Q1 2025 Chimera Investment Corp Earnings Call
And the floor will be opened for questions and comments. Following the presentation. If you should require assistance throughout the conference. Please press star zero to reach a live operator at this time. It is my pleasure to turn the floor over to your host Victor Falvo head of capital markets welcome Sir the floor is yours.
Victor Falvo: Thank you operator, and thank you everyone for participating in <unk> first quarter 2025 earnings conference call.
Before we begin I'd like to review the Safe Harbor statements.
Victor Falvo: During this call we will be making forward looking statements, which are predictions projections or other statements about future events.
Victor Falvo: These events are based on current expectations and assumptions that are subject to risks and uncertainties, which are outlined in the risk factors section of our most recent annual and quarterly SEC filings.
Victor Falvo: Fuel events and results may differ materially from these forward looking statements.
Victor Falvo: We encourage you to read the forward looking statement disclaimers in our earnings release, and our quarterly and annual filings.
Victor Falvo: During the call today, we may also discuss non-GAAP financial measures.
Victor Falvo: Please refer to our SEC filings and earnings supplement for reconciliation to the most comparable GAAP measures.
Victor Falvo: Additionally, the content of this conference call may contain time sensitive information that is accurate only as of the date of this earnings call. We.
Victor Falvo: We do not undertake and specifically disclaim any obligation to update or revise this information.
Philip: I will now turn the conference over to our President and Chief Executive Officer, Philip <unk>.
Philip: Thanks, Vic and good morning, and welcome to Chimera investment Corporation's first quarter 2025 earnings call. It's great to have you with us today.
Jack McDowell: Turning me on the call are Jack Mcdowell, our Chief investment Officer.
Jack McDowell: <unk>, one often our chief financial officer, and <unk>, our head of capital markets and Investor Relations.
Jack McDowell: After my remarks, Subra will review the financial results.
Jack McDowell: And then Jack will review the portfolio before opening the call for questions.
Jack McDowell: This has been a strong quarter for Chimera earnings available for distribution improved by 11% our book value increased by seven 4% and our economic return was nine 2%.
Jack McDowell: This quarter also marks something new it was our first full quarter since acquiring palisades.
Jack McDowell: The integration was fast seamless.
Jack McDowell: Cultural fit excellent strategic alignment even better.
Jack McDowell: Whether it's third party advisory portfolio oversight or core investment strategy Palisades is now part of the <unk> platform.
Jack McDowell: Third party loans under management by Palisades Advisory services are up 43% year over year, including an increase of $1 5 billion during the first quarter to nearly $24 billion.
Jack McDowell: Today, when you combine our on balance sheet assets with the assets, we manage for others were at nearly $30 7 billion.
Jack McDowell: That's everything in the residential mortgage market from re performing jumbo Prime <unk>.
Jack McDowell: Residential transition and non QM loans to agency MBS and residential equity products.
It's a deep diversified residential mortgage platform and is backed by over $2 6 billion in equity.
Jack McDowell: Why does this matter because we are not just adding businesses. We're building capabilities, we're diversifying our revenue and it's already having a real impact on our bottom line.
Jack McDowell: We also made impactful balance sheet moves this quarter, we exercised our call rights on all of our non remic securitization and issued two new securitizations backed by those loans.
Jack McDowell: This was effectively a cash out refinancing that unlocked a $187 million at a reinvestment hurdle below 6%.
Jack McDowell: And it was more in January we acquired in securitized $288 million in non QM loans.
Jack McDowell: We're holding the retained bonds unlevered on our balance sheet and expect a low teen return.
Jack McDowell: In March we picked up a $149 million of agency specified pools.
Jack McDowell: We also settled $100 million of residential transition loans during the quarter.
Jack McDowell: In each case, we expect mid teen Levered returns.
Jack McDowell: And lastly, we refinanced two key non mark to market facilities before market volatility hit <unk>.
Jack McDowell: Increasing their capacity improving their terms and extending their maturities.
Jack McDowell: <unk>, we extracted more than $100 million of additional cash from these refinancings.
Jack McDowell: So what's next.
Jack McDowell: Even in a volatile market, we're holding steady.
Jack McDowell: As of earlier this week, we estimate the current book value to be flat to slightly down from the end of the first quarter.
Jack McDowell: We're continuing to grow our third party loans under management.
Jack McDowell: We're adding agency MBS assets that deliver returns liquidity and flexibility and we're doing it all with a stronger balance sheet and more liquidity than we had at the start of the year.
Jack McDowell: Looking ahead to the rest of 2025, we're staying focused we expected diversified the portfolio grow recurring fee income add liquidity and look for opportunities to add accretive platforms.
Jack McDowell: Here's the big takeaway.
Jack McDowell: We're not just playing defense, we're building <unk> into a hybrid mortgage REIT, that's resilient and diversified.
Jack McDowell: Now I'll hand, it off to <unk> to walk you through the financials.
Speaker Change: Thank you Phil I will review <unk> financial highlights for the first quarter of 2025.
Speaker Change: GAAP net income for the first quarter was $145 9 million or $1 77 per share.
Speaker Change: GAAP book value at the end of the first quarter was $21 17 per share for the first quarter. Our economic return on GAAP book value was nine 2% based on the quarterly change in book value and a 37 first quarter dividend per common share.
Speaker Change: On an earnings available for distribution basis net income for the first quarter was $33 5 million or <unk> <unk> per share.
Speaker Change: Our economic net interest income for the first quarter was $72 3 million.
Speaker Change: For the first quarter the yield on average interest, earning assets was five 9% our average cost of funds was four 4% and our net interest spread was one 5%.
Unknown Executive: and the floor will be open for questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero to reach a live operator.
Speaker Change: Total leverage for the first quarter was $3 nine to one while recourse leverage ended the quarter at one two to one.
Of this one off and our Chief financial Officer, and booked Valval, our head of capital markets and Investor Relations.
Subaru: After my remarks, Subaru will review the financial results.
Speaker Change: For liquidity and securitized financing the company ended the quarter with $697 million in total cash and unencumbered assets.
Victor Falvo: At this time, it is my pleasure to turn the floor over to your host, Victor Falvo, head of Capital Welcome, sir. The floor is yours. Thank you, operator.
And then Jack will review the portfolio before opening the call for questions.
Subaru: This has been a strong quarter for Chimera earnings available for distribution improved by 11% our book value increased by seven 4% and our economic return was nine 2%.
Speaker Change: In January we closed on our <unk> 2021 securitization as part of our strategy to mitigate securitization execution risk on certain Securitizations veeva.
Phil Kardis: And thank you everyone for participating in Chimera's first quarter 2025 earnings conference call.
Unknown Executive: Before we begin, I'd like to review the Safe Harbor Statement. During this call, we will be making forward-looking statements, which are predictions, projections, or other statements about future events. These events are based on current expectations and assumptions that are subject to risks and uncertainties, which are outlined in the risk factors section of our most recent annual and quarterly SEC file. Actual events and results may differ materially from these forward-looking statements.
This quarter also marks something new it was our first full quarter since acquiring palisades.
Speaker Change: Veeva is short two year Treasury futures contracts to protect the net interest spread of <unk> 2025, <unk>. This short position was closed out in January.
Subaru: The integration was fast seamless.
Subaru: Cultural fit excellent strategic alignment even better.
Speaker Change: In March we exercised our call rights and terminated seven outstanding since Securitisations and refinance the loans with two new Sim securitizations, enabling the company to extract $187 million in cash.
Subaru: Whether it's third party advisory portfolio oversight or core investment strategy Palisades is now part of the <unk> platform.
Subaru: Third party loans under management by Palisades Advisory services are up 43% year over year, including an increase of $1 5 billion during the first quarter to nearly $24 billion.
Jack McDowell: Jack will review in more detail the economics of this activity during his prepared remarks for repo and hedging.
Unknown Executive: We encourage you to read the forward-looking statement disclaimers in our earnings release and our quarterly and annual filing.
Speaker Change: It had 2 billion floating rate sensitivity on our outstanding repo liabilities.
Unknown Executive: During the call today, we may also discuss non-GAAP financial measures. Please refer to our SEC filings and earnings supplement for reconciliation to the most comparable GAAP measures.
Subaru: Today, when you combine our on balance sheet assets with the assets, we manage for others were at nearly $30 7 billion.
Speaker Change: And we had $3 2 billion in notional value of various interest rate hedges of this total we have one 5 billion hedge positions rolling off during the second quarter, which will result in a more balanced liability hedge position.
Subaru: That's everything in the residential mortgage market from re performing jumbo Prime <unk>.
Unknown Executive: Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date of this earnings call. We do not undertake and specifically disclaim any obligation to update or revise this information.
Subaru: Residential transition and non QM loans to agency MBS and residential equity products.
Speaker Change: We had $1 4 billion in either non are limited mark to market features on our outstanding repo agreements, representing 47% of our secured recourse funding.
