Q2 2022 New York Mortgage Trust Inc Earnings Call

and thank you for standing by. Welcome to the New York Mortgage Trust's second quarter 2022 Results Conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the comments will be open for questions.

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This conference is being recorded on Wednesday, August 3, 2022.

A press release in Sublindal Financial presentation with New York's mortgage trust second quarter 2022 results was released yesterday. Both the press release and supplemental financial presentation are available on the company's website at www.nymtrust.com. Additionally, we are hosting a live webcast at today's call, which you can 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, may be deemed forward-looking statements within the meetings 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 and detailed and yesterday's press release and from time to time and company's filing with Securities and Exchange Commission.

Now at this time, I would like to introduce Jason Serrano, CEO and President. Jason, please go ahead. Jason, please go ahead.

Thank you very much. Good morning. Thank you for taking the time to join our earnings call this morning. I'm here joined with Christine Arya or a CFO . We are excited to talk to you this morning about the developments in this market. You know, we have seen the market actually transition to a bars market for the first time in quite some time. And we do the construction rebalance. It will allow us to take advantage of these latest trends. But before we get into this, let's...

Cover our second quarter highlights. In the quarter, we incurred a loss of 22 cents per share. This was a function largely of a unrealized losses that we incurred on a balance sheet, resulting in a negative.4% loss to our book value in the quarter.

Now due to the increase of allocations of the scratch to, sorry, to bridge loans over the course of the last 18 months, as well as holding recourse leverage below one times, we were able to limit losses given the extreme volatility that we saw in the interest rate markets.

Now after a declaring a 10 cent dividend our quarterly economic return on unspecified book value resulted in a 2.5 percent

We also in the quarter saw an opportunity to repurchase some of our shares, which is the first time we've done that in quite some time. We saw an opportunity to do so where we purchased 2.8 million shares in the quarter and 0.9 million shares thereafter, slightly after the beginning of the following quarter. We were able to do so at a attractive pricing of 2.69 for the company and $2.73 per share.

In the quarter, we acquired $890 million of investments. I'll be talking about how this was a tale of two quarters of activity given the latest moves. The acquisitions was highly dominated in bridge loans and also started seeing an opportunity to look to sell and monetize some of our JV positions in multifamily equity, which I'll talk about in a minute.

In the quarter, we also obtained $876 million of financing, 77%, which was non-mark the market. This allowed us to continuously increase our mark-to-market financing on our balance sheet and also allowed us to finance some of the acquisitions we made in that quarter.

We enter the quarter with...

very low leverage at 0.7 times and a recourse leverage ratio and a portfolio basis at 0.6 times.

$383 million of cash was held in the balance sheet, and we're expecting this number to increase over time as we are seeing opportunities to rotate our balance sheet into higher yielding assets.

At this time, I'll pass the call over to Christine to talk more early about our financials. Christine.

Thank you, Jason. Good morning, everyone, and thank you again for being on the call. In discussing the financial results for the quarter, I will be using some of the information from the quarterly comparative financial information section included in slides 24 to 35 of the supplemental presentation.

Our financial snapshot on slide nine covers keeper folio metrics on a quarter over quarter of comparison.

The company had gap loss per share of 22 cents and undepreciated loss per share of 13 cents. We paid a 10 cent per common share dividend which was unchanged from the previous quarter.

Gap Book Value Preshare was 4.06 and undepreciated Book Value Preshare and ended at 4.24.

down 4.7 from March 31st and translated to a negative 2.5% economic return on undepreciated book value during the quarter.

Our undepreciated book value decline during the quarter included 18 cents per share of unrealized losses primarily due to credit spread widening and increase in interest rates that resulted in a decline in the fair values of our residential loans and first law securities we own consolidated SLSG.

Our portfolio net interest margin for the quarter was 3.48%, a decrease of 39 basis points from the previous quarter.

Rising interest rates in the second quarter impacted our portfolio financing costs resulting in an increase of 28 basis points from the prior quarter.

We also experienced an 11 basis point decrease in our portfolio yield on average interest earning assets driven by lower yield on our investment in consolidated SLSC and to a lesser extent as a result of the overall composition of our BPL bridge loan portfolio with a quarter end weighted average coupon of 8.41%.

down from 8.53 at March 31st.

The company's recourse leverage ratio and portfolio recourse leverage ratio remain low at 0.7 times and 0.6 times, respectively.

Slide 10 details our financial results and slide 25 details the components of net interest income.

