Flagstar Financial Inc (NYCB) 2019 Q2 法說會逐字稿

Greetings and welcome to the New York Community Bancorp Second Quarter 2019 Earnings Conference Call.(Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Sal DiMartino.

Thank you, you may begin.

Thank you and good morning, everyone.

This is Sal DiMartino, Director of Investor Relations, and thank you all for joining the management team of New York Community Bancorp for today's conference call.

Today's discussion of the company's second quarter 2019 performance will be led by President and Chief Executive Officer, Joseph Ficalora; and Chief Financial Officer, Thomas Cangemi; together with Chief Operating Officer, Robert Wann; and Chief Accounting Officer, John Pinto.

Before turning the call over to management, there's a few disclaimers we need to read.

Certain comments made on this call will contain forward-looking statements that are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those the company currently anticipates due to a number of factors, many of which are beyond its control.

Among those factors are: general economic conditions and trends, both nationally and in the company's local markets; changes in interest rates, which may affect the company's net income, prepayment income and other future cash flows or the market value of its assets, including its investment securities; changes in the demand for deposits, loans and investment products and other financial services; and changes in legislation, regulation and policies.

You will find more about the risk factors associated with the company's forward-looking statements in this morning's earnings release and in its SEC filings including its 2018 annual report on Form 10-K and Form 10-Q for the quarterly period ended March 31, 2019.

The release also includes reconciliations of certain GAAP and non-GAAP financial measures that may be discussed during this conference call.

As a reminder, today's call is being recorded.(Operator Instructions) And now to start the discussion, I will turn the call over to Mr. Ficalora, who will provide a brief overview of the company's performance before opening the line for Q&A.

Mr. Ficalora, please go ahead.

Thank you, Sal.

Good morning to everyone on the phone and on the webcast, and thank you for joining us today as we discuss our second quarter 2019 operating results and performance.

Earlier this morning, we reported diluted earnings per common share of $0.19 for 3 months ended June 30, 2019, unchanged from the 3 months ended March 31, 2019.

We're very pleased with our performance during the second quarter, which has highlighted the strong loan and deposit growth, a continued focus on lowering our operating expenses, a relatively stable net interest margin and as always, our hallmark asset-quality metrics.

Furthermore, we believe that the company is well positioned for a lower interest rate environment given its viability sensitive balance sheet and the changed landscape in the New York City rent-regulated multifamily real estate market given our underwriting standards, our expertise and longevity in the market and our long-term relationships with the borrowers and brokers in this segment of the market.

To that end, before talking about our financial performance this quarter, I would like to comment on the new rent regulations and how we are impacted.

In light of the new regulations, we have evaluated our underwriting and credit risk management practices and we will continue to be an active participant in this market with underwriting guidelines appropriately calibrated to the new environment, and more importantly, we will continue to support our borrowers.

We have always been a conservative lender in this space, one who lends based on current, not projected cash flows, and this conservatism has served us well in the 50 years in which we have been actively involved in this type of lending.

As you can see by some of the additional information provided this morning, we are a low LTV lender compared to many of our competitors and therefore, our portfolio should perform much better under the new regulations.

Moreover, the bank has always been a main beneficiary of dislocation in the multifamily market be it credit driven like during the Great Recession or event driven.

As other players exit this market, we will be there to take advantage of the dislocation and seek opportunities to grow our portfolio at wider spreads.

Now moving to a quick summary of our quarterly performance.

Our overall loan portfolio grew 4% on an annualized basis compared to the level at December 31, 2018.

This was driven by our multifamily portfolio, which increased $582 million including $534 million growth during the second quarter in our C&I portfolio, which increased nearly $400 million on a year-to-date basis or 33% due to the strong growth in our specialty finance business.

More importantly, our loan pipeline heading into the third quarter of the year is a robust $2 billion, including $1.4 billion of multifamily loans at a rate of just under 4%.

Growth was funded by deposits, which continue to grow, increasing $1.6 billion year-to-date or 10% annualized.

The majority of the growth has been in[CD] category.

Going forward, we will continue to lower our deposit cost once the Federal Reserve pivots to an easing environment.

Our net interest margin for the quarter declined only 3 basis points to 2%.

Excluding prepayments, which rose 32% to $12.6 million during the second quarter, the margin would have been 1.89%, down 6 basis points.

