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spk08: Good morning, ladies and gentlemen, and thank you for standing by and welcome to the New York Mortgage Trust Fourth Quarter 2023 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. If you have a question, please press star followed by 11 on your touchtone phone. If you would like to withdraw your question, please press the pound key. If you are using speaker equipment, we do ask that you please lift the handset for making your selection. This conference is being recorded on Thursday, February 22, 2024. I would now like to turn the call over to Kristi Musalem, Investor Relations. Please go ahead.
spk13: Thank you all for joining New York Mortgage Trust Fourth Quarter
spk17: 2023 earnings call. A press release and supplemental financial presentation with New York Mortgage Trust Fourth Quarter 2023 results was released yesterday. Both the press release and supplemental financial presentation are available on the company's website at .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 meaning 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 are detailed in yesterday's press release and from time to time in the company's filings with the Securities and Exchange Commission. Now at this time, I would like to introduce Jason Torano, Chief Executive Officer. Jason, please go ahead.
spk07: Thanks, Kristi. Welcome to New York Mortgage Trust Fourth Quarter earnings call. Also joining me is our President Nick Ma and our CFO Kristi Nareo. After the Fed Chair surprised Dovish commentary late in the fourth quarter, much relief was immediately provided to the market in the form of lower medium term rates. However, the market gave back much as a relief after the latest CPAP print, which was more than a two standard deviation then from market expectations. With these gyrations, economists continue to update models with forecasts to predict the likelihood and timing of a soft landing or recession. Curiously, under extreme unbalanced sector gains in the US equity markets, debate rages on about the ability of the US economy to innovate its way through the hangover of a debt-fueled expansion. Our task is to determine how to prudently allocate capital against the potential long-term investment risk posed by slowing this economy. Our planning for this cycle was vastly completed last year. Now in 2024, we look forward to building the company's earnings base, given a portfolio reshaped with lower credit risk and asset duration. A goal for today is to explain this evolution and why we believe our balance sheet is primed for growth through a dislocated market. We believe this cycle can provide significant value to the company, not just over 2024, but the remainder of the decade. For success, our team will need to reach deep into the multiple decades of investment experience in sourcing, valuation, and asset management execution. We are excited about the opportunity ahead of us. Starting with fourth quarter activity noted on page four of our Q4 supplemental, the company generated earnings per share of 35 cents or 37 cents on an unappreciated basis. Adjusted book value per share ended the quarter at $12.66 or down 2.09%. After 20 cents dividend, quarterly adjusted economic return was negative 54 basis points. Book value gains from our single-family portfolio was largely offset by valuation reductions to our multi-family joint venture equity portfolio. After further dispositions, unrealized losses, and reclassifications of certain properties to held and used in the quarter, we have approximately 35 million remaining of capital allocated to JV multi-family equity that we intend to sell in the near term. Christine and Nick will provide additional details on this point a bit later. In setting up 2024, we enhanced our purchasing power by renewing and increasing warehouse line capacity to $2.2 billion, providing $1.6 billion of undrawn financing as of the fourth quarter. Additionally, to enhance liquidity, we issued our third BPL securitization in early January, consistent with past deals issued by NYMT. The $225 billion securitization obtained a revolver for future BPL acquisitions. Page eight of our review, starting with the U.S. deficit spending, which may have had a role in delaying economic contraction in 2023. The CBO recently reported that the U.S. budget deficit is expected to total $1.6 trillion in 2024. Over the next 10 years, the budget gap will grow another $1 trillion. Remarkably, interest expenses expected to total over $1 trillion in this year alone. The consequence of high Treasury issuance to fund U.S. deficit spending could result in stubbornly high long-term rates, even in the case Yellen continues to utilize a high allocation of short-term bills to fund the budget shortfall. To meet the liquidity needs of the U.S. government, global investment allocation to U.S. Treasuries could be diverted from other sectors and tenors within those sectors. In this scenario, the CRE space is particularly vulnerable. Fresh liquidity is required to recapitalize $2.8 trillion of debt maturing over the next four years, half of which is held by banks. Banks' ability to offer CRE refinancing packages on one hand, while fending off CRE loss reserves on the other, is likely to further restrict lending in the market. The opportunity available for permanent capital vehicles with access to liquidity is great. For over a decade, our team has experienced generating opportunities in the multifamily bridge loan sector, coupled with the extensive asset management experience New York Mortgage Trust platform can opportunistically navigate through the CRE dislocation on multiple fronts. We see a spillover effect constraining residential loan markets as well. Bridge loans and alternative financing for single-family residential properties used for investment purposes is likely to be transformed into a new generation of lending. After $3.5 billion of residential bridge loans invested to date, our team has the experience to capitalize on the opportunity. As previously documented, our approach to enhance company liquidity began in March 2022. We committed to curtailing investment activity, particularly in medium to long-duration credit risk, in favor of a portfolio rebalancing to provide enhanced flexibility. In early 2023, we continued to prioritize increased liquidity over balance sheet growth in consideration of a potential slowing U.S. economy and increased market credit concerns. Later in 2023, we recognized a recession call was premature. Nevertheless, we remained concerned about a strain in market liquidity. Thus, we increased our portfolio exposure to agency RMBS to stabilize portfolio interest income. We are pleased to report that company-adjusted interest income increased 22% quarter over quarter to $72.5 million. At the start of the fourth quarter, we added agency RMBS at tracking spreads. We also continue to add short-duration, high-coupon residential property bridge loans, reversing a sequential quarter portfolio decline. With recent improvement to securitization market funding, we expect to meaningfully add detailed bridge loans throughout the year. With $431 million of dry power available, not including capital allocated to the liquid agency RMBS sector, our balance sheet is structured for growth. We will continue to utilize a patient approach for portfolio growth. We believe this path will yield superior results not only this year, but has the potential to enhance results in the years ahead as trillions of dollars of maturing commercial real estate debt is sorted out. At this time, I'll pass the call over to Christine for additional comments on our financial results and then to Nick for portfolio manager discussion. Christine?
