Q3 2022 New York Mortgage Trust Inc Earnings Call
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Yeah.
Good morning, ladies and gentlemen, and thank you for standing by welcome to the New York Mortgage Trust's third quarter 2022 results conference call.
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This conference is being recorded on Thursday November three 2022.
That's release and supplemental financial presentation, with New York mortgage Trust's third quarter 'twenty Q results was released yesterday.
Both the press release and supplemental financial presentation are available on the company's website at www and why Amtrust Dot com.
Surely we are hosting a live webcast of todays call you can access in the events and presentations section of the company's website.
At this time management would like me form 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 reflect.
Any forward looking statements are based on reasonable assumptions.
We can give no assurance that its expectations will be attained factors and risks that could cause actual results to differ material 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.
Now at this time I would like to introduce Jason Serrano CEO and president.
Please go ahead.
Thank you very much good morning, welcome to the New York Mortgage Trust 2023rd quarter earnings call I'm joined this morning by our CFO Kristina Oreo.
Referring to the supplemental which is posted on our website.
For additional details.
U S. The U S economy activity was pressured in the third quarter by rising interest rates concerns over tightened monetary policy near double digit inflation and geopolitical instability. Thus far in 2022 equity markets have been challenged with the fed's decision to raise interest rates by 75 basis points and four consecutive meetings, taking the federal funds rate to it.
Quaint since 2008 with expected additional rate hikes in the upcoming months alongside of our growth growing concerns of a potential near term recession.
Accordingly fixed income markets had been impacted the yield on the two year Treasury increased to four 2% at the ended the quarter increase of 349 basis points from last year.
Rate hikes by the fed contributed to the Treasury curve inverting at the end of September the spread between the two and 10 year Treasury yield close at negative 39 basis points compared to 79 basis points positive 2021 year end.
As was the case for credit sensitive assets across markets pricing for many assets within our investment portfolio. During the third quarter declined, particularly so in the final weeks of the quarter due to these factors, we anticipate markets and the pricing will continue to experience volatility through the year end and into 2023. So the question is how do we navigate this risk.
While keeping our proactive stance to seek opportunities I hope to demonstrate that our portfolio managed decisions and financing plans over the last 18 months were designed to stay short nimble and liquid before I dive into these points I will start with a brief review of the third quarter financial results and then pass over to Christine for further details.
Now speaking from page seven.
Due to the macro factors discussed we incurred.
On depreciated loss per share of <unk> 27.
And unappreciated book value decline of eight 3% and in third quarter at $3 $8 million. This decline was related to mark to market changes of our portfolio against higher rates, which we believe is recoverable over time.
We saw a tremendous opportunity to buy back our shares in the quarter given a sharp selloff in the market and all we repurchased $5 5 million shares an average price of $2 60.
During the third quarter, we added $2 1 million shares this amount in the first days of October at a price of $2 23.
At these levels, we believe repurchases are highly accretive.
Particularly in light of our short duration portfolio and an ability to generate cash. Thus we expect to continue with share repurchase in Q4 should our common stock continued to trade at a significant discount to our unappreciated book value.
As we announced in late September we are focused on monetizing the value created against our timely multifamily property acquisitions, mostly aggregate in 2021, we were able to recognize $14 million.
<unk> gains from our first property sale more on that in a minute alongside of <unk> and other asset sales investment activity was significantly reduced in the quarter, primarily primary ore in the origination of our coupons, we're frankly, not reprice fast enough. Unfortunately second market sellers referred to primary market activity for their for their pricing levels and a feedback loop that lock them.
In the third quarter. In fact, we are still very much there today and I will have further details about that.
Shortly after the Jackson hole in Perl pivot head fake you will if you will we found an attractive entry point to a $242 million loan securitization.
This allowed us to reduce our repo market to market exposure and recourse leverage which now stands at industry, leading low of <unk> five times at the company and 0.4 times at the preferred level with that I'll pass over to Christine for more details on our financial results Christine. Thank you Jason Good morning, everyone and thank you again for being on the call our.
Our financial snapshot on slide nine covers key portfolio metrics on a quarter over quarter comparison, as Jason mentioned earlier underappreciated book value per share ended at $3 89 down eight 3% from June 30.
And translated to a negative five 9% economic return on depreciated book value during the quarter. The company had underappreciated loss per share of <unk> 27 in the third quarter.
Fair value changes related to our investment portfolio continued to have a significant impact on our earnings and book value. We recognized 34 cents per share of unrealized losses, primarily due to an increase in interest rates and credit spread widening that resulted in a decline in the fair values of a majority of the assets in our investment.