Also, the margin was impacted by 2 additional items this quarter, which reduced it by an additional 3 basis points.

Despite this, we believe that our net interest margin will benefit going forward from a combination of lower short-term interest rate environment than the substantial upward repricing of our multifamily and CRE loan portfolios.

Operating expenses continue to improve during the quarter.

At $123 million, our operating expenses now translate into a run rate of less than $500 million.

On the asset quality front, all metrics continue to be very strong and remain among the best in the industry.

Lastly, this morning, we also announced that the Board of Directors declared a $0.17 cash dividend per common share for the quarter.

The dividend will be payable August 26 to common shareholders of record as of August 12.

Based on yesterday's closing price, this represents an annualized dividend yield of 6.1%.

Before turning the call over to questions, I will add that we feel very good about our prospects going forward.

On that note, I now ask the operator to open the line for your questions.

We will do our best to get to all of you within the time remaining.

But if we don't, please feel free to call us later today or this week.

Operator?

(Operator Instructions) Our first question here is from Ebrahim Poonawala from Bank of America.

So I guess I just wanted to start off in terms of the margin outlook, Tom, obviously, you called out the 2 items but when you look at the core NIM at 1.89%, deposit costs, funding, debt cost still went up quarter-over-quarter.

If can you just talk to us about your expectation for the core margin if we bake in, sort of, a rate cut maybe this afternoon?

And how do we think about deposit rates and debt cost trending from here, are they going lower, or we still have some drift higher for both those?

Great.

So let me be very clear.

Obviously, we're in the position to say that our margins which we anticipated to start to rebound in 2020 assuming there is a rate cut this afternoon, that will happen in 2019.

So I'm updating my guidance positively for margin expansion in 2019, not 2020.

That should occur between Q3 and Q4.

So on a very short-term position, we're looking at maybe 1 to 2 basis points in Q3 versus Q2 and from there we should rebound.

Based on our funding costs and based on our repricing of the assets, I anticipate that the margin will go up every quarter thereafter throughout 2020.

So a very positive outlook, assuming there is a rate reduction.

We're actually assuming in our internals models 2 for 2019.

One in December and one as of today.

So we anticipate our margin outlook to be very favorable.

More importantly, as far as the funding cost is concerned, we anticipate that the deposit cost and the borrowing cost have peaked at the end of the second quarter, so we'll see reductions on the funding side both from the borrowings and also on the retail deposit side as well.

That's helpful.

And just in terms of prepay income I think there's a fair amount of concern that prepay income are driven by the rent law changes could significantly reduce or go away, like the loan growth was pretty strong in 2Q, was there a little bit of catch up in 2Q?

How should we think about, one, the sustainability of multifamily loan growth and as it relates to also prepay income going forward?

So obviously, Q2 versus Q1 was a favorable change, we were up over 30% on prepay which is an exciting dynamic.

However, given our dynamic of our portfolio coming due in the next 3 years, we have a sizable amount of refinancings expected.

So for next year, for example, we have $4.4 billion coming due at a 3.13% coupon.

That clearly is not going to pay 8 1/4%, which would the current option rate you would have to pay in this environment, that will all refi, the question is what happens with the 2021, 2022, which is also around $4 billion a year, do they accelerate?

If they accelerate prepay should stay relatively strong.

Just to give you some statistic as far as the pipeline is concerned, that pipeline that we have right now, I'd say 95% of it is all refi, between ourselves and others it's only a 5% purchase market right now, so obviously they're still contemplating what's happening with the market in respect to the changes in the rent law.

However, having the amount of refi coming from within our portfolio generates prepayments.

But also one of the more encouraging aspects for growth is that we're now seeing loans gravitate to our portfolio from other banks, which is what we expect.

So its 30% today, that should be higher as other banks exit the marketplace.

I'm sorry that is very consistent with what happened in normal cycle evolution.

We gain share during periods of difficulty because others leave the market.

So the people that are typically in our portfolio will have the ability to be a buyer in a decreasing valued market come to us and get financing.

Got it.

And what of the new loan origination new installments, have you seen any spread widening coming out of the rent law changes at all?

There's no question that there has been some economic value as far as spread widening.