Our portfolio net interest income increased by 1.9 million during the quarter, primarily due to the following. First, we had portfolio interest income of 61.8 million, an increase of 9.3 million as compared to the previous quarter, which is due to our continued investment in higher yielding BPL bridge loans.

This increase was partially offset by an increase in portfolio interest expense of 7.4 million primarily due to increased utilization of our warehouse facilities to fund purchases of single-family investments during the quarter.

Total net interest income, which includes interest expense related to our corporate debt and mortgage payable on real estate, decreased to 26.1 million as compared to the previous quarter. As you can see on slide 25, the increase in non portfolio related interest expenses is due to an increase in interest expense related to mortgages payable on real estate of 6.6 million from the previous quarter.

This increase is due to the full quarter impact of multifamily joint venture investments consolidated in the previous quarter, additional multifamily joint venture investments entered into and consolidated in the current quarter, and an increase in interest rates affecting 70% of the mortgage payable balance related to real estate, or approximately $884 million of unpaid principal balance that is floating rate debt.

We had non-interest related losses of 20.2 million, mostly from net unrealized losses of 67.7 million as a result of increases in interest rates and credit spread widening during the quarter.

This loss was partially offset by a 2.4 million.

2.4 million of net real-life gains from residential loan prepayment activity. 5.7 of preferred return generated by Hermesanine lending investments account of forest equity, and 3.5 million of other income. 3.5 million of other income.

The other income is primarily comprised of redemption premiums recognized from early repayment of mezzanine lending investments during the quarter and unrealized gains recorded on investment and entity that originates residential loans.

We also generated 35.9 million of income from real estate, which includes income-related to consolidated multi-family apartment properties, in which the company has equity investments in in the form of preferred equity or common equity, and our single-family rental portfolio. As discussed earlier, our real estate properties incurred interest expense of 13.2 million, and also incurred other expenses of 70.8 million. The other expenses incurred by these properties during the quarter are primarily related to depreciation expenses.

9.6 million of undepreciated and year-to-date respectively.

It is important to know that we pursue these investments for the potential participation and value appreciation of the underlying real estate.

which is realized only upon sale as a multi-family assets in the future.

As Jason mentioned earlier, we are continuing to consider opportunities to monetize the

As detailed on slide 28, you'll see that both incomes from and expenses related to real estate increase in the second quarter. These changes consistent with our expectation are primarily related to the full quarter impact of multi-family joint venture investments made in the previous quarter, as well as additional multi-family joint venture investments made during the current quarter, which required consolidation in our financial statements.

We had total GNA expenses of 3.2 million, which decreased compared to the previous quarter, due to a decrease in commission expenses. We had portfolio operating expenses of 12.7 million, which increased primarily due to the growth of our investment portfolio. I will now turn it over to Jason to go over the market and strategy update. Jason. Thank you, Christine.

So the market is clearly undergoing a seismic shift. We laid out on page 12 a diagram that describes the evolution of where this market and the transmission mechanism that's happening today. Starting with 2021 and up to basically the first core of 2022, as we all know that the market had extremely efficient financing, assets were trading at par plus from Rejination Pipelines. And the scurization market was very robust. During this time period, we selected to focus on shorter duration.

loans where Scarecordization financing is well helpful is not absolutely necessary to execute the strategy as we've talked about earlier we did complete Scarecordization and take advantage of That funding that was available to us But in in this really in the second half of the second quarter market started changing quite a bit The market became a discount market And new originated assets given the rate changes we're trading at discounts

and the financing became inefficient. Inefficient in ways of the rate, move higher, and also the buyer base related to these curations thinned out. So with respect to that, we saw this. So with respect to that, we saw this.

This pattern is starting to develop and we became very cautious even related to the short duration bridge opportunities which don't necessarily need to secure the financial financing to execute the strategy.

Going to 2023, we see a market where we believe that we likely deep-discount assets available to be purchased, where the market shifts from a financing spread model to a ROA or return an asset with no financing required, and some of these sub-sectors that we're looking at.

It would be important at this time to have a portion of an unrestricted cash that we available to access this market. And we believe this will end up being a market where liquidity and cash availability on an unrestricted basis will lead the opportunity and outperform the market as a whole. At this time, we will, we look to become aggressive, looking for opportunities where our asset management team could really be deployed to unlock value.

you know, the timing of this is the most important aspect of it. You know, it's impossible to time it perfectly and hit the target, but what we're trying to do here is really just hit the side of the barn really as it relates to the timing of the strategy. We're watching opportunities unfold and seeing portfolios from previously originated loans trade at discounts, but we believe that the market will offer a better value over time.