spk18: Thank you, Jason. Good morning. Today, I will focus my commentary on the main drivers of fourth quarter financial results. Our financial snapshot on slide 12 covers key portfolio metrics for the quarter, and slide 26 summarizes the financial results for the quarter. As Jason just covered, the company had undepreciated earnings per share of 37 cents in the fourth quarter as compared to undepreciated loss per share of $1.02 in the third quarter. Our earnings were impacted primarily by valuation improvements on our residential loan and bond portfolios, which resulted in $1.69 per share of unrealized gains recognized during the quarter. These gains were offset by a recognition of $0.38 per share of losses on certain multifamily real estate assets held by JV equity investments and disposal group held for sale due to a decrease in the estimated fair value less cost to sell of real estate assets and the reclassification of certain of our joint venture equity investments and multifamily properties from held for sale to held in use that I will discuss further. We experienced solid momentum in our portfolio acquisitions over the past three quarters after significantly reducing our investment activity for most of 2022, increasing our investment portfolio on a net basis by approximately $0.4 billion and $1.3 billion during the fourth quarter in the year, respectively, ending at $5.1 billion as of December 31. This was the primary driver of the increase in our interest income and adjusted interest income contribution for the quarter. Net interest income was relatively flat in the fourth quarter, contributing $16.8 million or $0.19 per share while our adjusted net interest income, a non-GAAP financial measure, increased to $23.5 million from $20.7 million in the third quarter. Our quarterly adjusted interest income increased by $13.2 million primarily as a result of the $674 million in investments made in agency RMBS and higher yielding short duration BPL bridge loans during the quarter. The increase in adjusted interest income was partially offset by a $10.4 million increase in adjusted interest expense due to the financing of investments made during the quarter. Our interest rate swaps continue to benefit our portfolio, reducing our adjusted interest expense during the quarter. Overall, the operations of our consolidated multifamily joint venture properties contributed a net loss of $0.8 per share during the quarter. Since investing in this asset class, we have disposed of six multifamily joint venture properties, four of which occurred in the second quarter of this year and one in the current quarter. This resulted in a decrease in overall net loss from real estate during the quarter. As mentioned earlier, we recognize $34.4 million or $0.38 per share of losses related to the following. First, an $18.3 million or $0.20 per share, loss from impairment charges in real estate due primarily to lower net operating income estimates resulting in lower property valuations as compared to our carrying costs of multifamily properties held for sale. And second, a $16.2 million or $0.18 per share loss related to reclassification of nine multifamily properties from held for sale to held in use as of December 31, as they no longer met criteria to be held for sale in conformity with GAP. The reclassification of the real estate assets from held for sale to held in use was at the lower fair value or carrying amount before the real estate assets were classified as held for sale, adjusted for depreciation and amortization expense that would have been recognized had the real estate assets been continuously classified as held in use. This changed to our plan of sale on the JV investments of multifamily properties but it's due to unfavorable market conditions and the lack of transactional activity in the multifamily market that negatively impacted our ability to secure a reasonable buyer and completely exit our investment in these giant ventures. We continue to market for sale our JV equity investments in five multifamily properties but we can provide no assurance of the timing or success of our ultimate exit from these investments. As mentioned earlier, fair value changes related to investment portfolio continue to have significant impact on our earnings. During the quarter, we recognize 152.9 million or $1.69 per share of unrealized gains due to higher asset prices on our residential loan and bond portfolios. These gains were partially offset by a 71 cents per share in losses recognized in our derivative instruments primarily consisting of interest rate swaps and 27 cents per share in real life losses related to the sale of non-agency RMBS and CMBS and losses incurred on foreclosed properties during the quarter. We had total GNA expenses of 11.7 million which remained relatively flat as compared to the third quarter. We had portfolio operating expenses of 6.1 million which increased primarily due to legal fees incurred related to the asset management of our BPL bridge portfolio. Adjusted book value per share ended at 12.66, down 2% from September 30. The main drivers of our adjusted book value change was a 35 cents in basic income per share, a reduction of 20 cents per share related to our declared dividend, a reduction of 7 cents per share primarily due to the removal of cumulative depreciation and amortization add-backs. Attrutable to consolidated multifamily properties for which impairment was recognized during the quarter and negative 39 cents per share change in estimated
spk16: fair value for liabilities.
spk18: As of quarter end, the company's recourse leverage ratio and portfolio recourse leverage ratio increased to 1.6 times and 1.5 times respectively from 1.3 times and 1.2 times respectively as of quarter end. Advancing leverage remains low relative to historic levels we would expect our leverage to move higher as we expand our holdings of high-weight liquid agency RMBS. Our portfolio recourse leverage on our credit book is up slightly at 0.4 times when compared to 0.3 times for the previous quarter. Currently 58% of our debt is subject to -to-market margin calls of which is collateralized by agency RMBS and 13% collateralized by residential credit assets. The remaining 42% of our debt as of December 31 has no exposure to collateral repricing by our counterparties. And as Jason mentioned earlier, we completed a revolving business purposeful unsecuritization last month. Consequently, this securitization reduced our debt subject to -to-market risk from 58% to 55% and our recourse leverage ratio and portfolio recourse leverage ratio to 1.5 times and 1.4 times respectively. We paid a 20 cents per common share dividend down from 30 cents in the prior quarter. We continue to evaluate our dividend policy each quarter and look at the 12 to 18 month projection of not only our net interest income but also realize our capital gains that can be generated from our investment portfolio. We remain committed to maintaining an attractive current yield for our shareholders and we believe that the current dividend provides excess liquidity for reinvestment in a more attractively priced market. I will now turn it over to Nick to go over the market and strategy update. Nick?
spk06: Thanks Christine. Good morning everyone. In the quarter we witnessed a key moment in the shift of the market sentiment. This follows the pivot in the Fed's stance on future monetary policy. Through Q4 we experienced dramatic moves in interest rates with five-year treasuries trending up to 5% in October then sharply reversing course to end the year at 3.9%. The Fed's restrictive policy has made further inroads in subduing inflation with economic data in the quarter pointing to the continued moderation of inflationary pressures. Fed Chair Powell's remarks in December further highlighted that the FOMC is now taking a more balanced approach to tackling inflation and managing economic risks. The market reacted positively with tightening spreads across asset classes alongside a falling interest rate curve. Over the course of the last year, NYMT has refocused on growing the balance sheet to achieve more consistent earnings. This was a shift in strategy given several prior quarters of minimal investment activity. We were initially concerned of heightened credit risks under the Fed's restrictive interest rate regime. Through 2023 we grew our portfolio such that we can generate more consistent income while also maintaining liquidity for future opportunities. Over the quarter we invested in $674 million of assets, primarily concentrated in $416 million of agency RMBS and $232 million of BPL bridge loans. The pace of agency RMBS purchases has slowed from last quarter's $946 million as we curbed our buying in response to the decline in yields in the latter half of the quarter. Current coupon mortgage spreads to interpolated five and 10-year treasuries started the quarter in the high 170s, reached a quarterly peak in October in the high 180s, then trended down to the end of the year in the high 130s. 77% of our agency purchases in the quarter was prior to the near-term peak of rates on October 19th. In BPL bridge we have made further progress to boost the volume of asset acquisitions with three quarters of consecutive growth. In 2023 we have grown our agency RMBS from zero to almost $2 billion of market value. We took advantage of the historically wide spreads in the sector that persisted throughout the year, driven by high interest rate volatility and tepid incremental demand from banks and money managers. In particular, we sought to build a portfolio of higher coupon specified pools under this favorable return environment. Quarter over quarter, the agency RMBS portfolio grew by approximately 30% on a market value basis. The average coupon of our spec pools continues to rise, increasing from .73% to .85% this quarter, driven by concentrated in .5% coupon bonds. Leverage in the strategy declined to 6.7 times as of year end, down from 8.5 times in the prior quarter. The declining leverage ratio was due to price increases in the agency bonds amidst lower yields and the slowdown of acquisitions in the latter half of the quarter. Given the available capital and the ability to scale up leverage in the portfolio, we still have capacity to meaningfully expand our agency RMBS exposure. We look to increase the portfolio's allocation to agencies under the current market environment, with high spreads still presenting a compelling risk adjusted return. Additionally, the asset class has also an added benefit of having outperformed in periods of economic downturn. BPL Bridge is a core asset class for us due to its high return and short tenor profile. The short tenor of the portfolio allows for flexibility to redeploy the return capital into BPL Bridge or other investments, depending on market conditions. From a credit perspective, the BPL Bridge portfolio continues to perform to expectation. Over the past few quarters, the level of delinquency in BPL Bridge has moderated to 20 percent, and -to-date cumulative losses in the strategy is under 10 basis points. In the past, the shrinking BPL Bridge portfolio balance due to our reduction in investment activity contributed to the high delinquency numbers on a percentage basis. Under the heightened acquisition pace, where the portfolio is growing quarter over quarter, this delinquency effect should be muted. For our current acquisition pipeline, we note that credit profile of new purchases has improved versus the existing portfolio. In particular, we try to avoid niche subsectors within BPL Bridge, such as ground-up construction or small balance multifamily. These are segments of the market that have experienced constraints, given the retrenchment of regional bank lending and therefore an increased risk of future credit dislocation. Furthermore, both ground-up and small balance