We currently around 3 5/8% to 3 3/4% for call it the Tier 1 type structure for 5-year money, going after the 7-year type money it's closer to 4% for it than an[8].

If you think about the portfolio here right now, the portfolio yield all-in I believe is around 4.02%, 4.03% going all in for the quarter.

So that total pipeline, $1.4 billion is the new money pipeline, so that's obviously going to -- it should be very accommodating for our growth expectations of 5%.

So we're not concerned about growth this year, obviously, the 5% was the number that we came out early on.

We'll update you in the latter part of the year, but clearly having a new money pipeline of 1.4 billion will bode well for our growth expectation, and obviously, the coupon being around 4% and funding cost coming down should add to the margin as well.

Got it.

And just one last question if I may.

Expenses you're running at $492 million annualized run rate in 2Q, talk to us in terms of like your previous guidance for low-$500 million for this year, do you expect that to be that -- are you updating that for lower guidance just in terms of an expense outlook that you can give?

So obviously, we're very pleased, we're coming in better than expected as far as our previous quarters' guidance, we came in below the $125 million.

I mean for next quarter for we'll teeter around this level, we hope we continue to slightly improve that number.

What's interesting is that we're going through a substantial conversion that will happen at the end of the year.

And going into 2020, that will potentially bode well for further adjustment depending on how much efficiencies will be driven from 1 platform.

I will say, and I'm going to kind of go out on a limb for 2020 as far as guidance, we're looking at probably low-40% type numbers for the efficiency ratio, that's a substantial reduction coming off the SIFI threshold of $50 billion.

So that number's -- in the low 40s it's kind of what we projected 1.5 years ago, and now it's coming to fruition.

Low 500s for 2020 should not be a problem and that will fall in somewhere to the low 40% threshold for efficiency ratio.

Do you mind giving like a dollar number for what that low 40% because there's -- the other side of the equation there, like, what is the low 40% of (inaudible) in terms of the annual expense for next year?

I will (inaudible) as guesstimate, E to H, probably more towards the low end of that range.

Our next question is from Steve Moss from B. Riley, please go ahead.

Just want to follow up on the loan growth expectations here, it seems like your implying an acceleration from the second half of the year and just how do we think about the drivers there?

Obviously, the pipeline is very strong north of $2 billion, and we have a $1.4 billion new money pipeline.

So although it's a lot of refi, there's refi that's naturally taking advantage of the equity they've built within their own portfolio because that's 70% of our own book with 30% from others.

So I think that, that will probably be the, in my view, the trend over the next couple of quarters until there's actual property transactions, but ultimately there will be some value where people will put on these buildings and they'll start trading again, but in the meantime we're getting a very interesting amount of business from the refi opportunities within the marketplace.

And going back to our portfolio, we have substantial refinancing coming, it's $14.5 billion over the next 36 months of which $4.4 billion next year is at the lowest rates we have in the portfolio.

So that's -- if you put -- that's a market, that's a significant jump going from 3 and -- let's say 3.13% to, let's say, around 4% that's a nice benefit for the margin for next year.

And this is something we've anticipated.

They waited as long as they can but they're not going to pay 8.25% they're going to have to exercise their option.

The question is how many of them are going to come in '21, '22, which is around $4 billion as well each year despite the exercise early, which we generate prepayment and higher coupon and they are all in the very low 3s.

So we're excited about the opportunity, we're very comfortable with the LTVs in that portfolio given that they're significantly lower than the market and we're an in-place cash flow lender, these loans have originated 4 or 5 years ago, they built up cash flow, they built up their value, they're going to look to try to extract some value, which will add to the portfolio.

So we think that we're going to have a very achievable 5% net loan growth.

I know there was some discussion at that achievable in this environment.

We started at 4% in the midyear, assuming things were going to be very challenging going into Q2.

Now we'll look at the second half with a very strong pipeline.

So 5% is very achievable this year, and we'll update the guidance as we get close to year-end.

So I think it's important to note that the changes in the marketplace have been significant and adverse.

And therefore, the lesser players are vacating the space as in all cycle turns we fill the void.

We do not have the same problems that other have.

Many, many, many players took into account projected earnings that were significantly higher than now would seem attainable.

Therefore, there is problem with those people and we, in fact, will fill the void.

