Q2 2021 New York Mortgage Trust Inc Earnings Call
[music].
Okay.
Good morning, ladies and gentlemen, and thank you for standing by welcome to the New York Mortgage Trust second quarter 2021 results conference call.
During todays presentation, all parties will be in a listen only mode.
Following the presentation the conference will be opened for questions.
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This conference is being recorded on Friday August 6 'twenty 'twenty 1.
Our press release and supplemental financial presentation, with New York Mortgage Trust second quarter 'twenty 'twenty..1 results was released yesterday.
Both the press release and supplemental financial presentation are available on the company's website at Www Dot N Y Amtrust Dot com.
Additionally, we're hosting a live webcast of todays call, which you can have access in the events and presentation 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 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, reflecting 80 for 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 the company's filings with the Securities and Exchange Commission.
At this time I would like to introduce Steve Mumma, Chairman and CEO, Steve. Please go ahead.
Thank you operator.
Good morning, everyone and thank you for being on the call Jason Serrano, our president will be speaking to our investment portfolio strategy and Christine <unk>, our CFO, who will be speaking in more detail about our financial results today.
We will be speaking to our supplemental financial presentation that was released yesterday after the market closed and it's available on our website.
We will now questions following the conclusion of our presentation.
The company had a solid second quarter results with GAAP earnings per share of <unk> 11 in.
And our comprehensive earnings per share of <unk> 12 cents.
On our book value increased to $4.70 for generating a total economic return for the quarter of 2.8%.
Wherever the company's portfolio net margin for the quarter was 55 basis points higher than our previous quarter benefiting from improvements in asset yields and decreased average funding costs from our liabilities.
The company took advantage of the lower interest rate environment accessing the market accessing the market with 2 capital markets transactions in April the company completed a private placement of $100 million of rated senior unsecured notes with a 5 year term and an interest rate of 575 per cent.
In July the company completed offering of our series a preferred stock for net proceeds of approximately $139 million with a coupon of 6.875% company used approximately $105 million of these proceeds to redeem our 775% series C preferred stock, thereby lowering our cost of capital by 100 basis points.
Well the company benefited from the lower interest rate environment. We also believe our execution of these 2 transactions and improved pricing levels validates the strength of our current balance sheet.
Now going to page 6 in our supplemental you'll see our investment portfolio totaled $3.2 billion at the end of the quarter and our market capitalization was also with $2.2 billion Boes.
Both unchanged from the previous quarter.
Our capital was currently is currently allocated at 77% single family and 21% to multifamily.
Our portfolio growth continues to focus on credit investments as we believe we can generate better risk adjusted returns with more stable funding.
On slide 7 we highlight some of our key developments during the quarter, we declared a <unk> <unk> common stock dividend and generated a total rate of return on our common stock of 2.2% for the period and we currently have a year to date total rate of return of 26, 6%.
Purchased approximately $258 million in residential loans and close on our second multifamily joint venture investment for $12 million.
On our financing efforts, we completed our first BPL revolving securitization for a total amount of $167 million, Jason will speak to this in more detail later in the presentation.
Completed a private placement of rated unsecured notes with a 5 year term and an interest rate of $5, 75%, our lowest cost of term financing in company history.
July we issued our first rated preferred stock offering raising approximately $135 million with an initial rate of $6.875.
We continue to focus on long term financing options to fund our growing business to help us navigate the ever changing financial landscape.
On slide 9 we go over portfolio metrics on a quarter over quarter comparison.
As I said before our net margin for the second quarter was $2, 97% an increase of 55 basis points from the previous quarter.
Our portfolio weighted average yield was 631% an improvement of 28 basis points. The increase was largely attributable to the continued rotation out of lower yielding CUSIP securities to higher yielding residential loans, including business purpose loans, our funding cost improved by 27 basis points during the quarter as the impact of calling 1 of our securitization for later in the firm.
Quarter was fully reflected in the second.
In July we called 2020, SP, 1 residential securitization and anticipation of issue a new securitization in the third quarter.
DSP, 1 securitization on approximate cost of 4%.
But we believe we can replace with costs in the low 2% range this quarter.
Our leverage remains low with 3 times and our liquidity remains strong as we head into the third quarter.
At this time I'd like Christine our CFO will now go over the financial results for more detail Christine. Thank you Steve Good morning, everyone and thank you again for being on the call and discussing the financial results for the quarter I will be using some of the information from the quarterly comparative financial information section included on slides 23 to <unk> 30 of the supplemental.
<unk>.