So with this selective approach, we expect to be able to drive value and also earnings, relate to our interest income and realize gains over time as the strategy continues unfold.

Turning to page 13.

Market themes are very similar, but are the way we're executing and the way we're thinking about solving ourselves is a bit different.

So in the residential housing markets, we're obviously seeing a slow down a bit in existing home sales. That's also related to a drop of existing inventory. We've been at historically low inventory levels. And the latest changes in inventory level has really been a function of the new home builds, which are not at the same price point as existing homes, and are showing a sequential increase in volume and units available for sale.

really to liquidity concerns, but we believe at some point we will be able to recognize and earn returns based on that particular market construct.

So today we are selectively adding in more of a whole basis in letting our portfolio rotate, monitor, and mature, allowing that to redeploy into future opportunities.

On the originator side, we're definitely seeing strains in the market. Obviously, we've all seen a couple of originators file for bankruptcy. We believe there's more to come. We're in early innings here. And given the stress we've seen to this date, we have seen portfolios trade in a scratch and dent space at a 30-point discount.

Now this is a loan that would be originated and sold into market at 102 and a half, but three to five months later is sold at 30 points lost. Now these are, when you see these types of activities, this is obviously a desperate measure for liquidity and obviously an opportunity for us to provide that liquidity to the origination market and particularly in the...

in the non-QM space that we're seeing some of that opportunity there. So we're not at a point now where we're seeing warehouse lines being fully liquidated or anything similar to that matter, but we believe that there will be a time period and a not too distant future where that could be available to us. And we're hanging around the hoop for that opportunity. In the multifamily space,

the red rolls and property appreciation is still very strong, particularly in the south with the still positive migration trends and follow job markets.

So with that said, it's an opportunity for us to take some gains we had built in the portfolio and we looked at do so in the short term. In the medium term, we definitely see an opportunity to provide gap funding for opportunities where the sponsor had a property, particularly on a bridge loan, which we see more than $100 billion of bridge loans produced over the last two years, with three year type of durations. Unfortunately, in this market, you've had LTVs on senior finance things.

So that is a definite opportunity and part of the reason why we want a clear cash note for what we think is going to be a very sizable market there.

Now turning page 14.

The portfolio acquisition I said earlier, we had $890 million of acquisitions in the quarter, but this was really a tail of two quarters. We had pretty strong proprietary flows in the first half, and unfortunately for us, we saw the market not moving coupons with lockstep with funding costs. It was a pretty frustrating environment for us in the back half of the second. In the back half of the second...

quarter and for that reason we significantly slowed our acquisition pace down there. And it seemed like the originators were really favoring volume versus a trackably priced assets, which is the reason why we were seeing discounted sales thereafter and particularly ended the third quarter. So with the market resetting and we'll talk a little bit later about the coupons increasing in these various asset classes.

it presents an opportunity for us to jump back in. With that said, we had $304 million of pre-payments redemptions. Again, this is related to the fact that we have a very short duration portfolio. And within the multi-family space, particularly with respect to our pref assets we have, we're seeing redemptions there that after significant buildup of rent rolls and appreciation and homes, not surprising, that were being taken out of.

some of our prep positions given the ability to recap our position or also fill the property.

Turning to page 15, on the portfolio financing side, we mentioned earlier that we increased the mark-to-market financing. As you see there, $756 million in that graph on the right side. That is a, you know, obviously is a continued focus for us. We want to build availability to the extent that we, you know, we're looking for these short-term opportunities for, to invest in this market, to have the availability of non-mark-to-market financing.

And we have basically about $600 million of unutilized financing lines today to access this market. So we feel a pretty good position there. We think the market's going to reposition into more of an ROA opportunity where financing is likely not needed. So I think incrementally for us, we don't see a big need to increase our financing lines there. But we do look for opportunities to take out assets and discourage these.

are positioning. So on the left side of portfolio assets, you know, again, 35% of our assets are in BPL bridge, 12 to 18 months, the rates are there fast, reinvestment or high turnover expectations at high coupons. You know, this is an asset that you wouldn't like to have to roll for, you know, two to three years. We, in continuing trying to keep the portfolio elevated, but again, we entered into this strategy over 18 months ago with the expectation that at some point we'd do.

as well as the cash side, $303 million, covers 41% of our market market debt because of the high turnover over $300 million per quarter. We're expecting to grow that cash position for the opportunities that we see coming. On the right side, this is, I think, part of the story here that is really helpful to kind of dig in. On the scurvisation side, with $1.1 billion of scurvisation debt, 100% fixed rate debt there. $1.1 billion of scurvisation debt, $100% fixed rate debt there.