There are good property owners who in fact do business with us on a regular basis or are intending to buy, at discounts, properties in their proximity because there will not be the kind of funding available to accommodate the loans that already exist in their markets.

And in terms of your exposure by markets, just wondering if you could update us the loan to values by borrow and the debt service coverage?

And how you're thinking about property values?

So let's do -- the good news is that, obviously, we put out some additional disclosure.

We filed an 8-K this morning, breaking out the dynamic of the multifamily growth.

And you can see on Page 14 of the 8-K, we break out the New York City boroughs or the 5 boroughs and breakout the other markets.

And as you look as if you want to look at the we'll call it the highly concentrated rent regulated market, which is the 5 boroughs.

Manhattan got a 48.42% of LTV, Brooklyn at 52.49% weighted average LTV, The Bronx is at 52.9% and Queens at 47.8, and Staten Island which is very little exposure there at 57%.

So for the most part, the New York City book is around 52% on average.

So that's obviously, a lot of coverage there, that's an in-place cash flow LTV that was based on a current rent roll, not future value.

We did not lend towards NCI, we do not have any meaningful exposure in that regard.

So we're very comfortable that when these loans come due they'll have more than adequate collateral to refinance with us and potentially take out some more dollars depending on what value they've created.

Okay.

That's helpful.

And then one last question.

In terms of just funding cost here, wondering what are your marginal funding cost these days when it comes to borrowings and CDs, and just kind of thinking about how we should think each Fed rate cut benefits your margin going forward?

So we are going to be aggressive on reducing our cost of funds, and we feel highly confident that our cost of funds have peaked.

So both on the borrowing side as well as the CD side, retail CDs.

So we're very active at looking at our deposit base.

We took in some extra money last quarter knowing there will be some other deposit type sources that will go out of the bank because we're going to be aggressively reducing our cost of funds.

So effective today, we dropped our rates again.

So I believe our rate is around 2% offering.

On average some in the 1.75-ish, but that's a significant adjustment from September of this time last year, when it was a highly -- we were close to 3%.

So we have $13 billion coming due in over a year, it's around $3 billion to $4 billion per quarter that's going to be rolling on the CD side, and that's going to roll down to the very low 2s and if that continues to ease that could be sub-2%.

So we're going to be very proactive in making sure that we get the benefit of the beta that we had on the way up now we get it on the way down.

So we will, obviously, significantly impaired by the data risk that we had given that we're a retail shop, the fact that the retail CDs will now react very quickly, we're going to be very active.

So we're not targeting 10% deposit growth, we're going to target a substantially drop in our cost of funds in the borrowing on the forward position, and we'll accommodate money in the mid- to upper 1s.

So we believe that is going to clearly drive our deposit and borrowing cost lower in 2019 and 2020 for sure.

Our next question is from Steven Duong from RBC Capital Markets.

Just to get back on the borrowings if you may, so how much in borrowings is due 2020?

Yes.

So we have what we believe what's going to mature in 2020 is about $3.4 billion, predominantly from the home loan bank, and an average of 2.13%.

2.13%, is that right?

That's right.

So we been -- so for example, last quarter we refinanced some structures, I think 1.70% was the new positions and that was expected back in November to be around 3%, so significantly lower based on expectations of the forward curve.

So we put on $755 million last quarter at 1.70%.

I'd say right now given where the rally in the bond market, and where rates are often in the forward curve, we're probably 1.50% to 1.55% depending on the structure that we choose to go with.

Got it.

Would it ever makes sense -- I assume, you guys still have a decent amount of borrowings beyond that.

Would it ever make sense to prepay those borrowings and just take the hit?

A lot of this stuff is relatively low cost and we're not looking at 3%, 4%, 5% money, it still very low cost compared to historical norms going out to 2020 more to 2.40% and again, most of the money is coming due in the next 1.5 years, so this is stuff that's going to mature without any consequence to capital.

We've got another $2 billion coming due the rest of '19, so that's just under 2%, 1.90%.

So that should be no negative impact to our cost of funds.

And depending on how much deposit flows come in and where the source funds come from we're going to be very active on pricing the best possible liability and hopefully in a declining rate environment.

Assuming, if they're one and done it is still going to be a very favorable environment for us because we've had so much headwinds as far as our margin is concerned.

I don't anticipate NII to go down post Q3, we should have NII up every quarter thereafter going to 2020.