<unk> 10 summarizes our activity in the second quarter, we acquired residential loans for $258 million closed on a multifamily joint venture investment for $12 million and purchased $19 million of investment securities.
Residential loans since the MBS for proceeds totaling $15 million.
Also had total repayments of approximately $309 million, primarily from our residential loans.
Most of these residential loans for purchase at a discount and the early payoff of the loans resulted in additional income of approximately $5 million, which is included in realized gains. We also had for multifamily loans that redeem which generated $1.5 million redemption premium income which is included in other income.
We had net income of $43 million and comprehensive income of 47 million attributable to our common stockholders. Our book value ended at $4.70 for up from 471 the previous quarter.
Slide 11 details our financial results, we had net interest income of $31.5 million, an increase of $1.1 million from the previous quarter.
Total net interest income increased from the previous quarter, primarily due to our continued investment in higher yielding business purpose loans, which contributed to the $2.1 million increase in total interest income.
This was partially offset by an increase in total interest expense of $1 million, primarily attributed to the interest expense recognized on the senior unsecured notes issued in April.
We had non interest income of $43.3 million, mostly from net unrealized gains of $23.9 million due to continued improvement in pricing on our assets, particularly our non agency MBS and <unk> securities residential loans and our investment in consolidated SLS G. In addition, lower <unk>.
Right.
Drove modest price appreciation on our agency MBS Securities. We also generated 5 million of net realized gains primarily from residential loan prepayment activity. In addition, our multifamily preferred equity investments accounted for as equity contributed $6.4 million of income which includes <unk>.
$5.5 million on preferred return income and $8 million of unrealized gains or other equity investments contributed $4.3 million of income primarily from income recognized on redemption of an equity investment that invested in residential loans. We had total G&A expenses of $12.5 million and <unk>.
<unk> of approximately $1.1 million from the previous quarter.
The increase can be attributed to annual awards and equity compensation to non employee directors during the quarter.
We had operating expenses of $10.6 million during the quarter, which included $6.7 million related to our portfolio investments. This increase primarily due to the growth of the business purpose loan portfolio and $3.9 million of operating expenses related to multifamily apartment properties that we consolidated <unk>.
Lawrence with GAAP.
As I mentioned earlier included on our results for the quarter as the net income activity related to multifamily apartment properties that we consolidate in our financial statements in accordance with GAAP.
These properties generated operating income of $2.1 million and incurred interest expense and operating expenses of <unk> 4 million and $3.9 million respectively.
After reflecting the share in the losses for the Noncontrolling interest of $1.6 million in total these multifamily apartment properties incurred a net loss of <unk> 6 million for the quarter. It should be noted that the net loss on these properties includes depreciation and amortization related to real estate.
The graph on slide 11 illustrates the change in our book value from June 30, our book value increased to $4.70 for during the quarter and increased 9% from the end of June 2020, our stock price has also recovered significantly increasing our price to book ratio to <unk> 90 for from <unk> 60 at the end of June.
2020, we continue to focus on growing and strengthening our balance sheet by investing in our core strategies of single family and multifamily investments and prudent liability management by placing greater emphasis on procuring longer term on a more committed financing arrangements Jason.
Jason will now go over the market and strategy update Jason.
Thank you Christine.
As it relates to our strategy, we continue to favor <unk> scratch and dent multifamily lending and <unk>.
See strong signals that provide a favorable investment landscape in these areas.
On page 14, starting with the <unk>. The overall economic backdrop is very supportive of the U S. Residential housing both single family and multifamily with estimated $5.5 million new housing units required to meet demand.
After $1.3 million of expected new builds the market will continue to be extremely tight in the near term.
With a significant housing deficit, we continue to support single family Bridge lending focused on modest home renovation under a 1 year loans are.
Our borrower alignment is strengthened with 74% pre model and 64% post model LTV.
We have faced increased market competition of lead with new market participants willing to compete on loan price, meaning low rates and or structure, meaning higher ltvs remain consistent with our pricing and the short duration BPL sector. We instead focus on competing with our process, where we can take advantage of our.
<unk> team and proven technology to reduce the operational burden of BPL originators before and after loans are purchased.
In the performing loans space, we continue to find value in the scratching on sector with a collapsed primary and secondary mortgage rate and.
And new curbs on early funding from the cash window for agency channels. We purchased loans closed loans that were found to have technical issues with the original origination guidelines our purchase even on a deep discount helps for the originators liquidity.
We have been able to buy loans from over 200 originators in the past few years with a purchase discount of 7 points on average we do not compete on price, but like Bpl's, we buy loans and expedited manner meeting the needs of our selling partners with a consistent diligence and closing process. This helps us be a preferred counterparty on the.