One thing that may not be obvious to everybody on the call is that we do not fair market value these liabilities. If we did, we would see a 3.7% increase to our book value. The reason why we don't do that, while many of our peers do, is simply while rates are higher and our cost of debt is fairly cheap at 2.7%, we still have the obligation of paying debt off at par. For more information, visit www.fema.gov

And therefore, taking a valuation increase on that liability, we think is inappropriate for us to do for balance sheet purposes, which is the reason why we keep it at part. But that would be a nice pick up if we were to change accounting measures there. Also, maybe not as quite obvious is that our get outstanding on the corporate side is very low. Maybe one bond issue outstanding due to 2026.

cost $100 million of notes outstanding at five and three quarter. That's something we re-financed previously. And you know, able to step down our financing cost there. And to trust preferred outstanding, you know, very favorable financing there with maturity at 2035. The reason why I point this out is that it's not just the cash we have on our balance sheet that is available, but also there's the whole backs related to.

Corporate financing that we need to do for maturity, payoffs, and looking at a very challenged market in the corporate bond space, you know, it's not something that we have to contend with. And therefore, when you look at our cash, we truly do have the flexibility to invest into this market. And as I said before, there's opportunities, you know, to further reduce our debt equity as well, which is a very low level at 1.4 times versus our pure average of the 3.7 times debt level.

and to further recourse the leverage outstanding there. Now, starting the page with 17, just on the single family portfolio, I did allude to earlier that we're seeing opportunities to invest in wider yields here. On the BPL bridge side, we're seeing about a 2% increase in total asset coupons. Again, this is an opportunity that was, a very short duration opportunity that we were investing in. This market was slow to react to rate increases.

primarily because of the short duration, which you'd expect, but we're finally seeing that market capitulate with increasing coupons there. There's also been a lower demand base that has been pulling assets through that market, so the contention of other market participants in this market is obviously thinned out quite a bit, and there's significant opportunity for us to grow.

As long as we continue to see coupons grow there, we'll be active. On the BPL rental side, again, this has been one of the markets where we thought rates should have increased faster. We didn't see it. We slowed our purchasing there from production from originators. Today we're not a buyer into this market, waiting for the settling out of the scurvisation market, which, again, it's said earlier, is very thin and unstable.

So this doesn't present an opportunity for us to sort of buy and securitize into this market which is why we're on hold there. In the scratch and end space, building liquidity constraints with respect to regionaries, this is going to be a big opportunity for us. There is small pockets trading at 30 points discounts as I said earlier. The market is anywhere from 70 to 90 depending on the assets and also the timing of when those coupons were struck.

But we think there's more pressure there and better opportunity over time on the RPEL space. There's nothing really to say. We've talked about this as a market we've moved on from quite a bit over a year ago. We have 96% of assets that are in this strategy that are already in term, scurriedization structures, where we earn equity return. And that name is, is, is, is, available to the scurriedization.

Delinquencies in this portfolio and across our entire book have been very stable in fact, were now below kind of 2019 pre-COVID levels on total delinquency base and most of the strategies that were focused on, particularly in the RPEL strategy. You know, this is high season assets, you know, typical origination age of these loans were pre-financial market meltdown in 2007. So lots of season here. So we're going to have a couple of other things. We're going to have a couple of other things. So we're going to have a couple of other things.

very low LTVs a lot of bar alignment with with with us as the owner of alone And and this is gonna be you know, we believe a stable portfolio going through time and we will portfolio going through time. and we will portfolio going through time.

Turning to page 18, again given the size of our business purpose loan strategy, itís important to highlight the characteristics of these loans. And what weíre looking at is we focused on high borrower experience where the borrowers in our portfolio have had at least 11 and a half projects on average actually for previous experience before we lent them. The link Iím going to see here is low at 5% on a short duration book. Basically this is extension issues where theÖ

Home is listed for sale or the construction timeline to completion has extended. But we know we given the low LTV at 73% at the cost of the home or after repair of 66% and we expect full recovery on that pool. And also very important we've. And also very important we.

the project rehab costs. As you can see, at least a third of our portfolio has actually very little to no rehab costs. We've focused on that point to really keep the duration short and avoid extension risk issues and therefore why we think we'll have consistent asset turnover. Really to keep the duration short and avoid extension risk issues and therefore why we think we'll have consistent asset turnover. As I said earlier, the $300 million per quarter we expect to continue.

given the short duration book. Now moving over to multifamily.