Subaru: It's a deep diversified residential mortgage platform and is backed by over $2 6 billion in equity.
Phil Kardis: I will now turn the conference over to our President and Chief Executive Officer, Phil Kardis. Thanks, Vic. And good morning, and welcome to Chimera Investment Corporation's first quarter 2025 earnings call. It's great to have you with us today.
Subaru: Why does this matter because we are not just adding businesses. We're building capabilities, we're diversifying our revenue and it's already having a real impact on our bottom line.
Speaker Change: During the quarter, we converted our long position in 500 million swaption into a one year pay fixed interest rate swaps with a rate of 345%.
Phil Kardis: Joining me on the call are Jack McDowell, our Chief Investment Officer, Subramaniam Viswanathan, our Chief Financial Officer, and Victor Falvo, our Head of Capital Markets and Investor Relations.
Speaker Change: This quarter, we also entered into a $1 billion two year sulfur interest rate gap with a 395% strike to protect against future interest rate movements as the existing interest rate swaps mature.
Subaru: We also made impactful balance sheet moves this quarter, we exercised our call rights on all of our non remic securitization and issued two new securitizations backed by those loans.
Phil Kardis: After my remarks, Subra will review the financial results and then Jack will review the portfolio before opening the call for questions. This has been a strong quarter for Chimera. Earnings available for distribution improved by 11%, our book value increased by 7.4%, and our economic return was 9.2%.
Subaru: This was effectively a cash out refinancing that unlocked a $187 million at a reinvestment hurdle below 6%.
Speaker Change: We executed on a total of 155 million pay fixed swap futures at a weighted average floor rate equaling pay fixed rate of 384%.
Subaru: And Theres more in January we acquired in securitized $288 million in non QM loans.
Speaker Change: For the first quarter of 2025, our economic net interest income and return on average equity was 11, 2%.
Subaru: We're holding the retained bonds unlevered on our balance sheet and expect a low teen return.
Subaru: In March we picked up a $149 million of agency specified pools.
Phil Kardis: This quarter also marked something new. It was our first full quarter since acquiring Palisades. The integration was fast, seamless. Cultural fit? Excellent. Strategic alignment? Even better. Whether it's third-party advisory, portfolio oversight, or core investment strategy, Palisades is now part of the Chimera platform. Third party loans under management by Palisades Advisory Services are up 43% year over year, including an increase of $1.5 billion during the first quarter to nearly $24 billion. Today, when you combine our on balance sheet assets with the assets we manage for others, we're at nearly 37 billion That's everything in the residential mortgage market, from re-performing, Jumbo Prime, residential transition and non-QM loans, to agency RMBS and residential equity products.
Speaker Change: GAAP return on average equity was 25, 9% and our return on average equity was eight 1% and.
Subaru: We also settled $100 million of residential transition loans during the quarter in each case, we expect mid teen Levered returns.
Speaker Change: And lastly compensation general administrative and servicing expenses were marginally higher quarter over quarter, when excluding imputed compensation expenses related to the policy acquisition.
Subaru: And lastly, we refinanced two key non mark to market facilities before market volatility hit <unk>.
Subaru: Increasing their capacity improving their terms and extending their maturities.
Speaker Change: Our transactional expenses were $5 $7 million this quarter, reflecting the costs associated with increased securitization activity.
Subaru: <unk>, we extracted more than $100 million of additional cash from these refinancings.
Subaru: So what's next.
Jack McDowell: I will now turn the call over to Jack to review, our portfolio and securitization activity.
Subaru: Even in a volatile market, we're holding steady as of earlier. This week, we estimate the current book value to be flat to slightly down from the end of the first quarter.
Jack McDowell: Thanks, <unk> and good morning, everyone I'll provide a brief overview of our investment activity during the first quarter as well as provide insight as to how we were positioned heading into April volatility.
Subaru: We're continuing to grow our third party loans under management.
Subaru: Adding agency MBS assets that deliver returns liquidity and flexibility and we're doing it all with a stronger balance sheet and more liquidity than we had at the start of the year.
Jack McDowell: During the quarter markets continued adjusting to the new administration's policy priorities, namely immigration reform efforts to improve government efficiency and an emphasis on redefining global trade partnerships interest rate volatility remain contained through mid February but spiked on February 19th after the January <unk>.
Phil Kardis: It's a deep, diversified residential mortgage platform, and it's backed by over $2.6 billion in equity.
Subaru: Looking ahead to the rest of 2025, we're staying focused we expect to diversify the portfolio grow recurring fee income add liquidity and look for opportunities to add accretive platforms.
Phil Kardis: Why does this matter? Because we are not just adding businesses, we're building capabilities. We're diversifying our revenue, and it's already having a real impact on our bottom line.
Subaru: Here's the big takeaway.
Jack McDowell: <unk> minutes reinforced a more hawkish higher for longer stance volatility peaked in early March and then eased following the release of a softer than expected February PPI and a well received 10 year Treasury auction on March 12.
Phil Kardis: We also made impactful balance sheet moves. This quarter, we exercised our call rights on all our non-REMIC securitizations and issued two new securitizations backed by those loans. This was effectively a cash out refinancing that unlocked $187 million at a reinvestment hurdle below 6%.
Jack McDowell: Over the course of the quarter Treasury yields rallied 36 basis points across twos intense maintaining the year end curve steepness of 33 basis points credit spreads widened during the period with investment grade and high yield corporate spreads gapping out by 14% and 60 basis points respectively.
Phil Kardis: And there's more. In January, we acquired and securitized $288 million in non-QM loans. We're holding the retained bonds unlevered on our balance sheet and expect a low team return. In March, we picked up 149 million of agency specified pools. We also settled $100 million in residential transition loans during the quarter. In each case, we expect mid-team leveraged return.
Jack McDowell: And structured products non QM AAA spreads widened by 25 basis points, while triple BS backed up by 10.
Jack McDowell: In the agency space current coupon OAS traded within an 18 basis point range versus swaps and 13 basis points versus treasuries ending the quarter roughly unchanged.
Phil Kardis: And lastly, we refinanced two key non-mark-to-market facilities before market volatility hit, increasing their capacity, improving their terms, and extending their maturity. Importantly, we extracted more than 100 million of additional cash from these refinances.
Subaru: Net interest income for the first quarter was $72 3 million.
Jack McDowell: Housing conditions continue to moderate national home price growth in February was three 9% year over year with markets in Texas, and Florida flat to down while northeast cities, along with Chicago, and Cleveland posting stronger gains in the 6% to 8% range.
Subaru: For the first quarter the yield on average interest, earning assets was five 9% our average cost of funds was four 4% and our net interest spread was one 5%.
Phil Kardis: So what's next? Even in a volatile market, we're holding steady. As of earlier this week, we estimate the current book value to be flat to slightly down from the end of the first quarter. We're continuing to grow our third party loans under management. We're adding agency RMBS, assets that deliver returns, liquidity and flexibility. And we're doing it all with a stronger balance sheet and more liquidity than we had at the start of the year.
Subaru: Total leverage for the first quarter was $3 nine to one while recourse leverage ended the quarter at one two to one.
Jack McDowell: Retail inventory rose, 20% year over year, but remains roughly 46% below pre pandemic levels.
Subaru: For liquidity and securitized financing the company ended the quarter with $697 million in total cash and unencumbered assets.
Jack McDowell: Affordability remains challenged with 30 year mortgage rates, averaging around 7% throughout the quarter based on bank rate statistics existing home sales declined to 4 million unit annualized pace, marking the slowest first quarter print since 2009.
Subaru: In January we closed on our <unk> 2025, <unk> securitization as part of our strategy to mitigate securitization execution risk on certain Securitizations veeva.
Jack McDowell: Single family housing starts were down 14% from the prior quarter as builders remains cautious in the face of rate pressures price uncertainty and input cost volatility.
Phil Kardis: Looking ahead to the rest of 2025, we're staying focused. We expect to diversify the portfolio, grow recurring fee income, add liquidity, and look for opportunities to add a creative platform.
Subaru: We have a short two year treasury futures contracts to protect the net interest spread of 2025 <unk>. This short position was closed out in January.
Jack McDowell: That said mortgage credit fundamentals remain healthy borrower equity is at record levels in both delinquency and foreclosure activity remained near historic lows.
Phil Kardis: Here's the big takeaway. We're not just playing defense. We're building Chimera into a hybrid mortgage rate that's resilient and diversified.
Subaru: In March we exercised our call rights and terminated seven outstanding since Securitizations and refinanced loans with two new Sim securitizations, enabling the company to extract $187 million in cash.
Jack McDowell: Early April brought renewed volatility tied to the announcement of U S. Tariffs the move index surged more than 50% in just over a week and unusually treasury yields sold off amid the volatility on speculation of foreign selling and reported unwind of Levered basis trades credit spreads widened across both corporate.