multifamily present increased default management challenges if delinquencies rise. Our purchases in the quarter consist of only 3 percent ground-up construction loans versus the portfolio average of 13 percent. We did not purchase any multifamily-backed bridge loans in Q4. The credit profile of our purchases both historically and today remains strong, with borrower credit scores above 700 FICO, loan to after-repair value ratios or LTARVs in the mid-60s, and loan to cost ratios or LTCs in the low 70s. We aim to continue growing our purchases in BPL Bridge in the coming quarters. In January 2024, NYMT also executed on its third BPL Bridge securitization. This two-year revolving structure will be beneficial for the funding of existing and future purchases of BPL Bridge. On the heels of tightening rates and spreads in the fourth quarter, there has been a flurry of activity in the non-agency securitization market. Issuers are trying to capitalize on better deal execution than what was available for most of 2023. An additional noteworthy point is that the first-ever investment-grade rated bridge securitization came to market in 2024, which will be an important evolution in the structure to fund these assets. Rated transactions should provide better financing costs relative to the unrated structures. NYMT's BPL Bridge purchase program fits very well with the tighter credit box necessary for a rated transaction. Rated deals have more punitive structural treatment of ground-up construction due to its correlation with higher rehab requirements. It is also restrictive on multifamily bridge loans. As I alluded to before, we have already been reducing exposure to these loans already. We plan to be an issuer of these rated deals in the future. On multifamily mezzanine lending, 2023 continues the historical strong performance of this asset class. The payoff rate of the portfolio has accelerated in 2023 at 37 percent compared to 32 percent in 2022. This is also higher than the historical annual payoff rate of 28 percent. The expectation for the portfolio is that this payoff rate should continue to remain high, primarily driven by the seasoning of the portfolio at 29 months and the 83 percent LTV at origination. Occupancy rates of the portfolio today have also been strong at 90 percent. Given that we significantly reduce our purchases since 2022, our portfolio has more years of locked rental growth at lower property acquisition entry points. This translates to additional equity buffer for the borrower and further alignment with NYMT's mezzanine position. We believe that the sponsors in our portfolio are in a position to monetize these assets today, fueling paydowns in the portfolio. Contrast this with later vintage originations in the market. We have limited exposure to originations from 2022 onwards as Fed rate increases took center stage. There has been upward pressure on cap rates and market shifts, causing certain pro-forma projections on NOI to be unachievable. On multifamily JB equity, we do not expect any future equity funding of new positions within this asset class, as our efforts are focused on the asset management and sale of the existing portfolio. We have made progress on the wind down of these assets that began in Q3 of 2022. So far, we have completed the sale or resolution of six of the original 20 properties, leaving 14 remaining properties as of the end of year. In the quarter, as Christine noted, we have moved nine of the remaining 14 assets to held and the market for the sale of these properties have become more challenging. As the pending forward supply of new multifamily properties has contributed to slowing rent growth, increased operating expenses, taxes, and insurance have also impacted overall property NOI. These factors, along with the interest rate volatility and an uncertain path for future cap rates, result in a wider bid-ask spread in the market. We find it more productive for our asset management team to complete any beneficial value-add programs on these properties to maintain or bolster occupancy for an improved NOI profile in the future. I'll now turn the call back to Jason.
spk07: Thanks, Nick. The company is focused on opportunities in a market undergoing a landscape change. Balance sheet growth is expected to continue with agency securities, short-term bridge loans, and structured derivatives. In this new environment, success may be achieved through organic creation of liquidity, tactical asset management, and prudent liability management. At this time, I'd like to open the
spk08: call for questions.
spk07: Thank
spk08: you.
spk15: And thank you.
spk08: As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And one moment for our first question. And our first question comes from Jason Weaver from Jones Trading. Your line is now open. Hi, good morning. Thanks for taking my question.
spk04: So I was wondering how you look at the affected trade-off in terms of allocating new capital to agency versus BPL bridge and what the relative ROEs are. Is that really just a timing issue alone given that allocating to agency is just a lot more liquid market in the immediate term?
spk06: Yeah, thanks for the question, Jason. This is Nick. Yeah, a big part of it is the fact that agencies are liquid. You're seeing a faster growth in that portfolio because we can deploy capital much quicker. But the goal is to have our BPL bridge to continue to grow. In terms of ROEs, we do see based on our leverage ratios in our agency portfolio somewhere in the mid-teens type return. And then in our BPL bridge, we see under securitization profile somewhere in the high teens type return. So at the margin from a return perspective, we do prefer BPL bridge. But because of our, as I mentioned earlier, a tighter credit box, it does take a little bit longer to procure.
spk04: Got you. Thank you. That's helpful. And focusing a little bit more on the agency side, I was curious how you think about the convexity risk in some of those higher coupon assets. I do get softer monetary policy. What's the likely reaction in prepayments on some of those? Are you thinking?
spk06: Yeah, we do understand that there's a trade-off between the convexity and the carry profile that we are targeting. Our general stance is that rates, and we have started to see that at the beginning of this year, will potentially stay higher for longer. So we don't mind participating in that particular part of the coupon stack. Furthermore, there is also, we do have a relatively large credit portfolio. And our credit portfolio that was accumulating at a time period where rates were lower has a different convexity profile with lower coupons in that particular sector. So we find that this is a nice balance for both. So a lot of the BPL bridge that we're buying has higher coupon, higher return, and a lot of agencies also have that high carry profile at the expense of some convexity risk. But we do believe looking at the portfolio as a whole is relatively balanced.
spk04: Thanks. That's helpful color. And just one more. I appreciate your comments on the remaining multifamily JV equity that you have on board. And just to hone in, I believe it's 14 assets and about $35 million in equity. So about, you know, have you actively been marketing those properties and have you received any bids, but they just really are at haircuts that are not attractive to you? Or is it not at that stage yet?
spk07: I'll take that question. Jason Serrano. The five assets that we have marketed, we have not received bids directly on those assets just yet. Two of those, and I'm talking this year, two of those were in a process last year where the sponsor walked away from a deposit that we held back. And it was due to changes in their funding requirements and rates that moved on them during that period. And it seemed like that buyer wasn't hedged. So in that case, we did have very attractive pricing there. And we looked to basically go back out to the market, given that the funding costs have alleviated somewhat and are back to kind of levels where these buyers were engaged. So that's just two of the five. And again, overall, it's a very small portfolio. And the assets we chose to put out to the market are assets that we've completed our value add program, where we believe that the go-forward NOI has been stabilized, and therefore, the bids will be attractive for us to execute. And just to further round up the question, we have nine assets which are not part of the sale or disposable group and are held in use. And those are assets that we are still in the process of completing our value added program. And there's a bit of a J curve that's still left on those assets. We have looked at whether or not that should be part of that disposal group. And the answer is, given that the cash flows are increasing, the NOI is increasing in those assets as those value add program, CAPEX programs, have achieved higher rents and entailed a more difficult funding market, we believe it's better to hold those assets on a more of a medium to longer term basis and benefit from the NOI growth and property valuation increase. So that's kind of split out. And on those nine, we have not received bids directly on those assets.
spk04: Okay, that's helpful. Thanks again for the time.
spk08: And thank you. And one moment for our next question. And our next question comes from both George from KBW. Your line is now open.
spk19: And good morning. I can ask you one more on the agency MBS. In 2024, how big a piece of your, or your assets or equity do you think agency MBS could become?
spk06: That's a good question. A lot of it is market dependent. Right now, these spreads are around 160, in the low 160s in terms of what we're seeing today. A lot of the assets that we were purchasing in the earlier half of the last quarter was higher than that. So at this juncture, we do believe that the pace of agency RMBS procurement, given current market conditions, will be a little bit slower. But with that said, we do have available available capacity to like into this. I would say that, you know, the we will still have a relatively consistent pipeline in terms of purchases from quarter over quarter, but the pace will not be as quick as as robust as we have seen in Q3 and Q4.
spk19: So okay, great. That's helpful. Thanks. And then switching over to the JV, the multifamily portfolio, what's the kind of the current return on the equity that's in that mix? And I mean, if you retain that or the, you know, the other nine properties, is the return there really coming from sort of the increase in the value of that over time, or just just trying to think about how that impacts the overall ROE of the, you know, of the balance sheet?
spk07: Yeah, so on the JV equity book, you know, the 57 million that we have exposed on our held for the held in use group and 35 million in JV equity, I would say overall, not materially significant to our earnings growth, given the size that that's remaining. You know, these assets were bought in the, you know, 5% cap rate and levered. And, you know, go forward, you know, we believe that a lot of the return attribution from here is going to be on property valuation increase as the NOI builds. I mean, we, when I talk about the value add program, it's more than just releasing activity and getting a better, you know, sequential quarter, year over year rent increase. It's also our occupancy. Many of the units had to be, you know, unoccupied as the valuation, as the value add program was implemented. And then, you know, putting tenants back in really materially increases the value of the property. So, you know, we expect go forward from here, you know, the cash flows of the property, obviously, in kind of the mid single digits range, but evaluation is what we're focused on as it relates to that value add. And we call it the, you know, the J curve in this program.
