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spk07: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust Second Quarter 2022 Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. If you are using speaker equipment, we do ask that you please lift the handset before making your selection. This conference is being recorded on Wednesday, August 3rd, 2022. A press release and supplemental financial presentation with New York's Mortgage Trust second quarter 2022 results was released yesterday. Both the press release and supplemental financial presentation are available on the company's website at www.nymtrust.com. Additionally, we are hosting a live webcast of today's call, which you can access in the events and presentation section of the company's website. At this time, management would like me to inform you that certain statements made during the conference call, which are not historical, may be deemed forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Although New York Mortgage Trust believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations and detailed in yesterday's press release and from time to time in companies filing with the Securities and Exchange Commission. Now, at this time, I would like to introduce Jason Serrano, CEO and President. Jason, please go ahead.
spk00: Thank you very much. Good morning. Thank you for taking the time to join our earnings call this morning. I'm here joined with Christine Nario, our CFO. We are excited to talk to you this morning about the developments in this market. We have seen the market actually transition to a buyer's market for the first time in quite some time. And we believe the construction of our balance sheet will allow us to take advantage of these latest trends. But before we get into this, let's cover our second quarter highlights. In the quarter, we incurred a loss of $0.22 per share. This was a function largely of unrealized losses that we incurred on our balance sheet resulting in a negative 0.4% loss to our book value in the quarter. Now, due to the increase of allocations to bridge loans over the course of the last 18 months, as well as holding recourse leverage below one times, we were able to limit losses given the extreme volatility that we saw in the interest rate markets. Now, after declaring a $0.10 dividend, our quarterly economic return on unappreciated book value resulted in negative 2.5%. We also, in the quarter, saw an opportunity to repurchase some of our shares, which was the first time we've done that in quite some time. We saw an opportunity to do so where we repurchased 2.8 million shares in the quarter and 0.9 million shares thereafter, slightly after the beginning of the following quarter. We're able to do so at an attractive pricing of 2.69 for the company and $2.73 per share. In the quarter, we acquired $890 million of investments. I'll be talking about how this was a tale of two quarters of activity given the latest moves. The acquisitions was highly dominated in bridge loans and also started seeing an opportunity to look to sell and monetize some of our JV positions in multifamily equity, which I'll talk about in a minute. In the quarter, we also obtained $876 million of financing, 77%, which was non-mark-to-market. This allowed us to continuously increase our mark-to-market financing on our balance sheet and also allowed us to finance some of the acquisitions we made in that quarter. Very low leverage at 0.7 times and a recourse leverage ratio and a portfolio basis at 0.6 times. $383 million of cash was held in the balance sheet, and we're expecting this number to increase over time as we are seeing opportunities to rotate our balance sheet into higher-yielding assets. At this time, I'll pass the call over to Christine to talk more thoroughly about our financials. Christine? Thank you.
spk06: Thank you, Jason. Good morning, everyone, and thank you again for being on the call. In discussing the financial results for the quarter, I will be using some of the information from the quarterly comparative financial information section included in slides 24 to 35 of the supplemental presentation. Our financial snapshot on slide 9 covers key portfolio metrics on a quarter-over-quarter comparison. The company had GAAP loss per share of 22 cents and undepreciated loss per share of 13 cents. We paid a 10 cent per common share dividend, which was unchanged from the previous quarter. GAAP book value per share was 4.06, and undepreciated book value per share ended at 4.24, down 4.7 from March 31st, and translated to a negative 2.5% economic return on undepreciated book value during the quarter. Our undepreciated book value decline during the quarter included 18 cents per share of unrealized losses primarily due to credit spread widening and increase in interest rates that resulted in a decline in the fair values of our residential loans and first-law securities we own in consolidated SLSC. Our portfolio net interest margin for the quarter was 3.48%, a decrease of 39 basis points from the previous quarter. Rising interest rates in the second quarter impacted our portfolio financing costs, resulting in an increase of 28 basis points from the prior quarter. We also experienced an 11 basis point decrease in our portfolio yield on average interest earning assets driven by a lower yield on our investment in consolidated SLSC and to a lesser extent as a result of the overall composition of our BPL bridge loan portfolio with a quarter end weighted average coupon of 8.41% down from 8.53 at March 31st. The company's recourse leverage ratio and portfolio leverage portfolio recourse leverage ratio remained low at 0.7 times and 0.6 times respectively. Slide 10 details our financial results, and slide 25 details the components of net interest income. Our portfolio net interest income increased by $1.9 million during the quarter, primarily due to the following. First, we had portfolio interest income of $61.8 million, an increase of $9.3 million as compared to the previous quarter. which is due to our continued investment in higher yielding BPL bridge loans. This increase was partially offset by an increase in portfolio interest expense of $7.4 million, primarily due to increased utilization of our warehouse facilities to fund