You do that with cost containment at the $500 million level, you're looking at EPS growth at -- significant, when you look at year-over-year comps because the company is not typically at a 75-basis-point ROA.

We should we something north of 1.

Got it.

And just getting to your pipeline, it seems your pipeline is pretty strong with the refi, do you know what percentage of the refi is coming from new customers versus existing?

Yes.

Like I said before, 70% of our refi book is our self, that's 30% coming from others.

That's going to be a trend that we believe -- I believe is going to increase dramatically.

There's many players that are no longer in the business or they are shying away from the business and we're in business, this is what we do, this is our primary focus.

So we're excited about the opportunity, as Mr. Ficalora indicated dislocation is where we make a lot of money, and we underwrite very conservatively.

And if their loans are substantially above what we would lend, we just won't lend to them.

So we'll be a very targeted low leverage lender, and we are going to be in the market at higher spreads, the spreads have widened approximately 50 basis points at -- like right now at 185 to almost 200 over depending on the day or the curve but that is significantly higher than the 150 that we had to compete.

Our largest competitor right now is the government, once the government realizes that they're giving away the shop, maybe they'll widen their spreads to, but the dust market is probably the most competitive market, and we clearly are looking at a unique opportunity as a portfolio lender, and we have lots of very strong relationships that tend to go to a portfolio lender versus going to the agency.

So the agencies are growing throughout the country and there's no question that people in Washington are concerned about this and have for quite some time expressed the desire to have the agencies far less involved in the marketplace rather than absorbing ever greater share throughout the country.

So that change will be very good for us.

Understood.

And just last one for me.

There had been some questions about just like your potential RWAs going up.

Assuming your cash flows on the collateral rent-regulated properties do not weaken, is there any conceivable scenario in which your risk-weighted assets would increase from major market declines?

Let's just say something draconian say like a 70% drop in market values?

That's very draconian.

We've done such a deep dive since these laws have been put in place.

We've analyzed at the loan level detail.

Assuming cap rate is going to probably gravitate a little bit higher here, they are going to be more borough specific.

The Manhattan cap rate versus The Bronx is dramatically different.

So you have to look at it holistically as far as what is impacted more negatively than others because of this change.

But the reality is we are low leverage lender, we look at interest rate and cap rates, and we shot them up, we believe significant, and we feel that it's not going to impact our capital position negatively, and we ran 15 different ways in where we can look at this market.

I'm not going to run a 70% drop in value, that's just -- that would be a silly analysis.

But if you run in, we'll say, adjusting and it's very simple 100 basis points cap rate is probably going to be around 80% drop in value.

If you raise interest rates 50 basis points, there's probably 9 basis points of the[DFCR].

So you do the simple math, it's manageable when you're running the Manhattan at 48% LTV.

And by the way, Manhattan has the lowest CapEx, of course, that was always viewed as the most upside potential.

So as you can see from our statistics we put out on Page 14 of our 8-K, that's where we are super conservative.

And by the way, a lot of our loans have mixed-use characteristics.

We have a lot of opportunities on the ground floors, it's not just that if a building is rent regulated, it doesn't mean that the ground floor is not regulated.

Our next question is from Steven Alexopoulos from JPMorgan.

Just -- so first for the multifamily loans that you refinanced in the quarter, how much did you haircut appraisals or values when issuing the new loans on average?

No.

It depends on the timing of that.

The reality is that we're always proportionate to the actual market.

We have the ability to recognize change in valuation.

And as the market evolves there is going to be a decrease in the value of this product.

We've lent on this product for decades at much, much lower values, so the loan that we do has to be repayable, all of our existing loans based on how we structure them are repayable.

All of our future loans will likewise be repayable.

But they may be on a lower value building.

So by example, if somebody over lent and the building goes into default and the value of the building collapses, we do a loan on the existing cash flows whatever they may be.

And when we do that loan at a lower value we are still going to be proportionately safe.

The ability for us to manage our risk is demonstrated by decades of success in doing so.

So every new loan will be at a proper value based on the actual rent rolls.

So we're very confident that this is a good period for us despite the fact that there is change in the marketplace.

Change in the marketplace has always given us greater share, greater return and greater stability.

Excuse me.