spk19: Okay, great. And then actually, just one more, in terms of the portfolio, you know, as it is right now going into 24, what's kind of the economic return you think that it can generate?
spk05: The portfolio, are you speaking
spk06: specifically about the multifamily JV equity or just portfolio?
spk19: No, actually the whole balance sheet, just, you know, just the ROE or, you know, just including expenses, just kind of, you know, how do you think it's positioned now in terms of what it can generate?
spk03: We estimate about mid teens return.
spk07: Yeah, I'll add to that. So, you know, we are, Nick just highlighted the return attribution per asset class. You know, one of the biggest factors for us on earnings growth is, you know, deployment of our dry powder that we've highlighted at 431 million in Q4, which also does not include, you know, the agency capital allocation that we've included. And, you know, with the way we're looking at agencies, you know, we're very opportunistic on that asset class. As Nick mentioned, you know, the pace will change depending on what the market's providing us on entry points. But overall, you know, we see that as a, you know, as a means to deploy capital and to stabilize our interest earnings, which, you know, we started in March 2023. But overall, you know, we're looking for further, you know, look for dislocation this market into more attractive entry points, particularly in the space where, you know, risk adjust returns, we believe are not as attractive as will be in the future. And therefore, you know, these are assets where, you know, look at in the credit space, anywhere from five to seven year durations, you only have an opportunity to buy it once, and then you're dealing with asset management and go forward returns from there. So, you know, we want to be very patient in our deployment schedule as it relates to those longer duration assets. As I highlighted in my earlier comments, you know, we do see about, you know, $2.8 trillion of CRE debt that's going to be coming due in the next four years. That's about half a billion per year. And banks are obviously very exposed to that with 50% of the exposure. And with that said, you know, liquidity, we believe, will be strained as the CRE debt is sorted out. So overall, you know, we do see more attractive opportunities in the future, highlighting our more conservative stance on deployment and asset allocation.
spk19: Okay, great. That's helpful. Thank you.
spk08: And thank you. And one moment for our next question. And our next question comes from Matthew P. Howlett from B. Riley. Your line is now open. Hi, good morning, everyone.
spk10: Thanks for taking my question. Hey, Jason, how do you, and I love this slide on the CRE market, the maturities coming up and, you know, what's being held by the banks, and all that stuff's probably underwater. How do you envision NYT participating in that? You could be buying sort of distress paper out there. We'd be providing rescue capital. How can you, how do you envision yields and leverage yields? Are we talking big teams? Just walk me through how you think NYT can participate in, was probably going to be a wave of maturity defaults and other distress.
spk07: Yeah, great question. So, you know, the way we look at this market is in two ways. There's a vintage effect. The vintage effect is based on entry points and financing costs at that time. And so if you look at basically, you know, 2021's first half and earlier, we see that as more of a market opportunity for us in the case of preferred equity lending, mezzanine lending, as simply as, you know, senior lending cut back about 20%, 15% in LTV. There needs to be a bridged lending gap funding source for that paper. That's an opportunity that is more on the performing side. And I'll call that dislocated. On the distress side, you know, it's the 2021 second half vintage and later, where, you know, not only have, you know, funding costs and LTV has been cut back on senior lending, but there's also issues on NOI and basically negative carry related to current financing costs. So, you know, as the market, you know, is now in around, you know, 6% plus type of financing costs and your cap rates at those earlier purchase points were at four and three quarters to five to five and a quarter range. You know, there's going to be some haircuts that have to be taken on those assets to basically refloat the positive carry. So in that case, the opportunity is multiple, you know, in multiple directions. It's recaps, it's, you know, senior loan purchases. And, you know, I would argue that, you know, a lot of this is to come. There's been quite a bit of cap arrays in the market as a whole. We're looking at it as there just hasn't been a lot of opportunity with respect to, you know, bank selling at discounts. The market has not gotten to that point just yet, but we believe, you know, over the course of, as these maturity schedules continue to come through and the lack of willing, you know, buyers stepping up at current evaluations, there's an opportunity there to work with banks, not only with respect to, you know, loan purchases, but also with respect to servicing. You know, our asset management platform is, you know, a 30-person team has been doing this for multiple decades. You know, it's very capable and very, not many institutional players are involved in that space where we can come in and use our technology and experience to help these positions and also get a look at the potential outtake of the actual, of the opportunity or the restructuring would take place. So, you know, we have been spending a lot of time on that and see an enormous opportunity for us, you know, in the near term.
spk10: That's interesting. You could partner with the banks and buy paper and do all those servicing. That's an interesting dynamic. I mean, I know it's early, but near crystal ball, I mean, we're talking what type of, I'm assuming a lot of these yields are to be unlevered. We think you're already getting mid-teens in your agency and 19 in your BPL. You think yields could be bad or unlevered, yields that or above that, you know, in this market? I mean, it just seems like it could be an incredible opportunity in any sense on what returns could look like.
spk07: Yeah, I mean, we're seeing that our mezzanine, you know, the mezzanine asset class today is around a 15% return opportunity. And that's, you know, at the, you know, kind of the 70s to very low 80s LTV range. So, you know, if you're looking at these assets and particularly what's called loan purchases, the market is going to, you know, look at it as a mid-teen type return opportunity. I mean, all you have to do is look at the debt funds that have been raised in this asset class and the return hurdles that they're speaking to their investors. And you can back into what you think, you know, what those, that senior note that discount needs to be based on the three and a half, you know, percent coupon that would exist on that bond or that note. So, you know, overall, you know, our opportunity, we would not avail our capital to it unless we saw a mid-teens and above type of return, you know, to our capital.
spk09: Great. Well, it's worth keeping all that dry powder for it. Thanks a lot.
spk08: And thank you. And one moment for our next question. And our next question comes from Doug Carter from UBS. Your line is now open. Hi. This is Cory Johnson on for Doug Carter. Sorry if I missed this earlier, but do you happen to provide any update on the book value for, the updated book value for this first quarter?
spk05: Hi Cory. No, we did not. We did not mention that earlier. So as of February
spk06: 20th, we see quarter to date adjusted book value to be down about 3%.
spk08: Okay. Thank you. Appreciate it. I'll follow ahead.
spk01: Thanks.
spk08: And thank you. And one moment for our next question. And our next question comes from Eric Hagen from BTIG. Your line is now open.
spk02: Hey, good morning. Hope we're doing well. To follow up on the book value mark to market quarter to date, can you flush out or provide any color about what's maybe, drag that down a little bit. And then in the BPL bridge portfolio, is there an unfunded commitment that's associated with that book? Thank you so much.
spk06: Yeah, no problem. On the first question is primarily driven by rate moves and primarily driven by rate moves adjusting yields higher on residential credit assets primarily. And then on the second question, yes, there's usually unfunded commitment on these BPL loans. But for the most part, I think what we try to do is we try to, a lot of the assets that we try to purchase have, we try to limit the amount of additional rehab that needs to be done because as you have larger rehab projects such as ground up, and if there is a point where the borrower hands back the keys that now you have this midstream project that you have to manage. So generally speaking, we try to limit how much additional rehab and try to make it as down the fairway in terms of projects as possible.
spk02: Yep, that's helpful. Is there a balance associated with the unfunded commitment? Looks like
spk18: the about 6.6 million of unfunded commitment liability that we have on our books.
spk20: Got it. Okay. Thank you guys so much.
spk08: And thank you. And if you would like to ask a question that is star one one, again, if you would like to ask a question that is star one one, one moment for the
spk11: Q&A. And I am
spk08: showing no further questions. I would now like to turn the call over to Jason Serrano for closing remarks.
spk07: Yes, thank you for joining our fourth quarter earnings call. We look forward to speaking with you on our first quarter call in early May. Have a great day.
