Q3 2019 Earnings Call
Prince will begin momentarily please continue to hold.
[noise].
[noise], ladies and gentlemen, thank you for standing by and welcome to the M.F., a financial Inc. third quarter earnings call at this time.
Our historical major including those containing words, such as we all believe expect anticipate estimate should could would or similar expressions are intended to identify forward looking statements. All forward looking statements speak only as of the date on which they have made these types of statements are subject to various known and unknown risks and Sir.
Assumptions and other factors, including those described eighth annual report on Form 10-K for year ended December 31, 2018, and other reports that it may file from time to time with the Securities and Exchange Commission. These risks uncertainties and other factors could cause phase actual results to differ materially from those projected expressed or implied in.
Statements. It makes for additional information regarding MFS is used to forward looking statements. Please see the relevant disclosure in the press release announcing interphase third quarter 2019 financial results. Thank you for your time and I would now like to turn this call over to MFS, CEO and President Craig Knutson.
Thank you al.
Good morning, everyone I'd like to thank you for your interest in and welcome you to imitate Financial's third quarter 2019 financial results webcast with me today are Steve yard our CFO , good murder, Christiansen, and Brian Wilson or co chief investment officers and other members of senior management.
Rates market experienced continued volatility in the third quarter of 2019.
Global growth slowdown concerns and trade tension contributed to a decision by the fed to cut rates at the end of July August brought a furious rates rally with 10 year rate plunging from 214 in mid July to 145 by Labor day, and two year rates falling by approximately 40 basis points during the same period.
We witnessed an abrupt reversal in the first two weeks of September when two year rates retraced almost this entire 40 basis point range, while tenure rates backed up 45 basis points. The fed again reduced the funds rate in the middle of September and then followed with a third rate cut last week.
We also witnessed some surprising illiquidity in the repo markets in mid September with overnight funding rates as high as 5% for a brief period for decisive action by the fed settle these markets.
Needless to say for Levered investors in mortgage assets. This environment has been extremely challenging.
While we cannot claim to have anticipated the stunning developments in rates markets and the phase investment strategy is very much intentionally not dependent on accurately predicted interest rate moves and we are happy to report that the market turmoil in the third quarter had very little impact on our financial results.
And the phase investment acquisition strategy, particularly our focus on purchase performing loans in which we include non QM fixed and flip and single family rental levels is proving to be a durable model. The groundwork that we weighed beginning in early 2017 gained further traction as our origination partners grow their business.
At least in part through MFS continued appetite to purchase loans. Additionally, during the third quarter of 2019 and that they made investments in the form of capital contributions to several of our origination partners Emma phase reputation as a reliable buyer of residential whole loans and dependable capital partner has enabled us to.
The source of significant volume of whole loans, including in some cases transactions with limited competition. Despite the difficult mortgage environment. We continue to make investments that provides solid returns on equity.
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And the phase GAAP earnings per share was 20 cents in the third quarter and we paid a 20 cents dividend to common stockholders on October 30, Onest Analyst day has paid a 20 cents dividend now for 24 consecutive quarters core earnings was also 20 cents per share in the third quarter, we acquired 1.1 billion of asset.
In the third quarter, including 918 million of whole loans, our investment portfolio decreased slightly during the quarter, but this was primarily due to opportunistic sales of high coupon 30 year fixed rate MBS in order to shed prepayment exposure prior to some high monthly prints.
As previously mentioned.
100 million of capital commitments to several origination partners during the quarter.
These range from new or additional equity contributions in all cases minority stakes to preferred stock investments some of which could include warrants for common equity to convertible debt investments also with warrants. This strategy is consistent with our approach whereby we provide capital in the form most suitable for our origination partners.
Our book value was essentially unchanged at $7, a nine cents per share in our economic return for the quarter was 2.5% or 10.1% annualized we've introduced a new measure of book value economic book value to highlight the fair market value of a significant class of our assets loans held at carriage.
