Q3 2019 Earnings Call
First name D Avi I'd David.
And our last name we are all W and borough.
A I.E.R.A. our euro.
And your company name.
Thank you.
Thank you very much your line will be on musical to the called again.
You're welcome all your question. Please press the pound <unk>, if you're using speaker equipment. We do ask that you. Please lift the headset before making your selection. This conference is being recorded on Wednesday November 620, 19, a press release with New York Mortgage Trust third quarter 2019 result was released.
Yesterday.
The press releases available on the company's website at Www Dot and why and trust Dotcom. Additionally, we're hosting a live webcast of today's call, which you can access in the event and presentations section of the company's website.
At the time management would like to me to inform you that certain statements made during the conference calls which are not historical maybe 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, the company's filings with the Securities Inc. States Commission now at this time I would like to interest.
Weve, Moma, Chairman and Chief Executive Officer, Steve. Please go ahead.
Thank you operator.
Good morning, everyone and thank you for being on the call.
Jason surround our president will also be speaking on this call. This morning.
The company continues to deliver solid results, we generated GAAP earnings per share of 15 cents a comprehensive earnings per share of 20 cents for the quarter.
Our book value per common share was $5.77 at September Thirtyth, an increase of two cents from June thirtyth.
Also during the total economic return of 3.8% for the quarter.
Company raised $311 million in common equity through two overnight offerings during the quarter.
In October the company also completed the preferred equity offering raising an additional $167 million.
Bringing our total stockholder capitalization to over $2 billion.
Companies generated annualized total look I would return of 17% through the nine months ended September thirtyth, while maintaining our dividend at 20 cents per share for the quarter its 11th quarter in a row.
Our investment team remained very active sourcing in funding approximately $400 million and credit sensitive assets, bringing our total investment portfolio to $4.5 billion at September Thirtyth.
Our pipeline investments for the fourth quarter is strong as we expect to close over $275 million and credit investments in both our multifamily residential assets.
I'd now like to have Jason speak to the about market conditions and some thoughts on our core portfolio strategy.
Good morning.
Global on US equity markets had made modest gains during the third quarter 2019, despite volatility largely driven by investor uncertainty regarding global trade restrictions.
Alongside other geopolitical concerns, which is becoming increasingly harder to predict.
Well economic data remains mixed data release with third quarter suggests that the U.S. economy has continued to expand in line with the previous quarters at approximately 3% well GDP growth and the labor market data indicate modest economic expansion consumer and business confidence indices have weakened.
Selecting our expectations made throughout the year recent survey data continues to indicate business active you slowing however, with respect the U.S. housing market argue the two most important factors our unemployment interest rates. Both these data points continue to provide a strong tailwind to the U.S. housing.
The U.S. labor market expanded during third quarter 2019, bringing a lower unemployment rate prints of 3.5% and the 30 year fixed rate mortgage is now over 375 basis points lower than it is the you're beginning of the year when the credit reserve started at lower rates 25 basis points in the last quarter, which is the third time.
This year.
Strong and strong employment and lower rates improve the cost of home ownership. In fact, the household debt service ratio related to a two a residential mortgage is now the lowest point in 40 years.
These points have mostly offset changes to the 2017 tax code, which disincentivize owner co owner occupied housing as such property price forecast project depreciation by 3% annually over the next two years equal to the current national growth on the supply side only four months of housing on the market for sale and.
Year low vacancies.
Record vacancies a multifamily demonstrates a us housing market that is in great shape.
With this backdrop, we're pleased with the results of our rotation from agency to credit what are the areas. We have focus throughout the years and single family portfolio of residential credit securitization bonds.
This sector represents 14% of total assets at quarter end, while we did not while we did monetize appreciation experience inflected securities in the quarter on the balance we expect price appreciation to continue particularly in esoteric markets, where securitization asset classes that were created after the crisis.
We see strong technicals that will likely grind tighter total new bond issuance in the single family securitization market is approximately 100 billion year to date.
The issuance exceeded market supply forecast for the year. Despite this increase runoff in the sector from bond refinancing inorganic asset pay downs is likely to bring the flat net overall supply of residential credit bonds in the year I guess, a backdrop of solid underlying fundamentals and little growth of new issue residential credit bonds, we expect.