purchases of single family investments during the quarter. Total net interest income, which includes interest expense related to our corporate debt and mortgage payable on real estate, decreased to $26.1 million as compared to the previous quarter. As you can see on slide 25, the increase in non-portfolio related interest expenses is due to an increase in interest expense related to mortgages payable on real estate of $6.6 million from the previous quarter. This increase is due to the full quarter impact of multifamily joint venture investments consolidated in the previous quarter. Additional multifamily joint venture investments entered into and consolidated in the current quarter and an increase in interest rates affecting 70% of the mortgage payable balance related to real estate, or approximately $884 million of unpaid principal balance that is floating rate debt. We had non-interest related losses of $20.2 million, mostly from net unrealized losses of $67.7 million as a result of increases in interest rates and credit spread widening during the quarter. This loss was partially offset by a $2.4 million 2.4 million of net realized gains from residential loan prepayment activity, 5.7 of preferred returns generated by our mezzanine lending investments accounted for as equity, and 3.5 million of other income. The other income is primarily comprised of redemption premiums recognized from early repayment of mezzanine lending investments during the quarter and unrealized gains recorded on an investment in an entity that originates residential loans. We also generated $35.9 million of income from real estate, which includes income related to consolidated multifamily apartment properties in which the company has equity investments in, in the form of preferred equity or common equity, and our single-family rental portfolio. As discussed earlier, our real estate properties incurred interest expense of $13.2 million and also incurred other expense of $70.8 million. The other expenses incurred by these properties during the quarter are primarily related to depreciation expense and amortization of lease intangibles, totaling $52.4 million. After reflecting the share of the losses to the minority partners of $18.9 million in total, our investments in real estate properties incurred a gap net loss of $29.1 million for the quarter. Excluding the company's share in depreciation and lease and tangible amortization expenses, these properties generated $4.1 million and $9.6 million of undepreciated earnings during the quarter and year-to-date, respectively. It is important to note that we pursue these investments for the potential participation and value appreciation of the underlying real estate, which is realized only upon sale of the multifamily assets in the future. As Jason mentioned earlier, we are continuing to consider opportunities to monetize the appreciated value in this portfolio. As detailed on slide 28, you'll see that both income from and expenses related to real estate increase in the second quarter. These changes consistent with our expectation are primarily related to the full quarter impact of multifamily joint venture investments made in the previous quarter, as well as additional multifamily joint venture investments made in the made during the current quarter, which required consolidation in our financial statements. We had total G&A expenses of $3.2 million, which decreased compared to the previous quarter due to a decrease in commission expenses. We had portfolio operating expenses of $12.7 million, which increased primarily due to the growth of our investment portfolio. I will now turn it over to Jason to go over the market and strategy update. Jason?
spk00: Thank you, Christine. So the market is clearly undergoing a seismic shift. We laid out on page 12 a diagram that describes the evolution of where this market and the transmission mechanism that's happening today. Starting with 2021 and up to basically the first quarter of 2022, as we all know that the market had extremely efficient financing, assets were trading at par plus from origination pipelines, and the securitization market was very robust. During this time period, we selected to focus on shorter duration loans where Securitization financing is, while helpful, is not absolutely necessary to execute the strategy. As we've talked about earlier, we did complete securitizations and take advantage of that funding that was available to us. But really in the second half of the second quarter, markets started changing quite a bit. The market became a discount market. New originated assets, given the rate changes, were trading at discounts. And the financing became inefficient. inefficient in ways of the rate moved higher, and also the buyer base related to these securizations thinned out. So with respect to that, we saw this pattern starting developing. We became very cautious, even related to the short-duration bridge opportunities, which don't necessarily need securitization financing to execute the strategy. Going to 2023, we see a market where we believe there will be likely deep discount assets available to be purchased, where the market shifts from a financing spread model to a ROA or return on asset with no financing required in some of these subsectors that we're looking at. It will be important at this time to have a portion of unrestricted cash that you can – that will be available to access this market, and we believe this will end up being a market where liquidity and cash availability on an unrestricted basis will lead the opportunity and outperform the market as a whole. At this time, we look to become aggressive, looking for opportunities where our asset management team could really be deployed to unlock value there. So the flexibility that we have with the assets we have in our balance sheet that have high turnover related to fix and flip loans, also with monetization of certain strategies such as our multifamily equity portfolio, We were able to rotate these assets into higher-yielding returns in a buyer's market. And we believe that the timing of this is the most important aspect of it. It's impossible to time it perfectly and hit the target, but what we're trying to do here is really just hit the side of the barn, really, as it