Subramaniam Viswanathan: Now I'll hand it off to Subra to walk you through the financials. Thank you, Phil. I will review Chimera's financial highlights for the first quarter of 2025. Gap net income for the first quarter was $145.9 million or $1.77 per share. Gap book value at the end of the first quarter was $21.17 per share. For the first quarter, our economic return on gap book value was 9.2% based on the quarterly change in book value and the $0.37 first quarter dividend per common share. On an earnings available for distribution basis, net income for the first quarter was $33.5 million or $0.41 per share.
Subaru: Jack will review in more detail the economics of this activity during his prepared remarks for repo and hedging.
Subaru: We had 2 billion floating rate sensitivity on our outstanding repo liabilities.
Jack McDowell: And structured product markets, while volatility has since moderated forecast have generally shifted to reflect lower growth expectations and increased inflation risks for the balance of the year.
Subaru: And we had $3 2 billion in notional value of various interest rate hedges of this total we have $1 5 billion hedge positions rolling off during the second quarter, which will result in a more balanced liability hedge position.
Jack McDowell: Amid this backdrop our season re performing loan portfolio, which comprises the majority of our GAAP assets continued to perform in line with expectations serious delinquencies were stable at eight 9% and prepayments take down to five 5%.
Subaru: We had $1 4 billion in either non are limited mark to market features on our outstanding repo agreements, representing 47% of our secured recourse funding.
Subramaniam Viswanathan: Our economic net interest income for the first quarter was $72.3 million. For the first quarter, the yield on average interest earning assets was 5.9%, our average cost of funds was 4.4%, and our net interest spread was 1.5%. Total leverage for the first quarter was 3.9 to 1, while Ricoh's leverage ended the quarter at 1.2 to 1. For liquidity and securitized financing, the company ended the quarter with $697 million in total cash and unencumbered assets. In January, we closed on our SIM 2025 I-1 securitization. As part of our strategy to mitigate securitization execution risk on certain securitizations, we were short two-year treasury future contracts to protect the net interest spread of SIM 2025 I-1.
Subaru: During the quarter, we converted our long position in 500 million swaption into a one year pay fixed interest rate swaps with a rate of 345%.
Jack McDowell: Our Palisades Advisory services asset management team remained focus on integrating the portfolio into our systems with an emphasis on driving positive outcomes in the loan book.
Subaru: This quarter, we also entered into a $1 billion two year sulfur interest rate cap with a 395% strike to protect against future interest rate movements as the existing interest rate swaps mature.
Jack McDowell: Our book value increased seven 4% during the quarter largely driven by compression performing by yield compression in performing loans, which was partially offset by wider yields in the nonperforming loan cohort yields.
We executed on a total of 155 million pay fixed swap futures at a weighted average floor rate equal and pay fixed rate of 384%.
Jack McDowell: Yields on securitized debt were largely unchanged as spreads widened rapidly in the last week of March neutralizing much of the rate rally during the quarter.
Jack McDowell: We continue to deploy capital in a deliberate and disciplined manner in light of the macro backdrop, we have built additional liquidity and positioned our portfolio to withstand volatility spread widening and funding chalks. If they were to emerge importantly, this should also allow us to be opportunistic during periods of market <unk>.
Subaru: For the first quarter of 2025, our economic net interest income return on average equity was 11, 2%.
Subaru: GAAP return on average equity was 25, 9% and our return on average equity was eight 1% in.
Subramaniam Viswanathan: This short position was closed out in January.
Subaru: And lastly compensation general administrative and servicing expenses were marginally higher quarter over quarter. When excluding included compensation expenses related to the policy acquisition.
Subramaniam Viswanathan: In March, we exercised our call rights and terminated seven outstanding SIM securitizations and refinanced the loans with two new SIM securitizations, enabling the company to extract $187 million in cash.
Jack McDowell: Location.
Jack McDowell: During the quarter, we settled a $288 million SCR securitization and purchased $149 million of specified pools. We also closed $100 million of short duration residential transition loans and committed to another $32 million for settlement in the second quarter.
Subaru: Our transaction expenses were $5 $7 million this quarter, reflecting the costs associated with increased securitization activity.
Subramaniam Viswanathan: Jack will review in more detail the economics of this activity during his prepared remarks. For repo and hedging, we had two billion floating rate sensitivity on our outstanding repo liability. And we had 3.2 billion in notional value of various interest rate hedges of this total. We have 1.5 billion hedge positions rolling off during the second quarter, which will result in a more balanced liability hedge. We had $1.4 billion in either non or limited mark-to-market features on our outstanding repo agreements, representing 47% of our secured recourse funding. During the quarter, we converted a long position in 500 million swaps into a one year pay fixed interest rate swaps with a rate of 3.45%.
Jack McDowell: Our team continues to actively evaluate MSR opportunities with potential for us to execute in that sector. Later in 2025, as a way to generate attractive returns while simultaneously helping to balance the duration risk in other parts of the portfolio.
Subaru: I will now turn the call over to Jack to review, our portfolio and securitization activity.
Jack: Thanks, <unk> and good morning, everyone I'll provide a brief overview of our investment activity during the first quarter as well as provide insight as to how we were positioned heading into april's volatility.
Speaker Change: As mentioned by Phil and Subra some of the quarter's most impactful activity was on the liability side.
Jack: During the quarter markets continued adjusting to the new administration's policy priorities, namely immigration reform efforts to improve government efficiency and an emphasis on redefining global trade partnerships interest rate volatility remained contained through mid February but spiked on February 19th after the January <unk>.
Speaker Change: We refinanced two structured repo lines with combined capacity of more than 610 million extending the maturities by 18% to 24 months, while lowering costs and securing mostly fixed rate non mark to market terms. This unlock more than $100 million of investable cash at attractive rates.
Jack: <unk> minutes reinforced a more hawkish higher for longer stance volatility peaked in early March and then east following that lead.
Speaker Change: I'm going to pause briefly and ask that you turn your attention to page 16 of our investor presentation.
Subramaniam Viswanathan: This quarter, we also entered into a 1 billion, 2-year SOFR interest rate cap with a 3.95 percent strike to protect against future interest rate movements as existing interest rate swaps mature. We executed on a total of $155 million pay-fixed, E-reswap futures at a weighted average, par rate equivalent pay-fixed rate of 3.84%. For the first quarter of 2025, our economic net interest income return on average equity was 11.2%. Our gap return on average equity was 25.9%. And our EAD return on average equity was 8.1%. And lastly, compensation, general, administrative and servicing expenses were marginally higher quarter over quarter, when excluding imputed compensation expenses related to the policy's acquisition.
Jack: <unk> of a softer than expected February PPI, and a well received 10 year Treasury auction on March 12.
Speaker Change: Here, we added a supplemental slide that walks through a series of transactions. We completed in March as part of these transactions, we exercised our redemption rights on all $312 million of its outstanding Securities tied to our seven non remic securitizations.
Jack: Over the course of the quarter Treasury yields rallied 36 basis points across twos and tunes, maintaining the year end curve steepness of 33 basis points credit spreads widened during the period with investment grade and high yield corporate spreads gapping out by 2014, and 60 basis points respectively.
Speaker Change: These deals collateralized by $646 million of seasoned loans had built significant embedded equity over the years as senior bonds had paid down and loan performance improved.
Jack: Construction products non QM AAA spreads widened by 25 basis points, while triple BS backed up by 10.
Speaker Change: We refinance those loans into two strategic new securitizations totaling $517 million in senior bonds, one remic and one non remic transaction further enhancing the cash flow profile of our retained interest in releasing $187 million of cash for reinvestment.
Jack: In the agency space current coupon OAS traded within an 18 basis point range versus swaps and 13 basis points versus treasuries ending the quarter roughly unchanged.
Jack: Housing conditions continued to moderate national home price growth in February was three 9% year over year with markets in Texas, and Florida flat to down while northeast cities, along with Chicago, and Cleveland posting stronger gains in the 6% to 8% range resale inventory rose 20% year over year.
Speaker Change: As you can see from the middle box on the slide while our overall cost of funds went down the additional debt will increase our annual run rate interest expense by approximately $11 million that implies our breakeven return on capital is approximately five 8%, meaning any incremental return generated in.
Subramaniam Viswanathan: Our transaction expenses were $5.7 million this quarter, reflecting the costs associated with increased securitization activity.
Jack McDowell: I will now turn the call over to Jack to review our portfolio and securitization activities. Thanks, Subra. And good morning, everyone. I'll provide a brief overview of our investment activity during the first quarter, as well as provide insight as to how we were positioned heading into April's volatility. During the quarter, markets continued adjusting to the new administration's policy priorities, namely immigration reform, efforts to improve government efficiency, and an emphasis on redefining global trade partnerships. Interest rate volatility remained contained through mid-February, but spiked on February 19th after the January FOMC minutes reinforced a more hawkish, higher-for-longer stance.