A demand supply imbalance persist for better selling opportunities.
With that said, we have developed channels to source bonds outside the market's general auctions with our fifth familiarity and as an active investor in assets are similar to underlying pools that are securitized. We can move quickly to efficiently price such securities ties bond risk without the need of a rating will performing data from the securitization market. This has helped us create approach.
Party channel investments securities that are off market, where we compete on process and not just price.
Within our residential loan portfolio, we have selectively argueta portfolio of 1.3 billion or 30% of assets over the last 12 months.
We have been more active in what we categorized in our public bonds as distressed loan paper as mentioned on prior calls the profile distressed loans, we are buying a selective mix of borrowers that are.
Payment Gray area. These borrowers are generally either a few months delinquent or just a few months current on the mortgage loans.
After the credit crisis were over 7 million bars were processed through government education programs, a permanent solutions to loan restructure it was missed opportunity for many loans today.
Banks and the Gecs continued to de risk from loan servicing servicing delinquent or our recently delinquent loans is not a core business function for these entities and are finding channels to de risk with large scale portfolio sales.
Given the frequency of multi billion dollar portfolio sales throughout the year Big data and analytics is key to the investment strategy, we seek certain bar profiles, where we have experienced favorable results to tailored servicing our which programs.
The higher quality of lossy after the higher payment velocity after loan boarding improved our interest income in the quarter.
We expect to build on higher interest income related to this strategy.
In subsequent quarters as we exit the J curve of new portfolio acquisitions made earlier in the year.
Given our activity in the securitized debt market, leading to a consistent view throughout 2019 tire bond spreads we've been patient the timing of watts to lock in term financing our loan positions from our bank warehouse funding term financing costs, which is typically a fixed rate in this market is now 100 basis points lower than started the year we will.
Look to lock in these lower term funding rates with certain loan profiles, where we feel execution is favorable in the near term.
Now with single family mortgage rates, approximately 77 basis points lower that the start of the year.
Our refinancings or CPR as are up in almost all residential mortgage loan sectors that benefits our loan portfolio because of the discount to par paid its acquired the assets. However, a different part of our business has benefit more directly.
Due to the rapid decline rate decline many originators were caught off balance of the spike in refinance volume.
Volume spikes create a strain on origination operations, because it's more difficult to scale up personnel than down for volume inflections, given a myriad of compliance in underwriting guidelines hedges that were installed with Dodd Frank we generally see a higher volume origination process our has created.
And our scratching net loan business, we help originators face near term liquidity.
They are facing near term liquidity constraints by buying these loans intended to be securitize with the gses or non agency channels.
But can't be sold because some miss in the underwriting process. As a result, we have a nice buildup in our year end investment pipelines of these assets because we can move quickly to price the assets. The underwriting issues, we have experienced with buying over loans were 100 from counterparties in this market, we're able to drive volumes in.
This niche sub sector, the value proposition ever business of buying loans or pools of loans at such a substantial discounts where the intention was to sell me leave or flip at a premium to secure the in channel is excellent.
Now switching over to the multifamily side of the business, where approximately 1.5 billion or 33% of our total assets are invested as of September Thirtyth. We continue see strong fundamentals with vacancy rates remaining near historic lows starts on multifamily homes containing five or more averaged a season seasonally adjusted rate of 367000 during the.
Nine months ended September through 2019, which is at a similar pace. The last year overall headlines applied unit deliveries remains strong. However, we continue to see miss allocation of the supply with stubbornly high labor and material costs, a relatively the same level across different regions of the United States builders focus on where rents are the highest to maximize the.
The project economics.
With this constraint we see all of it elevates construction Prime gateway markets like La San Francisco, New York in Miami. These developments have act. These developments have have access to relatively cheap funding costs because of the high because the size of the familiarity of the market, especially from overseas financing Counterparties. However in these seem.
Markets, we are observing negative domestic state to state migration residents looking for cheaper cost of living and lower taxes are starting to had negative impact on supply and demand technicals widely reported as examples include residents in la who are finding better volume Dallas or New York City resins their move to Florida like in markets like Tampa Bay.