relates to the timing of the strategy. We're watching opportunities unfold and seeing portfolios portfolios from previously originated loans trade at discounts, but we believe that the market will offer better value over time. So with this selective approach, we expect to be able to drive value and also earnings related to our interest income and realized gains over time as the strategy continues to unfold. Turning to page 13, market themes are very similar, but the way we're executing and the way we're thinking about involving ourselves in the market is a bit different. So in the residential housing markets, we're obviously seeing a slowdown a bit in existing home sales. That's also related to a drop of existing inventory. We've been at historically low inventory levels. And the latest changes in inventory levels have really been a function of the new home builds, which are not at the same price points as existing homes and are showing a sequential increase in volume and units available for sale. But given the still very low units in the market on an existing basis, less than a million units, it's definitely stabilized markets against the rate increases. In this space and single family, we're looking to selectively add here. This is not yet a full market opportunity where we're seeing basically sales at any price related to liquidity concerns, but we believe at some point we will be able to recognize and earn returns based on that particular market construct. So today we are selectively adding in a more of a whole basis in letting our portfolio rotate and mature and allowing that to redeploy into future opportunities. On the originator side, we're definitely seeing strength in the market. Obviously, we've all seen a couple of originators file for bankruptcy. We believe there's more to come. We're in early innings here. And, you know, given the stress we've seen to this date, we have seen portfolios trade in a scratch and dent space at a 30-point discount. Now, this is a loan that would be originated and sold into market at 102.5, but three to five months later, it's sold at 30 points lost. Now, when you see these types of activities, this is obviously a desperate measure for liquidity and obviously an opportunity for us to provide that liquidity to the origination market, and particularly in the non-QM space. that we're seeing some of that opportunity there. So we're not at a point now where we're seeing warehouse lines being fully liquidated or anything similar to that matter, but we believe that there will be a time period in the not-too-distant future where that could be available to us. And we're hanging around the hoop for that opportunity. In the multifamily space, the rent rolls and property appreciation is still very strong, particularly in the south, with the still positive migration trends and solid job markets. So with that said, it's an opportunity for us to take some gains we had built in the portfolio and we look to do so in the short term. In the medium term, we definitely see an opportunity to provide gap funding for Opportunities where the sponsor had a property, particularly on a bridge loan, which we see more than $100 billion of bridge loans produced over the last two years with three-year type of durations. Unfortunately, in this market, you've had LTVs on senior financings come down anywhere from 10% to 15% on LTV basis. And that presents an opportunity for us to provide gap funding at teens' returns with very low LTVs. So that is an opportunity that's building, not here today. The maturity wall of that schedule looks to start coming to fruition in the later part of this year, but really earnestly in the beginning of 2023. So that is definitely an opportunity and part of the reason why we want to clear cash for what we think is going to be a very sizable market there. Now turning to page 14, the portfolio acquisition I said earlier We had $890 million of acquisitions in the quarter, but this was really a tale of two quarters. We had pretty strong proprietary flows in the first half, and unfortunately for us, we saw the market not moving coupons up with lockstep with funding costs. It was a pretty frustrating environment for us in the back half of the second quarter, and for that reason, we significantly slowed our acquisition pace down there, and It seemed like the originators were really favoring volume versus attractively priced assets, which is the reason why we were seeing discounted sales thereafter, and particularly into the third quarter. So with the market resetting, and we'll talk a little bit later about the coupons increasing in these various asset classes, it presents an opportunity for us to jump back in. With that said, we had $304 million of prepayments redemptions. Again, this is related to the fact that we have a very short-duration portfolio, and within the multi-family space, particularly with respect to our PREF assets we have, we're seeing redemptions there that, after significant buildup of rent rolls and appreciation and homes, not surprising that we're being taken out of some of our prepositions given the ability to recap our position or also sell the property. Turning to page 15, on the portfolio financing side, we mentioned earlier that we increased the mark-to-market financing. As you see there, $756 million in that graph on the right side. That is a, you know, obviously is a continued focus for us. We want to build availability to the extent that, you know, we're looking for these short-term opportunities for to invest in this market to have the availability of non-marked market financing. And we have basically about $600 million of unutilized financing lines today to access this market. So we feel a pretty good position there. We think the market is going to reposition into more of an ROA opportunity where financing is likely not needed. So I think incrementally for us, we don't see a big need to increase our financing lines there. But we do look for opportunities to take out assets in the securitization market today, and we're looking for opportunities there. Now, on page 16, we added this slide in. I think it helps explain a lot of our positioning situations and also – and strategy. We've had a number of questions through the quarter, and our attempt