Jack: But remains roughly 46% below pre pandemic levels.
Jack: Affordability remains challenged with 30 year mortgage rates, averaging around 7% throughout the quarter based on bank rate statistics existing home sales declined to a 4 million unit annualized pace, marking the slowest first quarter print since 2009.
Speaker Change: Excess of five 8% should be accretive to earnings.
Speaker Change: Overall, we view these transactions as foundational they reflect our ability to generate capital organically enhance liquidity and continue positioning the portfolio for resilience and optionality.
Jack: Single family housing starts were down 14% from the prior quarter as builders remained cautious in the face of rate pressures price uncertainty and input cost volatility.
Speaker Change: These actions left us well positioned entering April we ended the quarter with $253 million in cash and $444 million of unencumbered assets. This allowed us to comfortably hold cash during the initial period of volatility.
Jack: That said mortgage credit fundamentals remain healthy borrower equity is at record levels in both delinquency and foreclosure activity remained near historic lows.
Speaker Change: Importantly, the resilience of our liability structure limited margin calls to less than $20 million during the during the volatility despite the market dislocation.
Jack McDowell: Volatility peaked in early March and then eased, following the release of a softer-than-expected February PPI and a well-received 10-year Treasury auction on March 12th. Over the course of the quarter, Treasury yields rallied 36 basis points across 2s and 10s, maintaining the year-end curve steepness of 33 basis points. Credit spreads wind during the period with investment grade and high yield corporate spreads gapping out by 14 and 60 basis points respectively. Instructure products non QM triple A spreads wine by 25 basis points while triple B's backed up by 10 In the agency space, current coupon OAS traded within an 18 basis point range versus swaps and 13 basis points versus treasuries, ending the quarter roughly unchanged.
Jack: Early April brought renewed volatility tied to the announcement of U S. Tariffs the move index surged more than 50% in just over a week and unusually treasury yields sold off amid the volatility on speculation of foreign selling and proportionate unwise of Levered basis trades credit spreads widened across both corporate.
Speaker Change: By mid to late April we began selectively adding agency MBS exposure at attractive entry points. However, we remain cautious and expect a relatively high bar for capital deployment, given the ongoing uncertainty and current macro environment.
Jack: And structured product markets, while volatility has since moderated forecast have generally shifted to reflect lower growth expectations and increased inflation risk for the balance of the year.
Speaker Change: As we mentioned last quarter, our focus remains on constructing a durable portfolio that supports attractive risk adjusted returns through cycles agency MBS and MSR has remained areas of emphasis complementing our core credit related loan investments, we continue to evaluate non QM and <unk> loans. However, we anticipate.
Jack: Amid this backdrop our season re performing loan portfolio, which comprises the majority of our GAAP assets continued to perform in line with expectations serious delinquencies were stable at eight 9% and prepayments tick down to five 5%.
Speaker Change: Any near term investments being opportunistic in nature, given our stated portfolio objectives, we continue to recycle capital in our short duration residential transition loan book and intent and intend to maintain that allocation as a component of our strategy moving forward.
Jack McDowell: Housing conditions continue to moderate. National home price growth in February was 3.9% year over year, with markets in Texas and Florida flat to down, while Northeast cities, along with Chicago and Cleveland, posting stronger gains in the 6 to 8% range. Resale inventory rose 20% year over year, but remains roughly 46% below pre-pandemic levels. Affordability remains challenged, with 30-year mortgage rates averaging around 7% throughout the quarter based on bank rate statistics. Existing home sales declined to a 4 million unit annualized pace, marking the slowest first quarter print since 2009. Single-family housing starts were down 14% from the prior quarter, as builders remained cautious in the face of rate pressures, price uncertainty, and input-caused volatility.
Jack: Our Palisades Advisory services asset management team remained focus on integrating the portfolio into our systems with an emphasis on driving positive outcomes in the loan book.
Speaker Change: This was a strong quarter, we deployed capital tactically into accretive investments raised cash organically and significantly improve the flexibility of our funding stack all of which helped us navigate april's volatility and positions us well going forward as always we remain focused on disciplined risk management and thoughtful.
Jack: Our book value increased seven 4% during the quarter largely driven by compression performing by yield compression in performing loans, which was partially offset by wider yields in the nonperforming loan cohort yield.
Jack: Yields on securitized debt were largely unchanged as spreads widened rapidly in the last week of March neutralizing much of the rate rally during the quarter.
Speaker Change: Full portfolio construction that concludes our remarks, we'll now open the line for questions.
Jack: We continue to deploy capital in a deliberate and disciplined manner in light of the macro backdrop, we've built additional liquidity and positioned our portfolio to withstand volatility spread widening and funding chalks. If they were to emerge importantly, this should also allow us to be opportunistic during periods of market does.
Speaker Change: Thank you ladies and gentlemen, the floor is now open for questions. If you do have a question. Please press star one on your telephone keypad at this time again that star one if you do have a question or comment please hold as we poll for questions.
Jack McDowell: That said, mortgage credit fundamentals remain healthy, borrower equity is at record levels, and both delinquency and foreclosure activity remain near historic lows.
Speaker Change: And we will take our first question from Doug Harter from UBS. Please go ahead Doug.
Jack: Location.
Jack: During the quarter, we settled a $288 million D SCR securitization and purchased $149 million of specified pools. We also closed $100 million of short duration residential transition loans and committed to another $32 million for settlement in the second quarter.
Jack McDowell: Early April brought renewed volatility tied to the announcement of U.S. tariffs. The MOVE index surged more than 50% in just over a week, and unusually, Treasury yields sold off amid the volatility on speculation of foreign selling and purported unwinds of levered basis trades. Credit spreads wind across both corporate and structured product markets. While volatility has since moderated, forecasts have generally shifted to reflect lower growth expectations and increased inflation risk for the balance of the year. Amid this backdrop, our seasoned, re-performing loan portfolio, which comprises the majority of our GAAP assets, continue to perform in line with expectations.
Doug Harter: Thanks, just first for clarification. When you said book value was flat to slightly down.
Speaker Change: So far in the second quarter just ended.
Doug Harter: Just put some numbers around what what slightly down might mean.
Jack: Our team continues to actively evaluate MSR opportunities with potential for us to execute in that sector. Later in 2025, as a way to generate attractive returns while simultaneously helping to balance the duration risk in other parts of the portfolio.
Speaker Change: I think as of Tuesday, Doug is down about 40 basis points.
Doug Harter: Great.
Speaker Change: Super helpful.
Doug Harter: And then.
Speaker Change: I guess, how should we think about the timing to deploy.
Jack: As mentioned by Phil and Subra some of the quarter's most impactful activity was on the liability side.
Doug Harter: That extra.
Speaker Change: 187 million.
Speaker Change: Investment capital that you've freed up with the re securitization.
Jack: We refinanced two structured repo lines with a combined capacity of more than $610 million extending the maturities by 18 to 24 months, while lowering costs and securing mostly fixed rate non mark to market terms. This unlock more than $100 million of investable cash at attractive rates.
Speaker Change: And then with.
Speaker Change: It kind of with that in the earnings power you delivered this quarter how are you thinking about the dividend.
Jack McDowell: Series delinquencies were stable at 8.9% and prepayments ticked down to 5.5%. Our Palisades Advisory Services Asset Management Team remained focused on integrating the portfolio into our systems with an emphasis on driving positive outcomes in the loan book. Our book value increased 7.4% during the quarter, largely driven by yield compression in performing loans, which was partially offset by wider yields in the non-performing loan cohort. Yields on securitized debt were largely unchanged as spreads wined rapidly in the last week of March, neutralizing much of the rate rally during the quarter. We continue to deploy capital in a deliberate and disciplined manner.
Speaker Change: Yes, so I can talk quickly about the deployment of the capital. So I would say up to this point, we've probably deployed about a 3rd% to 40% of it.
Jack: I'm going to pause briefly and ask that you turn your attention to page 16 of our investor presentation.
Speaker Change: Like we said in the prepared remarks, I mean, the bar for capital deployment in this environment certainly on the credit side is somewhat high our focus is.
Jack: Here, we added a supplemental slide that walks through a series of transactions. We completed in March as part of these transactions, we exercised our redemption rights on all $312 million of its outstanding Securities tied to our seven non remic securitizations.
Speaker Change: Right now building up that liquidity bucket, we think thats, an important component of our both near term and long term strategy. So we have been deploying that into agency MBS, we see the relative value. There in attractive. We also see based on how we're hedging out the duration risk that helping with our book value volatility.
Jack: These deals collateralized by $646 million of seasoned loans.
Jack: Significant embedded equity over the years as senior bonds that pay down and loan performance improved.
Speaker Change: So in the near term that is our focus we were trying to predict how long it would take to deploy <unk>.
Jack McDowell: In light of the macro backdrop, we have built additional liquidity and positioned our portfolio to withstand volatility, spread widening and funding shocks if they were to emerge. Importantly, this should also allow us to be opportunistic during periods of market dislocation.