spk08: This concludes today's conference call. Thank you for participating. You may now disconnect. Good morning, ladies and gentlemen. And thank you for standing by. And welcome to the New York mortgage trust fourth quarter, 2023 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. If you have a question, please press star followed by one one on your touchtone phone. If you would like to withdraw your question, please press the pound key. If you are using speaker equipment, we do ask that you on Thursday, February 22nd, 2024. I would now like to turn the call over to Christine Salem, investor relations. Please go ahead.
spk13: Thank you all for joining New York mortgage trust fourth quarter,
spk17: 2023 earnings call. A press release and supplemental financial presentation with New York mortgage trust fourth quarter, 2023 results was released yesterday. Both the press release and supplemental financial presentation are available on the company's website at .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 meaning 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 are detailed in yesterday's press release and from time to time in the company's filings with the securities and exchange commission. Now, at this time, I would like to introduce Jason Torano, chief executive officer. Jason, please go ahead.
spk07: Thanks, Christy. Welcome to New York mortgage trust fourth quarter earnings call. Also joining me is our president Nick Ma and our CFO, Christine Arrio. After the chair surprised Dovish commentary late in the fourth quarter, much relief was immediately provided to the market in the form of lower medium term rates. However, the market gave back much as a relief after the latest deep-fried print, which was more than a two standard deviation then from market expectations. With these gyrations, economists continue to update models with forecasts to predict the likelihood and timing of a soft landing or recession. Curiously, under extreme unbalanced sector gains in the US equity markets, debate rages on about the ability of the US economy to innovate its way through the hangover of a debt-fueled expansion. Our task is to determine how to prudently allocate capital against the potential long-term investment risk posed by slowing this economy. Our planning for this cycle was vastly completed last year. Now in 2024, we look forward to building the company's earnings base, given a portfolio reshaped with lower credit risk and asset duration. A goal for today is to explain this evolution and why we believe our balance sheet is prime for growth through a dislocated market. We believe this cycle can provide significant value to the company, not just over 2024, but the remainder of the decade. For success, our team will need to reach deep into the multiple decades of investment experience in sourcing, valuation, and asset management execution. We are excited about the opportunity ahead of us. Starting with fourth quarter activity noted on page four of our Q4 supplemental, the company generated earnings per share of 35 cents or 37 cents on an unappreciated basis. Adjusted book value per share ended the quarter at $12.66 or down 2.09%. After 20-cent dividend, quarterly adjusted economic return was negative 54 basis points. Book value gains from our single family portfolio was largely offset by valuation reductions to our multi-family joint venture equity portfolio. After further dispositions, unrealized losses, and reclassifications of certain properties to held and used in the quarter, we have approximately 35 million remaining of capital allocated to JV multi-family equity that we intend to sell in the near term. Christine and Nick will provide additional details on this point a bit later. In setting up 2024, we enhanced our purchasing power by renewing and increasing warehouse line capacity to 2.2 billion, providing 1.6 billion of undrawn financing as of the fourth quarter. Additionally, to enhance liquidity, we issued our third BPL securitization in early January. Consistent with past deals issued by NYMT, the $225 billion securitization contains a revolver for future BPL acquisitions. Page eight of our supplemental shows two important graphs that help shape our market view, starting with the U.S. deficit spending, which may have had a role in delaying economic contraction in 2023. The CBO recently reported that the U.S. budget deficit is expected to total $1.6 trillion in 2024. Over the next 10 years, the budget gap will grow another $1 trillion. Remarkably, interest expenses expect to total over $1 trillion in this year alone. The consequence of high Treasury issuance to fund U.S. deficit spending results in stubbornly high long-term rates, even in the case Yellen continues to utilize a high allocation of short-term bills to fund the budget shortfall. To meet the liquidity needs of the U.S. government, global investment allocation to U.S. Treasuries could be devoid from other sectors and tenors within those sectors. In this scenario, the CRE space is particularly vulnerable. Fresh liquidity is required to recapitalize $2.8 trillion of debt maturing over the next four years, half of which is held by banks. Banks' ability to offer CRE refinancing packages on one hand while spending off CRE loss reserves on the other is likely to further restrict lending in the market. The opportunity available for permanent capital with access to liquidity is great. For over a decade, our team has experienced generating opportunities in the multifamily bridge loan sector. Coupled with the extensive asset management experience, New York Mortgage Trust platform can opportunistically navigate through the CRE dislocation on multiple fronts. We see a spillover effect constraining residential loan markets as well. Bridge loans and alternative financing for single-family residential properties used for investment purposes is likely to be transformed into a new generation of lending. After $3.5 billion of residential bridge loans invested to date, our team has the experience to capitalize on the opportunity. As previously documented, our approach to enhance company liquidity began in March 2022. We committed to curtailing investment activity, particularly in medium to long-duration credit in favor of a portfolio rebalancing to provide enhanced flexibility. In early 2023, we continued to prioritize increased liquidity over balance sheet growth in consideration of a potential slowing U.S. economy and increased market credit concerns. Later in 2023, we recognized a recession call was premature. Nevertheless, we remained concerned about a strain in market liquidity. Thus, we increased our portfolio exposure to agency RMBS to stabilize portfolio interest income. We are pleased to report that company-adjusted interest income increased 22% -over-quarter to $72.5 to $9. At the start of the fourth quarter, we added agency RMBS added tracking spreads. We also continue to add short-duration high-coupon residential property bridge loans, reversing a sequential quarter portfolio decline. With recent improvement to securitization market funding, we expect to meaningfully add detailed bridge loans throughout the year. With $431 million of dry powder available, not including capital allocated to the liquid agency RMBS sector, our balance sheet is structured for growth. We will continue to utilize a patient approach for portfolio growth. We believe this path will yield superior results not only this year, but has the potential to enhance results in the years ahead as trillions of dollars of maturing commercial real estate debt is sorted out. At this time, I'll pass the call over to Christine for additional comments on our financial results and then to Nick for portfolio manager discussion. Christine.