It's not hard to envision.
California resident population 40 million to decline in the coming decade. This through the first on California had population decline, even though the back to the mid 18 hundreds other markets with high new construction, so such as New York is already seen population decline.
What's even more troubling fees Mark is the Super majority of the construction is in the luxury sector. According to you already data last year, a staggering 87% of on the construction of at least 50 unit apartments was dedicated to luxury high end segment.
This focus provides uneven growth opportunities in south southeast, we're migration is positive and supplies lacking especially for workforce housing, which is a particular focus for us.
Due to these trends, we see significant growth opportunities for our business as an example in fourth quarter. The company expected to fund its fourth Freddie came at Freddie Mac K series first loss investment for the or totaling 57 million recently FHLB provided updates to their multifamily loan purchase cap through the five quarter.
Period of Q4, 2019 into Q4, 2020, Fannie and Freddie will each be allowed to address 100 billion of new loan production with the Abbvies expectation 390 billion of multifamily lending next year. The Gses will continue to prepare the upper dominant player in this market.
Not only will robust securitization of cases deals continue to be sold by Freddie Mac. We also expecting the GRC to look for new ways to pare down there accumulated portfolio holdings in other ways. In fact last month Fannie Mae began this effort with its first ever risk transfer multifamily deal, which we participate in.
We have been a consistent partner of the enterprises and look forward to expanding their relationship in new ways in the new year since our first purchase in the case or invest in 2011, we've evaluated the financials and underwrote over 1200 us multitenant properties across United States.
Ill be is we have conducted onsite inspections and review the capability. The project manager on over 650 properties 200 in the last year and half alone.
The amount of on the ground market knowledge that we have gained through their participation. The first of all holder of these these deals allows us to stay ahead of the headline risk.
The competitive edge is enormous and provides a unique off market opportunities.
With this knowledge, we have built strong relationships with sponsors of multifamily properties across the U.S as an example, our direct mezzanine loan program to multifamily properties continues to add substantial value to our earnings with 15% of our capital allocation strategy as of September Thirtyth.
In the space relied our proprietary relationships, particularly in south southeast sectors. The United States. In fact, we have focused on the region of this regionally you asked for years now which is consistent provide attractive risk adjusted returns in the double digits, we consistently when deals largely due to our efficient efficient process and a solid track record of meeting our coming.
Units.
Lastly, as I stated earlier, we contains rotate out of their agency trade at net interest margins compressed throughout the year in the sector without dramatically increasing leverage you find a difficult to consistently provide attractive returns negative convexity risk in this market is very difficult to contain three hedges interest rate volatility tends to increase.
Cost of hedging, which is why we have 7.7 of complex both the sector and declining.
Expectation from here should be incrementally lower exposure quarter over quarter at least until we see rates right now.
With the recent cabarets as Michael today was probably with the full explanation of our focus in the credit markets and how.
How the business transition over the years take advantage of feedback loops generated between our core strategies. We are excited about our able ability to deliver strong earnings and under low levels of leverage utilized utilization of 1.5 times today at this time I'll pass it back to Steve for closing comments.
Thanks, Jason Tonight that goes through a little bit more detailed our income statement and what we've done in the third quarter.
We had $34.8 million in GAAP, net income and $45.7 million and comprehensive net income.
The company generated a net interest income of $32 million and had a portfolio net interest margin of 240 basis points for the quarter.
Operating strategy over the last several years several years does not rely solely on net interest margin or as many defined core earnings to cover our dividend, but on the total contribution for all income sources, including fees gain on sale and unrealized activities.
Our net margin typically represents about 60% to 65% of earnings in any given quarter, but by generating earnings away from that margin. We take some of the leverage pressure off of our balance sheet as our leverage is less than two times and is currently 1.5 times, which we believe reduces volatility on our earnings quarter over quarter as allowed us to maintain the stable book value.
Enable us to deliver a 20 cents dividend for 11 quarters in a row.
Our average, earning assets totaled $3.9 billion for the quarter, an increase of almost 360 man from the previous quarter.