Jack: We refinance those loans into two new securitizations totaling $517 million in senior bonds, one remic and one non remic transaction further enhancing the cash flow profile of our retained interest in releasing $187 million of cash for reinvestment.
Speaker Change: Like I said, we're probably a 3rd% to 40% of it allocated up at this point and we would tactically look to deploy the remainder.
Speaker Change: Subject to cash reserves in that kind of stuff over the next four to eight weeks.
Jack McDowell: During the quarter, we settled a $288 million DSCR securitization and purchased $149 million of specified pools. We also closed $100 million of short-duration residential transition loans and committed to another $32 million for settlement in the second quarter. Our team continues to actively evaluate MSR opportunities with potential for us to execute in that sector later in 2025, as a way to generate attractive returns, while simultaneously helping to balance the duration risk in other parts of the portfolio.
Speaker Change: Doug This is still about the dividend that's something that we'll probably start thinking about in the next month or so and as you know there is a variety of factors that go into that in terms of what could we look at for our board determination, but I think it is.
Jack: As you can see from the middle box on the slide while our overall cost of funds went down the additional debt will increase our annual run rate interest expense by approximately $11 million.
Jack: That implies our breakeven return on capital is approximately five 8%, meaning any incremental return generated in excess of five 8% should be accretive to earnings.
Speaker Change: The mature at this point for us to think about that given the market volatility we will see how things play out over the next month or so.
Speaker Change: Great. Thank you guys.
Speaker Change: Thank you and we will take our next question from Trevor Cranston from citizens. Please go ahead Trevor.
Jack: Overall, we view these transactions as foundational they reflect our ability to generate capital organically enhance liquidity and continue positioning the portfolio for resilience and optionality.
Jack McDowell: As mentioned by Phil and Subra, some of the quarter's most impactful activity was on the liabilities. We refinanced two structured repo lines with combined capacity of more than $610 million, extending the maturities by 18 and 24 months while lowering costs and securing mostly fixed-rate, non-market-to-market terms. This unlocked more than $100 million of investable cash at attractive rates.
Trevor Cranston: Hey, Thanks, good morning.
Speaker Change: Okay.
Speaker Change: Looking at the third party business.
Jack: These actions left us well positioned entering April we ended the quarter with $253 million in cash and $444 million of unencumbered assets. This allowed us to comfortably hold cash during the initial period of volatility.
Speaker Change: The growth seems like its been pretty consistent over the last several quarters.
Speaker Change: Can you talk about the outlook for that business in terms of.
Speaker Change: The growth potential over.
Speaker Change: Over the next year or two.
Speaker Change: Sure.
Jack McDowell: I'm going to pause briefly and ask that you turn your attention to page 16 of our investor presentation. Here, we added a supplemental slide that walks through a series of transactions we completed in March. As part of these transactions, we exercised our redemption rights on all 312 million of outstanding securities tied to our seven non-REMIC securitization. These deals, collateralized by $646 million of season loans, have built significant embedded equity over the years as senior bonds have paid down and loan performance improved. We refinanced those loans into two new securitizations, totaling $517 million in senior bonds, one REMIC and one non-REMIC transaction, further enhancing the cash flow profile of our retained interest and releasing $187 million of cash for reinvestment.
Jack: Importantly, the resilience of our liability structure limited margin calls to less than $20 million during the during the volatility despite the market dislocation.
Speaker Change: Look I mean, we're we believe that Theres, a fair amount of growth potential there.
Speaker Change: So we're bullish on this but it depends on a variety of factors as third parties continue to purchase loans I mean, we provided about a valuable service to them in terms of what I would call.
Jack: By mid to late April we began selectively adding agency MBS exposure at attractive entry points. However, we remain cautious and expect a relatively high bar for capital deployment, given the ongoing uncertainty and current macro environment as.
Speaker Change: The blocking and tackling aspect of it and so we think there is still upside as we continue to bring in new clients.
Jack: As we mentioned last quarter, our focus remains on constructing a durable portfolio that supports attractive risk adjusted returns through cycles agency MBS and MSR has remained areas of emphasis complementing our core credit related loan investments, we continue to evaluate non QM and <unk> loans. However, we anticipate.
Speaker Change: But that is something thats.
Speaker Change: Just going to depend on kind of where we see the the.
Speaker Change: The mortgage market go, but as both growing within existing clients and we're adding some new clients.
Speaker Change: Got it okay. That's helpful.
Speaker Change: And then on the.
Speaker Change: The book value performance.
Jack: Any near term investments being opportunistic in nature, given our stated portfolio objectives, we continue to recycle capital in our short duration residential transition loan book and intent.
Speaker Change: To start with second quarter.
Have you guys basically seeing credit spreads fully recover from the widening in the early part of April or can you just take us through kind of the moving parts are.
Jack McDowell: As you can see from the middle box on the slide, while our overall cost of funds went down, the additional debt will increase our annual run rate interest expense by approximately $11 million. That implies our breakeven return on capital is approximately 5.8%, meaning any incremental return generated in excess of 5.8% should be accretive to earnings.
Jack: Turn to to maintain that allocation as a component of our strategy moving forward.
Speaker Change: The fleet portfolio.
Speaker Change: Yes, so we've seen.
Jack: This was a strong quarter, we deployed capital tactically into accretive investments raised cash organically and significantly improve the flexibility of our funding stack all of which helped us navigate april's volatility and positions us well going forward as always we remain focused on disciplined risk management and thoughtful.
Speaker Change: It's a good question I mean from a credit spread perspective, we have seen just a.
Speaker Change: April through today generally some widening in spreads we've seen it retraced from the Wides, but about halfway I would say.
Speaker Change: Does that makes sense.
Jack McDowell: Overall, we view these transactions as foundational. They reflect our ability to generate capital organically, enhance liquidity, and continue positioning the portfolio for resilience and optionality. These actions left us well-positioned entering April. We ended the quarter with $253 million in cash and $444 million of unencumbered assets. This allowed us to comfortably hold cash during the initial period of volatility. Importantly, the resilience of our liability structure limited margin calls to less than 20 million during the during the volatility, despite the market dislocation. By mid to late April, we began selectively adding agency MBS exposure at attractive entry points.
Speaker Change: Yes.
Jack: Full portfolio construction that concludes our remarks, we will now open the line for questions.
Speaker Change: So.
Speaker Change: The remainder of.
Speaker Change: How do you get to a flat book value is that coming from.
Jack: Thank you ladies and gentlemen, the floor is now open for questions. If you do have a question. Please press star one on your telephone keypad at this time again that star one if you do have a question or comment please hold as we poll for questions.
Speaker Change: The interest rate component of things yes.
Speaker Change: Yes, no. So you have to remember when we our book value was impacted by both our assets and liabilities. So the change in book value is going to also be affected by how rates move across the curve. So our some of our securitized debt is shorter duration and our loans are longer duration the way that we.
Speaker Change: And we will take our first question from Doug Harter from UBS. Please go ahead Doug.
Speaker Change: Get back to a flat book value quarter.
Doug Harter: Thanks, just first for clarification. When you said book value was flat to slightly down.
Speaker Change: Second quarter quarter to date basically.
Speaker Change: Deterioration in loan value from wider credit spreads has also been offset by the change in the securitized debt as well.
Speaker Change: So far in the second quarter just ended.
Speaker Change: Just put some numbers around what what slightly down might mean.
Jack McDowell: However, we remain cautious and expect a relatively high bar for capital deployment given the ongoing uncertainty in current macro environment.
Speaker Change: I think as of Tuesday, Doug is down about 40 basis points.
Speaker Change: They are basically offsetting each other.
Speaker Change: Got you, Okay that makes sense, thanks, and just one thing I would point out too well.
Speaker Change: Great.
Jack McDowell: As we mentioned last quarter, our focus remains on constructing a durable portfolio that supports attractive risk-adjusted returns through cycles. Agency MBS and MSRs remain areas of emphasis, complementing our core credit-related loan investments. We continue to evaluate non-QM and DSCR loans. However, we anticipate any near-term investments being opportunistic in nature, given our stated portfolio objectives. We continue to recycle capital in our short-duration residential transition loan book and intend to maintain that allocation as a component of our strategy moving forward.
Speaker Change: Super helpful.
Speaker Change: And then.
Speaker Change: We've tried to add additional disclosure and the investor presentation. So we put a couple of new slides in there that provide additional detail with respect to our loan and securitized debt portfolio. So hopefully having that information will help.
Speaker Change: I guess, how should we think about the timing to deploy.
Speaker Change: That that extra.
Speaker Change: $187 million of investment capital that you've freed up with the re securitization.
Speaker Change: And then with.
Speaker Change: Kind of with that in the earnings power you delivered this quarter how are you thinking about the dividend.
Speaker Change: The market get a sense of how the book value is moving into different components, because it is a nuance portfolio.