As I said earlier, we're on a whole position for the meds lending opportunities. We have a fantastic book, plenty of equity built up in here. We'll talk about it in a second. But at 12% coupon, they have never experienced a loss in this athlete class since we started originating loans in the space many years ago. And this is an opportunity that we think is growing. On the joint venture, I think the opportunity, we step into this opportunity to catch the tailwinds of the migration changes.

portfolio.

Starting at page 20, just to give more detail on our portfolio as relates to multifamily, a lot of questions have come up on this point. As you can see on the top left corner, as relates to the portfolios or the properties behind our MES loans, 95% are occupied. Rent growth has been extremely strong. In 2021, underlying properties had 8% rent growth, in 2022, those who are at 12%.

This is a portfolio we expect at some point to be redeemed on most of these on the 28 different positions over time. And in the quarter we had two loans that were outstanding, and 10 million dollars were paid off. What we like about this strategy is with the coupon, in the 11.8% there's upside opportunity here as we have minimum pre-pay multiples once the asset is paid off.

In this case, 1.42 times multiple, given the increase of rents and value properties, we do expect to continue seeing these prepay multiples increasing, given the early prepayment trends that we're seeing in our book. And again, very strong performance. Only one loan currently is the link limit at 1.5% of the entire position. We expect this this this vastly given the LTV to pay off at par.

Now turning to page 21, this again is the new page, a little bit more disclosure here on our JV equity position. These are obviously 20 assets here that we are in equity position on where there's no cross-collaboration with respect to the underlying asset. So these 20 assets own outright, as you can see on the second to last column on the right gives our equity position in these properties.

anywhere from 70 to a kind of 95% ownership position. We gave the vintage of when the assets were acquired, particularly to show where some of the buildup in rent growth has happened. As I've noted here in 2021, we've had rent growth of 16% and then 17% respectively in 2022. We think we timed the market well here, particularly in the markets that we're involved in. Most are in the southern part of the United States.

and some secondary markets such as Oklahoma City that has been kind of a, have been receiving some strength from some of the, you know, Dallas growth that's been there and pricing people out of that market to Oklahoma City as an example. But you know, this is a asset with high occupancy where there's a transition story that we initially saw available to us to move rents up, particularly related to CapEx expenses or management changes. And we've been looking to execute that strategy across the $255 million of.

equity that we have outstanding in this market. The market rallying in the southern part in the thesis that we'd see demand there back in 2020 has really paid off and we were really excited about the opportunities we have to either monetize the portfolio or look at a corporate kind of structure opportunity here. So we're looking at all different opportunities here to monetize this book.

And finally, on this last page here, we're at this earlier in the face of a market transition that's clearly unfolding. The luxury that we have and has been built over the past year and a half has been being able to have a highly high-ass rotation portfolio where we can redeploy our cash that is truly unrestricted into this market at higher-ealing opportunities. In an environment where deployable capital will be

truly what differentiates us from the market and will be available to provide liquidity to the market in various areas. We're excited about this opportunity in talking further about it. And talking further about it.

So at this time, I'd like to pass the call over to the operator for questions.

Thank you, and as a reminder to ask a question, you will need to press star 11 on your telephone.

Please stand by. We'll be compiling the Q&A roster.

And our first question comes from the line of Doug Harder with Credit Suisse. Your line is open. Your line is open.

Thanks and good morning. Just on the multifamily JV portfolio, can you talk about what type of embedded gains you might have on that and remind us if that asset is market to market on the balance sheet?

So I'll start with the market-to-market. These assets are held at cost basis, less depreciation amortization on a depreciated basis, and obviously that is below our cost basis.

So that's where we currently hold these assets on our balance sheet today. You know, we are looking at, you know, we've had some reverse inquiry on our portfolio and other kind of corporate transaction opportunities. We look forward to, you know, sharing more about that in the coming quarter. But at this moment, this is still in kind of preliminary stage. I mean, we're showing here some rent growth that can help understand the valuation increases that we've seen in our portfolio. But that's not something we're gonna comment on on this call.

All right. And then, as you think about the potential for some sort of monetization event, how do you think about the timing of wanting to do that, to line up with the opportunities that I guess you see building over the coming months? I guess just how do you think about kind of matching up the timing?