Portfolio more in this point in a minute.
Consistent with our efforts to further strengthen our balance sheet, we completed a securitization of residential loans as Jason mentioned with the completion of the securitization as of September 30, the company's recourse leverage ratio and portfolio recourse leverage ratio decreased to <unk> five times and four times respectively.
From <unk> seven times and six times, respectively. As of June 30. In addition, it is worth mentioning that only 23% of our total financing arrangements, including Cdos. Our securitization structures is subject to mark to market margin call risk down 30 down from 33% at.
June 30.
We paid a <unk> 10 per common share dividend, which was unchanged from the prior quarter.
While our financing costs were higher in the third quarter due to rising interest rates. The contribution of adjusted net interest income to EPS during the quarter.
Same level as a year ago <unk> per share as a result of our low utilization of leverage.
Moving on to slide 10.
I'll focus my commentary on the main drivers of third quarter financial results.
We had GAAP net interest income of $14 2 million or <unk> <unk> per share for the quarter, excluding the $16 million or <unk> <unk> per share of interest expense on mortgages payable related to our consolidated real estate. Our adjusted net interest income as mentioned earlier contributed <unk> <unk> per share in earnings.
During the quarter, we opportunity Opportunistically dispose of investment securities in our portfolio generating in total realized gains of $20 6 million or <unk> <unk> per share also as Jason mentioned during the quarter, we successfully dispose of a property in one of our consolidated joined.
Venture structures.
At a 218 times multiple earning NY empty a net gain of $14 million, which is included in net which is included net of losses incurred from other investments and other income of $4 million.
Also as previously discussed.
Historic rate volatility witnessed in the third quarter cost prices and a majority of the assets in our investment portfolio to significantly decline.
This resulted in one $128 1 million or <unk> 34 per share of unrealized losses incurred in the third quarter of the $128 1 million of unrealized losses $67 million or <unk> 18 per share are attributed to residential loans held in securitization vehicles.
Unlike some of our peers, we do not mark our liabilities to fair value. Therefore, there is no corresponding unrealized gain recognized on our securitization liabilities to offset unrealized losses on the assets held in the securitization.
In correlation to our decision to significantly curtail our investment activity in the quarter in light of extreme volatility our G&A and portfolio operating expenses were down $4 1 million in the quarter as compared to the second quarter.
The final point to highlight is our adjustments to add back depreciation expense and operating real estate and amortization of lease intangibles to calculate underappreciated earnings as previously announced we are actively considering opportunities to monetize the appreciated value of our consolidated JV investments. Therefore meeting the held for sale.
Criteria for GAAP purposes on a go forward basis, we would expect depreciation and amortization to reduce significantly as the majority of these assets are held for sale and capital gains to be the main driver of earnings related to this portfolio I will now turn it over to Jason to go over the market and strategy update Jason. Thank you Christine.
I'm talking from page 12, the U S housing market underpinned by a multi decade low of U S units available for sale is now slowing units of new and existing homes trading below 2019 levels are now below 2019 levels due to an average monthly mortgage pay that 60% to 90% below.
Previous year's payment depending on the market.
So the the raising interest rates have caused our affordability levels today to actually experienced the worst that the market has seen in over two decades with a 60% to 90% rise in the.
Multi payment now.
What we highlighted here last quarter was a transmission mechanism for the market going from the first quarter of 2022 to 2023. So we've updated that everything pretty much is going as as we outlaid last quarter in that the first half of 2022, we saw a par plus efficient financing market the securitization market.
It was very robust and many deals could get done at really the tightest levels that we've seen in this market in quite some time.
In the third quarter 2022, after the second quarter falloff of securitization activity discount and efficient inefficient financing became the norm.
In that time period throughout the entirety of the third quarter, we have paused our best.
Our pipelines, where we had.
About $1 billion of pipeline that we could have invested into in the third quarter.
And with that we were able to to forego some mark to market and also.
Lower coupon.
Assets on our balance sheet that would be better off if we would have waited to invest in those assets. Today. So the plan has work however in the fourth quarter as we discussed in last quarter's conversation, we're seeing a dislocated market with wide bid ask spreads that feedback loop I mentioned earlier were the primary market level.
We are not adjusting fast enough higher.
Is causing the secondary markets referenced those points and caused a larger bid ask spread.
Which is locking the markets. So what we expect to happen is capitulation in early 2023 with deep discount assets being available where financing is not required given the underlying returns meeting.