Speaker Change: Yes, so I can talk quickly about the deployment of the capital I would say up to this point, we probably deployed about a 3rd% to 40% of it.
Speaker Change: Got it okay. Thank you.
Speaker Change: Thank you once again Thats star one if you do have a question or comment.
Speaker Change: Like we said in the prepared remarks, I mean, the bar for capital deployment in this environment certainly on the credit side is somewhat high our focus is.
Jack McDowell: This was a strong quarter. We deployed capital tactically into accretive investments, raised cash organically, and significantly improved the flexibility of our funding stack, all of which helped us navigate April's volatility and positions as well going forward. As always, we remain focused on disciplined risk management and thoughtful portfolio construction.
Bob: And we'll take our next question from Bose George from <unk>. Please go ahead Bob.
Speaker Change: Hey, guys good morning.
Speaker Change: In terms of the book value going forward after the hedges roll off in the second quarter. What is your portfolio duration is going to look like.
Speaker Change: Right now building up that liquidity bucket, we think thats, an important component of our both near term and long term strategy. So we have been deploying that into agency MBS, we see the relative value there being attractive. We also see based on how we're hedging out the duration risk that helping with our book value volatility.
Yes, Bose keep in mind.
Speaker Change: Notwithstanding what we're doing on the agency side and in the first quarter that was relatively new but we hedge the interest at floating rate interest rate risk on our short duration repo. So even the hedges that we have on with our swaps in our cap and everything we have on now that really.
Unknown Executive: That concludes our remarks.
Unknown Executive: We'll now open the line for questions. Thank you.
Unknown Executive: Ladies and gentlemen, the floor is now open for questions. If you do have a question, please press star one on your telephone keypad at this Again, that's star one if you do have a question or. Please hold as we poll for questions.
Speaker Change: <unk>.
Speaker Change: So in the near term that is our focus we were trying to predict how long it would take to deploy.
Speaker Change: So, we're probably a 3rd% to 40% of it allocated up at this point and we would tactically look to deploy the remainder.
Speaker Change: Isn't there to protect book value with the way that we sort of look at things is when we buy loans, we securitize them.
Douglas Harter: And we'll take our first question from Doug Harder from UBS. Please go ahead, Doug. Thanks.
Speaker Change: Subject to cash reserve that cost itself over the next four to eight weeks.
Speaker Change: As an effect locking in our net interest margin and providing a hedge for our assets now that now that we consolidate the loans or securitizations on our balance sheet that does create some book value volatility, but when the way that we're looking at our hedge strategy is when those hedges roll off.
Douglas Harter: Just first for clarification, when you said book value was flat to slightly down, you know, so far in the second quarter, just can you just put some numbers around what what slightly down might mean? I think as of Tuesday, Doug is down about 40 basis points. Great, that's super helpful.
Speaker Change: Doug This is Phil about the dividend that's something that we will probably start thinking about in the next month or so and as you know theres a variety of factors that go into that in terms of what do we look at for our board determination, but I think it's just premature at this point for us to think about that given the market volatility we will see how thing.
Speaker Change: <unk> that will increase our exposure to our floating rate liabilities. It really won't have much impact at all on the volatility in our book value.
Speaker Change: <unk> play out over the next month or so.
Phil Kardis: You know, and then, you know, I guess, how should we think about the timing to deploy that, that extra, you know, 187 million of investment capital that you freed up with the re-securitization? You know, and then with, you know, kind of with that and the earnings power you delivered this quarter, you know, how are you thinking about the dividends? Yeah, so I can talk quickly about the deployment of the capital. So I would say up to this point, we probably deployed about a third of 40% of it. You know, like we said, in the prepared remarks, I mean, the bar for capital deployment in this environment, certainly on the credit side, is somewhat high.
Speaker Change: Great. Thank you guys.
Speaker Change: Thank you and we will take our next question from Trevor Cranston from citizens. Please go ahead Trevor.
Speaker Change: The way that we're looking at.
Speaker Change: Just to expand on that a little bit because the book value element is something that we are focused on from a portfolio construction standpoint, we're not necessarily looking to.
Trevor Cranston: Hey, Thanks, good morning.
Speaker Change: Looking at the third party business.
Hedge our book value risk and incur those costs given the way that we finance our portfolio, but we do believe that through adding an agency component, adding msr's that is a natural way, where we can add yield generating assets that will balance the.
Speaker Change: The growth seems like its been pretty consistent over the last several quarters can you talk about the outlook for that business in terms of.
Speaker Change: The growth potential.
Speaker Change: Over the next year or two thanks.
Speaker Change: Sure.
Speaker Change: Look I mean, we're we believe that there is a fair amount of growth potential there.
Speaker Change: <unk> volatility and our credit book.
Speaker Change: So we're bullish on this but it depends on a variety of factors as third parties continue to purchase loans I mean, we provided about a valuable service to them in terms of what I would call.
Speaker Change: Okay, great. Thanks, and then just in terms of the deployable capital there was $187 million was there. Another number you mentioned earlier in the call I thought it was a $100 million, but yeah. Just wanted to clarify if it was just that 187.
Phil Kardis: Our focus is, you know, right now building up that liquidity bucket. We think that's an important component of our both near term and long term strategy. So we have been deploying that into agency MBS. We see the relative value there being attractive. We also see, you know, based on how we're hedging out the duration risk, that helping with our book value volatility. So in the near term, that is our focus. If we were trying to predict how long it would take to deploy, you know, like I said, we're probably, you know, a third to 40% of it allocated up to this point.
Speaker Change: The blocking and tackling aspect of it and so we think there is still upside as we continue to bring in new clients.
Speaker Change: Or is there another number as well.
Speaker Change: Yes, so there were multiple.
Speaker Change: But that is something thats.
Speaker Change: Activities are a series of transactions that occurred in the first quarter.
Speaker Change: Just going to depend on kind of where we see the.
Speaker Change: In addition to the re securitization of our non remic transactions, that's a $187 million. We also refinanced two structured repo facilities.
Speaker Change: The mortgage market go, but as both growing within existing clients and where we're adding some new clients.
Speaker Change: Got it okay. That's helpful.
Speaker Change: And then on the.
Speaker Change: And we lowered our cost of funds in those facilities, we extended the term to 18 and 24 months and collectively we were able to extract an additional 100 approximately $100 million in investable cash.
Phil Kardis: And we would tactically look to deploy the remainder, subject to cash reserves and that kind of stuff over the next, you know, four to eight weeks.
Speaker Change: The book value performance.
Speaker Change: Starting with second quarter.
Speaker Change: Yeah.
Speaker Change: Have you guys basically seeing credit spreads fully recover from the widening in the early part of April or can you just take us through kind of the moving parts are.
Phil Kardis: And Doug, this is still about the dividend. You know, that's something that, you know, we'll probably start thinking about in the next month or so. And as you know, there's a variety of factors that go into that in terms of what we look at for a board determination. But I think it's just premature at this point for us to think about that given the market volatility. We'll see how things play out over the next month.
Speaker Change: Okay, and so should we see that $100 million is kind of fully deployable. So just really 287 that you can kind of invest.
Speaker Change: So the flex portfolio. Thanks.
Speaker Change: So we've seen yes, it's a good question I mean from a credit spread perspective, we have seen.
Speaker Change: That's right.
Speaker Change: Okay, Okay, great. Thanks.
Speaker Change: April through today generally some widening in spreads we've seen it retraced from the Wides, but about halfway I would say.
Speaker Change: Thank you and we will take our next question from Eric Hagen from BTG. Please go ahead Eric.
Unknown Executive: Great, thank you guys.
Trevor Cranston: Thank you and we'll take our next question from Trevor Cranston from Citizens. Please go ahead Trevor. Hey, thanks. Good morning. You know, looking at the third party business, the growth seems like it's been, you know, pretty consistent over the last several quarters.
Eric Hagen: Hey, Thanks, good morning, guys.
Speaker Change: Does that makes sense.
Speaker Change: What's the right way to maybe think about the sensitivity to higher delinquency rates from here between the <unk> portfolio.
Speaker Change: Yes.
Speaker Change: So.
Speaker Change: The remainder of.
Speaker Change: How you get to a flat book value is that coming from.
Speaker Change: Sounds like the non QM and some of the newer issue loans and other opportunities you've talked about I mean on the one hand like the RPI portfolios conditioned on being delinquent right and the DQ rate is already relatively high.
Speaker Change: The interest rate component of things.
Speaker Change: No. So you have to remember when we our book value was impacted by both our assets and liabilities. So the change in book value is going to also be affected by how rates move across the curve. So are some of our securitized debt is shorter duration and our loans are longer duration.