Yeah, so I mean we have enough cash and cash that is coming through our BPL portfolio to access that opportunity. So it really doesn't depend on rotating our multifamily equity books for that. We think that, you know, the, while, you know, if we just keep it within the multifamily sector, the opportunity for, I just described earlier, which is that kind of, um, that bridge lending, uh, um, gap funding capital that would be, we think will be necessary.

More in 2023 is a more of a medium term opportunity for us while we think the monetization of components of this portfolio or a corporate transaction is more of a short term opportunity.

Great. Appreciate it. Thank you.

Members. Thank you.

And our next question comes from the line of Jen Masaga from FACSET. Your line is now open.

Gemma, so go your wine is that open?

I guess we can move to the next question.

Our next question is from a line of Christopher Nolan from Latinburg, Selman. Your line is now open.

Can you hear me?

Yes? Yes. Oh, I didn't hear my name announced. Thanks for the detail on the intro here. Just a bunch of questions and related to the strategy.

Should we, what, I know you mentioned gap funding in your terminology. I mean, should we look at that as hard money lending or are you directly investing in additional comm inequities into these properties? I mean, what sort of strategies are you looking to invest in just? I mean, what sort of strategies are you looking to invest in just?

Yeah, we think the opportunity is going to circle around, we take that funding, what I mean by that, in particular is that we know we...

Senior lending in the multi-family space was mid-high 70s, and we're seeing regional community banks, et cetera, cut back their LTV in this market environment to anywhere from 50 to 65 even low 70s. So we think there's about 10 to 15% minimum of where if you were going to refinance a particular asset, which is going to be a bridge loan that's coming up from maturity, they all need in a foundational capital.

to get that asset recalculized. And then that's where we can come in. And that's where we see the opportunity. So it would be in the form of lending and not equity. And the opportunity from a duration standpoint, we believe the loans will be quite short. And really attempting for allowing the underlying sponsor to access probably more favorable funding through this.

through this time period, particularly in kind of 10-year fixed funding that is available through the agencies.

So, you know, the...

What we little discuss here is that the fact that there's a very strong agency senior financing market for multi-family properties across this country within Fannie and Freddie Mac. And that is very much stabilized the funding source of the opportunity for underlying sponsors. And why we believe that this market will outperform through this next cycle, simply because that funding is strong. And with respect to Fannie and Freddie, they have...

budgets for financing availability that they're going to provide to the market and they've consistently been kind of under budget, particularly as the market is slowed. So, you know, there's, you know, plenty of available funding for good assets with good stories behind good managers and those the assets that we want to help support on an this new cycle.

And as a follow-up, are you looking... It sounds like the sponsors are coming from a point of weakness. And I mean, are they being compelled by their banker or Fannie Mae to raise the equity? And if that's the case... rr yo

Do you have any protections in terms of, you know, the sponsor sort of going belly up on me? Are you putting the title of property in escrow or something, you know? It's because you're sort of going into potentially dangerous waters at time and just a little clef that the refication should be helpful.

Yeah, so I mean the opportunity is a case where there's no real requirement.

coming from Fred, if any, or Freddie for this purpose. It's really a function of the debt structures that were produced back in, you know, 2020-2021, which were, you know, for the most part, 100 billion plus of short duration, you know, two to three year senior financing. So there's a maturity wall that is in front of many of these sponsors across the United States. And the question is, how do they-

get through that. And get through it meaning if they're not going to sell the property and they want to recapitalize. This is the opportunity for us. So this is not necessarily coming from a just stressed point of view in that the property is gotten, you know, where BSR ratio is dropped a little one times. This is coming from strength of the sponsor and that they want to continue holding these assets. They don't want to liquidate today. But they've obviously seen, you know, a build up in rental.

a lot to change from now until then. We wanted to highlight that the rotation that we're looking at with respect to our portfolio is not in continuing in the equity strategy, but more on the lending side is what we're looking to allocate in the future.

And then finally, are you seeing with more of your sponsors where their cap rates for the investment these properties is now?

Their funding costs are now higher than their cap rates.

So when you talk about cap rates, there's many ways to look at it. And the interesting point about cap rates in this market is you typically don't have the type of rental increases that I just described earlier in these markets.

So when you look at a cap rate, at a purchase cap rate, typically you have inflationary type of rent rolls, where here you're having double digit rent rolls. So if somebody entered in a property at a four and a quarter cap rate in the market is five and a quarter today.

you know that is off of a assumption that the foreign accord you haven't had rent rate and have any income gains in the portfolio of the rental rate increases. and the portfolio of the rental rate increases.