Being value, which were 4.97 billion as of September 30, because GAAP accounting stipulates that these assets be shown at carrying value on our balance sheet. Their fair value, which is now 5.12 billion or $145 million more than the carrying value is not reflected in our reported book value since.
The fair value of these assets represents the expected value. If we were to sell them. We believe that their inclusion in economic book value more accurately represents the value of our assets.
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Third quarter investment activity was very strong as we purchased approximately $1.1 billion of assets, including 980 million of whole loans. The majority of our whole loan purchases were purchased performing loans non QM fixed and flip in single family rental as our acquisition of these assets slightly exceeded our investments in these.
Assets of $913 million in Q2, the process of acquiring these assets is very different from that associated with our other asset classes as we generally purchase these loans directly from originators rather than from the street was through both offerings.
Through our willingness and ability to explore various arrangements, including flow agreements strategic alliances and minority equity investments, we've been able to partner with originators to source attractive new investment, while enabling them to grow with support from MSC is a reliable provider of capital.
We will also during the quarter able to purchased an additional 133 million of RPL NPL NBS.
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As we have shown previously our expanding investments in newly originated loans or purchase performing loans is beginning to have a meaningful impact on our interest income. These loans are included in our loans held at carrying value on our balance sheet recall that we also include loans purchased as re performing loans or purchase credit impaired loans.
Our loans held the carrying value in the third quarter all loans the carrying value produced $64.2 million of interest income. This is versus 101 million for all of 2018 and 57.9 million in Q2 2019.
More notably 53.6 million of the 64.2 million was from purchase performing loans up from 46.9 in the second quarter.
As we continue to grow our balance sheet, we will add marginally more leverage, particularly on our residential whole loans held the carrying value. We would expect this leverage ratio will continue to increase modestly as our portfolio assets can easily support leverage of three to four times, what has to repo borrowing or securitizations.
For our credit sensitive whole loans, we've committed significant resources to our asset management efforts, we recognized that by immersing ourselves in the complicated and sometimes messy details of managing credit sensitive loans that we can achieve better outcomes and improved returns as good as our third party services are there is a tangible benefit.
To direct oversight and involvement in decision, making and finally, our legacy non agency portfolio continues to perform well and contribute materially to our financial results generating a yield in the most recent quarter of 10.3%.
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To summarize our strategy and initiatives for the rest of 29 team and into 2020 . We expect to continue to increase our investments in purchase performing loans, specifically non QM fixes lift and single family rental.
When and if we're able to grow our other existing asset classes at attractive levels. We will obviously continue to do so and as always we're constantly evaluating new investment opportunities given our track record. We are usually among the first to see new opportunities as we have demonstrated the ability and willingness to help structure. These deals.
And invest in size.
Will likely continue to execute strategic sales of legacy non agency MBS. This is all part of managing a mature portfolio and includes sales of bonds at relatively high prices with little additional upside sales of callable bonds at a premium and sales of low loan count or odd lot position sizes at attractive levels.
We have managed our agency CRT portfolio by selling the season deals trading at very tight spreads in high dollar prices earlier in the year before the rally in rates caused prices of these securities to weaken due to prepayment concerns. This portfolio is now $378 million, which is nearly half what it was in early 2018.
And finally, we'll look to optimize our capital structure through the use of additional leverage including Securitizations that said I think our leverage will still likely be the lowest in the peer group.
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Market conditions have been difficult for many in our space, particularly as volatility in the rates markets have made investments in agency MBS challenging because in the phase investment strategy is much more mortgage credit focused weve been able to continue to make sizable investments in assets that produce attractive returns.
We just don't have the exposure to prepayments that most of our peers do and our business and earnings power is much less tied to the shape of the yield curve or stable book value and consistent earnings are result of an investment strategy that does not depend on accurately predicting interest rate changes and executing reactionary investments and hedging active.
Please.
To our considerable efforts to partner in creative ways with a handful of originators, we're confident that we'll be able to source additional volume of purchase performing whole loans for the foreseeable future as we continue to grow. These portfolios. We are increasing the earnings power of our business and the phase investment initiatives are firing on all cylinders, we will that.