Phil Kardis: Could you talk about the outlook for that business in terms of, you know, the growth potential over the next year or two? Thanks. Look, I mean, we're, you know, we believe that there's a fair amount of growth potential there. It's, so we're bullish on this. But, you know, it depends on a variety, you know, of factors as, you know, third parties continue to purchase loans. I mean, we provide a valuable service to them in terms of what I would call the blocking and tackling aspect of it. And so, you know, we think they're still upside as we continue to bring in new clients.
Speaker Change: In the non QM is starting from a lower point so like what are your expectations for.
Speaker Change: How each of those asset classes could respond to higher delinquency rates from here.
Speaker Change: Yes, that's a great question and we obviously being a credit oriented shop, we think about that all the time and I actually wouldnt characterize the delinquencies in the <unk> portfolio has been high for that type of product I think if you look across the <unk> universe.
Speaker Change: We get back to a flat book value quarter in the second quarter quarter to date.
Speaker Change: Basically the deterioration in loan value from wider credit spreads has also been offset by the change in the securitized debt as well.
Speaker Change: Right around that 10% level is pretty pretty average and I would say just looking at the trends in our portfolio that level has been very stable over time.
Speaker Change: So they are basically offsetting each other.
Speaker Change: Got you, Okay that makes sense.
Phil Kardis: But, you know, that is something that's, you know, just going to depend on kind of where we see the mortgage market go. But it's both growing within existing clients and we're adding some new clients. Got it. Okay, that's helpful.
Speaker Change: Just one thing I would point out too.
Speaker Change: We've tried to add additional disclosure and the investor presentation. So we put a couple of new slides in there that provide additional detail with respect to our loan and securitized debt portfolio. So hopefully having that information will help.
Speaker Change: Keep in mind. These are very unique borrower cohorts they've got a lot of equity they have been in the house for over 17 years Oftentimes you have life.
Speaker Change: Life events that caused delinquencies for a month or two at a time. It does require some degree of engagement by the Servicers and that's sort of where our Palisades asset management capability comes into play just making sure that when there is some sort of a hardship.
Trevor Cranston: And then on the platform value performance in the start of the second quarter Yeah, have you guys basically seen credit spreads fully recover from from the widening in the early part of April? Or can you just take us through kind of moving parts of the flat book value? Thanks. Yeah, so we've seen it's a good question. I mean, from a credit spread perspective, we have seen just April through today, generally some widening in spreads. We've seen it retraced from the wides, but about halfway, I would say. Did that make sense? Yeah. So the remainder of how you get to a flat book value is that coming from The interest rate component of things.
Speaker Change: No.
Speaker Change: The market get a sense of how the book value is moving in the different components of it as a new loss portfolio.
Speaker Change: Got it okay. Thank you.
Speaker Change: Oftentimes temporary that Theyre, making right party contact with these borrowers understanding what they are situational profile is and then working collaboratively to try to remedy that.
Speaker Change: Thank you once again Thats star one if you do have a question or comment.
Bose George: And we will take our next question from Bose George from <unk>. Please go ahead Bob.
Speaker Change: And then on the non QM side.
Bose George: Hey, guys good morning.
Speaker Change: The nice thing about those portfolios. These days just given the amount of equity the credit quality of those portfolios. We have seen just in general non QM delinquencies starting to trend upwards. So its definitely something that we're monitoring not just in our portfolio, but just across the market in general.
Speaker Change: In terms of the book value going forward after the hedges roll off in the second quarter.
Bose George: What is your portfolio duration is going to look like.
Bose George: Yes, Bose keep in mind.
Bose George: Notwithstanding what we're doing on the agency side and in the first quarter that was relatively minute, but we hedge the.
Speaker Change: As we think about deployment of capital.
Bose George: Floating rate interest rate risk on our short duration repo so even the hedges that we have with our swaps in our cap and everything we have on now that really isn't there to protect book value with the way that we sort of look at things is when we buy loans, we securitize them that is in effect.
Phil Kardis: Yeah, no. So you have to remember when we, our book value is impacted by both our assets and liabilities. So the change in book value is going to also be affected by how rates move across the curve. So some of our securitized debt is shorter duration and our loans are longer duration. The way that we get back to a flat book value quarter to, you know, in the second quarter, to date, basically the deterioration of loan value from wider credit spreads has also been offset by the change in the securitized debt as well. So they're basically offsetting each other.
Speaker Change: And just from a sensitivity standpoint credit risk is the risk that we take and that's why we have an asset management team. That's why we have systems and infrastructure in place to ensure that we are managing that risk appropriately but.
Speaker Change: Right now just given the equity in the market given the credit fundamentals that we're seeing across mortgage finance.
Bose George: Locking in our net interest margin and providing the hedge for our assets now that now that we consolidate the loans securitizations on our balance sheet that does create some book value volatility, but when the the way that we're looking at our hedge strategy is when those hedges roll off.
Speaker Change: We don't have a high degree of concern that we're going to have significant risk in our portfolio with respect to an increase in the.
Speaker Change: Defaults and delinquencies.
Speaker Change: That's really good color I appreciate that.
Bose George: That will increase our exposure to our floating rate liabilities. It really won't have much impact at all on the volatility in our book value.
Speaker Change: You mentioned the two two new loan loan facilities I think I heard you say.
Phil Kardis: Yeah, gotcha. Okay, that makes sense. Thank you.
Phil Kardis: And just one thing I would point out too, we tried to add additional disclosure in the investor presentation. So we put a couple of new slides in there that provide additional detail with respect to our loan and securitized debt portfolio. So hopefully having that information will help, you know, the market get a sense of the book value is moving into different components, because it is a nuanced portfolio. Yeah, got it. Okay. Thank you. Once again, that's star one.
Speaker Change: What's the advance rate on those facilities and are those specifically for the subordinate.
Bose George: And the way that we're looking just like just to expand on that a little bit because the book value element is.
Speaker Change: Securities that you guys are 10, and the counterparty on those facilities are those banks or nonbanks.
Bose George: Our focused on from a portfolio construction standpoint, we're not necessarily looking to you know.
Speaker Change: Yes, so there are structural repo facilities.
Speaker Change: Really not going to give out the advance rate on these assets are a lot of our derivatives of retained position. So early the advance rate is sort of does it.
Bose George: Hedge our book value risk and incur those costs given the way that we finance our portfolio, but we do believe that through adding an agency component as adding msr's that is a natural way, where we can add yield generating assets that will balance the dura.
Speaker Change: Make a whole lot of sense, unless you understand the underlying collateral and those were done through banking relationships.
Speaker Change: Got it.
Boze George: If you do have a question or comment, then we'll take our next question from Boze George from KBW. Please go ahead. Good morning.
Speaker Change: Are there margin call holidays, such on those structures with us.
Bose George: Ration volatility and our credit book.
Speaker Change: Yes, that's a great question. So we extended the terms of those are non mark to market or limited mark to market facilities, which that actually in the prepared remarks. It was a big push that we have and even during the April volatility our margin calls were limited to less than $20 million during that entire time frame, which is really a test.
Speaker Change: Okay, great. Thanks, and then just in terms of the deployable capital there was $187 million was there. Another number you mentioned earlier in the call I thought it was a $100 million, but yes, I just wanted to clarify if it was just that 187.
Phil Kardis: In terms of the book value going forward after the hedges roll off in the second quarter, you know, what is your portfolio duration going to look like? Yeah, both keep in mind, notwithstanding what we're doing on the agency side, and in the first quarter, that was relatively, you know, minute. But we hedge the interest floating rate interest rate risk on our short duration repo. So even the hedges that we have on with our swaps and our cap and everything we have on now, that really isn't there to protect book value. The way that we sort of look at things is when we buy loans, we securitize them, that is in effect, locking in our net interest margin and providing the hedge for our assets.
Bose George: Or is there another number as well.
Bose George: Yes, so there were multiple.
Bose George: Activities are a series of transactions that occurred in the first quarter.
Speaker Change: But to the efforts of gone into structuring or different financing lines.
Bose George: In addition to the re securitization of our non remic transactions, that's a $187 million. We also refinanced two structured repo facilities.
Speaker Change: Great. Good stuff. Thank you guys so much.
Speaker Change: Once again Thats Star one is you do have a question or comment.
Speaker Change: Okay.
Bose George: And we lowered our cost of funds in those facilities, we extended the term to 18 and 24 months and collectively we were able to extract an additional 100 approximately $100 million in investable cash.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: And there appear to be no further questions at this time I'll turn the floor to fill Carter for closing remarks.
Phil Kardis: Now that now that we consolidate the loans and securitizations on our balance sheet, that does create some book value volatility. But when the way that we're looking at our hedge strategy is when those hedges roll off, that will increase our exposure to our floating rate liabilities, it really won't have much impact at all on the volatility in our book value. And the way that we're looking, just like just to expand on that a little bit, because the book value element is something that we are focused on from a portfolio construction standpoint, we're not necessarily looking to, you know, hedge our book value risk and incur those costs, given the way that we finance our portfolio.