Bringing the total increase for the year of $1.2 billion or 43% since the beginning of 2019.
We expect our investment portfolio to be approximately $5 billion by year end with average earning assets for of $4.5 billion for the fourth quarter as our investment pipeline continues to remain very strong.
Our investment portfolio totaled $4.5 million at September thirtyth, including $956 million and agencies agency RMBS Securities with a 100 with 142 million or 7.7% of our total capital as Jason alluded to.
Our focus remains on credit sensitive investments, which are priced generally at a discount or near part to minimize our exposure to interest rate convexity risk, mainly prepayments, which is a significant component to this agency return.
We had $2 billion in residential credit investments, including sub performing and re performing loans as well as non agency securities backed by various types of residential credit loans.
These investments are currently funded with repo lines, but we continue to evaluate both the rated unrated markets for possible Securitizations, we anticipate our first securitization will be completed in the first quarter of 2020.
We had $1.5 billion, a multifamily investments or 30.7% of our invested capital in the fourth quarter. The company expects to fund $56 million in our fourth Freddie Mac first loss security of the year.
We believe the fundamentals for renting remains very strong and will continue in the future as the dynamics of homeownership versus renting evolve.
Our net interest income totaled 21.4 million for the quarter.
Included in our press release for the first time or several tables by income category within non interest income to try to better explain these components as there are many.
We had net end, we let we had net unrealized we had net realized gains for the quarter of $6.1 million, primarily from the sale of certain CMBS Securities. We had net unrealized gains of $11.1 million for the quarter really comprised of two significant components, one a $13.3 million loss from interest rate hedges.
It was offset by $24.4 million in unrealized gains from both our multifamily and residential loan portfolios.
We had other income of $3.9 million largely comprised of income from our multifamily direct lending investments, but for accounting purposes, we do not qualify as loan accounting and therefore, the income generated from those assets must be characterized in noninterest income.
Even though the actual risks are identical to the loans that were including in that margin.
Our general administrative expenses were $8.3 million for the quarter down $1.5 million from the quarter ending June Thirtyth 2019. The decrease was due to two main components. The termination of our last external management agreement in the second quarter, which resulted in a reduction of management fees of $575000.
As well as a 700000 dollar decrease in expenses related to an annual equity Board compensation Award that has done on our second quarter.
On a normalized basis going forward, we would expect the expenses to run at approximately $8.5 billion per quarter.
As we head into year end, we believe the company has never been better position a market cap exceeds $2 billion for the first time in company history, we have a strong and growing pipeline of targeted credit investments and the team of professionals focused on our mission to deliver stable book values over a long over over longer periods of time, while maintaining a stay.
Table dividend to our shareholders.
We appreciate your continued support and look forward to speaking about our annual and fourth quarter results in February 2020.
Our 10-Q will be filed on or about Friday November eightth of this week with the SEC It will be available on our website thereafter.
Operator, if you can please open up the call for questions for Jason I myself. Thank you my pleasure, ladies and gentlemen at this time, if you'd like to ask the question over the phone. Please press Star then one in your telephone keypad answer your questions have been answered English moves up in Q simply press the pound key.
And our first question will come from minus Stephen laws with Raymond James Your line is now open.
Hi, Good morning appreciate the comments in your prepared remarks, Stephen Jason.
Can you talk about you break a good bit of capital. The last few months talk about incremental returns, you're seeing and I guess, coupled with that I know you guys did touch on this in your remarks, but were what are you seeing the most attractive between the multifamily and read the I know I know you mentioned that.
The agency is likely to to run down here, but where are you seeing the most attractive opportunities today and other than agency are there any asset classes that you guys are really just avoiding at this point.
Yes, I think it look when we think about raising capital and we look at where we're going to deploy Steven over the last really three years, it's almost fallen 50 50 into residential credit multifamily and right now we see equal opportunities in both classes.
There is a there is a very difference between those classes righted the multifamily side.
The investment involves much more credit analysis on a specific assets either in the direct lending or a combination of several larger assets in the Freddie K first loss Securitizations.
Those were going to fund with a lot less leveraged and we would typically in the residential.