Just bear in mind there is obviously always an abundance of caution if the market shifts like this.

But the reality is that our weighted average LTVs won't change, we will be writing our paper in those low weighted-average LTV levels and more importantly, in the event that we have our own customers that for example may go to that 50% to 100%, we're going to charge them for it.

We're going to -- just because the loan is at, let's say, 77% LTV on a debt service coverage is slightly below that criteria, they will have to pay.

So I think, again, economic spread I think, Joe said in his remarks, we prepare to benefit from higher spreads in the business model, there will be higher spreads, it's already starting.

As property transactions start to take place, which they really haven't, I'm indicating the pipeline 5.5% of our businesses is purchase, the rest is all is refi.

When the purchases start to occur, the cap rates start to reset.

My view is that you'll see the ultimate spreads start to widen further, which eventually the government will catch up on as well.

So we're excited about the opportunity, we're not going to change to be aggressive or super conservative.

We're known as an A lender in the space, and we'll continue to be super conservative in our approach.

And then Tom, I know credit quality is obviously very good again for multifamily in the quarter.

But did you increase the reserve at all on multifamily given the rent change?

And what is the specific reserve on multifamily?

So again, if you look at the historical losses, which we have embedded in our -- it should allow us a 7 basis point historical loss of allocation, and then you're looking at a total reserve about 31 basis points that we have embedded in the portfolio, the 24 basis points is qualitative.

So no question that we have a very low list book, we follow GAAP, right?

I mean we make adjustments from time to time, and you're assuming we also made adjustments qualitatively because of these rent regulation changes.

So that's what we have in our portfolio, 31 basis points.

31, okay.

And then the prepayment penalty income, I know was a focus on the call earlier, it's been very resilient versus peers.

One thing I noticed the weighted average life has come down quite a bit, I think you've gone up 2.1 years in the multifamily book?

Why has that come down so much?

People are sitting on the sideline like I indicated.

We're optimistic about 2020 because we have $4.4 billion at 3.13%, that's going to 8 1/4%.

Or let's say it's 8%, they're not going to pay 8%, they're going to pay market, so market is around 4%.

So that's -- as they wait on the sidelines, they have to come to market.

At the same time, prepay activity, we believe will be continuing to be relatively strong given that we have a 2021 and 2022 credits that are coming up to their option period, and those are all both in the low 3s.

So they're not going to pay 8%, they're not going to pay 7%, they're going to pay the market, which is around 4%.

So that would -- so the fact that we have a significant portfolio refinancing in ourselves of substantial dollars is indicated there are more refi than our portfolio, some are 0 point, some are 1% or 2%.

They may not be 3 or 4 points you're accustomed to because of the pent-up demand on increased value but you always have choices being made by customers to lock in their financing.

I think the -- go ahead.

No, no go ahead, Joe.

I just had one final one...

I was just going to say, given the way we lend, everybody has value in the buildings that they're managing today.

We, in fact, did not over lend and as many of our competitors did so when they look at the opportunity to refinance, they don't have to go chasing after dollars that don't exist they already have the dollars in their cash flows.

So the reality is that our portfolio has the ability to fund the acquisition of the market.

As every cycle has demonstrated, our people actually have value in the buildings that manage and therefore they can get additional dollars from us on their actual rent rolls.

Okay.

Just 1 final one the margin.

The Fed cutting rates obviously will take pressure off your funding cost.

But I think the hope for all banks is that the intermediate part of the curve holds as the Fed cuts rates.

Let's think about what's the level of steepness ideally you need the curve to see the NIM expand more sustainably?

Well, again, I'm running a very conservative model into 2020, and I have my margin going up every quarter, quarter to quarter by[2020] starting at the -- between Q3 and Q4 and that is assuming a cut today and more likely another adjustment at the end of the year.

So we're very bullish, we'll come in with such a low pace.

Our overall asset yields were at the bottom, our cost of funds were at peak.

So I was very clear that our deposit costs and our borrowing cost will hit the peak in Q2.

So it will have the benefit of deposit cost coming down, borrowing cost coming down, the forward curve is showing a much lower rate scenario, so that fits for the rest of the yield.

We'll lock in that funding and lower cost on the borrowing side, and we're going to be very proactive on adjusting our retail franchise aggressively as the Fed goes to an easing or a neutral stance.