here was to answer some of these questions that came up inter-quarter and to really kind of address our positioning. So on the left side of portfolio assets, again, 35% of our assets are in BPL Bridge, 12 to 18-month durations there, fast reinvestment or high turnover expectations, high coupons. This is an asset that you wouldn't like to have to roll for you know, two to three years in continuing trying to keep the portfolio elevated. But again, we entered into this strategy over 18 months ago with the expectation that at some point we'd move, you know, the rotation, we'd move the asset rotation into longer duration assets at discounted prices. And, you know, that strategy, while, again, not currently available today, we believe that is building and our strategies will be executed. Going back down on the joint venture portfolio, again, focused recycling, some of the cash, the $399 million of capital we have in equity investments there, as well as on the cash side, $383 million, covers 41% of our mark-to-market debt. Because of the high turnover, over $300 million per quarter, we're expecting to grow that cash position for the opportunities that we see coming. On the right side, This is, I think, part of the story here that is really helpful to kind of dig in. On the securitization side, with $1.1 billion of securitization debt, 100% fixed rate debt there, one thing that may not be obvious to everybody on the call is that we do not fair market value these liabilities. If we did, we would see a 3.7% increase to our book value. The reason why we don't do that, while many of our peers do, is simply While rates are higher and our cost of debt is fairly cheap at 2.77%, we still have the obligation of paying debt off at par, and therefore taking a valuation increase on that liability we think is inappropriate for us to do for balance sheet purposes, which is the reason why we keep it at par. But that would be a nice pickup if we were to change accounting measures there. Also, maybe not as quite obvious is that our debt outstanding on the corporate side is very low. We have one bond issue outstanding due 2026, close to $100 million of notes outstanding at five and three quarter. That's something we refinanced previously and able to step down our financing costs there. And two trusts preferred outstandings, very favorable financing there. with maturity at 2035. The reason why I point this out is that it's not just the cash we have on our balance sheet that is available, but also there's the holdbacks related to corporate financing that we need to do for maturity, payoffs, and looking at a very challenged market in the corporate bond space. It's not something that we have to contend with. And therefore, when you look at our cash, we truly do have the flexibility to invest into this market. And as I said before, there's opportunities to further reduce our debt to equity as well, which is very low level at 1.4 times versus our peer average of the 3.7 times debt level, and to further recourse the leverage outstanding there. Now, starting the page with 17, just on the single-family portfolio, I did allude to earlier that we're seeing opportunities to invest in wider yields here. On the BPL bridge side, we're seeing about a 2% increase in total asset coupons. Again, this is an opportunity that was a very short-duration opportunity that we were investing in. This market was slow to react to rate increases, primarily because of the short duration, which you'd expect. But we're finally seeing that market capitulate with increasing coupons there. There's also been a lower demand base that has been pulling assets through that market. The contention of other market participants in this market is obviously thinned out quite a bit, and there's significant opportunity for us to grow. As long as we continue to see coupons grow there, we'll be active. On the BPL rental side, again, this has been one of the markets where we thought rates should have increased faster. We didn't see it. We slowed our purchasing there from production from originators. You know, today we're not a buyer into this market waiting for, you know, the kind of settling out of the securitization market, which, again, as I said earlier, is very thin and unstable. So this doesn't present an opportunity for us to sort of buy and securitize into this market, which is why we're on hold there. In the scratch and end space, building liquidity constraints with respect to originaries, this is going to be a big opportunity for us. there is small pockets trading at 30 points of discounts, as I said earlier. The market is, you know, anywhere from 70 to 90, depending on the assets, and also the timing of when those coupons were struck. But we think there's more pressure there and better opportunity over time. On the RPL space, there's nothing really to say. We've talked about, you know, this as a market we've moved on from quite a bit over a year ago. You know, we have 96% of our assets that are in this strategy that already in-term securitization structures where we earn an equity return and that NIM is stable to the securitization. Delinquencies in this portfolio and across our entire book have been very stable. In fact, we're now below kind of 2019 pre-COVID levels on total delinquency base. And most of the strategies that we're focused on, particularly in the RPL strategy, You know, this is high season assets, you know, typical origination age of these loans. We're pre-financial market meltdown in 2007. So lots of season here, very low LTVs, lots of borrower alignment with us as the owner of the loan. And this is going to be, you know, we believe a stable portfolio going through time. Turning to page 18. Again, given the size of our business purpose loan strategy, it's important to highlight the characteristics of these loans. And, you know, what we're looking at is we focused on high borrower experience where the borrowers in our portfolio have had at least 11.5 projects on average, actually, for previous experience before we lent them. Delinquencies here is low at 5% on the short duration book. Typically, this is extension issues where the Home is listed for sale or the construction timeline to completion has extended. But given the low LTV at 73% at the cost of