Portfolio and on the residential side, we continue to focus on credit it may be Jason can speak further on a residential side, yes. So on that side, we are seeing multibillion dollar portfolio sales on a quarterly basis from both the geo season large banks.
Our goal of those portfolios is to find is a.
Portion of those portfolios where.
It meets our guidelines for acquisition, where we have served and strategies and data that is helping us understand the ability for the R&D predisposed to positive outcome. So we particularly will partner on transactions, where we can.
Take a sub sector of the larger pool and acquired for our purposes. So we still see equity type returns in that space, which is the sub performing loans base.
As the the bids on on on clear paper continue to ratchet up with lower rates Thats, providing a nice tailwind for for gains in our portfolios.
In in the residential space, we still don't see large market opportunity.
In the non QM trade.
We avail ourselves to all originators a market as we're not competing directly against any one of them.
The supply that space continues to underwhelm in a lot of the refinance apply obviously at lower rates has compressed some of the equity returns.
But overall aggregating a larger portfolio for we're on a securitization is taking would take a longer period of time, which expose you to more rate rate risk that we that we like the only area market I'd say that we kind of have comp.
One area that we definitely have pushed back quite a bit is in fixing flip while we have aggregated portfolios in that space selectively.
Our concern there is that the refinance volume of of borrowers that are going through fixed and flip rather than selling their home after year and again, we stay back as the market where borrowers bars are basically taking bridge loans for year to renovate a property and solid at a profit.
In that space the renovations onto a sale are now renovations were refinanced than to a sale. So when you start seeing a pickup of refinances in this market versus a sale. The home you know that the original project.
Grammars work were missed something was missing the point in the project for it to not be sold and within that year period. So that will at we believe that may address to that that sector overtime and and cause.
It's a pickup in default. So that's an area that were little bit more concerned about just simply looking at the the timelines of the sales are occurring by these on local developers that are taking these houses.
Through a resale.
Overall as I said in my comments Youre looking at the ESCO market looking at scratch and Dent given higher volumes reached origination activity in more mistakes that are made as because.
Continue providing us with attractive equity returns.
Thanks, Will's comments and Jason following up on the portfolio sale of.
Commentary, how should we think about opportunities in the fourth quarter is.
With multiple holidays in the back half the quarter to the things slow down or or with yearend or large financial institutions, one incentivized to try and sell these underperforming portfolio is off the balance sheet.
How do we think about the investment opportunity and seasonality on the fourth quarter.
I mean every year, we've been doing this for seven eight years in this space and in the loan space.
I have been doing it.
So there always is window dressing tours in the year for some institution that provide some opportunities.
Which requires our traders and.
And analysts to be at the office over the near period, but offer a closing so that is more opportunistic in nature and generally at.
Bigger discounts so in that opportunity will avail itself towards end of the year it almost always happens.
But if you look back last two years, we've had quite a bit volatility in December I think the market in talking to different participants out there.
I think we should expect a slowdown of of are trading activity.
If you simply because of that volatility last year was was also very tough for the market and obviously was assumed bounce back in the first quarter.
But at this point there has been profits made on on the residential credit sector and it would seem more likely that.
Everybody would try to print there.
Stabilizer book by not entering into large scale trades in the fourth quarter with that said we are obviously on our who will be open for business and we'll likely see some opportunities, but again I'll be more options to be nature, we're not expecting any significant large portfolio sales those sales.
Our happening in in this month and Steve you might say give have the amount of capital that we raised over the last 12 months and you think about our earning assets relative to the ending quarter balance because of some of the assets that were investing in especially residential loans, there's probably a 60 day lag between entering into a.
A letter some kind of purchase agreement in the actual settlement alone. So we sort of have a rolling natural 400. This type pipeline of investments that are going to fund in the fourth quarter and so a lot of the activity that we would typically do in the fourth quarter, you're not going to really see it until the first quarter of 2020, especially.
As it relates to a lot of the residential investing but I think we feel pretty good about from a funding standpoint, where we're going to end up at the end of the year and as Jason said.
I think that Theyre, just was a large Fannie Mae loan sale this week.