So we feel highly confident that our margin -- it's very different than others, we're not a LIBOR-based lender.

We're lending in the belly of the curve, so we're going to see margin expansion every quarter thereafter, and it's going to be a very meaningful benefit to year-over-year comps on EPS.

You're looking at a sizable increase of earnings per share numbers from 2019 versus 2020, and a very conservative balance sheet growth, very conservative Fed scenario.

If assuming that we -- and this is, by the way, an inverted U-curve.

So if the curve steepens, then numbers will only get better for us.

Our next question his from Moshe Orenbuch from Crédit Suisse.

Most of my questions have been asked and answered.

Maybe could you just talk a little bit how you see each of the next steps play out in terms of the competitive environment in response to the rent changes?

Like what happens over the next 3 months and over the next 6 months and over the next year?

Yes, go ahead, sorry.

Yes.

Well, it's not only that people are afraid, there are people that have over lent and the reality is it will become more and more evident that the capacity of that particular property to accommodate the excess dollars will, in fact, fall away.

So there is going to be value change in the marketplace, there's going to be significant losses taken by the excess lenders, that is all consistent with cycle turn.

It's being driven by an act of government that has changed the pro forma income stream of this particular product.

The good news for us, we always lend within the existing cash flows.

So we are not being impacted in the same manner.

When in fact, we refinance prospectively, we will likewise do the lending that we've done for decades, very conservatively and very consistently dependent upon the existing cash flows.

So the dollars that are on the table for our new loans will be proportionate to the actual income stream that the property provides.

So we are lender that has a demonstrated track record of performance during periods of adversity.

The period ahead will represent adversity and many of the people that have over lent in this market will in fact retreat from the market.

They won't be providing new loans and the loans they have will be defaulting.

So the reality is this dislocation of the market works to our advantage, so prospectively, we are highly confident that we'll be able to grow our portfolio very nicely and that we will be able to perform significantly better than the market and then, quite frankly, to our great satisfaction.

One thing I want to add to Joe's commentary is that there is a high probability that customers may look to potentially go between 7- and 10-year money versus the traditional 5-year just because it may take a little bit longer to try to extract value, that's obvious.

Obviously, that's -- then the agency becomes a more unique player as far as competition, but that's possibly one of the scenarios that will play out because of these changes.

And reality is that when they go to 7 and 10 years, we wind getting higher yields so this is definitely good for our prospective margins.

Got you.

But just, what's the factor that causes them to realize that decline in value, right?

It's not like they have to mark this stuff to market on a day-to-day basis, right?

It's very simple.

The people that are making the payments, stop making the payments.

When loans start going into default, you don't have to do an analysis, it's pretty clear.

They recognize the owners recognize that their expectations with regards to income are not going to be met and they make a decision as to whether they want to continue to pay at very high valued property at a rate that they don't particularly like for value which is not sustainable.

So people that have literally exposed themselves to excess dollars whether they be the lender or the owner are going to make a decision that they do not believe they can justify carrying that value into the future.

So therefore, they will default that's why the market's going to have significant change.

The good news for us every time -- even decades -- every time the market has adjusted, we've gained share and we've greatly outperformed.

This is not a bad period for us.

It actually turns out to be -- based upon our conservative methods, this turns out to be the time that we are most distinguishably better than our competitors.

Our next question is from Matthew Breese from Piper Jaffray.

Just Tom, you mentioned several times that even running your very conservative model that every quarter in 2020 you have the NIM expanding if you assume exactly what's in your model.

Can you just give us some idea of that NIM expansion could look like?

Could you bookend it for us?

Well, I'm not going to give 2020 guidance.

I will say from my scenario, I have 2 rate adjustments, 1 effective today, so going into the tail end of the Q3.

And then you have 1 at the end of the year coming off what we call bottom margins, bottom peak funding cost and bottom asset yield, so that's going to play out very nicely when we reprice that multifamily portfolio and other assets that are repricing.

As far as growth, growth is going to be very conservative.

I'm running 5% growth, it's early.

I think that number's probably going to be higher, but right now we're at 5%, I feel highly confident given the current pipeline 5% is very achievable for 2019.

There's been a lot of discussion out there publicly that NYCB is not going to be able to grow 5% this year, I think that's a silly assessment given the current pipeline and given starting at 4% midyear.