spk18: Thank you, Jason. Good morning. Today, I will focus my commentary on main drivers of fourth quarter financial results. Our financial snapshot on slide 12 covers key portfolio metrics for the quarter. Slide 26 summarizes the financial results for the quarter. As Jason just covered, the company had undepreciated earnings per share of 37 cents in the fourth quarter as compared to undepreciated loss per share of $1.02 in the third quarter. Our earnings were impacted primarily by valuation improvements on our residential loan and bond portfolios, which resulted in $1.69 per share of unrealized gains recognized during the quarter. These gains were offset by a recognition of 38 cents per share of losses on certain multifamily real estate assets held by JV equity investments and disposal group held for sale due to a decrease in the estimated fair value of cost to sell of the real estate assets and the reclassification of certain of our joint venture equity investments in multifamily properties from held for sale to held in use that I will discuss further. We experienced solid momentum in our portfolio acquisitions over the past three quarters after significantly reducing our investment activity for most of 2022, increasing our investment portfolio on a net basis by approximately $0.4 and $1.3 during the fourth quarter in the year, respectively, ending at $5.1 as of December 31. This was the primary driver of the increase in our interest income and adjusted interest income contribution for the quarter. Net interest income was relatively flat in the fourth quarter, contributing $16.8 million or $0.19 per share, while our adjusted net interest income, a non-GAAP financial measure, increased to $23.5 million from $20.7 million in the third quarter. Our quarterly adjusted interest income increased by $13.2 million, primarily as a result of the $674 million in investments made in agency RMBS and higher yielding short duration BPL bridge loans during the quarter. The increase in adjusted interest income was partially offset by a $10.4 million increase in adjusted interest expense due to the financing of investments made during the quarter. Our interest rate swaps continue to benefit our portfolio, reducing our adjusted interest expense during the quarter. Overall, the operations of our consolidated multifamily joint venture properties contributed a net loss of $0.8 per share during the quarter. Since investing in this asset class, we have disposed of six multifamily joint venture properties, four of which occurred in the second quarter of this year and one in the current quarter. This resulted in a decrease in overall net loss from real estate during the quarter. As mentioned earlier, we recognize $34.4 million or $0.38 per share of losses related to the following. First, an $18.3 million or $0.20 per share loss from impairment charges in real estate due primarily to lower net operating income estimates resulting in lower property valuation as compared to our carrying class of multifamily properties held for sale. Second, a $16.2 million or $0.18 per share loss related to reclassification of nine multifamily properties from held for sale to held in use as of December 31 as they no longer met the criteria to be held for sale in conformity with GAP. The reclassification of the real estate assets from held for sale to held in use was at the lower fair value or carrying amount before the real estate assets were classified as held for sale, adjusted for depreciation and amortization expense that would have been recognized had the real estate assets been continuously classified as held in use. This changed to our plan of sale on these JV investments and multifamily properties, but it's due to unfavorable market conditions and the lack of transactional activity in the multifamily market that negatively impacted our ability to secure a reasonable buyer and completely exit our investment in these giant ventures. We continue to market for sale our JV equity investments in five multifamily properties, but we can provide no assurance of the timing or success of our ultimate exit from these investments. As mentioned earlier, fair value changes related to our investment portfolio continue to have significant impact on our earnings. During the quarter, we recognize 152.9 million or $1.69 per share of unrealized gains due to higher asset prices on our residential loan and bond portfolios. These gains were partially offset by a 71 cents per share in losses recognized in our derivative instruments primarily consisting of interest rate swaps and caps and $0.27 per share in real life losses related to the sale of nonagency RMBS and CMBS and losses incurred on foreclosed properties during the quarter. We had total GNA expenses of $11.7 million, which remained relatively flat as compared to the third quarter. We had portfolio operating expenses of $6.1 million, which increased primarily due to legal fees incurred related to the asset management of our BPL bridge portfolio. Adjusted book value per share ended at 12.66, down 2% from September 30. The main drivers of our adjusted book value change was a 35 cents in basic income per share, a reduction of 20 cents per share related to our declared dividend, a reduction of 7 cents per share primarily due to the removal of depreciation and amortization add back, attributable to consolidated multifamily properties for which impairment was recognized during the quarter, and a negative 39 cents per share change in estimated
spk16: fair value for liabilities.
spk18: As of quarter end, the company's recourse leverage ratio and portfolio recourse leverage ratio increased to 1.6 times and 1.5 times respectively from 1.3 times and 1.2 times respectively as of September 30. While our financing leverage remains low relative to historic levels, we would expect our leverage to move higher as we expand our holdings of highly liquid agency RMBS. Our portfolio recourse leverage on our credit book is up slightly at 0.4 times when compared to 0.3 times for the previous quarter. Currently, 58% of our debt is subject to mark to market margin calls of which 45% is collateralized by agency RMBS and 13% collateralized by residential credit assets. The remaining 42% of our debt as of December 31 has no exposure to collateral repricing by our counterparties. And as Jason mentioned earlier, we completed a revolving business purpose loan securitization last month. Consequently, this securitization reduced debt subject to mark to market risk from 58% to 55% and our recourse leverage ratio and portfolio recourse leverage ratio to 1.5 times and 1.4 times respectively. We paid a 20 cents per common share dividend down from 30 cents in the prior quarter. We continue to evaluate our dividend policy each quarter and look at the 12 to 18 month projection of not only our net interest income but also realize for capital gains that can be generated from our investment portfolio. We remain committed to maintaining an attractive current yield for our shareholders and we believe that the current dividend provides excess liquidity for reinvestment in a more attractively priced market. I will now turn it over to Nick to go over the market and strategy update. Nick?
spk06: Thanks, Christine. Good morning, everyone. In the quarter, we witnessed a key moment in the shift of the market sentiment. This follows the pivot in the Fed's stance on future monetary policy. Through Q4, we experienced dramatic moves in interest rates with five-year treasuries trending up to 5% in October, then sharply reversing course to end the year at 3.9%. The Fed's restrictive policy has made further inroads in subduing inflation with economic data in the quarter pointing to the continued moderation of inflationary pressures. Fed Chair Powell's remarks in December further highlighted that the FOMC is now taking a more balanced approach to tackling inflation and managing economic risks. The market reacted positively with tightening spreads across asset classes alongside a falling interest rate curve. Over the course of the last year, NYMT has refocused on growing the balance sheet to achieve more consistent earnings. This was a shift in strategy given several prior quarters of minimal investment activity. We were initially concerned of heightened credit risks under the Fed's restrictive interest rate regime. Through 2023, we grew our portfolios such that we can generate more consistent income while also maintaining liquidity for future opportunities. Over the quarter, we invested in $674 million of assets, primarily concentrated in $416 million of agency RMDS and $232 million of bridge loans. The pace of agency RMDS purchases has slowed from last quarter's $946 million as we curbed our buying in response to the decline in yields in the latter half of the quarter. Current coupon mortgage spreads to interpolated 5- and 10-year Treasuries started the quarter in the high 170s, reached a quarterly peak in October in the high 180s, then trended down to the end of year in the high 130s. 77% of our agency purchases in the quarter was prior to the near-term peak of rates on October 19th. In DPL bridge, we have made further progress to boost the volume of asset acquisitions with three quarters of consecutive growth. In 2023, we have grown our agency RMDS from zero to almost $2 billion of market value. We took advantage of the historically widespread in the sector that persisted throughout the year, driven by high interest rate volatility and tepid incremental demand from banks and money managers. In particular, we sought to build a portfolio of higher coupon-specified pools under this favorable return environment. Quarter over quarter, the agency RMDS portfolio grew by approximately 30% on a market value basis. The average coupon of our spec pools continues to rise, increasing from .73% to .85% this quarter, driven by purchases primarily concentrated in .5% coupon bonds. Leverage in the strategy declined to 6.7 times as of year end, down from 8.5 times in the prior quarter. The declining leverage ratio was due to price increases in the agency bonds amid lower yields and the slowdown of acquisitions in the latter half of the quarter. Given the available capital and the ability to scale up leverage in the portfolio, we still have capacity to meaningfully expand our agency RMDS exposure. We look to increase the portfolio's allocation to agencies under the current market environment, with high spreads still presenting a compelling risk-adjusted return. Additionally, the asset class has also an added benefit of having outperformed in periods of economic downturn. BPL bridge is a core asset class for us due to its high return and short tenor profile. The short tenor of the portfolio allows for flexibility to redeploy the return capital into BPL bridge or other investments, depending on conditions. From a credit perspective, the BPL bridge portfolio continues to perform to expectation. Over the past few quarters, the level of delinquency in BPL bridge has moderated to 20% and -to-date cumulative losses in the strategy is under 10 basis points. In the past, the shrinking BPL bridge portfolio balance due to a reduction in investment activity contributed to the high delinquency numbers on a percentage basis. Under the heightened acquisition pace where the portfolio is growing quarter over quarter, this delinquency effect should be muted. For our current acquisition pipeline, we note that the credit profile of new purchases has improved versus the existing portfolio. In particular, we try to avoid niche subsectors within BPL bridge, such as ground-up construction or small balance multifamily. These are segments of the market that have experienced constraints given the retrenchment of regional bank lending and therefore an increased risk of future credit dislocation. Furthermore, both ground-up and small balance multifamily present increased default management challenges if delinquencies rise. Our purchases in the quarter consists of only 3% ground-up construction loans versus the portfolio average of 13%. We did not purchase any multifamily-backed bridge loans in Q4. The credit profile of our purchases both historically and today remains strong, with borrower credit scores above 700 FICO, loan to after-repair value ratios or LTARVs in the mid-60s and loan to cost ratios or LTCs in the low 70s. We aim to continue growing our purchases in BPL bridge in the coming quarters. In January 2024, NYMT also executed on its third BPL bridge securitization. This two-year revolving structure will be beneficial for the funding of and future purchases of BPL bridge. On the heels of tightening rates and spreads in the fourth quarter, there has been a flurry of activity in the non-agency securitization market. Issuers are trying to capitalize on better deal execution than what was available for most of 2023. An additional noteworthy point is that the first-ever -grade-rated bridge securitization came to market in 2024, which will be an important evolution in the structure to fund these assets. Rated transactions should provide better financing costs relative to the historical unrated structures. NYMT's BPL bridge purchase program fits very well with the tighter credit box necessary for a rated transaction. Rated deals have more punitive structural treatment of ground-up construction due to its correlation with higher rehab requirements. It is also restrictive on multifamily bridge loans. As I alluded to before, we have already been reducing exposure to these loans already. We plan to be an issuer of these rated deals in the future. On multifamily mezzanine lending, 2023 continues the historical strong performance of this asset class. The payoff rate of the portfolio has accelerated in 2023 at 37% compared to 32% in 2022. This is also higher than the historical annual payoff rate of 28%. The expectation for the portfolio is that this payoff rate should continue to remain high, primarily driven by the seasoning of the portfolio at 29 months and the 83% LPV at origination. Occupancy rates of the portfolio today have also been strong at 90%. Given that we significantly reduce our purchases since 2022, our portfolio has more years of locked-in rental growth at lower property acquisition entry points. This translates to additional equity buffer for the borrower and further alignment with NYMT's mezzanine position. We believe that the sponsors in our portfolio are in a position to monetize these assets today, fueling paydowns in the portfolio. Contrast this with later vintage originations in the market. We have limited exposure to the market. The market has been in a state of crisis since 2022, as the originations from 2022 onwards as Fed rate increases took center stage. There has been upward pressure on cap rates and market shifts, causing certain pro-forma projections on NOI to be unachievable. On multifamily JB equity, we do not expect any future equity funding of new positions within this asset class, as our efforts are focused on the asset management and sale of the existing portfolio. We have made progress on the wind-down of these assets that began in Q3 of 2022. So far, we have completed the sale or resolution of six of the original 20 properties, leaving 14 remaining properties as of the end of the year. In the quarter, as Christine noted, we have moved nine of the remaining 14 assets to held and used. The market for the sale of these properties have become more challenging, as the pending forward supply of new multifamily properties has contributed to slowing rent growth. Increased operating expenses, taxes, and insurance have also impacted overall property NOI. These factors, along with the interest rate volatility and an uncertain path for future cap rates, result in a wider bid-ask spread in the market. We find it more productive for our asset management team to complete any beneficial value add programs on these properties to maintain or bolster occupancy for an improved NOI profile in the future. I'll now turn the call back to Jason.