Probably another one next week from another seller and then as we go into the at the end of the fourth quarter, you'll see you'll see sporadic selling but we think we can take advantage of.
Great. Thanks, Steven and my last question flipping to the.
Financing side of the equation.
It looks like the financing costs for the ready credit declined the multifamily credit actually went up a few basis points can you talk about what drove that and with with LIBOR moving.
Lower and obviously the forward LIBOR curve now.
Pretty flat can you talk about will what you expect to see occur on the financing saw financing cost as we look forward.
Yeah, and really it was really the financing cost increase in the multifamily was really more of a function of increasing the leverage there in extending the term some of the financing Steve. So you know to the extent that we're able to get 12, an 18 month repos on that the two year repos on some of our.
Predicate and securities and so we just felt like tends to be prudent.
To take some of the volatility on the funding side is to extend some of those maturities and thats with some of that cost increase went too.
There was a little disruption in LIBOR pricing as we went into the quarter end. So we know as we started to think about refinancing our repo book in September we start pushing some of the repos out over a year end just to avoid the yearend possible price issues.
And so thats, probably why sabal tweak up in cost, but no significant increase in cost.
And in fact, as we look at our warehouse lines in our loans were in a process of finalizing into a new.
Agreement, which will lower our cost in the residential loans.
We think funding still seems to be very advantageous, it's just a matter of.
Transitioning step from 30 day exposure to a little bit longer less risk exposure.
Ill.
From the.
Funding side on from warehouse lines, and we are seeing spreads tightening in roughly 20 basis points to 30 basis points.
Which we will be will benefit from as we knew these lines on the LIBOR side, we saw one month LIBOR declined by 30 basis points.
Over the year, which has saved us on annualized basis roughly.
$8 million per year in total financing costs. So that obviously is the financing side of the credit has very helpful.
Two overall business and generating return to the assets we own.
Theres, an interplay that occurs between that and the assets the assets.
Yeah.
When we looked at when the investors looking at a targeted teens returns you look at the equation of lower front funding labor costs and that does tend to increase the price.
Of the next portfolio sale.
So that the while there has benefited somewhat lower LIBOR there is an offset of.
Slightly higher asset costs. So, we obviously look at the market where.
There's been a delay in that activity on the not reflected in the and current pricing and market, but we're very happy about our ability to oxy gain the on the savings here and also our timing of when we look we'll look to securitize as funding costs have come down 90 basis points and securitization market. So that has been a good.
Yes.
Result for us and something we piloted take advantage of the next quarters.
Great. Thanks, a lot for your comments.
Thanks, Steve.
Thank you and our next question will come to light Eric Hagen KBW. Your line is now open.
Thanks, Good morning, guys the loan pipeline with the Gsvs It sounds like conforming originations that you talk through in the prepared remarks can you walk through that again I just want to understand why.
You guys are able to buy loans at a discount to par when they would be.
Be able to sell in the specified pool market for.
Quite a hefty premium thanks.
So we're talking about here or loan that failed some underwriting guidelines at that point of origination.
Simply giving a borrower notice of 60 days prior to closing loan of what is.
With that interest costs, he would incur and other items like that or.
A bar that may have taken out in auto loan.
In the period of which he was underwritten to period of which was closed. So therefore, the DTA getting them ratio changed slightly. So these are things that we see.
That is the has persisted in this market for since the beginning of the and really the agency market.
And these defaults when they come up basically are.
I have an issue in that the loan that is on a warehouse line that was intended to be sold to the agencies generally I would now is disqualified for being on that line in the originator has a certain period of time of removing those assets off of the rounds line.
In originators are basically close to 20 times levered entities the of 95% hurt advance rates plus on the loan that they originate so in that case theres a near term liquidity issue that did that originator would face, especially with respect to non bank lenders.
In that case, we have a we've we've deployed strategies here, where we work with originators look at the issues that they've been on covered on their loans as they attempted to sell into the pipelines and we would look to buy those on the discounts given the timeline are required to get those lines those loans off and the and the and fraction that was caught.
Now, we're typically looking for technical infractions here fraud, and other items like that that do come into play.
And those are not loans, we look to buy.