the home or after repair of 66%, we expect full recovery on that pool. And also very important, we've looked at the project rehab costs. As you can see, at least a third of our portfolio has actually very little to no rehab costs, we've focused on that point to really keep the duration short and avoid extension risk issues and therefore why we think we'll have consistent asset turnover. Really to keep the duration short and avoid extension risk issues and therefore why we think we'll have consistent asset turnover. I said earlier 300 million per quarter we expect to continue given this short duration book. Now moving over to multifamily. As I said earlier, we're in a hold position for the MES lending opportunities. We have a fantastic book, plenty of equity built up in here. We'll talk about it in a second. But at a 12% coupon, I have never experienced a loss in this asset class since we started originating loans in this space many years ago, and this is an opportunity that we think is growing. On the joint venture equity opportunity, we stepped into this opportunity to catch the tailwinds of the migration changes that were happening in the southern part of the United States. We thought there were better value to be held as an equity position versus a MES position, particularly in the southern part of the United States. And therefore, we started looking at this equity opportunity back in late 2020, early 2021. We think we hit the market well with respect to timing, and we look forward to monetize part of this portfolio. Turning to page 20, just to give more detail on our portfolio as it relates to multifamily, a lot of questions have come up on this point. As you can see on the top left corner, as it relates to the portfolios or the properties behind our MES loans, 95% are occupied. Rent growth has been extremely strong. 2021, our underlying properties had 8% rent growth. In 2020, that's 12%. This is a portfolio we expect at some point to be redeemed on most of these on the 28 different positions over time. And in the quarter, we had two loans that were outstanding of $10 million were paid off. What we like about this strategy is with the coupon, in the 11.8%, there's upside opportunity here as we have minimum prepay multiples once the asset is paid off. In this case, 1.42 times multiple. Given the increase of rents and value of properties, we do expect to continue seeing these prepay multiples increasing given the early prepayment trends that we're seeing in our book. And again, very strong performance. Only one loan currently is delinquent at 1.5% of the entire position. We expect this asset given the LTV to pay off at par. Now turning to page 21. This, again, is a new page, a little bit more disclosure here on our JV equity position. These are obviously 20 assets here that we are in equity position on where there's no cross-collarization with respect to the underlying asset. So these 20 assets own outright, as you can see on the second to last column on the right, gives our equity position in these properties, anywhere from 70% to a kind of 95% ownership position. We gave the vintage of when the assets were acquired, particularly to show where, you know, some of the buildup in rent growth has happened. As I've noted here in 2021, we've had rent growth of 16% and then 17% respectively in 2022. We thought, you know, we think we timed the market well here, particularly in the markets that we're involved in. You know, most are in the southern part of the United States and some secondary markets such as Oklahoma City that has been kind of have been receiving some strength from some of the Dallas growth that's been there and pricing people out of that market to Oklahoma City, as an example. But, you know, this is an asset with high occupancy where there's a transition story that we initially saw available to us to move rents up, particularly related to CapEx expenses or management changes. And we've been, you know, looking to execute that strategy across the $255 million of equity that we have outstanding in this market. The market rallying in the southern part and the thesis that we see demand there back in 2020 has really paid off and we're really excited about the opportunities we have to either monetize the portfolio or look at a corporate kind of structure opportunity here. So we're looking at all different opportunities here to monetize this book. And finally, on this last page here, we're, as I said earlier, in the face of a market transition that's clearly unfolding. The luxury that we have and has been built over the past year and a half has been being able to have a high asset rotation portfolio where we can redeploy our cash that is truly unrestricted into this market at high yielding opportunities. In an environment where deployable capital will be truly what differentiates us from the market and will be available to provide liquidity to the market in various areas, we're excited about this opportunity and talk to you further about it. So at this time, I'd like to pass the call over to the operator for questions.
spk07: Thank you. And as a reminder, to ask a question, you will need to press star 1-1 on your telephone. Please stand by while we compile the Q&A roster. And our first question comes from the line of Doug Harder with Credit Suisse. Your line is open.
spk03: Thanks, and good morning. Just on the multifamily JV portfolio, can you talk about what type of embedded gains you might have on that and remind us if that asset is mark-to-market on the balance sheet?
spk00: Yeah, so I'll start with the market-to-market. These assets are held at cost basis, less depreciation, amortization on a depreciated basis, and obviously, you know, that is below our cost basis. So that's where we currently hold these assets on our balance sheet today. You know, we are looking at, you know, we've had some reverse inquiry on our portfolio and other kind of corporate transaction opportunities. We look forward to sharing more about that in the coming quarter. But at this moment, this is still in kind of preliminary stage. I mean, we're showing here some rent growth that can help understand the valuation increases that we've seen in our portfolio. But that's not something we're going to comment on on this call.