spk07: Thanks, Nick. The company is focused on opportunities in the market undergoing a structural landscape change. Balance sheet growth is expected to continue with agency securities, short-term bridge loans, and structured derivatives. In this new environment, success may be achieved through organic creation of liquidity, tactical asset management, and prudent liability management. At this time, I'd like to open the call for questions. Thank you.
spk15: And thank you.
spk08: As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And one moment for our first question. And our first question comes from Jason Weaver from Jones Trading. Your line is now open. Hi. Good morning. Thanks for taking my question.
spk04: So I was wondering how you look at the effective tradeoff in terms of allocating new capital to agency versus BPL bridge and what the relative ROEs are. Is that really just a timing issue alone given that allocating to agency is just a lot more liquid market in the immediate term?
spk06: Yeah. Thanks for the question, Jason. This is Nick. Yeah. A big part of it is the fact that agencies are liquid. You're seeing faster growth in that portfolio because we can deploy capital much quicker. But the goal is to have our BPL bridge to continue to grow. In terms of ROEs, we do see, based on our leverage ratios in our agency portfolio, somewhere in the mid-teen step return. And then in our BPL bridge, we see under a securitization profile somewhere in the high 15 step return. So at the margin from a return perspective, we do prefer BPL bridge. But because of our, as I mentioned earlier, a tighter credit box, it does take a little bit longer to procure.
spk04: Got you. Thank you. That's helpful. And focusing a little bit more on the agency side, I was curious how you think about the convexity risk in some of those higher coupon assets. I do get softer monetary policy. What's the likely reaction in prepayments on some of those? Are you thinking?
spk06: Yeah. We do understand that there's a trade-off between the convexity and the carry profile that we are targeting. Our general stance is that rates, and we've started to see that at the beginning of this year, will potentially stay higher for longer. So we don't mind participating in that particular part of the coupon stack. Furthermore, there is also, we do have a relatively large credit portfolio. And our credit portfolio that was accumulating at a time period where rates were lower has a different convexity profile with lower coupons in that particular sector. So we find that this is a nice balance for both. So a lot of the BPL bridge that we're buying has higher coupon, higher return, and a lot of the agencies also have that high carry profile at the expense of some convexity risk. But we do believe looking at the portfolio as a whole is relatively balanced.
spk04: Thanks. That's helpful color. And just one more, I appreciate your comments on the remaining multifamily JV equity that you have on board. I think it's, and just to hone in, I believe it's 14 assets and about $35 million in equity are so about, have you actively been marketing those properties and have you received any bids, but they just really are at haircuts that are not attractive to you or is it not at that stage yet?
spk07: I'll take that question. Jason Serrano. The five assets that we have marketed, we have not received bids directly on those assets just yet. Two of those, and I'm talking about this year, two of those were in a process last year where the sponsor walked away from a deposit that we held back and it was due to changes in their funding requirements and rates that moved on them during that period and it seemed like that buyer wasn't hedged. So in that case, we did have very attractive pricing there and we looked to basically go back out to the market given that the funding costs have alleviated somewhat and are back to the kind of levels where these buyers were engaged. So that's just two of the five. And again, overall, it's a very small portfolio and the assets we chose to put out to the market are assets that we've completed our value add program where we believe that the go-forward NOI has been stabilized and therefore the bids will be attractive for us to execute. And just to further round up the question, we have nine assets which are not part of the sale or disposable group and are held in use and those are assets that we are still in the process of completing our value added program and there's a bit of a J curve that's still left on those assets. We have looked at whether or not that should be part of that disposal group and the answer is given that the cash flows are increasing, the NOI is increasing in those assets as those value add program capex programs have achieved higher rents and it is a more difficult funding market. We believe it's better to hold those assets on more of a medium to longer term basis and benefit from the NOI growth and property valuation increase. So that's kind of the split out and on those nine, we have not received bids directly on those assets.
spk04: Okay, that's helpful. Thanks again for the time.
spk08: All right. And thank you. And one moment for our next question. And our next question comes from both George from KBW. Your line is now open.
spk19: Yes, good morning. I actually want more on the agency MBS. In 2024, how big a piece of your you know, or your assets or equity do you think agency MBS could become?
spk06: Thanks. That's a question. We it's a lot of it is market dependent. Right now, Z spreads are around 160 in the low 160s in terms of where we were, what we're seeing today. A lot of the assets that we were purchasing in the earlier half of the last quarter was higher than that. So from at this juncture, we do believe that the pace of agency RBS procurement given current market conditions will be a little bit slower. But with that said, we do have available available capacity to like into this. I would say that, you know, the we will still have a relatively consistent pipeline in terms of purchases from quarter over quarter, but the pace will not be as as quick as as robust as we have seen in Q3 and Q4.
spk19: Okay, great. That's helpful. Thanks. And then switching over to the JB, you know, the multifamily portfolio, what's the kind of the current return on the equity that's in that mix? And I mean, if you retain that or the, you know, the other nine properties is the return they're really coming from sort of the increase in the value of that over time, or just just trying to think about how that impacts the overall ROE of the, you know, the balance sheet.
spk07: Yeah, so on the equity book, you know, the 57 million that we have exposed on our help for the held in use group and 35 million in JB equity, I would say overall, not materially significant to our earnings growth, given the size that that's remaining. You know, these assets were bought in the, you know, 5% cap rate and and levered. And, you know, go forward, you know, we believe that a lot of the return attribution from here is going to be on property valuation increase as the NOI builds. I mean, we, when I talk about the value add program, it's more than just releasing activity and getting a better, you know, sequential quarter, year over year rent increase. It's also our occupancy. Many of the units had to be, you know, unoccupied as the valuation, as the value add program was implemented. And then, you know, putting tenants back in really materially increases the value of the property. So, you know, we expect to go forward from here, you know, the cash flows of the property, obviously, in kind of the mid single digits range, but evaluation is what we're focused on as it relates to that value add. And we call it the J curve in this program.