The go forward yield expectations and at that time, we expect to be aggressive and liquid to invest into these markets now we're able to do that through our.
Our first with our operations, where we didnt.
Engaging high fixed cost entitlements, which would have allowed us to.
We're forced us to continue buying assets into the market to support the cost that we haven't our balance sheet.
So with that in the.
Flexibility and nimbleness that we've provided our portfolio also is was managed to preserve book value in higher rates or more volatility in this case, we favored.
Short term duration assets, which helped.
To help minimize the mark to market loss and also reduce the requirement to use repo leverage mark to market repo leverage for our balance sheet.
Now the.
Timing is going to be everything here on when to start redeployment efforts in a significant manner, we need to exhibit patients the bid ask spreads and market capitulation could take longer than initially discussed the beginning of 2023, and we will wait until that happens we.
We are already seeing evidence of this where there is trades that are in the market that are failing based on <unk>.
Too big of a discount being required by the market in particular in the <unk> space single family residential.
<unk>.
Single family rental.
We're seeing a 15% to 30% discount to current values being priced into the market.
And a little very little trading looks like sellers want to sell at a 15% discount and buyers want to buy at a 30% discount to current values and the single family rental markets.
So thats just an example of some of the.
A lack of trading that's happening because large bid ask spread.
Now the execution of this particular market environment is going to be key based on asset management and ability to rockers sleeves and deal with.
The underlying.
Discount that you've been purchasing and being able to unlock value through asset management plans. This is something we are very adept at doing that.
Various amounts of experience over two decades, managing discounted assets distressed environments and look forward to optimizing our portfolio in that environment.
Going over to page 13.
The investments right.
I mentioned $119 million was invested in the third quarter much of that was actually.
Draws from previous loans that we funded.
So when I mentioned, we curtailed investment activity was significant.
We were able to basically hold up over about $1 billion of investment activity and that was decides.
Decided.
Two a portfolio manager decision of waiting for a better opportunity given what we saw earlier in the third quarter.
The paradigm shift.
Works.
Significantly curtail our investment pipelines in all core strategies.
And single family.
<unk> rental and fix and flip as well as within the multifamily sector.
Now again, our focus is acquiring assets on a levered basis, we believe that the market will come around to be able to do that and generate double digit returns without the use of leverage.
However, we also recognize that the market definition liquidity and.
At some point in 2023 will change to be really unrestricted cash.
And.
For our purposes, and how we've dealt with our debt management, we believe that our definition of unrestricted cash which is going to be truly unrestricted cash will be able to be able to put into higher yielding opportunities to grow our earnings per share.
To discuss that point turning to page 14.
Our portfolio of financing strategies to optimize cash was a.
What was more or less a day.
Risking mechanism for mark to market financing.
For folio financing exposure for mark to market repo exposure equals 23%.
As of the third quarter.
Mark to market repo percent of asset portfolio is only 14%.
Currently carry as Christie mentioned, a 0.4 times portfolio recourse leverage.
But the story goes beyond just the portfolio financing. It goes what they are also within our corporate borrowing strategy.
We have three bonds that are expanding our balance sheet today.
$100 million unsecured fixed which is due in 2026.
And.
Two.
A junior subordinate debt deals that are due in 2035 company recourse leverage of five times.
As a result.
I mentioned this because there are no maturity walls that we have to contend with and reserve cash back in case of dislocated markets for corporate activity.
When we mentioned that we have unrestricted cash we truly believe that it is unrestricted and can be used in this market environment.
Evidence of that in the third quarter, we had margin calls about $52 million.
Now this is very low relative to the 369 cash we had on our balance sheet ended the second quarter also low with respect to $4 $3 billion of portfolio that we have on our balance sheet.
So we're able to manage this margin call risk and we expect it to actually.
Suppose to repo leverage decline in the fourth quarter with an additional securitization that is being priced.
Now going to page 15 balance sheet the balance sheet summary.
We left this page in there from last quarter. It puts it all together and it provides a nice summary of our portfolio assets and and that on the left side bridge loans.
With leading opportunity again over 18 months ago, we decided to invest into this space.
As a.
Trade is not a business in that we were focused on.
Utilizing our cash for short term opportunities that would have fast reinvestment criteria enable to enable us to invest into higher yielding or more dislocated assets in the future.
And also on the multifamily side.
We focused on both JV and as in lending both our shorter dated opportunity shorter.
<unk> opportunities for us to invest in on the joint venture side, we saw an opportunity in 2001 to two by underlying properties, we thought that would be a short data opportunity and that the environment would not last forever to have.