Mystic that we will continue to drive earnings to port to balance sheet growth.
And now I'd like to turn the call over to Steve yard, who will provide further details on the financial results for the quarter.
Thanks, Craig.
Third quarter 2019 interface net income to common shareholders with 91.8 million or 20 cents to share.
GAAP earnings were consistent overall with the prior quarter and again covet dividend distributions.
In addition, core earnings, which excludes the impact of unrealized gains and losses on certain investments in residential mortgage securities and related hedges.
For the in GAAP earnings each period was all side 20 cents per common share.
Please turn to page eight when we present additional information on the highlights and then.
This quarter, which were as follows.
Other income was one cents per common share high this quarter and reflected the following.
One a continued strong contribution from residential whole loans measured at fair value through net income.
Consistent with prior periods in the charted income generated by fair value lies effects coupon and other cash receipts.
Two.
Hi, net income impact of realized gains on sales of residential mortgage securities as we continue to Opportunistically manage these portfolios.
And three improved performance at that 30 agency MBS and related hedges.
Net interest income was one cents per common share lower this quarter.
The key drivers at MFS third quarter net interest income included.
One is Craig noted the continued credit for that portfolio is performing loans.
Drove net income per visit.
5% higher than the prior quarter.
To lower amounts invested in residential mortgage securities.
Portfolio balances reinvested primarily in Hawaii.
In addition, the prior quarter included approximately 3 million at accretion income recognized on the early redemption at par of legacy non agency securities that have been held at a discount.
And three include quarter of interest expense on our convertible bond that was issued last quarter in June .
Finally, operating and other expenses were consistent overall with the prior quarter.
Expenses this quarter over 1.5% of equity and this is in line with expected run rate.
And now ill turn the call athletic under Chris Johnson will provide more details of our investment activity and portfolio performance for the third quarter.
Thanks, Steve turning to page nine.
The third quarter was not an active quarter for our investments team as we acquired approximately 1.1 billion of assets and sold approximately $330 million of assets in the quarter.
We continue to grow at holdings of residential whole loans, and a strong pace purchasing over $900 million in the third quarter.
2019 has been a strong year for whole loans acquisitions as we have on average purchase in excess of $900 million whole loans in each quarter. This year.
Is robust pace of acquisition is primarily due to our success in expanding our pace of acquisitions of non QM fixing flip and SFR launch this year.
Portfolio runoff is elevated in the quarter as we experienced an increase in early redemptions of NPL RPL Emcares any strategically sold $257 million higher coupon 30 or agency MBS and a gain of 2.8 million to reduce the prepayment risk in our agency MBS portfolio as we expect prepayments to remain.
Elevator.
We also opportunistically sold $77 million of legacy and CRT securities in the third quarter, realizing $14.9 million of gains.
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We continue to execute on the strategic plan, we laid out in 2017 as our holdings of non QM fixing flip and SFR loans continues to grow and add meaningfully to earnings.
Our success in incorporating these new loan products into our investment strategy continues to be the primary driver of portfolio growth.
Since the third quarter of 2017, our whole loans portfolio has grown from by 19% of our investment portfolio to approximately 54% as at the end of third quarter.
The main reason for this growth has been a noncash fix uplift and escobar loans, which have grown from zero in the third quarter 2017 to over 4 billion at the end of the third quarter of 2019.
In addition, non QM fixing flip and SFR loans now account for approximately 60% of the whole loans portfolio and approximately a third of the total investment portfolio.
We are extremely happy with the progress we made on incorporating these loan product into our investment strategy and I'm excited to continue to grow these holdings in the future.
Turning to page 11.
Mm face investment strategy, which emphasizes credit risk over interest rate risk continues to deliver attractive yields and spreads.
Our credit sensitive assets continue to benefit from positive credit fundamentals and lower prepayment sensitivity.
Yield on interest interest, earning assets averaged 5.32% in a quarter, while the net intervention that it was 182 basis points.