spk03: All right. And then, you know, as you think about the potential for some sort of monetization event, you know, I guess, how do you think about the timing of wanting to do that, you know, to line up with the opportunities that, you know, I guess you see building over the coming months, you know, I guess just how do you think about kind of matching up the timing?
spk00: Yeah, so, I mean, we have enough cash and cash that is coming through our BPL portfolio to access that opportunity, so it necessarily doesn't depend on rotating our multifamily equity book for that. We think that, you know, the, well, you know, if we just keep it within the multifamily sector, The opportunity for what I just described earlier, which is that kind of that bridge lending gap funding capital that we think will be necessary more in 2023 is more of a medium-term opportunity for us, while we think the monetization of components of this portfolio or a corporate transaction is more of a short-term opportunity.
spk03: Great. Appreciate it. Thank you.
spk00: No worries.
spk07: Thank you. And our next question comes from the line of Jemisaga from FactSet. Your line is now open.
spk09: Jemisaga, your line is now open. I guess we can move to the next question.
spk07: Our next question is from the line of Christopher Nolan from Lautenberg Thalmann. Your line is now open.
spk04: Hi, can you hear me? Yes.
spk09: Yes.
spk04: Oh, I didn't hear my name announced. Thanks for the detail on the intro here. Just a bunch of questions, and related to the strategy, I know you mentioned gap funding in your terminology. I mean, should we look at that as hard money lending, or are you directly investing in additional common equity into these properties? I mean, what sort of strategies are you looking to invest in?
spk00: Yeah, we think the opportunity is going to circle around. When we say gap funding, what I mean by that in particular is that senior lending in the multifamily space was mid to high 70s, and we're seeing regional community banks, et cetera, cut back. their LTV in this market environment to anywhere from 50 to 65, even into low 70s. So we think there's about 10% to 15% minimum of kind of where if you were going to refinance a particular asset, which is going to be a bridge loan that's coming up for maturity, that you'll need some additional capital to get that asset recapitalized. And then that's where we can come in, and that's where we see the opportunity. So it would be in the form of lending and not equity. And the opportunity from a duration standpoint, we believe the loans will be quite short and really attempting for allowing the underlying sponsor to access probably more favorable funding through this time period, particularly in kind of 10-year fixed funding that is available through the agencies. What we little discuss here is that the fact that there's a very strong agency senior financing market for multi-family properties across this country within Fannie and Freddie Mac, and that has very much stabilized the funding source of the opportunity for underlying sponsors, and why we believe that this market will outperform through this next cycle, simply because that funding is strong. With respect to Fannie and Freddie, they have you know, budgets for financing availability that they're going to provide to the market. And, you know, they've consistently been kind of under budget, particularly as the market has slowed. So, you know, there's, you know, plenty of available funding for good assets with good stories behind good managers. And those are the assets that we want to help support in this new cycle.
spk04: And as a follow-up, are you looking – it sounds like the sponsors are coming from a point of weakness. And I mean, are they being compelled by their banker or Fannie Mae to raise the equity? And if that's the case, do you have any protections in terms of the sponsor sort of going belly up? I mean, are you putting the title of the property in escrow or something? Because you're sort of going into potentially dangerous waters at times. And just a little clarification would be helpful.
spk00: Yeah, so, I mean, the opportunity is a case where there's no real requirement coming from Fannie or Freddie for this purpose. It's really a function of the debt structures that were produced back in 2020, 2021, which were, for the most part, $100 billion plus of short duration, two to three year senior financing. So there is a maturity wall that is in front of many of these sponsors across the United States. And the question is, how do they get through that? And get through it meaning if they're not going to sell the property and they want to recapitalize, this is the opportunity for us. So this is not necessarily coming from a distressed point of view in that the property has gotten where DSCR ratios drop below one times. This is coming from strength of the sponsor in that they want to continue holding these assets. They don't want to liquidate today. But they've obviously seen a buildup in rental rate increases in property value through their holding period from when they struck these loans back a couple years ago. So the opportunity for us is to be that lender where they can access that senior paper or senior fixed rate paper with 10-year maturities, which is obviously very stable for them, so they can continue on with their business plan with the property. That's where we see the opportunity today. Obviously, a lot could change from now until then. We wanted to highlight that the rotation that we're looking at with respect to our portfolio is not in continuing in the equity strategy, but more on the lending side is what we're looking to allocate in the future.
spk04: And then finally, are you seeing with more of your sponsors where their cap rates where they invest in these properties is now, their funding costs are now higher than their cap rates?