And this is more of a kind of fire sale opportunity for us to acquire assets now in this market with origination volumes increasing.
And doing to supply.
And the origination framework and it's hard to add employees to deal with the origination versus the away around so in this case.
The originators are kind of strapped.
For the operational side of the grades in there that they have.
When you have increasing in origination and more supply them. The same pipeline without increasing your total production capacity that you do find more issues. So.
Our team has been busy evaluating those and we have seen almost doubling of our pipelines in that space simply because of the refinance activity has occurred in this market given lower rates.
Very interesting no I think that just supports the niche.
Opportunity one gets in New York Mortgage Trust, that's very interesting. Thank you and then on the on the distressed loan segment I'm just trying to gauge how fast the runoff is I.
I don't think its right to maybe phrase the question in terms of prepayments Peters CPR the portfolio, but how much how much capital is being returned back to you.
In any given period just in that.
Segment of the portfolio. Thanks.
Yes, I think if you historically, Eric I mean, the rotation really is a couple combinations right in your point is well well taken about prepayment I mean, we really there is a lesser amount that comes from direct prepayment, it's really either we throw them into a sick of permanent type vehicle that securitization or we sell the loans outright.
Because we have been so we really we've accumulated a significant amount of loans over the last 12 months, we transition them to a new servicer. So what we're trying to do is bring these borrowers to a different place and their credit cycle that improves the value before we think about selling them and so I think what you'll start to see as we go into 2020.
<unk> increased velocity in selling some of these loans or putting them into permanent vehicles for financing to try to monetize that part of the credit improvement.
We have not been significant active sellers of alone in this year, primarily because we've been in the building portfolio phase that we still think that weaken the loans that were keeping we think that we can continue to add value to them and thats really what we havent sold any.
Very little.
Got it alright, great. Thank you very much for the comments guys shirt.
Thank you and just as a reminder to ask a question of the phone. Please press Star then one on your telephone keypad.
Our next question will come to life, Matthew Howlett when the Mora. Your line is now open.
Hey, guys. Thanks for taking my question another strong quarter I, just want to capital at the upcoming securitization.
You know where what's the opportunity there where do you think you said 100 basis points in.
The market to come in 100 basis points are we talking about 3% term type securitization.
We'll take your world cost down could you maybe just go into a more deals what you're expecting a early next year.
As it relates to the securitization market, obviously getting term financing, which is going to have slightly wider.
Total cost of debt versus.
Short term repo funding.
However, it is turned out to the risk of.
Any kind of mark to market or any other events like that is on.
No wonder an issue given the term financing.
So when you look at Securitizations you look at it.
As a function of.
The overall life that financing not just a one.
So given the 100 basis points decline, it's become more competitive or at least more competitor closer to kind of repo financing terms, given the flat curve or inverted curve earlier, so it's providing us with opportunity to basically term out with slightly increases on costs of financing.
We talked about a securitization we know we.
In Europe Motor show Us, what we will be looking to the frequent issuer in this market over time, given our aggregation of loan portfolios that we will be receiving and earning the name off ago Securitizations is what our business plans.
There is there's a gestation period of when that happens given the payment profiles of borrowers that we're buying that would have that we're looking to.
Make more stable when you get to a point, where the bar is paid 12 consecutive months. It starts opening up the channel for really efficient financing, we can get a rated securitization Don.
And that is that is our goal.
The interim process. There is before that event happens as you buy new loan pools, there are esoteric unrated securitization deck and can be completed on our portfolios.
Where financing costs has come down eyes, as I said early about equal to 100 basis points.
And in that case, where we'd be taking sub sectors of our portfolio and moving them too.
A more of a term funding type facility, where we see the esoteric market pricing fairly the risk that that is being on.
Being assessed there I mean again were buyers of the securitization debt, we analyze and on the rate of loans in those portfolios almost daily as new deals come down and looking at our current portfolio. So we were constantly monitoring where the inflection point is for us to go into a securitization, which type of assets should going securitization based on.
Our pricing views on the securitized debt.
We have financing facilities in place that our effort that will be evergreen rolling facilities. So we will have.
Long notice periods of when repos with.
Where we borrowing.
Which has helped us alleviate the concern of.