Short term rates continue to fall in the third in the fourth quarter. This year in response to multiple fed rate cuts and lower expectations for interest rates and growth in general.
Year to date, Walmart leverage declined by 73 basis points that approximately 63 basis points of that decline happening in the second half of the year.
And if they has and continues to be well placed to benefit from falling short term rates as most of our assets financings are based on one or three month LIBOR rates and the percentage of repo that has had to pay fixed swaps remains relatively low at about 37%.
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Here, we show the yield cost of funds and spreads for holdings as well as the equity allocated to its asset class.
Our largest asset class in terms of dollar amount invested as well as equity allocated continues to be whole loans of carrying value is over 50% of interface equity allocated to it.
In addition whole loans in general, including whole wants a fair value continue to represent the majority of our equity allocation at around 60% of EMEA face equity.
Along the carrying value added 5.52% in the quarter, while the leverage for this asset class increased in the quarter to 1.9 times debt to equity compared to 1.5 times debt to equity in the second quarter.
As you said before expected leverage on this asset class to continue to trend up overtime.
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Where we take a look at MFS interest rate sensitivity.
Our asset duration changed little in the quarter and remain relatively low at 160 basis points at the end of the quarter.
The actively managed our hedge position this quarter and winding $75 million of high paying longer dated swaps earlier in the quarter. When you sold some higher coupon 30 year agency MBS.
And adding 500 million of two year pay fixed swaps at a rate of 1.39% at the end of August when rates were closer lows for the quarter as a result, our swap notional balance increased by 425 million or the average pay fixed rate on a soft declined 70 basis points to 2.25%.
Finally, our net Eurasia was relatively unchanged and remains relatively low at 114 basis points at the end of the quarter.
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We continue to move to various interest rate cycles and experienced large changes in interest rates over short periods of time. It is important to remember that MFS strategy remains focused on maintaining a low and stable interest rate duration, while emphasizing credit sensitive assets over interest rate sensitive assets.
Our strategy has consistently limited quarterly changes in book value.
Since 2014, the largest quarter over quarter decline of book I asked and 4% with the average changes book value of less than 2%.
As before by limiting book Daily fluctuations, we believe and if they will have the staying power to take advantage of new opportunities as they arise.
With that I will turn call over to Brian will talk about our credit investments in more detail.
Thank you can manner.
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The current state of mortgage credit continues to be supported by housing and economic fundamentals.
I think affordability has ticked up in recent months as mortgage rates have declined at the same time homebuilders have been growing more positive on housing market over the year.
Home prices continue to year over year growth.
Corelogic National home price index was up 3.6% in August from year ago.
The unemployment rate main mode throughout the quarter in a 3.6% in October .
The supply of homes available remains limited and has declined further.
All these factors should continue to support stability and growth to home prices.
Last reported 90 day.
Mortgage delinquencies are still down at levels around 1%, we expect two entities to remain low as we believe underwriting standards are still prudent today.
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Our loan strategy had another successful quarter of acquisitions in quite over 900 million alone consisting of over $550 million Nonqm, approximately 375 million our business purpose loans.
We were able to add several new tire parties and the Nonqm that didnt purpose loan space over the quarter and as Craig mentioned made additional strategic investments in originators over the quarter, which we believe created a stable source for attractive asset into our portfolio.
We continue to be pleased with our season loan portfolios performance with diligent asset with our diligent asset management teams oversight.
Our loans appear on our balance sheet and two lines.
And how the carrying value $5 billion among other fair value when the halftime selection is permanent made at a time at acquisition.
Typically we elect carrying value for purchase performing loans and re performing loans and fair value for nonperforming loans.
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Our RPL portfolio continues to perform well.
87% of our portfolio remains less than 60 days delinquent. In addition, although 13% of the portfolio 60 days delinquent or greater almost 30% of those loans have been making payments in the last 12 months.
And with the recent rally in rates, we have seen prepayments speeds for RPL portfolio increase.
Amortized cost of 84 celadon prepayments are positive.