Space.
Lastly, with a housing deficit.
Multifamily valuations have also improved with increased rents.
In this case, we target selected submarkets facing more acute housing shortage is found in the south southeast United States.
Average.
Average multifamily rental rates are up are up 7% year over year led by double digit gains in markets like Atlanta, Tampa, and Raleigh, and our direct lending and JV business, we focus on low to mid rise properties and secondary markets. We have done so without incurring a loss in any position in the 8 years plus investing in this space.
Consistent with the commentary and other strategies, we are focused on hitting all funding timelines for our acquisitions under a consistent due diligence process approach with our sponsors.
Again, we compete by providing a trusted process here.
Holding the line on pricing across these strategies in the face of higher accomplish and allowed us to increase our average yield on assets.
Turning to page 14.
In the month, our pace of acquisitions slowed to $290 million from $364 million last quarter.
While we do see elevated.
Levels of competition or a larger contributor to the decline investment activity was related to a focus on.
But all opportunities, we can take longer to close, particularly in the multifamily space.
Thus, we expect we expect to see a meaningful increase to our allocations in the third quarter with our core strategies turning to page 15, as I stated on previous calls we expect our portfolio leverage defined as recourse financing to remain low first we run an unlevered strategy within multifamily.
Loan and JV investments as return on assets is expected to meet.
To meet your targets in the low to upper teens second was onshore markets securities securitization debt or term non recourse financing is the primary focus point.
Our opportunity is to continue allocating new purchases alongside a $700 million of unencumbered loans, we have on balance for this form of financing. We are currently working on a number of transactions with bankers and unrated space and with rating agencies and the weighted residential debt offerings as discussed on our last call we expected <unk>.
Mark even.
To be even more accommodating to issuers as the level of demand, including replacement been with higher market paid on rates continues to outstrip new supply.
As a result, we witnessed financing cost decline about 28 basis points for a 2% loans on the unrated or NPL space <unk> space.
And in the right space AAA financing levels improved approximately 15 basis points on a quarter to a 1%.
Area of cost of debt.
We are excited about this proposition to generate.
Equity returns within our portfolio with reduced leverage risk versus traditional bank.
Offerings repo offerings.
On page 16.
As discussed the current environment is favorable for our strategies. While we are not currently active in the re performing loan options are 895 million preferred today with a 484% coupon at 72% LTV would be extremely difficult to replicate in today's market with year over year housing price printing.
On housing prices breathing at 16% growth rate the highest level recorded on the <unk> index.
Our equity position with our borrowers continues to improve which brings a higher degree of alignment and downside protection with our loss mitigation approach at $97, our loan valuations accretive to par alongside of the market improvement as such we recently noticed investors to call 1 of our unrated deals with 300 million loans.
<unk> loans in today's market and as Steve mentioned earlier, we see up to 200 basis points.
This cost savings with the <unk> of these loans.
With our business purpose loans, which at the end of the second quarter equaled $622 million of asset value.
Here, they are mainly bridge and rehab loans, we have funded these loans without any loss to date, we believe and apparently many others in todays market find the strategy to fit well within the macros in the housing market.
Our recent.
Our recent new issue revolving securitization this space paves the way for high teens low Twenty's returns on these assets after launching the deal with $160 million on loans in the second quarter. We continue to utilize the cash built with new struck within the structures with $75 million of new loans added to the securitization in July.
Within the performing loan strategy, which is mostly scratching net loans, we have seen an elevated amount of activity in the quarter.
It should bring higher investment pipelines in Q3.
Like the agency market, we have witnessed an increase to the portfolio's prepayment activity.
However, unlike the agency market, we benefit from this active because of a deep discount.
Acquisition cost turning.
Turning to page 17.
In this quarter, we highlighted this trend here.
Where we show the purchase price against exact loans that prepaid in a particular month.
On average acquisition price of between $93.95, we captured the discount with loan prepayments, mostly above 30 CPR.
While paydown activity reduces the portfolio size the payoffs are accretive to our earnings as we capture the 5% discount.
Turning to page 18.
Finally in the residential markets, we provide an update on <unk>.
<unk> portfolio here, we continue to focus on markets with low housing supply borrowers with proven experience low LTV and importantly, low rehab it requirements provide for a quick project turnaround. We believe these characteristics hit a sweet spot in the market with our high level of originator trade support we believe we can maintain.
On a high level of activity benefiting our pipelines increasingly competitive market environment.
Now turning to page 19 switching over to Walt on multifamily overview.