Any kind of.
Any kind of cash needs in the near term, but the the securitization side equation become more attractive given.
Get these esoteric markets are becoming more of a normalized market, where empirical data has been provided to the bondholders and they're getting more comfortable with respect to the risk that they're taken that align deals.
Given these are generally new securitizations that had been produced in this market.
Got it when I think about empties leverage profile going forward the securitization should enhance really the economic will be given you're going to be terming out debt from Brean capital for reinvestment is that the way to sort of think about the impact.
Any forward, yes, I think if you like we talk about callable leverage and total leverage of the company and so what you're doing is transferring some of your call, we'll leverage risks to two permanent financing, which.
It may increase our leverage.
In the securitization, but it doesn't include increase our risk with the leverage and so that's really what we're evaluating as into Jason's point again trying to factor in how much money, we can monetize against the loans and what's the cost of doing that relative to our shorter term financing options.
Got it Okay, and then flipping to the Fannie Sandy I just want to go back here. Those comments you made on Fannie selling fresh loss risk with Freddie We know Freddie has that well developed K series talk about Fannie program I know they've sold it to the DUS bonds. The triple A.'s that now looks like there theyre going into what sort of popping Friday can you look.
And of course, the opportunity there is sustainable return profile.
Yes look that the Fannie program is different than the Freddie in that sense at the Freddie is that true securitization, where they sell the bottom layer risk out to the private marketplace in the dust program. What Franny is doing currently is they are accumulating a series of risk that they hold because of the dust program and.
When you think about the desk sharing loss sharing program, it's more of an insurance policy with the originator rights of the originators sharing some of the risks with Fannie Mae Fannie Mae selling their portion of the risk not a 100% of the risk on a particular alone. So unlike a freddie K first slots on where we actually have a chance to oversee the collateral.
Workout situation as a whole during the first loss piece in the Fannie Mae it's more like a residential transfer program both agencies have where you're just buying a bond based on a expected yield.
Any don't really have any ability to go when and deal with the collateral and so you're all your analysis is upfront.
So you're looking at that and you're trying to figure out.
The yield or entering into so is it was a very liquid market. It was very well bid. The first transaction in some cases of bonds were 40 times oversubscribed. So I think its they are taking advantage of a.
Undersupplied market in this kind of product and so it's really these first couple of transactions are going to be fact, finding in terms of trying to determine what is the right yield. So I think we entered into the first trade. One we wanted to make sure that we were we know the Freddie program very well, we want to get understanding by getting involved.
But it's really at this point, it's more of a wait and see and see what really long term opportunities are going to be we think at a minimum to short term, it's a trading opportunity.
Over time off to see how it plays out from a from an actual credit analysis possibility.
Great well look for you guys had denim and so the first mover with your Friday case or look forward to hearing developments of Fannie appreciate the comments.
Thanks, Matt.
Thank you and our next question will come to life, Christopher Nolan with Ladenburg Thalmann. Your line is now open.
Hey, guys I hear you correctly that operating expenses in the fourth quarter should be 89 million or did I Miss your it's right about eight to half billion. We think the run rate will be Chris how do you think around there and Steve you think thats going to be the case, even though lease in the first half of 20.
Yes, I mean look at old the company has experienced tremendous growth both in capital portfolio size and human capital, which is obviously the large component of DNA.
I think these significant hires are are behind it.
We can continue to grow the portfolio I mean at the margin. If we continue to grow the company larger will be a slight increases in expenses, possibly but I think the run rate is pretty pretty solid down and we've done a lot of a lot of growth in 2019 got for me. Thanks.
Thanks.
Thank you very much and I'm showing no further questions in the queue. At this time. So now it is my pleasure to hand, the conference back over to Mr., Steve Mumma, Chairman and Chief Executive Officer for any closing comments and remarks. Please proceed. Thank you just want to thank everybody for being on the call to continue supported the company and we think we're in a great position.
Right now as the company in terms of opportunities.
And we will continue to push the company forward as we've done in 2019, we look forward to going through our fourth quarter updated in year end.
In February of next year, thanks, everyone.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect everybody have a wonderful day.