We expect to see elevated prepayments speeds in the lower mortgage rate environment as our bar is gaining access to new financing options as our credit continues to improve.
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Our exceptional asset management team oversight for servicing decision and active management of the portfolio had enhance returns.
The team has worked in concert with our servicing partners to more quickly get launched we perform as well as limit and reduced timeline to resolution.
This slide shows the accounts for loans that were purchased prior to September month end 2018, therefore owned for more than one.
35% of loans that were delinquent purchase on either performing or painful.
And 41% Ida liquidated, our Oreo tubing liquidated.
The 24% still nonperforming status.
Hi, modifications have been effective at 76% either performing or painful.
We're happy with these results as they continue to outperform our assumptions at the time purchase.
Turning to page 19.
Again, we had another successful quarter of growth to our Nonqm portfolio.
To date, we've acquired over $3.1 billion on paper and pull down including over one and a half billion. This year and continue to work with our origination partners on strategic relationships.
A variety of different loan type can be consider nonqm ranged from structural features such as an interest only period or term greater than 30 years to the way income and documented such as the use of bank payments for self employed borrowers.
For loans with higher debt to income ratio and Salon.
We believe underwriting of these loans is prudent to.
The portfolio has a weighted average loan to value ratio of 56% in a FICO score of over 700.
The credit performance, which performed as expected around 1% six days delinquent agree.
Leverage is attainable through the use of warehouse line and securitization.
As noted before securitization execution has improved this year and we expect to securitize should conditions warrant.
With the low interest rate environment currently living yield on these assets trade in the mid 4% range and are and we are able to achieve low double digit always with appropriate leverage.
And now I'd like to turn the call back over to good manner to walk you through our business purpose month.
Thanks, Brent turning to page 20.
We had another successful quarter of business purpose loan acquisitions and third quarter as we've purchased over 375 million in you could be an undrawn commitments in the quarter.
Since we started acquiring business purpose loan for the end of 2017, we have purchased over 6500 loans with over 2 billion in you could be an undrawn commitments.
We're excited about our progress and expect to continue to expand our acquisition of bits and purpose loans in the future.
At the end of the third quarter, we held 969 million of you could be a fixed and flip loans with additional 126 million of Undrawn commitments.
Credit metrics continued to be strong and performance has been inline with our expectations. Our target deal for this asset class remains at around 7%.
We held 364 million of SFR loans at the end of the third quarter.
Similar to the fixed and flip loans to credit metrics in performance remained strong and inline with expectations.
Hi, good yield for this asset class is in the mid 5% range.
I will turn call over to crack for some final comments.
Thank you could monitor.
In summary, we remained very active in the investment market, we purchased $1.1 billion of assets in the third quarter 2019.
This growth in our whole loan portfolio has resulted in materially higher interest income over the last three quarters and we expect further such increases as we move forward in 2019 and into 2020.
While we have made excellent progress in growing our asset base. We have further capacity to continue to increase our investments by adding leverage to our balance sheet.
This concludes our presentation operator, we please open up the call for questions.
Thank you, ladies and gentlemen, if you wish to ask a question. Please press unwind and then zero on your telephone keypad Emailing me I heard on at any time.
Time by repeating.
There are coming every user speakerphone, please pick up your handset before passing the number once again, if you have a question.
You May pass one and 10 zero at this time and my mom and refresh question.
And our first question will come from the Lyne Andrich Shane JP Morgan. Please go ahead.
Charlie actually on for exploring.
[noise] noticed a uptake uptick in the delinquencies on the fixed and flip loan portfolio. This quarter is there anything in particular, that's driving that just curious because.
A relatively short term loans and wondering if that's kind of the typical season and curve or.
Growth driven or if there's anything else, we should be thinking about there.
Hey, yes. The good question. Thank you I think it's just more as a function of a maturing of the portfolio.
We would expect overtime as the portfolio seasons and it reaches a steady state delinquency.
And I think based upon what we're seeing it's in line with our expectations.