We have seen a recent decline in senior financing costs within the agency sector by approximately 30 basis points, which sparked an increase in our pipeline with sponsors who are seeking cash flowing multifamily property acquisitions cash.
Cash loans with sponsors can immediately take advantage of the sub 3% senior financing cost.
We support these acquisitions within there's a profit layer to the sponsors acquisition on average on that up to 80% LTV.
With a contractual coupon of 11, 6% and additional early prepayment benefits.
The risk adjusted return here is very attractive as I said it stayed earlier, we keep market share in this space with a proven process against tight closing timelines such as in the case for 10% or do you want to change.
We started to refocus on JV this year with a more favorable macro environment in the south southeast of the United States.
And have looked at multiple recapitalization opportunities alongside the sponsors. The team is very focused on the part of the market by utilizing our large network developed over 10 years of source portfolio opportunities.
Quickly on the multifamily security side, we discussed on the previous quarter book, We believe the market is fleet price here with yields on the 2% area as such we recently liquidated nearly all our positions.
Last month in this sector to move towards a full exit of this sector given the tight market environment.
Turning to page 20.
Lastly, with respect with respect to multifamily performance not surprisingly underlying property occupancy rates continue to improve with demand in the local markets given the sector strength, we continue to receive prepayment notices from borrowers on our portfolio.
As an additional 4 loans prepaid in the quarter, providing a 14, 7% investment IRR at a 1.4 times multiple after all applicable minimum return multiples.
We have very few.
Assets and special service.
We continue to work towards a par payoff for the 2 of the 40 assets.
And this part of the portfolio.
Now I'll turn on page 21, we thank you for your time to hear an update of our business. The investment team is focused on unlocking new opportunities across the resi loans sectors and multifamily cap structures. Our goal is to deliver high returns with low volatility. We're excited about our new investment prospects and financing arrangements to continue with this success at this time I'll pass it back to Steve.
Thanks, Jason on operator, you can open it up for questions.
As a reminder to ask a question you will need to press star 1 on your Touchtone phone. So withdraw your question press the pound key.
You are using speaker equipment, we do ask that you. Please lift the handset before making her selection.
These standby, while we compile the Q&A roster.
Your first question comes from the mind of Doug Harter with credit Suisse.
Yeah.
Thanks, Steve.
Hoping you could talk about the decision to kind of raise day unsecured debt and increase the amount of preferred.
On the context of kind of the low overall balance sheet leverage in front on how you weighed those different forms of capital.
Sure. So from the other the preferred first I mean really we raised $137 million, we paid redeemed 105.
For net up on flight, we still have another preferred equity piece thats out there that can be redeemed.
That's that's higher cost of 7 and 3 quarters, we've raised a 5 year money. It was the first time, we did a rated deal we wanted to test the market and see where we can get we have seen some of our competitors getting very good execution and we have a convertible deal thats maturing in early January so keeping all of that into perspective, we were testing the market on the rated.
World.
Way to replace that convertible deal that's going to be maturing in January and I think as we look at when we think about the preferred given the size of our balance sheet. It's really trying to continue to lower the overall cost of capital on that and really not net increasing substantially that preferred channel. So I think over time.
Youll see the preferred sort of get rebalanced back to where it's been we were up like 35 million relative to where the net pay off.
But we still have that 703 quarters out there that we're looking at what's the best way to manage that money going into this cycle.
Given the outbreak of the Delta variance, we want to make sure we understand the impacts of potential liquidity as we go into the remainder of the year.
And so we want to be more conservative as it relates to financing opportunities.
Great and then just on.
To make sure I understand.
Revolving securitization.
Long as the revolving period.
Yeah.
Yeah.
Could that could go directly to them.
Yeah. So the the revolving is really replacing the SaaS pay downs, we have in the portfolio. So the short duration on the loans given away your maturity with some extension.
Anywhere from 12 to 18 months kind of the pay downs expected, we want to make sure we were able to re lever those deals into a 2 year revolving structure, which is what debt securitization provides so with that we can keep the leverage outstanding.
Efficiently finance our pipelines.
It's a 2 year period that we can continue to reinvest.
So a 2 year period and then yeah.
And then I would like to use. It then it's 3 year, yes. That's right. There is a step up for 3 years later.
Got it okay.
That's helpful. Thank you.
Thanks, Doug.
Your next question comes from the line of <unk>, George with K B W.
Hey, everyone. This is actually Mike Smith on for Bose. So just on the bps you mentioned some of the competition in the space can you just talk a little bit about your broader sourcing strategy and kind of.
Have you seen any decline in expected returns given the increased competition in the market.
Yes.
Yes.
