanks.
Jason T. Serrano: Yeah, no worries. So as it relates to buyersâ market, what we're seeing is for the first time in many quarters that, these kind of portfolios are trading in this market. Obviously, the market was very efficiently financed earlier. We didn't see discounts on new originated product other than in the scratch and dent spaces, which we've been playing for quite some time. But in BPLs and DSCR, and non-QM did not see that, and we're obviously seeing it now. And we believe that opportunity we will be building. So, with respect to your question on increase of returns, yes, we definitely expect the returns and the different strategies that we're focusing on to increase. We've talked about on the run coupons and BPLs of 200 basis points higher. And that is obviously an easy story to understand, and any new investment there would be 2% increase in coupon. But, the focus is really there's a lot of origination product out there that was originated without really being priced in to deal with the financing costs increases on 30-year kind of loan product, and that's where we're seeing some of the market get stuck and where our liquidity may be used in the future. So that is an unfolding story. It's not here now, but there's definitely markings that are showing that that could accelerate, particularly in early 2023. As it relates to SLST I'll pass that over to Kristine.
Kristine R. Nario-Eng: For SLST you'll see it in Slide 26 Eric. First quarter, we had about 15 million of losses there and realized and we have for the second quarter about 4 million in losses. And as to your question as it relates to being levered, so we own first law securities in the securitization as well as IO securities. So, what we can lever that we can put it out on repo, to answer your question.
Jason T. Serrano: And furthermore, we could also look to securitize it. At this point, obviously, it's a difficult market for the securitization space given the fact this is a RPL book with stable financing from Freddie Mac. We preferred to keep to not finance it through a securitization strategy just yet. But that's something that is available to us.
Eric Hagen: Got you. Thanks for the perspective.
Operator: Thank you. And our next question comes from Steven laws with Raymond James. Your line is now open.
Stephen Laws: Hi, good morning. I wanted to follow-up, I guess a little bit on Doug and another's questions around the real estate, how should we think about I think you have one asset under contract for Q3, how should we think about the gain that we need to put into our model? And then just think about modeling that going forward?
Jason T. Serrano: Yeah, so I mean again, we talked about where our basis is in these assets. And we've talked about some of the market input factors that are creating an output of a higher value with respect to these properties. At this point, we're not going to comment on the future realized gain activity with respect to that portfolio. This is obviously a developing situation for us, we have been responding to both reverse inquiry and as well as some other market opportunities that are there. We hope to share more color with respect to this book, on our next call and further explain where this portfolio is going. But at this point, it's too premature to have that discussion.
Stephen Laws: Okay, fair enough. Following Doug again with leverage, but gradually moving higher here talking about the recourse metric, and sounds like there's great opportunities now, you've got some monetization in the pipeline coming. So how do we think about what you see as a normalized or steady state or target leverage number so to speak as we think about how capital is being deployed and what the expected kind of repayments and sales look like?
Jason T. Serrano: Yes, so with respect to leverage we expect leverage to stay low in this kind of context. We did increase our leverage, recourse leverage with respect to some of the strong growth we had in the quarter, the first half of that quarter. That's why we have seen an increase of our leverage there. It was just a function of our pipelines. But given where we stand today and some of the monetization themes that we're talking about as well as the NASA opportunity where it may not require financing to achieve that target return, we don't see material increases to this. In fact, we think it should go the other way which is a decrease of our leverage ratios over time. And that's a function of just having more unlevered, unencumbered assets on our balance sheet in this new market environment.
Stephen Laws: Great and then lastly maybe for Kristine and I appreciate the new Slide 16 and that Jason touched on the some of the fixed rate debt but can you maybe talk about a net interest rate sensitivity or exposure. I think in your prepared remarks you mentioned some floating rate debt on the real estate. But maybe as you think about both sides of the balance sheet, how do you view the net sensitivity to in rates?