A 60, plus still increased relinquish rate anywhere between four and 8% is is quite common for these types of loans.
And so so we feel like it's in line with expectations.
Okay, great. Thanks very much.
Thank you.
Thank you. The next question is from Eric Hagen from KBW. Please go ahead.
Finally on the on the credit for single family rental and and other business purpose loans can you just described the servicing of those assets it seems.
Like it's obviously a little bit of an esoteric servicing model I mean, I'm thinking about the guy who's in the middle of Oh.
Of rehab of the property ready to sell it pretty defaults in the middle of Rehabbing. It I mean, how does that can you describe how that works. Thanks.
Eric you cut out on the first part of your question Im sorry could you repeat the first part of the question.
Oh sure.
I was just asking about this the servicing kind of model of the business purpose loans, specifically for the single family rental and.
Section slip I mean, it just seems like a bit of an esoteric asset class, where a default would.
It might be challenging to.
Capture the value of your asset once once a borrower defaults on something like that thanks.
Thanks for the question, Eric I think in terms of the single family rental.
The servicing there is more.
Similar to regular resi mortgage servicing.
Many of the many of these loans is simply one property one loan.
So thats servicing is fairly straightforward.
In some cases it might be one loan multiple properties.
And that aspect.
It's the servicing is not necessarily more complicated. It's just simply if you. If you have to four close and was a few more steps, but at the end of the day. The SFR servicing is somewhat similar to regular resi does have the fixed afflicted the business purpose you're right.
There is more moving pieces.
And so.
In a nutshell the way that the servicing work in most cases were acquiring new servicing retained so the originators stays on us as a servicer and that has multiple benefits.
Our first we're working with experienced people experienced people in the biggest purpose space where have extensive experience managing these types of loans and serves we sense assets, but also they have deep relationship with the borrowers offer lot of these originators and Servicers is a repeat customers.
Multiple loans will come back for over time, so they understand their needs and stand the dynamics on the ground in particular.
Information on the local geography, and so what happens in practices that you know you had alone is a short term loan but that is a draw mechanism. There is an inspection mechanism. So you are throughout the life. Some of the loan multiple touch points, where you are figuring out one how the how the project is going.
I have they met the milestones and so on a so far so you have a lot of visibility in what's going on the ground and to the extent something goes wrong.
The key piece there is one that alone was properly underwrite and at the time off of purchase meaning the LTV yet at the beginning in the LTV throughout the life of loan is appropriately size.
And then if you need to step in and works as a property that we had we had the appropriate resources and needs to do that so and there's two aspects to that one is working with quite accomplished services in recent years, but also as you as you know from our our previous experiences and ongoing experience and working through our nonperforming loan portfolio.
We had ex extensive experience in loss mitigation foreclosing on properties.
Owning and managing Oreo and so we feel that that all those in house expertise here along with the.
Excellent partners that we work that we're quite well.
Position to kind of work through any any issues, if I might might arise and Eric I'll just add one thing that.
Defies logic, a little bit, but we do see it on fixed and flip loans. So an operator may finish a project in the houses listed and he's onto he's onto the next project in east committing capital to the next project and Youre quite often see this where youll get a payment or two while the houses on the market and he knows he is going to salad nobody is going to pay.
Off the loan results for the next thing so it's a little surprising because you wouldn't necessarily expected, but it's just affecting it occurs.
It occurred somewhat frequently in this space.
Thanks, guys that was exactly the kind of detail I was looking for I mean, Craig you noted that we should expect leverage to pick up a little bit the model can handle between three and four times.
I'm just trying to square this way I mean, you've got some some really high yielding positions that.
Levered very much that are rolling off the portfolio and being replaced with.
Some of the business purpose loans, which you guys have talked a lot about and admittedly those can handle higher leverage im just trying to understand if we're if what you're trying to guide US too is is earnings increasing over the time overtime or is this.
It's a higher leverage religious there Doug.
Basically keep earnings.
Level.
Thanks.
I would say I look at the additional leverage capacity as a way to grow or assets.