spk00: So when you talk about cap rates, there's many ways to look at it. And the interesting point about cap rates in this market is you typically don't have the types of rental increases that I just described earlier in these markets. So when you look at a purchase cap rate, typically you have inflationary type of rent rolls, where here you're having double-digit rent rolls. So if somebody entered in a property at a 4.25% cap rate and the market is 5.25% today, that is off of an assumption that the four and a quarter you haven't had rent rate and have any income gains in the portfolio through rental rate increases. And so while the cap rates have moved out up to 100 basis points, you do also have rent raises that have also offset some of those costs and therefore could support higher coupons in this market. So it's really a function of where that asset is located and what kind of rent growth they've seen, where your point that you're driving, which is how can they fund these properties when the costs are greater than their return, could be offset. So it really depends on the market. Typically, what we're seeing in the South is that the gains on the portfolio have outstripped the increased funding costs, and that's keeping the opportunity very much you know, in focus for those sponsors.
spk04: Great. Thank you.
spk07: Thank you. Our next question is from the line of Eric Hagan with BTIG. Your line is now open.
spk01: Hey, thanks. Good morning, guys. Maybe just a couple from me. When you talk about this being a buyer's market, would you say that the hurdle rate you're aiming to achieve has also changed? And would you say that the hurdle rate has changed specifically for the bridge product? And then in the SLSP portfolio, can you repeat what the mark-to-market changes were last quarter? And based on the way the asset is financed there, can you re-lever that debt, or is that not re-leverable? Thanks.
spk00: Yeah, no worries. So as it relates to buyer's market, what we're seeing is for the first time in many quarters that the market Discounted portfolios are trading in this market. Obviously, the market was very efficiently financed earlier. We didn't see discounts on new originated product other than in the scratch and end spaces, which we've been playing for quite some time. But in BPLs and DSCR and non-QM, we did not see that, and we're obviously seeing it now. And we believe that opportunity will be building. So with respect to your question on increase of returns, yes, we definitely expect. the returns and the different strategies that we're focusing on to increase. We talked about on-the-run coupons and BPALs, 200 basis points higher, and that is obviously an easy story to understand in that any new investment there would be 2% increase in coupon. But the focus is really there's a lot of origination product out there that was originated without really focusing really being priced in to deal with the financing cost increases on 30-year kind of loan product. And that's where, you know, we're seeing some of the market get stuck and where our liquidity may be used in the future. So, you know, that is an unfolding story. It's not here now, but there's definitely markings that are showing that that, you know, could accelerate, particularly in early 2023. As it relates to SLST, I'll pass that over to Christine.
spk06: So for SLST, you'll see it in slide 26, Eric. First quarter, we had about 15 million of losses there unrealized, and we have for the second quarter about 4 million in losses. And then as to your question as it relates to being levered, so we own first loss securities in the securitization as well as I.O. securities. So what we can lever that, we can put it out on repo to answer your question.
spk00: And furthermore, we could also look to securitize it. At this point, obviously, it's a difficult market for the securitization space, given the fact this is a RPL book with stapled financing from Freddie Mac. We prefer to not finance it through a securitization strategy just yet, but that's something that is available to us.
spk01: Gotcha. Thanks for the perspective.
spk07: Thank you. And our next question comes from the line of Stephen Laws with Raymond James. Your line is now open.
spk05: Hi, good morning. I wanted to follow up, I guess, a little bit on Doug and others' questions around, you know, the real estate. You know, how should we think about, I think you have one asset under contract for Q3. How should we think about the gain that we need to put into our model and then just think about, you know, modeling that going forward?
spk00: Yeah, so, I mean, again, we talked about where our basis is in these assets, and we've talked about some of the market input factors that are creating an output of a higher value with respect to these properties. You know, at this point, we're not going to comment on future realized gain activity with respect to that portfolio. This is, you know, obviously a developing situation for us. We have been, you know, responding to both reverse inquiry and as well as some other market opportunities that are there. We hope to share more color with respect to this book on our next call and further explain where this portfolio is going. But at this point, it's too premature to have that discussion.
spk05: Great. Fair enough. Following Doug again with leverage, but gradually moving higher here, talking about the recourse metric. you know, it sounds like there's great opportunities now. You've got some monetizations in the pipeline coming. So how do we think about what you see as a normalized or steady state or target leverage number, so to speak, as we think about, you know, how capital is being deployed and what the expected kind of repayments and sales look like?
spk00: Yeah, so with respect to leverage, we expect leverage to stay low, you know, in this kind of context. You know, we did increase our leverage, recourse leverage, with respect to some of the, you know, the strong growth we had in the quarter, the first half of that quarter. That's why, you know, we've seen an increase of our leverage there. It was just a function of our pipelines. But, you know, given where we stand today in some of the monetization themes that we're talking about, as well as an asset opportunity where it may not require financing to achieve that target return, you know, we don't see material increases to this In fact, we think it should go the other way, which is a decrease of our leverage ratios over time. And that's a function of just having more unlevered, unencumbered assets on our balance sheet in this new market environment.