The market, we definitely see an increase in competition really over the last.
A few months now.
There has been a.
The story is very popular.
Very strong non.
Macro tailwind that supports the asset so its not surprise on other market participants are are looking to enter into this space or are increasing their funding availability.
As it relates to our pipelines, we're buying loans from the same originators that we've been working with.
Past few years.
We as I mentioned earlier, we haven't reduced our yield requirements in this space. Despite the fact that the market overall has.
It is trading at a tighter level.
We we do so because we believe that our operational capability and a lot of handholding going back and forth with the originators on the closing process as well as afterwards allowed.
The engineers are also the servicer of the loans post.
Post origination date so.
There's a lot of servicing needs and a lot of help we can provide with as it relates to updating the portfolio.
So on all of those cases, we find ourselves in position, where we're able to continue buying loans at.
At previously.
Yields have been consistent for us for the last 6 months.
And.
We believe we are able to do that because we are able to move quickly with these originators and provide.
Our level of service as a buyer that we think is differentiated.
So hope that answers your question.
Yes, no. That's helpful. And then a lot of peers are taking equity stakes in originators or acquire originators to kind of secure sourcing and improve economic share.
Is this something you could look to do or on the other side of that if any of your origination partners have had any change to their ownership structure.
Yes.
<unk>.
We've talked to just about all the mark participants in the space on the origination side.
<unk>.
<unk> a number of those opportunities.
Being a capital market transaction.
Our acquisition or entering into a GP of a structure of 1 of the originators in the market. So we've kind of seen it all we've evaluated alongside with other market participants we have decided not to pursue.
Capital markets activity through our purchase simply because we believe we can maintain the levels that we're purchasing.
This is again a market that is pretty finicky.
It shut down in March 2020.
Valuations on the ammonia originators are.
Pretty volatile given the short timelines of the loans themselves and how fast the market can basically.
Just stopped new investment activity. So we didn't feel as prudent to spend that type of capital for the pipelines that are available.
Also we view this this market as a.
Is it trade in this rate continues to be strengthening strategy, given the macro environment, but.
No.
This is a bit of a new market, yes hard money lending has been around for as long as the mortgage industry has been around round, but.
This type of financing and with the.
<unk>.
On the efficiency of the securitization market is providing for kind of a new state.
Stage of investment opportunity and that could easily change quickly.
I think we prefer to look at more alone data strategies in the BPL market.
<unk> mentioned earlier, our focus has been on the short duration part of the market with the fix and flip type of loans.
There are opportunities in the.
Investor loan or debt service coverage ratio of space that we are evaluating but at this point, we're comfortable where we stand with respect to our pipelines in the fix and flip strategy.
Great. That's helpful. And then just 1 more for me can you provide an update on how book value has trended since quarter end.
Yes look I mean, we don't typically we don't give specific forward looking statements as it relates to dividends <unk> book value.
Given where the market is certainly there was a little bit of a backup in rates. This morning, with the issue of the employment numbers, but.
Given the strength for the credit markets, we would say that our book value is probably up slightly.
Great. Thanks for taking the questions.
Sure. Thanks.
Your next question comes from the line of Steven <unk> with Raymond James.
Hi, Good morning, Steve Jason on Christine.
Sterling, maybe a bigger picture question.
Reading some articles just about.
Different.
Agency <unk>.
Multifamily guide.
Guidelines, maybe those caps going up maybe loosening of standards and some shifts there yeah, how does that create an opportunity for you maybe on kick outs or <unk> or other.
<unk>.
How does that potentially what's going on in D. C change either positively or negatively your pipeline of potential investment opportunities.
Yes, I mean, certainly we look at those things as it relates not so much directly to us because we're a co investor in these properties providing mezzanine capital.
But certainly to the extent that they reduce programs, where you get supplemental financing on an existing property that's beneficial to us as they increase their limits and Inc.
It's really not the limits of lending that hurts us is if they increase the amount of money that they will lend against the property at the agency level that certainly squeezes into where we play.
However, there is so many opportunities right now providing additional capital.
When we started to do JV investing again quite frankly, because we think there is better opportunities in some cases on certain properties to participate at the JV level certainly with properties that we would consider 8 like properties B plus to a those are probably JV equity investment opportunities versus where we look at the beach.
A b plus properties, where theyre going to be lifted to from a b to b plus or a is it better mezzanine opportunity.
So.
That's why we continue to increase our touch space into the multifamily.
Area, but yes, we are keenly aware of what's going on in the agency space.
And watching what Washington is doing is probably going to be a drive to affordable housing too.
Those are areas, we will look at also going forward.