Right and so.
Yes. One is whole is holds the carrying value, which is about $5 billion, but it's 1.9 times levered. So that's really the glaring example of where you could add more leverage as Brian said, you shouldn't be surprised of securitization enters the picture at some point here.
So I don't think we're not trying to guide earnings or anything else. It's really how will we fund additional balance sheet asset growth and I think it'll be through marginally higher leverage you know that said I think our leverage is 2.8 times, so and I think it's maybe it picked up a little bit over the last year, but it moves fairly slowly right its.
One turn of leverage is $3.5 billion a blowing so.
You don't expect that to change in a quarter.
Got it Okay and then one just one housekeeping on on the warehouse lines that you guys talked about with non QM and another whole loans is that is that the balance of that embedded in the in the and the repo you show on balance sheet or I guess, a truck warehouses technically a repo I'm just trying to understand where that shows up.
Yes, yes, it does.
Okay, what what is the balance of the warehouse lines and what's the cost of financing on that.
The balance I mean, it it again, we have several warehouse line.
And it would say upwards of.
3 billion ish.
Give or take on the on the amount we're borrowing on those and then you would say the cost of financing is anywhere from.
Livewatch, plus 150 to LIBOR, plus 200 and change depending on the asset.
Thanks, a lot Brian Thank you guys.
Sure.
Thank you and again if you do have a question. Please press one and then came out in one month Caroline F. Kenneth Lee.
Please go ahead.
Hi, Thanks for taking my question just a brief follow up on on the previous question.
In terms of.
Bringing the leverage ratio up and it sounds as if there could be some opportunities to grow assets within the whole loans portfolio, but as well you're also ramping up that business purpose loans.
Just wondering in this current environment, where could we see more than relative asset growth coming from is it more.
From the whole loans or the business purpose going to as it ramps up thanks.
Sure well I guess, just as a technicality. We would include the business purpose loans in our in our whole loans, but I think that's where we expect our.
Jordi about growth to come from is on what we call purchase performing loans go it's primarily nonqm fixing blip in single family rental.
Right.
The market size as it relates to non QM is probably bigger than the business purpose space and if you're comparing to fix input. So you know where you've seen the growth sort of been around.
Two to one.
Give or take for current I mean, it could stay the same but if we're able to source additional investments on the fixed up and at the Buyside, we could see additional growth there as well.
Great great.
And just just one follow up if I may you know you talked about a near term outlook for some strategic sales, though of legacy non agencies as well somebody else, but just wondering when you look out towards the near term or the potential implications in terms like investment spreads from from that.
Activity. Thanks.
Well I think I don't think we've purchased legacy non agencies. It any material size for years, so as I as I said earlier, it's really it's really managing a mature portfolio. So that portfolio is.
On average those loans or are probably 13 14 years old. So it's you know it's examples are you know selling a bond that's callable at a premium.
You know selling bonds that we think don't really have much additional upside in terms of performance.
And then in other cases, just selling small pieces low loan count bonds or odd lot positions that we typically traded a concession to a market price where you know if we see that same CUSIP trade in the market, we can get around not execution for it. So elite these sales of legacy non agencies, we've been consistently.
Managing that portfolio when this fashion for probably the last five years and so I don't really think that will change, but we we don't expect that that portfolio will will grow certainly.
Understood very helpful. Thank you.
You bet.
Okay.
Thank you and the next question asked from hearing Coffey from Wedbush. Please go ahead.
Yes, good morning, and thank you for taking my question.
Another great quarter.
When we look at some of these strategic investments you're making in your origination partners.
What's in it and the total balance is about 100 or.
Your the investments you made this quarter were about 100.
That is to stay the investments you made this quarter about a 100 pedal balances close to 123 million at the ended the quarter.
What are the economic besides the fact that you probably get equity position what are the other economic benefits is there like a preferred coupon and interest rate.
Is there some positive access to their origination flow that you wouldn't get without this investment what when you look at the economic returns on that 123 million.
What are the components of that.