And so while the, you know, cap rates have moved out, you know, up to 100 basis points. You know, you do also have rent raises that have also offset some of those costs and therefore could support higher coupons in this market. And therefore could support higher coupons in this market.

So it's really a function of where that asset is located and what kind of rent growth they've seen. Where that...

you know, where your point you're driving, which is, you know, how could they fund these properties when the costs are greater than their their return, you know, it could be offset. So it really depends on market. Typically, you know, what we're seeing in the south is that there the gains on the portfolios have outstripped the increased funding costs and, you know, that's keeping, you know, the opportunity very much, you know, in focus for those sponsors.

Great, thank you.

Thank you.

Our next question is from a line of Eric Hagen with BTIG. Your line is open. Your line is open.

Hey, thanks. Good morning, guys. Maybe just a couple for me. When you talk about this being a buyer's market, would you say that the hurdle rate you're aiming to achieve has also changed?

And we just say that the hurdle rate has changed specifically for the bridge product.

And then in the SLST portfolio, can you repeat what the mark-to-market changes were last quarter?

Based on the way the asset is financed there, can you re-lever that debt?

Not releverable. Thanks.

So as relates to buyer's market, what we're seeing is for the first time in many quarters that the

Discounted portfolios are trading in this market. Obviously, the market was very efficiently financed earlier. We didn't see discounts on new originated product, other than in the scratch and end spaces, which we've been playing for quite some time. But in BPLs and DSVR and non-QM, we did not see that and we're obviously seeing it now. And we believe that opportunity will be building. So with respect to your question on,

increase of returns, yes, we definitely expect the returns and the different strategies that we're focusing on to increase, we talked about on the run coupons and BPLs 200 basis points higher, and that is obviously an easy story to understand in that any new investment there would be 2% increase in coupon, but the focus is really, there's a lot of origination product out there that was originated without.

really being priced in to deal with the financing cost increases.

on 30-year kind of loan product. And that's where we're seeing some market get stuck and where our liquidity may be used in the future. So that is an unfolding story. It's not here right now, but there's definitely markings that are showing that that could accelerate, particularly in early 2023. As released, SLST all passed that over to Christine. So for SLST, you'll see it in slide 26, Eric. First quarter, we had about 15 million of losses there and realized that we have.

given the fact this is an RPL book which they both financing from Freddie Mac. We prefer to keep to not finance it through a securization strategy just yet, but that's something that is available to us.

Gotcha. Thanks for the perspective.

Thank you.

And our next question comes line of Stephen Laws with Raymond James. Your line is now open.

I get morning. I wanted to follow up. I guess a little bit on Doug and another question around. I guess a little bit on Doug and another question around.

You know, the real estate, you know, how should we think about, I think you have one asset under contract for Q3. How should we think about the gain that we need to put into our model and then just think about, you know, modeling that going forward. And then just think about, you know, modeling that going forward.

Yeah, so, I mean, again, we talked about where our basis is in these assets, and we've talked about some of the market input factors that are creating an output of a higher value with respect to these properties. At this point, we're not going to comment on future realized gain activity with respect to that portfolio. This is obviously a developing situation for us. We have been responding to both reverse and query, as well as...

some other market opportunities that are there. We hope to share more color with respect to this book on our next call and further explain where this portfolio is going. But at this point, it's too premature to have that discussion.

Right, Bernoff, you know, because the fallen dog again looked leverage, but gradually moving higher here, talking about the recourse metric, you know, and...

It sounds like there's great opportunities now. You've got some monetizations in the pipeline coming. How do we think about

what you see as a normalized or steady state or target leverage numbers, so to speak, as we think about how capital is being deployed and what the expected kind of repayment failed the guy.

Yeah, so, with respect to leverage, we expect leverage to stay low, you know, in this kind of context. You know, we did increase our leverage, recourse leverage with respect to some of the, you know, the strong growth we had in the quarter, the first half of that quarter. That's why, you know, we've seen an increase of our leverage there. It was just a function of our pipelines. But you know, given where we stand today and some of the monetization themes that we're talking about.

As well as an asset opportunity, we're may not require financing to achieve that target return. We don't see material increases to this. In fact, we think it should go the other way, which is a decrease of our leverage ratios over time. And that's a function of just having more unleavored unencumbered assets on our balance sheet in this new market environment.

Great. And then lastly, maybe for Christine, and appreciate the new slide 16, and I'm not Jason touched on some of the fixed rate debt, but can we maybe talk about a net interest rate sensitivity or exposure, I think, in your prepared remarks, you mentioned some floating rate debt on the real estate, but maybe as you think about those sides of the balance sheet, how do you view the net sensitivity of the 500-bit increases in rates?