spk05: Great. And then lastly, maybe for Christine, I appreciate the new slide 16, and I know Jason touched on some of the fixed rate debt, but can you maybe talk about a net interest rate sensitivity or exposure? I think in your prepared remarks, you mentioned some floating rate debt on the real estate. But maybe as you think about both sides of the balance sheet, how do you view the net sensitivity to, say, 50, 100 BIP increases in rates?
spk06: We should expect that to go up in the future as it relates to our floating rate debt. But if you look at our multifamily investments, especially the consolidated investments. That's really looking at our share in the equity there. So it's not a full kind of pickup in terms of gains and losses. It's still going to be related to the performance of the property. So what we would expect on multifamily is that as they continue to improve the property, there will be rental growth there. So you'll see income as it relates to our consolidated JV investments to improve.
spk00: Great. And as it relates to looking at page, so I add on this page here where we broke out the corporate debt, a lot of the repo financing we've conducted is in the BPL space. And that is a short duration strategy. So while we expect funding costs to increase there, we also expect the portfolio to decline. So the full effect of kind of the rate increase over a two to three year period wouldn't be felt in that portfolio.
spk03: Great. Thanks for your time.
spk07: Thank you. Our next question is from Matthew Hallett with B. Reilly Financials. Matthew, your line is open.
spk02: Good morning. Thank you for taking my question. Jason, just on the dividend, you've got a lot of moving parts here. I really like the strategy, and I appreciate that page 26 here. You're going to be generating a lot of gains here, it looks like, going forward. I think previously you've talked about getting NII up to cover the dividend, like a lot of mortgage rates try to do. How should investors look at earnings and dividend coverage, you know, going forward? Or it was just something where you have to always sort of bake in realized gains as part of the core strategy?
spk00: Yeah, I mean, that's been consistent with our activity for many years now, where a component of our return is in the realized gain sector, a section of our balance sheet income statement. And, you know, we did see opportunities to increase interest income in our portfolio through these higher yielding strategies in the BPL space and in other related strategies and prep lending within our mezzanine book. However, the market's not functioning well at this point, given the inefficient financing and the scarification market, to continue looking to grow interest income through a levered yield basis, levered yield model. So as the market transitions into as what we see is unfolding today, transitions into a lower levered opportunity with discounted asset availability. Obviously, the story changes a bit into expectation of not only interest income, but also an unrealized gain activity through that discount that we would be looking to purchase those assets. So that is going to be a function of our story and has been for quite some time. Our dividend policy is an 18-month forecast on earnings, including the realized gain activity, and not a look back in the last three months of interest income. So it's a very complete picture of where we expect our earnings to come. And obviously, given the unrealized activity, it's typically choppy. You don't have a smooth process as it relates to asset liquidations.
spk02: know so it needs to the dividend policy needs to be over more extended period of time to capture the unrealized gain activity that we expect to generate through the portfolio okay so we have to think about this different than what we typically model you see in mortgage rates and and you know it's a strategy obviously different than what you see in some of the larger mortgage rates out there so i certainly i understand that um and thanks for that and the second thing was you also i mean we'll wait for details obviously on the multifamily you know, gains and the sales are going to come with that. But you mentioned also, I think you said corporate strategic, you know, alternatives. Are you speaking of something like a spinoff, another subsidiary with regards to multifamily investments?
spk00: Yeah. So all options are on the table. I mean, we're coming from position of strength. We have a great portfolio and, you know, we, we, You know, we see the market, you know, has demand and increased demand for what we have generated here. So whether, you know, corporate or a monetization through a sale, we're looking at both options. You know, we did put one asset in a purchase and sale agreement just to, you know, see how the market is functioning relating to some of the earlier gains we had. It's gone extremely well. So I think everything you said is on the table. And we're going to look to maximize value for our shareholders in the most efficient and least cost manner for this book. So we're focused on timing. We're focusing on efficiency. And we're going to focus on the total expected value that we think we've generated and being able to monetize that fully. And any of those options are on the table for us to evaluate, and we'll be working through that over the course of the quarter.
spk02: Good. I was glad to see you guys buying back stock. It just looks like the book's understated, and I'm happy to see you taking advantage of the discount. Thanks for taking my question.
spk07: Thank you. I would now like to turn the conference back to management for closing remarks.
spk00: Well, thanks, everybody, for joining the call. We really appreciate your support and the time you spent with us. Look forward to speaking to you again on our third quarter call. Have a great day and enjoy the rest of your summer. Take care.
spk07: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
spk09: The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.
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