Sure So as I said Henry.
They range from a common to preferred.
Often with warrants and convertible debt. So yes, obviously the preferred has a coupon, which you know without getting into the specific coverage.
Pretty healthy coupon it provides a good all right away.
Same with the convertible debt.
In terms of the the other economic benefit they would get you know it's a couple of things you know what I think it's to the extent that these originators are successful when they grow their business and they and they increase their enterprise value. You know we have we have a piece of that and so deal remains to be seen but that's certainly a possibility.
But the other thing that it does is that it's commence our relationship with these originators again. These are minority equity stakes of these non controlling interest, but you know these arrangements could range from a flow agreement to a commitment over time or you know in some cases there they are even less formal but its you know it's all part of having.
More of an active partnership with a handful of originators and I you know all fall I'll mention that we haven't made any investments in originators that we haven't bought loads from already so.
What we found is there's no better way to get to know and originator and how they think about credit underwriting than to own lows. So typically it started slowly with some transactions and I think it grows over time.
And now how are we talking about two or three originators are 10 or 20, how diversified is this position.
I would say, it's safe to say it's between those two number ranges that you mentioned [laughter], you mean 15 [laughter].
[laughter] how about for no quickly when you look at the securitization opportunities how what are the funding.
Dynamics on that Steve how does it.
So is it is it just a an alternative to live or is it a fixed coupon is it as more of a steady state.
He's had a higher advance rate maybe you can go through and obviously you would be against the loans with carrying value.
Yeah, maybe go give us send us a sense of what that would look like well have brian's speak to that the Henry.
Yes, one of the things that you would be fixing your funding costs that will be one advantage is that the next advantage would be yes, you can increase leverage men at this at this point at.
Our company is only 2.8 times leverage as a whole and that asset class is 1.9 times in any of the whole loans that carrying value. So yeah, implementing the securitization and adding leverage without adding additional loans just sort of creates additional interest expense on our balance sheet to so the key.
Is growing the asset side, and then optimizing the financing side you know after that so.
So the coupon slightly higher than what you're paying.
The coupon no the coupon would probably be a little bit lower but then you have to factor in deal costs and alike.
And then finally.
The the reporting of a fair value book value is very helpful.
And a good good perhaps for C.. So hot how does that play out when you have a whole portfolios loans that.
Has never really produced any losses.
That's a very good question.
I guess Henry if your question is what are we expecting with Cecil long transition.
I think we said.
He is one of the Devil is that we we have like somewhat unique given out limited loss history to try and.
Translate our path limited experience and come up with what our Cecil Reserve will be Taiwan, we're still working through that we're getting pretty costly coming up with.
What we think our transition numbers will play a lot fair to say that we're still running some scenarios and try to make some elections around yeah discounting or not discounting cash was.
Also yeah, the possibility of even electing Ted I option for a portion of that portfolio and avoiding cease all together for what to do that so it's a little early for us to spec like yes. At this point what at day, one transition number would base out im not going to do that at this time.
Right.
Sensors, we have had limited loss history and therefore, the yes my expectation at this time is that the day one impact of diesel is not going to be.
That significant to our overall financial position, although it is fair to say as you transition to a lots of line.
Reserving approach compared to an incurred loss approach that we currently is that you would expect higher reserves under that model.
I mean, the two things that people upset about c. So one is that it's basically solving a problem that doesn't exist.
But the other thing is is that it because banks have such as a strict.
Capital regime to work with whereas the rating agencies, they've sort of been doing Cecil since day, one and that it creates a.
More flexibility in an opportunity for quoting nonbank financial.
Have you had any read from the marketplace in terms of what opportunity so could create or is it really too early to tell.
I think its oil itself that I don't think Thats really the way we're looking at it but.
Certainly will have an impact on the nonbank financial and nonbank financial plan to use too.
Looking at loan loss reserving in this way.
Great. Thank you very much and congrats on a great quarter.
Et cetera.
Thank you and at this time there no further questions. Thank you. Please continue.
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