Kristine R. Nario-Eng: We should expect that to go up in the future as it relates to our floating rate debt. But if you look at our multifamily investments, especially the consolidated investment, that's really looking at our share in the equity there. So it's not a full kind of pick up in terms of gains and losses. It is still going to be dependent -- it's still going to be related to like the performance of the property. So what we would expect on multifamily is that as they continue to improve the property there will be rental growth there. So you'll see income as it relates to our consolidated JV investments to improve.
Jason T. Serrano: You are right. As it relates to looking at page, just want to add on this page here where we broke out the corporate debt, a lot of the repo financing we have conducted is in the BPL space. And that is a short duration strategy. So, while we expect funding cost to increase there, we also expect the portfolio to decline and so the full effect of kind of the rate increase over a two to three-year period wouldnât be felt in that portfolio.
Stephen Laws: Great, thanks for your time.
Operator: Thank you. Our next question is from Matthew Howlett with B. Riley Financials. Your line is open.
Matthew Howlett: Hey, good morning. Thanking for taking my question. Just on the dividend, there are a lot of moving parts here. I really like the strategy and appreciate the page 26 here. Are you going to be generating a lot of games here it looks like going forward, I think previously you have talked about getting NII up to cover the dividend, sort of lot of mortgage rates try to do, I mean, how should investors look at earnings and dividend coverage going forward, is there something we have to always sort of bake in realized gains as part of the core strategy?
Jason T. Serrano: Yeah, I mean that's been consistent with our activity for many years now where a component of our return is in the realized gain sector, a section of our balance sheet and income statement. And we did see opportunities increase interest income in our portfolio through these higher yielding strategies in the BPL space and then in other related strategies. And press lending within a mezzanine book. However, the market is not functioning well at this point given the inefficient financing in the securitization market, to continue looking to grow interest income through a kind of levered yield basis, leverageble model. So as the market transitions into what we see as unfolding today, transitions into a lower leverage opportunity with discounted asset availability. Obviously the story changes a bit into expectation of not only interest income but also an unrealized gain activity through that discount that we would be looking to purchase those assets. So that is going to be a function of our story and has been for quite some time. Our dividend policy is an 18 month forecast on earnings including the realized gain activity. And not to look back in the last 3 months of interest income so it's a very complete picture of what we -- where we expect our earnings. To comment obviously given the unrealized activity it is typically choppy. You don't have a smooth process is related to asset liquidations. So, it needs the -- the dividend policy needs to be over a more extended period of time to capture the unrealized gain activity that we expect to generate to the portfolio.
Matthew Howlett: Okay, so we only have to think about this different than what we typically model in mortgage rates and it's a strategy obviously different than what you see in some of our larger mortgage rates out there, so certainly I understand that and thanks for that? The second thing was also I mean we'll wait for details obviously on the multifamily gains and the sales are going to come with that. But you mentioned also the corporate strategic alternative, are you speaking of something like a spin off in other subsidiary with regards to multifamily investments?
Jason T. Serrano: Yes, so all options are on the table. I mean we are coming from position of strength. We have a great portfolio and we see the market as demand and increased demand for what we have generated here. So whether corporate or a monetization through a sale we're looking at both options. We did put one asset in purchase and sale agreement just to see how the market is functioning relating to some of the earlier gains we had, it has gone extremely well. So I think everything you said is on the table and we're going to look to maximize value for our shareholders in the most efficient and least cost manner for this book. So, this is a -- we're focused on timing, we are focusing on efficiency, and we are going to focus on the total expected value that we think we have generated and being able to monetize that fully. And any of those options are on the table for us to evaluate and we will be working through that over the course of the quarter.
Matthew Howlett: Good and I'm glad you see guys buying back stock. It just looks like the book is understated and I am happy to see you taking advantage of the discount. Thanks for taking my questions.
Operator: Thank you. I would now like to turn the conference back to management for closing remarks.
Jason T. Serrano: Well thanks everybody for joining the call. We really appreciate your support and the time you spend with us. Look forward to speaking to you again on our third quarter call. Have a great day and enjoy the rest of your summer. Take care.
Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