Double digit rental rate increases per year, so we see an opportunity to monetize our portfolio today and the mezzanine lending various debt that was issued below the senior debt, which we find incredibly it's accretive to our portfolio.
On the right side.
Securitization debt as Christine mentioned earlier, we do not mark to market or B our underlying.
Securitization notes.
That would offset unrealized losses on our portfolio that are underlying those loans.
In that case, we the majority of our financing is through the securitization debt sector.
And as I mentioned earlier.
We have very little corporate debt on our balance sheet.
And no maturity wall speak to speak of.
Yes.
Now turning to page 16.
Our single family portfolio overview.
Our single family portfolio is stable.
Our highest credit risk category in the sector that we have here is within our RPM as you can see the FICO scores are quite low and also the fact that these borrowers had been somewhat delinquent in previous time.
But to date, we are portfolio 60, plus delinquency ratio has declined by three 5% since the beginning 2021.
When you are aligned with the borrower.
62% LTV plenty of equity.
Unable to work with the borrower on sustainable payment.
Payment plans you should expect this result.
We have securitized 99, 5% of this portfolio to date.
In Enbridge lending.
Rental and performing loan opportunities. These are the areas that were pretty robust allocations over the last couple of quarters and areas that we saw an opportunity to pause and reset for a dislocated opportunity.
Turning to multifamily.
On the multifamily business rental rental unit demand continues to be elevated.
And in the short term, particularly in the south and southeast the demand for rental units is outpacing the supply.
Due to the high migration, particularly in Florida, and Texas nationally rents continue to increase.
At a slower rate with the southeast outperforming.
This opportunity here on a senior lending.
Relating to both our Mezz loan opportunity, we've seen senior lending.
Advance rates decline in other words banks are not advancing the same proceeds they did on senior loans as they had in the past.
The differences roughly.
10 point decline in advance rate. So it is taking a 75 LTV to 65 LTV as an example, and in this case.
It provides a nice opportunity to fit as a second lien or mezzanine financing behind that first lien with with with larger equity position for US today, we see this opportunity as a core strategy. However.
<unk> are also recognizing that the underlying rates, which you could lend out arent moving as fast as we'd like.
We'd like to see this lending rate around anywhere north of 13 closer to 15, and we think it's a process that is happening to achieve those types of lending rates, but they're not quite there yet in the market. We think we'll be able to see that in 2023 or perhaps even in the later part of this on this quarter.
On the joint venture side as we discussed we are in a monetization effort on the portfolio.
On the multifamily mezzanine lending.
<unk>.
Two loans that were prepaid and redeemed in the quarter $19 million.
Total $17 six 6% lifetime IRR on these assets as well as a one <unk> multiple now this is.
Exactly we expect to see in our lending and our coupons around 11 nine percentage of Etsy on average, but because of the minimum payoff multiples. We do are able to achieve a higher return.
This asset class as and sector has been extremely stable. We have only one loan that is delinquent and we expect a full payoff at par again, we believe this sector has been highly accretive to our balance sheet and we continue to add value over time.
Now on the multifamily joint venture side, we have listed out the 19 properties that remain in our portfolio as we mentioned earlier, we had one sale of a Houston property last quarter as well.
Which achieved a 66, 3% IRR or two 8% of all times multiple now these are assets that we underwrote to a 13 seven.
17% IRR, obviously, the return here is well beyond our expectation.
We had significant rental growth in our portfolio as you can see labeled.
On the top left corner here in 2021, we had a 60% growth in our portfolio in 2022, we had a 17% growth and we are still seeing rental growth in our portfolio again looking at the cities.
In the south southeast part of the United States. So we feel very.
We're fairly confident that we're able to produce.
Further gains in this portfolio and hence the reason why we're looking to monetize.
These 19 assets.
Yes.
Now I would like to wrap up my commentary with the following the company is focused on opportunities in a market undergoing it landscape change in offering deep discount pricing.
Due to the inefficiencies that we're seeing in the securitization market and we believe the <unk>.
And in the new environment will be achieved through organic creation of liquidity tactical asset management and prudent liability management for book value protection.
Thank you for your time at this time ill pass it over to the operator to take us to open up the call for Q&A. Thank you.
At this time, we will conduct a question and answer session. If you have a question. Please press the star followed by one one on your Touchtone phone and wait for your name to be announced.
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Key.
Using speaker equipment, we do ask you. Please lift the handset before making your selection. Please standby, while we compile the Q&A roster.
Our first question comes from Doug Harter with credit Suisse.
Your line is open.