spk19: Okay, great. And then actually just one more in terms of the portfolio, as it is right now going into 24, what's kind of the economic return you think that it can generate?
spk05: The portfolio, are you speaking specifically about the multifamily JV equity or just portfolio?
spk19: No, actually the whole balance sheet, just, you know, just the ROE or, you know, just including expenses, just kind of, you know, how do you think it's positioned now in terms of what it can generate?
spk03: We estimate about mid teens return.
spk07: Yeah, I'll add to that. So, you know, we, Nick just highlighted the return attribution per asset class. You know, one of the biggest factors for us on earnings growth is, you know, deployment of our dry powder that we've highlighted at 431 million at the end of Q4, which also does not include, you know, the agency capital allocation that we've included. And, you know, with the way we're looking at agencies, you know, we're very opportunistic on that asset class. As Nick mentioned, you know, the pace will change depending on what the market's providing us on entry points. But overall, you know, we see that as a, you know, as a means to deploy capital and to stabilize our interest earnings, which, you know, we started in March 2023. But overall, you know, we're looking for further, you know, look for dislocation this market and more attractive entry points, particularly in the credit space where, you know, risk adjust returns, we believe are not as attractive as will be in the future. And therefore, you know, these are assets where, you know, looking in the credit space anywhere from five to seven year durations, you only have an opportunity to buy it once, and then you're dealing with asset management and go for returns from there. So, you know, we're, we want to be very patient in our deployment schedule as it relates to those longer duration assets. We, as I highlighted in my earlier comments, you know, we do see about, you know, $2.8 trillion of CRE debt that's going to be coming due in the next four years. That's about half a billion per year. And banks are obviously very exposed to that with 50% of the exposure. And with that said, you know, liquidity, we believe will be strained as the CRE debt is sorted out. So overall, you know, we do see more attractive opportunities in the future, you know, highlighting our more conservative stance on deployment and asset allocation.
spk19: Okay, great. That's helpful. Thank you.
spk08: And thank you. And one moment for our next question. And our next question comes from Matthew P. Howlett from B. Riley. Your line is now open. Hi, good morning, everyone. Thanks for
spk10: taking my question. Hey, Jason, how do you, how do you, you, I love this slide on the, on the CRE market, the maturities coming up and, you know, what's being held by the banks and all that stuff's probably underwater. How do you envision an NYT participating in that? You could be buying sort of distressed paper out there. We'd be providing rescue capital. How can you, how do you envision yields and leverage yields? Are we talking about teens? Just walk me through how you think NYT can participate in, was probably going to be a wave of maturity defaults and other distress.
spk07: Yeah, great question. So, you know, that the way we look at this market is in two ways. There's a vintage effect. The vintage effect is based on entry points and financing costs at that time. And so if you look at basically, you know, 2021's half and earlier, we see that as more of a performing market opportunity for us in the case of preferred equity, lending, mezzanine lending, as simply as, you know, senior lending cut back about 20%, 15% in LTV. There needs to be a bridged lending gap funding source for that paper. That's an opportunity that is more on the performing side. And I'll call that dislocated. On the distress side, it's the 2021 second half vintage and later, where not only have funding costs and LTV has been cut back on senior lending, but there's also issues on NOI and basically negative carry related to current financing costs. So, you know, as the market is now in around 6% plus type of financing cost and your cap rates at those earlier purchase points were at the four and three quarters to five and a quarter range, you know, there's going to be some haircuts that have to be taken on those assets to basically refloat the positive carry. So in that case, the opportunity is multiple, you know, in multiple directions. It's recaps, it's, you know, senior loan purchases. And, you know, I would argue that, you know, a lot of this is to come. There's been quite a bit of cap arrays in the market as a whole. We're looking at it as well. And there just hasn't been a lot of opportunity with respect to, you know, bank selling at discounts. The market has not gotten to that point just yet. But we believe, you know, over the course of as these maturity schedules continue to come through and the lack of willing, you know, buyers stepping up at current evaluations, there's an opportunity there to work with banks, not only with respect to, you know, loan purchases, but also with respect to servicing. You know, our asset management platform is, you know, a 30-person team has been doing this for multiple decades. You know, it's very capable and very, not many institutional players are involved in that space where we can come in and use our technology and experience to help these positions and also get a look at the potential outtake of the actual, of the opportunity or the restructuring that would take place. So, you know, we have been spending a lot of time on that and see an enormous opportunity for us, you know, in the near term.
spk10: That's interesting. You could partner with the banks and, you know, buy paper and do all those servicing. That's an interesting dynamic. I mean, I know it's early, but near crystal ball, I mean, we're talking what type of, I'm assuming a lot of these yields could be unlevered. Do you think, you're already getting mid-teens in your agency and 19 on your BPL. Do you think yields could be unlevered or above that in this market? I mean, it just seems like it could be an incredible opportunity in any sense on what returns could look like.
spk07: Yeah, I mean, we're seeing that our mezzanine, you know, the mezzanine asset class today is around a 15% return opportunity. And that's, you know, kind of the 70s to very low 80s LTV range. So, you know, if you're looking at these assets and particularly what's called loan purchases, the market is going to, you know, look at it as a mid-teen type return opportunity. I mean, all you have to do is look at the debt funds that have been raised in this asset class and the return hurdles that they're speaking to their investors. And you can back into what you think, you know, what those, that senior note discount needs to be based on the 3.5%, you know, percent coupon that would exist on that bond or that note. So, you know, overall, you know, our opportunity, we would not avail our capital to it unless we saw a mid-teens and above type of return, you know, to our capital.
spk09: Great. Well, it's worth keeping all that dry powder for it. Thanks a lot.
spk08: And thank you. And one moment for our next question. And our next question comes from Doug Harder from UBS. Your line is now open. Hi. This is Cory Johnson on for Doug Harder. Sorry if I missed this earlier, but do you happen to provide any update on the book value for, the updated book value for this first quarter?
spk05: Hi, Cory. No, we did not, we did not mention that earlier. So, as of
spk06: February 20th, we see quarter to date adjusted book value to be down about 3%.
spk08: Okay. Thank you. Appreciate it. That's all I had.
spk01: Thanks.
spk08: And thank you. And one moment for our next question. And our next question comes from Eric Hagen from BTIG. Your line is now open.
spk02: Hey, good morning. I hope we're doing well. To follow up on the book value mark to market quarter to date, can you flush out or provide any color about what's maybe, drag that down a little bit? And then in the BPL bridge portfolio, is there an unfunded commitment that's associated with that book? Thank you so much.
spk06: Yeah, no problem. On the first question is primarily driven by rate moves and primarily driven by rate moves adjusting yields higher on residential credit assets primarily. And then on the second question, yes, there's usually unfunded commitment on these BPL loans. But for the most part, I think what we try to do is we try to, a lot of the assets that we try to purchase have, we try to limit the amount of additional rehab that needs to be done because as you have larger rehab projects such as ground up, and if there is a point where the borrower hands back the keys that now you have this midstream project that you have to manage. So generally speaking, we try to limit how much additional rehab and try to make it as down the fairway in terms of projects as possible.
spk02: Yep, that's helpful. Is there a balance associated with the unfunded commitment? Looks like the
spk18: 6.6 million of unfunded commitment liability that we have in our books.
spk20: Got it. Okay, thank you guys so much.
spk08: And thank you. And if you would like to ask a question that is star 11, again, if you would like to ask a question that is star 11, one moment for the Q&A.
spk11: Okay. And I
spk08: am showing no further questions. I would now like to turn the call over to Jason Serrano for closing remarks.
spk07: Yes, thank you for joining our fourth quarter earnings call. We look forward to speaking with you on our first quarter call in early May. Have a great day.
spk08: This concludes today's conference call. Thank you for participating. You may now disconnect.
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