Great. Thanks for the comments on that Steve.
Jason and Christine kind of for.
For both of you, but I guess.
You called the called the deal in Q3.
Jason how much more opportunity as we think about those calls next year or is there some percentage maybe some amount you think.
Continue to be called in.
And then Christine from Aw.
<unk> standpoint.
How should we think about the gains net and <unk> from that call and additionally, any gains on.
I thought it was $90 million on the MBS sales, but I think Jason said, maybe all of the 147%. So any gains in Q3 are our losses on those sales.
I'll start with the the call. So we recently issued a notice to our to the investors that are in 1 of our Securitizations that was done on a year ago. So the non call period is coming up.
And Thats why were looking at call. It again, we think we can save about 200 basis points of the 200 basis points of.
Interest costs and also re lever the transaction.
Which is helpful.
We do have other deals outstanding and those deals would also be.
We also be looking to make a clause in this market given.
At this point on the unrated space.
The financing that's available is probably the best is the best debt that we've ever seen and the NPL space or the non rated space NPL RTL on rated space.
In our fuel weighted space.
We're going to do is transition the loans that are that have been paying for quite some time and transition those into ready to deal, which I mentioned earlier.
We are.
We're looking to issue 1 of those deals in the near term.
We see senior financing cost that the era of the 1.1%.
Answering level, so clearly all day discrimination charges beat the financing.
Terms debt.
Financing costs, you see it in the repo space, which is another reason to do the securitizations, but it's very attractive against a legacy portfolio of assets, we own that have obviously coupons.
Ltvs debt very hard to replicate in todays market with the purchase prices that are available.
As it relates to the sales of our.
On the CBS, we sold.
Most of the assets, we still have a few remaining debt were.
Looking at this quarter as well, but.
We were able to sell those consistent with our valuation on those bonds given that.
The multimarket process there.
Alright, so we.
So just to be a little bit more specific we sold <unk> for $90 million that's majority of them.
But.
And the marks or the price that we've exited is close to what we marketed at quarter end.
On.
And as to answer your question as it relates to any gains or losses on the.
Securitization that we're going to call. It it's not really a concept for that theres not going to be any gain or loss recognized for that.
Brian just briefly on.
Situation, we're looking to flip the loans back into the market.
Which then you would recognize again our goal here is to re securitize the assets under more efficient financing.
We've since those Werent remics instances, where our loans to begin with we didn't recognize the gain putting them into the securitization. So it was just a financing transaction and that's why it doesn't generate any extra P&L that you see other guys calling deals those are deals that they've bought in the marketplace and so those werent their loans. Initially so that's where they have the ability to bring those loans back.
<unk>.
And generate a gain.
Perfect I appreciate all of your comments on that topic. Thank you very much.
Sure.
Your next question comes from the line of Eric Hagen with <unk>.
Great. Thanks, good morning.
1 more follow up on the.
2020, SP 1 that your colleague.
I guess the specific question is what kind of advance rate do you expect to get like.
And the and how much capital are you expected to free up for the opportunity.
And then the second question.
What's your lifetime expected loss trend at this point Thats OSP deal that you're on.
When you guys book of yield that shows up on earnings.
Default and severity rates are embedded in that yield and is there any upside for loans paying down even faster.
I'll start with the securitization.
We had the deal outstanding a year.
We're taking about $310 million to.
$310 million of loans back into the market.
<unk> re securitization.
The amount of capital that will be freeing up on that deal.
It is not.
It is not material from our total capital the reason to do the deal is the 2 <unk>.
Gain access to better financing levels, and we use the IPO market.
The financing market is basically a gestation period for our appeal related strategy.
So that would be done on another 1 year deal so.
It's a.
It's really a cost of capital consideration there not as a means to kind of unlock.
Fresh capital for our new investment purchases.
Yeah.
And DSO as Eric we don't really we don't disclose specifics on on defaults and other parameters around the <unk> deal, but certainly prepayment speeds increase has helped that deal right.
Extent that youre, taking back loans that sit on a pool of you're projecting losses. It is helpful to the bond, but just given the overall healthiness of the housing market and increased valuations that certainly supports a lot of the loans in those deals.
Okay, and then 1 on operating expenses forgive me if you said this but the.
Operating expenses I assume included deal expenses.
During the quarter.
You strip those out whats the kind of on the deal expenses get capitalized at a cost of debt right. That's right Eric any securitization debt issuance cost is included in the cost of the debt.
Okay, so that $10.6 million on operating expenses for the quarter.
Maybe I missed it in your opening remarks, but what was.
What's driving the $10.6 million.