Alright. Thank you. This is John can you talk to your answer Doug.
My first question could you just give us an idea of the pace.
Future JV equity transactions.
Yes, so we our current engage on a couple of properties. We are looking at individual sales. We're looking at portfolio sales were looking at strategic opportunities.
So the pace is really undetermined.
The market as I mentioned earlier is influx.
That includes even property transactions influx, meaning that the there is more of an wait and see approach to 2023 then.
Willing to put more capital to work in 2022, and I think thats across a lot of sectors credit risk sectors in this market.
But we do have a.
A pipeline of sales that we're working on at the moment.
The pace is really dictated by the market really hard to make a firm comment on that.
Thank you and I guess, just the return opportunity on those do you think are similar to what you're what you saw it but the Houston property.
I think theyre going to be some maybe more so maybe less it's hard to say.
Again this market is what the right rate.
<unk> one thing that is in our favor here despite rate increases the reason why cap rates are still quite low.
In this market is that the market is supported by agency financing on the senior debt side. So.
They have a budget to put to work for senior financing against properties. Just like this which has allowed the cap rate to stay quite low relative to other markets.
That has been a tailwind to this market for for quite some time.
The stability of the financing is there where you don't have that in residential credit so.
Yes, so from that perspective, it's hard to comment on exactly what the.
Our returns look like we know that from our.
From that perspective, we have these assets market depreciated and amortize lower depreciation amortize costs as well.
Depreciate basis, we hold it at.
Our cost basis, and we feel like we given the rental rate increases that we've experienced these portfolios that they're more valuable today and we hope to demonstrate that over the course of the year.
Thank you Anne.
Do you have a book value update.
Quarter to date.
Yes, we're seeing basically less than 1%.
Decline in our portfolio both diagnosis.
Got it thank you.
Please standby for the next question.
The next question comes from Christopher Nolan Ladenburg Thalmann, Christopher Your line is live.
Okay.
Quick question is for these JV exits that you plan to.
Remain exposed to multifamily through Mezz lending.
Yes, that's right we saw an opportunity.
2021 to add exposure in the equity space, we did so because of the migration that was experience that we're seeing there.
It was quite obvious.
And the rental the lack of supply.
And demand that was there.
<unk> was obviously.
New construction was held offer for quite a bit and is now catching up.
So we saw an opportunity to put some money to work there and we felt like when we were.
When we are underwriting the the mezzanine loan opportunities, we saw better upside with the same downside protection in the JV space equity space. So that so hence that's why we looked at that space today, we see better opportunities in prep or in mezzanine lending.
And because of that.
With a larger equity cushion given I just mentioned earlier that the senior lending has pulled back.
Slightly and therefore, and we can fit in with higher.
Equity.
Exposure equity cushion below us so with a with our performance of.
And the history of underwriting this market for us we've never experienced a loss in this asset class has been a fantastic strategy, we have great underwriting and sourcing capabilities. So we do expect to continue.
Putting money to work in this space.
Timing of it is a little more up in the area, depending on capitulation for a higher rate kind of loans.
That's something we're looking to continue doing that.
Where we are in the cycle.
Is this mezz lending sort of a form of hard money lending.
I wouldn't call it hard money lending I mean this is this is traditional second lien mezz lending that debt.
<unk> been a part of the multifamily market for quite some time I would say hard money lending comes into play where you shortened the duration or the maturity of the loan to a year and it could look more like a loan to own opportunity.
Providing the sponsor some bridge capital.
And youre waiting to see if they can.
Formulate whatever plan they need to to pay off on a one year maturity.
The market is not there yet.
And we don't foresee that in near term, we do know that there is about $130 billion of.
<unk>.
Bank loans senior loans that will be coming due over the course of 2023 and that provides an opportunity given that bank loans senior funding was done at.
At a higher LTV then it's available today, so there will be needs for.
A second component.
To finance these assets.
Given the run up in rental yields and some appraisal values and we see that the assets could support that additional debt debt, which is quite frankly equal to the same senior level that they had from two years ago.
And final question is it fair to say given your comments in terms of preparing the market for investment opportunity.
In coming quarters that we should see the leverage low recourse leverage levels decrease further.
That's right, yes, we're looking at moving a portfolio within our BPL rental.
Strategy into securitization.
In the coming days.
That will significantly reduce our mark to market exposure due to rebuild financing.
As well as focus on assets that do not require leverage now we do have.
A revolver to revolver securities within our BPL.
Short dated BPL alone strategy that we continue to utilize and we want to keep funded.
So that we should expect to be active there.