We should expect that to go up in the future as it relates to our floating rate debt. But if you look at our multifamily investments, especially the consolidated investments, that's really looking at our share in the equity there. So it's not a full kind of pickup in terms of gains and losses. It's still going to be related to the performance of the property.

So what we would expect on multi-family is that as they continue to improve the property there will be rental growth there. So you will see income as it relates to our consolidated JV investments to improve.

Great, and as relates to...

As it relates to looking at page, so I add on this page here, where we broke out the corporate debt. A lot of the repo finance we've conducted is in the BPL space, and that is a short-race strategy. So while we expect funding costs to increase there, we also expect the portfolio to decline. And you know, you know, you know,

So the full effect of the rate increase over a two to three year period wouldn't be felt in that portfolio.

Great. Thanks for your time, Tom.

Yep.

Thank you.

Our next question is from Matthew Hallett.

with B. Riley financials.

That figure line is open.

Your line is open.

Good morning. Take care of my question. Questions and submissions given in Kennedy?

You know, you got a lot of moving parts here. I really like the strategy and I appreciate that page 20.

26 here. You're going to be generating a lot of gains here, it looks like, going forward. I think previously you've talked about getting NII up to cover the dividend, like a lot of mortgage rates try to do. I mean how should investors look at…

earnings, dividend coverage, going forward, it was just something we had to always sort of bake in, realize gains as part of the core strategy. Yeah, I mean, that's been consistent with our activity for many years now, where, you know, component of our return is in the realized gains factor, a section of our, you know, of our balance sheet, and income statement. And, you know, we did see opportunities to increase interest income and our portfolio through these higher yielding strategies in the BPL space and in other related strategies.

and pref lending within our mazin book. However, the market's not functioning well at this point, given the inefficient financing and discretization market, to continue looking to grow interest income through a levered-yield basis, levered-yield model. So as the market transitions into, as what we see is unfolding today, transitions into a lower levered opportunity with...

with discounted asset availability. Obviously, the story changes a bit into expectation of not only interest income, but also in unrealized gain activity through that discount that we would be looking at to purchase those assets. purchase those assets.

So, you know, that is going to be a function of our story and has been for quite some time. You know, our dividend policy is an 18-month, you know, forecast on earnings, including the realized gain activity, and, you know, not a look back in the last three months of interest income. So, you know, it's a very complete picture of what we, where we expect our earnings to come. And obviously, given the unrealized activity, it's...

Typically choppy, you don't have a smooth process as it relates to actual liquidations. So it needs the, the dividend policy needs to be over more extended period of time to capture the unrealized gain activity that we expect to generate through the portfolio. We do generate through the portfolio. We do generate through the portfolio.

Okay, so we have to think about this different than what we typically model. You see it more of your grades and, you know, it's just strategy obviously different than what you see in some of the larger more your grades up there. So I certainly understand that. And thanks for that. And the second thing was you also, I mean, we'll wait for details off, you know, the monkey family.

you know gains and the sales are going to come with that but you mentioned also corporate strategic, you know alternatives. Are you speaking of something like a spin-off, another subsidiary with regards to multifamily investments?

Yeah, so all options are on the table. I mean, we're coming from a position of strength. We have a great portfolio and we see the market as demand and increased demand for what we have generated here. So whether corporate or a monetization through a sale, we're looking at both options. We did put one asset in a purchase and sale agreement just to see how the market is functioning relating to... I hope that's your plan for 2021.

some of the earlier gains we had, it's gone extremely well. I think everything you said is on the table and we're going to look to maximize value for our shareholders and the most efficient and least cost manner for this book. So this is a, we're focused on timing, we're focusing on efficiency and we're going to focus on

the total expected value that we think we've generated and being able to monetize that fully. And any of those options are on the table for us to evaluate, and we'll be working through that over the course of the quarter.

Good. And I'm glad to see you guys buying back stock. It just looks like the books understated and it's glad I'm happy to see you taking advantage of the discount. Thanks for taking my question.

Thank you. I would now like to turn the conference back to management for closing remarks.

Well, thanks everybody for joining the call. We really appreciate your support and the time you spent with us. Look forward to speaking to you again on our third quarter call. Have a great day and enjoy the rest of your summer. Take care.

Thank you. This concludes today's comment call. Thank you for participating. You may now just connect.

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