An increase because.
An increase in our.
Portfolio for business purpose loans, so that increases that but we also have a portion of that related to our multifamily properties that we consolidate in accordance with GAAP. This is a V I, a consolidation which increased operating expense number.
This quarter.
Okay, I'm really just kind of looking for a run rate operating.
So that run rate operating is a little difficult because you really should look at it we have it as 2 different lines right. We have $6.7 million in expenses related to portfolio. The $3.9 is really going to jump around based on if we if we ended up consolidated.
A multifamily property all of a sudden you can have a jump that's really not really a jump in direct expenses to us, but it's just because we have to consolidate their activity up but the operating.
Getting expense line certainly is related to our portfolio and the growth of that operating expense and the portfolio is 100% related to our BPL portfolio growth. So the way those loans on book or just a higher expense ratio to services loans for that drives that number up.
We grow that portfolio.
Got it okay. Thanks for the color.
Yeah sure. Thanks for the question Terry.
Your next question comes from the line of Christopher Nolan with Ladenburg Thalmann.
Hey, guys on your multifamily equity investments are those into common equity or preferred equity.
That multifamily investments, we have preferred equity, but we also have JV equity, which would be on on the common.
For the preferred equity investments that show up as equity.
Chris It's really from an accounting standpoint, they have similar characteristics of what we would contemplate the other stuff was preferred loans, but because of certain legal requirements within the documentation. They ended up being accounted for as equity, but we're earning an interest rate on the JV is absolutely true equity in the sense that we are party.
At the equity level, but the preferred all our preferred investments have a coupon associated with them. Okay. So the preferred is really secured to some degree by the underlying it has secured a 100% theres equity below it that's the ordinating it and it's in the preferred is secured for the property.
And then on Whatsapp.
For our cap rates are because the JV partner or you go into these multifamily properties with.
I mean, I think the markets that we participate in in the SaaS and southeast obviously, the cap rates have been compressed but.
Well, it's really we're really looking when we get into these transactions not so much the entry cap rate as the exit cap rate and so we're looking for those cap rates seem to have some ability to compress for us to hit our exit multiple targets and so we don't really have a specific cap rate.
Minimum or maximum it really depends on the property specific and where it is located in the in the opportunity to change that cap rate. So we don't really have a specific cap rate in mind and remember that the opportunities that we're focused on our transitional plays for the most part so what we're really focused on is what the management new management teams.
Transition business plan is for the property.
Theres 2 forms either management.
Improvement or if there's some deferred maintenance that needs to be addressed with respect for the property that could help with the rent rate increases. So we look for those plays where.
For that could happen also shortened the duration of the profit offering as well.
Because.
Typically.
My answer would come in and look to basically take our loan out once the management plan has been executed and then off too.
To take a 10 year.
Senior loan out from from Freddie Mac or for Fannie Mae for that matter, but.
Also and we do focus on ground up construction as well.
Outside of just the traditional story within multifamily and there we're looking at very similar.
Similar markets with opportunities, where theres just a.
Deficit of housing demand, especially with the migration trends in the United States from northeast on the southeast. So we're seeing opportunities we're very.
Free high rent rate increases very low.
Very high occupancy rates and therefore.
For analysis of these markets.
So on a very favorable to add new products into some of these secondary and tertiary markets, where we're aligning ourselves with the with the sponsor.
And I guess sort of low given the collapse of that building in Florida.
And given youre investing properties, which I understand low to medium rise, but do you expect you know construction.
Construction renovation or maintenance cost to increase substantially on these properties.
Relative to what we saw in Miami.
We don't lend or have exposure in that market for those type of properties.
We're again, we're mostly secondary tertiary markets, mostly garden style apartments.
And there.
For the types of.
Maintenance.
For maintenance that we see when we're looking to get into your deal for the transitional play.
Is more aesthetic improvements for property that are dated kitchens bathrooms.
And communal areas.
Okay, Yes.
Chris We we have a very healthy program and we have a large asset management team for those very reasons to go out and review property to make sure. We understand what are the physical needs and maintaining that property, but taken as a 100% accurate in saying that the majority of this stuff is really to update and bring forward units to market standard.
Okay. Thank you.
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Your next question comes from the line of Matthew Howlett with B Riley.
Hey, guys. Good morning, Thanks for taking my question.
When I model the portfolio margin out went up sequentially.
Hear you with the you got to keep on calling the securitization and issuing new ones that would probably is the lowest for securitization rates we've ever seen.
With that Marty can you sustain that sort of 3% on on a GAAP basis or is it could it.
Move around through the mix shift or could you just give us a little bit on on how to model that.