Speaker Change: Okay, and so should we see that $100 million is kind of fully deployable. So just really 287 that you can kind of invest.
Bill Credits: Hi, This is bill credits and I want to thank everyone for participating in our first quarter 2025 earnings call and we look forward to speaking to you.
Bose George: That's right.
Bose George: Okay, Okay, great. Thanks.
Speaker Change: A couple of months for our second quarter earnings call. Thank you.
Speaker Change: And we will take our next question from Eric Hagen from BTG. Please go ahead Eric.
Speaker Change: Thank you ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation you may disconnect. Your lines at this time and have a great day.
Eric Hagen: Hey, Thanks, good morning, guys.
Eric Hagen: What's the right way to maybe think about the sensitivity to higher delinquency rates from here between the RPM portfolio. It sounds like the non QM and some of the newer issue loans and other opportunities you've talked about I mean on the one hand like the RPM portfolio is conditioned on being delinquent right and the DQ rate is already relatively high.
Eric Hagen: In the non QM is starting from a lower point so like what are your expectations for.
Phil Kardis: But we do believe that through adding an agency component, adding MSRs, that is a natural way where we can add yield generating assets that will balance the duration volatility in our, you know, credit book.
Eric Hagen: How each of those asset classes could respond to higher delinquency rates from here.
Eric Hagen: Yeah, No. That's a great question and we obviously being a credit oriented shop, we think about that all the time and I actually wouldnt characterize the delinquencies in the <unk> portfolio has been high for that type of product I think if you look across the <unk> universe.
Phil Kardis: Okay, great. Thanks. And then just in terms of the deployable capital, you know, there was 187 million. You know, was there another number you mentioned earlier in the call? I thought it was 100 million. But yeah, just wanted to clarify if it was just that 187 or was there another? Yeah, so there were multiple activities or a series of transactions that occurred in the first quarter. In addition to the re-securitization of our non-REMIT transactions, that's the $187 million, we also refinanced two structured repo facilities. And we lowered our cost of funds in those facilities. We extended the term to 18 and 24 months.
Eric Hagen: Right around that 10% level is pretty pretty average and I would say just looking at the trends in our portfolio that level has been very stable over time.
Eric Hagen: Keep in mind. These are very unique borrower cohorts, they've got a lot of equity they've been in the house for over 17 years Oftentimes you have life events that cause delinquencies for a month or two at a time. It does require some degree of engagement by the Servicers and that's sort of where our palisades asset.
Eric Hagen: Agent capability comes into play just making sure that when there is some sort of a hardship.
Phil Kardis: And collectively, we were able to extract an additional approximately $100 million in investable cash. Okay, and so should we see that 100 million is, you know, kind of fully deployable, so it's really 287 that you can kind of invest? That's right. Okay, okay, great. Thank you.
Eric Hagen: Oftentimes temporary that Theyre, making right party contact with these borrowers understanding what they're situational profile is and then working collaboratively to try to remedy that.
Eric Hagen: And then on the non QM side.
Eric Hagen: The nice thing about those portfolios. These days just given the amount of equity the credit quality of those portfolios. We have seen just in general non QM delinquencies starting to trend upwards. So its definitely something that we're monitoring.
Eric Hagen: And we'll take our next question from Eric Hagen from BTIG. Please go ahead, Eric. Hey, thanks. Good morning, guys.
Eric Hagen: What's the right way to maybe think about the sensitivity to higher delinquency rates from here, you know, between the RPL portfolio and things like the non-QM and some of the newer issue loans and other opportunities you talked about? I mean, on the one hand, like the RPL portfolio is conditioned on being delinquent, right? And the DQ rate is already relatively high. And the non-QM is starting from a lower point. So like, what are your expectations for How each of those asset classes could respond to higher delinquency rates from here. Yeah, that's a great question. And we, I mean, obviously, being a credit oriented shop, we think about that all the time.
Eric Hagen: In our portfolio, but just across the market in general as we think about deployment of capital.
Eric Hagen: And just from a sensitivity standpoint credit risk is the risk that we take and that's why we have an asset management team. That's why we have systems and infrastructure in place to ensure that we are managing that risk appropriately, but right now just given the equity in the market given the <unk>.
Eric Hagen: The fundamentals that we're seeing across mortgage finance.
Phil Kardis: And I actually wouldn't characterize the delinquencies in the RPL portfolio as being high for that type of product. I think, you know, if you look across the RPL universe, you know, right around that 10% level is pretty, pretty average. And I would say just looking at the trends in our portfolio, that level has been, you know, very stable over time. Keep in mind, these are very unique borrower cohorts. They've got a lot of equity. They've been in the house for over 17 years. Oftentimes, you have, you know, life events that cause delinquencies for a month or two at a time.
Eric Hagen: We don't have a high degree of concern that we're going to have significant risk in our portfolio with respect to an increase in <unk>.
Eric Hagen: Defaults and delinquencies.
Speaker Change: That's really good color I appreciate that.
Speaker Change: You mentioned the two two new loan loan facilities, if I heard you say.
Speaker Change: What's the advance rate on those facilities and are those specifically for the subordinate.
Speaker Change: Securities that you guys retain and the counterparty on those facilities are those banks and Nonbanks.
Speaker Change: Yes, so there are structural repo facilities.
Speaker Change: Not going to give out the advance rate on these assets are a lot of our derivatives of retained position. So early the advance rate is sort of does it make.
Phil Kardis: It does require some degree of engagement by the servicers. And that's sort of where our Palisades asset management capability comes into play, just making sure that, you know, when there is some sort of a hardship, oftentimes temporary, that they're making right party contact with these borrowers, understanding what their situational profile is, and then, you know, working collaboratively to try to remedy that. And then on the non-QM side, you know, the nice thing about those portfolios these days, just given the amount of equity, the credit quality in those portfolios, we have seen just in general non-QM delinquencies starting to trend upward.
Speaker Change: Make a whole lot of sense, unless you understand the underlying collateral and those were done through banking relationships.
Speaker Change: Got it.
Speaker Change: Are there margin call holidays or such on those structured repo facilities.
Speaker Change: No. That's a great question. So we extended the terms of those are non mark to market or limited mark to market facilities, which that actually in the prepared remarks. It was a big push that we have and even during the April volatility our margin calls were limited to less than $20 million during that entire time frame, which is really a testament to.
Phil Kardis: So it's definitely something that we're monitoring, not just in our portfolio, but just across the market in general, as we think about deployment of capital. And just from a sensitivity standpoint, you know, credit risk is the risk that we take. And that's why we have an asset management team. That's why we have systems and infrastructure in place to ensure that we are, you know, managing that risk appropriately. But right now, just given the equity in the market, given the credit fundamentals that we're seeing across mortgage finance, we don't have a high degree of concern that we're going to have significant risk in our portfolio with respect to an increase in defaults and delinquencies.
Speaker Change: The efforts have gone into structuring or different financing lines.
Speaker Change: Great. Good stuff. Thank you guys so much.
Speaker Change: Yeah.
Speaker Change: Once again Thats Star one if you do have a question or comment.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: And there appear to be no further questions. At this time I will turn the floor to fill Carter for closing remarks.
Bill Credits: Hi, This is bill credits and I want to thank everyone for participating in our first quarter 2025 earnings call and we look forward to speaking to you in.
Phil Kardis: That's really good color. I appreciate that. You mentioned the two new loan facilities, I think I heard you say, what's the advance rate on those facilities? And are those specifically for the subordinate securities that you guys retain? And the counterparty on those facilities? Are those banks or non banks? Yeah, so there are structured repo facilities. We're really not going to give out the advance rate on these. The assets are a lot of our derivatives are retained positions. So really, the advance rate is sort of doesn't make a whole lot of sense unless you understand the underlying collateral.
Speaker Change: A couple of months for our second quarter earnings call. Thank you.
Speaker Change: Thank you ladies and gentlemen, this does conclude today's teleconference.
Speaker Change: You for your participation you may disconnect your lines at this time.
Speaker Change: Great.
Speaker Change: [music].
Phil Kardis: And those were done, you know, through banking relationships. Got it. And are there margin call holidays or such on those structured repo facilities? Yeah, no, that's a great question. So we extended the terms and those are non-mark-to-market or limited mark-to-market facilities, which that actually in the prepared remarks, you know, is a big push that we have. And even during the April volatility, our margin calls were limited to less than $20 million during that entire time frame, which is really a testament to the efforts that have gone into structuring our different financing.
Unknown Executive: Great, good stuff. Thank you guys so much. Once again, that's star one. If you do have a question or comment...
Unknown Executive: And there appear to be no further questions at this time.
Phil Kardis: I'll turn the floor to Phil Kardis for closing.
Phil Kardis: Hi, this is Phil Crudison. I want to thank everyone for participating in our first quarter 2025 earnings call, and we look forward to speaking to you in a couple of months for our second quarter earnings call. Thank you.
Unknown Executive: Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a