And but for the most part what we do see some incremental leverage opportunities. Our focus is going to be on the non mark to market side of the equation for financing okay. Thank you.
Please standby for the next question.
The next question is from Bose George with <unk>. Your line is live.
Hi, everyone. This is actually Mike Smith on for Bose.
So it sounds like Youre pretty cautious in terms of capital deployment can you just kind of talk through how you're thinking about the balancing act between buying back more stock and versus maintaining a strong liquidity position and then as a follow up can you just remind us how much remaining authorization you have left on the buyback.
Yes, so I'll start with the.
The liquidity situation.
So the.
What we've done over 18 months has built.
Over $1 billion of shorter duration BPL.
<unk> the goal there was to.
You'll be able to utilize that market those assets into a higher yielding market. So it was a great cash utilization strategy for us given the high coupons short duration aspect of those portfolios.
And.
We see.
An opportunity to rotate that capital into.
We hope to see.
A better buying opportunity in 2023 so.
Today.
We see better opportunity as it is as it relates to our our share price.
And buybacks versus the the.
The investment market today simply because of the discount we currently trade at.
And we do have to weigh that with liquidity unexpected capitalization efforts in 2023.
As I said earlier, we do expect to continue.
Engaging.
Buying back shares in the market if level stay.
<unk>, we've been purchasing it and.
That is something that we're going to continually monitor and look at.
Previous calls.
We werent as forthcoming simply because we were still debating.
The value proposition there versus assets, we saw market, but once that the third quarter.
Secures Asian markets are.
Being very much less liquid and inefficient.
The meter turn towards our buyback.
Literally as a primary strategy in the third quarter, we spent.
More money there than we did in new investment activity.
Given the majority of what we invested in in the third quarter was related to a drawdown from previous loans that we actually funded so.
We will continue looking at our our shares in our share price and the discount to book value as an opportunity.
It's highly accretive.
And that.
That could change depending on share price as well as.
The market opportunity offering.
Yes.
Large bid ask spread to shorten that up and becoming more of a buyer's market.
We're balancing and we will continue to follow and.
Thank you Andrew how much and when.
And to answer your question with how much is left over so as of 930 Thats about 178 million with the trades that we settled early in October that will be taking you down to a $176 million.
Great great.
Great. That's helpful color and maybe just wanted to dividend.
No.
Can you just talk through how you are thinking about the dividend it looks like especially given the context of.
The comments you made on remaining defensive it looks like.
ROA on the existing book implies like a breakeven.
Ro.
10% to 11% is that something you.
You can generate.
Just given your defensive posture or any other color on the dividend would be helpful.
Yes, so as we said earlier in previous calls our dividend policy is kind of an 18 month forecast on not only our interest income, but also some realized activity, we see on our balance sheet.
Today, we believe we can support that Tencent spaced on that Christine mentioned earlier our interest.
Net interest income generated about eight cents of EPS on top of potential liquidations in the future for additional realized gains are a component to our our dividend policy for quite some time now has been the principal component on sales were realized activity.
To meet our dividend obligation and that still continues today we.
<unk>.
Over the past five years really have not been a story of of NIM that has the full focus of what we are looking to and how to crack.
However, a leveraged play on assets with <unk>.
Term liabilities to pay dividend, it's always been a component of.
<unk>.
Looking at not only the interest income on assets, we're generating but also on principal activity through discounted purchases.
Or realized activity so.
The fact that we're we've.
Already announced the 10% dividend and then looking at the 18 month forecast, we feel that we can support that dividend over time now the market.
Obviously.
Key component here is whether or not we can reinvest our our BPL short term duration loans into the market to higher yielding opportunities that's something we expect to do.
And.
The goal there just in today's market, where coupons in that space are generally 150 to 200 basis points higher than it was a month and half ago two months ago.
At a minimum we could reinvest into continuous into the BPL space to earn a higher return than we had earlier.
But we think there may be better opportunities.
In 2023 so.
For us we wanted to stay liquid wanted to.
Be able to be active in a dislocated market and be able to put money to work at compelling risk adjusted returns so with.
With that we think that the bridge from the BPL book to the opportunity or just even higher coupon bpl's.
We will continue allow us to support our dividend.
Great. That's helpful. Thanks for taking the questions.
Okay.
Please standby for the next question.
The next question is from Keith Stewart at Jones trading your line is live.
Hi, This is Matthew on for Jason what is the quarterly operating expense run rate that you guys have for operating real estate is going to look like after the next chunk of asset sales.
And then how should we model that to get to zero once the sales are completed.