Yes, I mean, 2 things you've got to keep in mind. When you look at our margin..1 we have very low leverage right. So that margins being calculated by an asset yield of $6.31, and then the cost of debt, but that debt is a smaller portion relative to our assets. So that that's 1 comment on the second comment is as.
As we get out of the CUSIP Securities and we focus more on BPL loans on multifamily investing those are certainly higher coupon assets, then scratch and dent in some of our old RPM loan portfolios. So.
Thats, where youll see some movement around in as it relates to the cost of debt I mean, certainly as we go through and re price our warehouse lines that come due in the fourth quarter, we will look to be tightening that up but you are correct in saying that the securitization market has never been tighter as it relates to rates and then Jason maybe you want to add some for that yes, I mean, just the sale of our Securities book.
Which we sold most of our multifamily securities last quarter will improve our total.
Interest, earning asset yield.
So it's more of a rotation.
Given the.
The increase in value as you've seen in that space.
So basically we believe is about a 2% total yields kind of yield to that securities portfolio. When we sold those bonds.
And thats, replacing into.
Mostly BPL and multifamily type of space, So a rotation on.
Top of utilization of our our cash and lower financing costs with respect Securitizations should continue to improve our net interest margin.
Have you did you say high teens on the BPL securitization that you sought on the retained securities.
Did I hear you yeah, that's right I mean, the highlight is simply Youre looking at.
High single digit type of coupon with our financing cost dropped by 50 basis points on that deal.
So when you look at new model through the securitization leverage that's there with respect to the financing costs, usually can get to a 20% level on there.
Those types of on those assets.
The yield on the equity matter, yes.
Return on equity of the securitization.
That's right and would you argue with log market as well.
Oh go ahead, yes, yes, that's right.
There is not many markets, where you could achieve that type of return.
It's really related to the fact that it's a short duration loans were similar to our multifamily business. This is a bridge play into any improvement story. So theyre willing the contractors are willing to take a higher cost of debt.
To turn that into a flip or we're seeing more cases now turning into a rental property.
With.
Taking back the property has an interest.
As a investment on appropriate is also.
Thats why that cost of debt is there.
Theres lots of management requirements on managing the draws.
Ensure that improvements are going on accordingly, so those other reason typically while you have a higher cost of capital for that type of debt.
Which we benefit from.
And you walk in the financing via the trust and its a revolving trust like a credit card deals that work like a credit card deal what you pay it down and you keep on putting a new receivable into effort for 2 years, we can recycle the paydowns that we received in that securitization.
Our fixed cost of capital there so.
In credit card deals recycling happens much more frequently in these types of deals maybe 1 or 2 times a month, where you look at the paydowns on recycled with new portfolio opportunities. So the.
Like a CLO as an example, you are able to enter add new assets to that portfolio over the course of 2 years, which is what you'd like to see on it when you have 1 year duration type of asset when.
When youre doing securitizations.
Which is why we opted for that structure.
Great got it.
And then I guess on on the unencumbered $700 million unencumbered on weekends.
How much of that is are you going to finance I mean can you just sort of give us the cadence on how what you're going to do with that over the next sort of 12 months.
Yes, yes, I mean, we're looking at.
As you mentioned earlier.
We're kind of seen historically low securitization costs across different industries right. So we're looking at.
The assets, we have in that book and pairing with our pipeline assets and looking to optimize our securitizations within both the non rated in the <unk> space.
So we are evaluating that piece.
On our residential loan book.
<unk>.
To add we think is prudent leverage to that portfolio.
Great and then last question with the with the pricing on the on the series F.
The other deals out there not on the over the next couple of years youre going to be callable the other preferreds right.
Presumably you are looking at thoroughly for both the series C..7 and 3 quarters is currently callable.
Oh got it to have a couple of years.
With that I know that that's the series C is trading series that for trading up I mean, do you think you could.
Potentially test at 6% right.
Over time do you see the preferred.
We are consistently currently we are constantly constantly the word on looking for monitoring those markets to try to optimize our capital cost structure no question.
Well, that's good to have a significant impact if he can do a great.
Okay. That's it for me Thanks, a lot thanks, Jason.
Thanks, Thanks for that have a great day.
At this time there are no further questions I would like to turn the call back over to Mr. Steve Mumma.
Thank you operator, and thank you everyone for being on the call today and enjoy the rest of your summer and be safe and be smart around Covid and we look forward to talking to you, but on our third quarter results in November have a great day.
Ladies and gentlemen, this concludes today's conference call. We thank you for participating you may now disconnect.
Okay.
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