Well.
And in terms of operating expenses, there will still be operating expenses left in the property, but if you take a look at what's really driving that operating expense on real estate as depreciation and amortization with GAAP accounting being held for sale depreciation and amortization on majority of those properties will be essentially zero.
What is going to be left over is multifamily property on a consolidated JV structure that we have where we own less than 20% of common equity there will still be depreciation but to a lesser extent as it compares to.
Prior quarters.
Thank you and then with that cash is the plan to pay off the repo debt outstanding or continue to invest it.
Yes, so the <unk>.
Is it going to be.
Two to invest the repo debt payoff will occur through a securitization that we're looking to complete so if we're successful in that.
And that deal.
Which is out at the moment, we will be able to pay down debt through transference of.
<unk> leverage.
And the cash will be utilized for investment opportunities.
Got you and then one quick follow up what is the cap rate that you guys are looking to get or have got on some of these sales.
Assets.
Yes.
Cap rate if you spend time in the multifamily space. There is probably three or four definitions of what cap rate means cap rate.
Traditionally is obviously.
Your rental income versus your cost basis, and minus the expenses, there, but because of.
Because of rental rate increases that youre seeing across the market. There is catch up that needs to be applied into some of the formula that you are looking to sell so if you have leases that are rolling.
In the next six months that are up 10%. That's part of your cash flow. Therefore, the cap rate number really becomes very difficult to understand because it doesn't incorporate that.
Given our current cash flow.
It simply answer your question caveat those points you are around 545, 5%.
But the loss to lease is a significant component of your cash flow on a pro forma basis that has to be modeled in as well.
So that.
And that is that as opportunity.
Awesome. Thank you yep.
Yes.
Please standby for the next question.
Next question comes from Matthew Howlett with B Riley Your line is open.
Good morning, Thanks for taking my question Jason.
Yeah.
My question is on.
Quick question.
You get the Companys oil as well positioned as really any anyone out there with the leverage and the excess cash.
More capital coming in the door and when you look at the pace of capital deployment in 2022, and I know you don't have a crystal ball, but you could get obviously deployed or overnight given.
All of the different asset classes Youll look at what are some of the.
Things as asset prices decline, we saw during the last recession with things went down and then went down further and further whats what can you tell us in terms of when you feel like it's time.
To start really getting aggressive.
Right so the.
The first point that you mentioned.
If you found value in today's markets, particularly in BPI rental or fix and flip or short dated loans.
You could really on the market today, there are various originators that.
Would love somebody show up with $250 million of cash to invest in this market.
And the problem is that the loans that they're producing.
Just arent attractive relative to the term rates that we see in the market today.
But there is.
And much different than a year ago.
Anybody with capital can step in and take a big market share that exist in this market.
We're also looking at the fact that we're.
Quite possibly could call peak housing third quarter of 2022.
<unk>.
That's evident obviously in the affordability measures that are.
One of the worst levels in 20 years.
So I think there is there will be some significant buyer's remorse that it may experience from Q3 activity.
And I think that is part of our opportunity for 2023.
In that if you have not efficiently finance those assets in 2022, we believe that the 2023 financing environment to be even more difficult and more of an even less efficient than it is today.
Your question on timing is really a function of when we can generate.
Our double.
Double digit kind of equity type of returns without the use of leverage.
And a much broader and much deeper stress scenario, that's what basically help the housing market cure is when rental yields became 13, 14% and you can earn that just by buying a home and not in utilizing leverage while similar.
Kind of outcomes that we would expect in some of these loan products, where the financing is not available or very inefficient.
Or are there other there were maybe shopping our portfolios not getting done in 2022, and 2023 is a capitulation on that sale.
What causes some of those capitulation is financing and warehouse lines. They are typically structured 364 days and.
The roles on that financing facilities for loans, we expect.
Obviously, it could be pressured in that you have less financing.
That will be provided the answer rates will be lower likely if there is an aged portfolio.
And if you're if you're over lever there.
It Hasnt do not have enough liquidity to take those assets offer warehouse line that becomes a distressed opportunity.
And that is something that we expect to see in some parts of this market, particularly particularly within the origination channels.
In the market today so.
For those reasons.
We're kind of a hold until we see that capitulation, we see loans in houses being shopped and trades, failing or not not being consummated because the discount required by the market is larger than their pain points of the seller, but over time, we believe that.
Some of those those will run out of time and will provide an opportunity for us to invest in this market.
So.
I think I hear what youre, saying that youre going to buy this stuff unlevered double digits.
It potentially make more time watched them go up maybe put financing them over time, but in the meantime, <unk> could operate would effectively very limited recourse leverage if you get the securitization closed.
That's right and we purposely designed I mean, there are various opportunities to issue corporate debt in 2021.
At at pretty attractive levels.
We weighed that on a five year timeline, which comes pretty quickly, especially when you're investing in three to five year assets.
We didn't want to have maturity wall structure, we'd rather have the financing on a secured basis with respect to our assets matched to our assets.
Which is why we utilize.
Mark to market repo leverage one year facilities on our.
BPL.
Fix and flip loans because of the short duration.
As mentioned earlier, we have two securitizations are outstanding there, we can recycle some of those assets, but we also have.
Those assets on repo currently and we think that is a good use of.
<unk> of leverage there and ties well with the asset but the goal is to stay very liquid stay nimble and look for these opportunities now that's what we currently see today, however, various things that come into this market landscape in <unk>.
Some of the discount opportunities may not be it may not be realized what we can do and will do in that timeframe. If for example.
The expectation of the fed pushing inflation interest rates higher to curb inflation, which really the only way you do that is through higher unemployment rates, if that doesn't come to fruition and we have a paradigm as inflation well than some of our expectations on these distributors located opportunities will not come into play.
But as I said earlier the market given the liquidity situation of various market players in the market is for anybody is taking.
You can come in and you can.
One of the largest buyers of these markets today.
With the company and with the understanding of what your <unk> These assets.
We can step into the market with.
With the same type of asset classes that we're in today at higher rates or or wait for this dislocation to occur and we believe that our capital is better spent waiting for dislocation at this moment.
I would agree and you guys are in a really good position with all the expertise.
Various.
Business classes I appreciate it thank you.
Please standby your next question.
The next question is from Eric Hagen of BT I E. Your line is live.
Hey, Good morning Hope you guys are doing all right.
How are you guys thinking about the warehouse funding for whole loans.
Ability to source additional warehousing going forward just to <unk>.
<unk> ability of those assets in general do you also have a breakdown of the type of collateral which is on warehouse.
Right now and if I can just tack on another question just what's the unfunded commitment in the BPL portfolio right now thank you guys.
Yes, so warehouse funding wise.
We have proposals in front of us to upsize, our our warehouse lines I think it's.
It's not something network concerned with at all given the availability to take.
The upsized request for proposals.
We have significant amount of capacity in our current warehouse line.
Today, so given the securitization to the repo loans two securitizations.
And reducing our repo balances there the commitments we have from our warehouse lenders were kept the same we have not reduced those so we have we could re lever those assets those warehouse lines up if we felt like that was an opportunity to do so.
Again, our plan is not to do that we see opportunity to do otherwise.
But there is.
Theres really no we don't see any issues on buying large portfolios and utilizing leverage for that.
<unk>.
As early as it relates to.
Our BPL.
Activity.
We are generally.
Funding around.
About $73 million a quarter.
We expect that to occur for the next few quarters, but obviously as we expect it to also taper off given the.
For <unk>.
For purposes of PPL distress or BPL bridge loans were.
We have a seasoned portfolio.
Is that right.
A lot of our ramp if you look at our investment activity the ramping of our portfolio really occurred in the fourth quarter of 2021 into the first quarter of 2022.
So these are 18 month loans on average.
We've already kind of move forward in time about six months.
And we also have focused on a strategy of.
Buying loans that had very.
Low utilization or low construction requirements and our goal is to buy loans that would have very easy concepts to move forward in a.
And the plan for the operator.
We have a chart on our in our supplemental that shows that activity.
We have many assets, where there was no requirement for for.
For repairs.
We eliminated the kind of ground up construction and high repair.
Situations, which then.
Correlates to low <unk>.
Go forward draws for our portfolio.
And to answer your question in terms of what's in the warehouse lines, it's predominantly our BPL bridge loans there are some.
Obviously your rental allowance that's a narrow the SCR, but we are looking to move them into a securitization.
Priced Theres also are performing performing loan book, our scratch and Dent, that's there or RPM portfolio are predominantly all securitized, it's about 99, 5% of that portfolio and securitization structures.
Got it.
Thanks for following up on that I appreciate you guys.
Thank you.
At this time I would like to turn it back to Mr. Turano for closing remarks.
Well. Thank you everybody for taking the time today to be on our earnings call for much in <unk>.
Quarter 2023 for earnings call. Thank you alright, Thank you very much and have a great day.
Thank you for your participation in today's conference.
The program you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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