So I think the growth is real, we feel confident of the growth, spreads are wider.

So again, we're assuming about probably a 180 spread in our model, it may go to 200, so relatively conservative, that's where the market is right now.

And funding cost, I indicated, we're going to be very proactive on dropping our cost of funds.

Effective today our rates are lower a lot, so open up a CD, probably 1.99%, you open up a liquid CD probably 1.75%, so rates are coming down.

I think the market is sold already.

I think the fact that I go back to my previous statement, our beta risk last year was high off the charts.

2 years in a row we lost a lot of money in NII because of high beta.

You have to give us credit on the way down, rates start to go lower we'll see that same beta impact benefit to the retail franchise.

$13 billion CDs repricing at levels at the highest levels we've had probably in decades.

They will be priced lower.

And we'll be proactive on adjustment.

And by the way there's the positive runoff we'll just replace it with borrowing.

So it is right now the forward curve is a lot cheaper than the borrowing cost.

So we're very mindful of this transition when the Fed either at an easing and/or neutral stance.

Right.

So maybe we can focus in on that.

So the cost of interest-bearing liabilities when and if the Fed cuts and if we get one more, what would you expect the cadence of reduction in the cost of external liabilities, is that a low kind of single-digit basis point of high single-digit?

Just some range there would be helpful.

I would say if you think about a 25-basis-point adjustment you're probably looking at 85% of the move that we're going to put to our retail franchise.

So if I take someone of that 250 you're going to be more close 230-ish, right now we are not at 250, so we're right down at 2%.

The next move could bring it down to 180 on average.

You're looking at a very proactive view on the easing of retail deposit cost because we're very proactive coming off of the SIFI threshold and growing the balance sheet and we use retail funding to finance the balance sheet.

So we are going to be very proactive on reducing the cost of funds, it's going to be very meaningful to us and as I indicated, I believe that Q2 was the peak of our cost of funds both on the retail side as well as the wholesale.

And I'm not going to give 2020 guidance, it's way too early.

But we're very optimistic that we going to have a very unique comparison when you look at these dynamics.

We're looking at significant EPS comp year-over-year.

Even though I don't have 2020 guidance out there, you can run the model, you'll see how this will react and take into account these low coupons that are coming due that will be -- if they refuse to go the option period they pay 8%.

No one pays 8%, everybody refis, so we're excited about that opportunity and we talked about this last year, we thought that rates would have been higher so maybe it was 4.5%, now we're talking low 4s to high 3s but it's still meaningful better than 3.13% that's coming due.

I believe there's going to be more customers coming from 2021, 2022 option dates coming in which will also pay us points on the way to the next refinance.

Joe, you'd mentioned that competitors have just simply over lent in this market and some of your peers to protect themselves, have not taken what appraisers would give them in terms of cap rates, call it 3.50% cap rate or 4% cap rate, they've used something higher.

Have you done something similar?

And could you give us some color around what the cap rate you would use versus the market to underwrite your multifamily?

I think the interesting thing is that the end result is the key to recognizing that we use lower cap rates, that we, in fact, are -- I'm sorry we use higher cap rates and we are in a position to understand what makes the market change and how that will impact our values and have the ability for us to refi.

So even during periods such as this, we have substantial refinancings and the ability for us to refi is the realization of the owner that the rate in and of itself is not the only reason why they would come to refi.

They, in fact, utilize their opportunity to gain dollars and use those dollars effectively to buy cheap.

The marketplace is going to be very real.

Values are going to come down.

So when you think about cap rates, it's Tom, so when you think about cap rates think about the fact that Manhattan and The Bronx are very different markets, so right out of the gate you're looking at 100 basis points differential between an appraisal coming out of Manhattan versus something that's predominantly rent regulated in The Bronx.

So clearly the marketplace has that embedded.

So when you think of current LTVs that are out there, these are current weighted LTVs, the lowest LTV the company has is Manhattan and Queens, 48.42% in Manhattan, 47.8% for Queens, that's embedded in a very conservative view of that cash flow.

So other banks may be lending at 75% LTV, you can see based on the actual LTV that we have publicly disclosed that we take a very conservative view towards cap rates, for the cash flow to upside potentials.

We don't lend on the upside.

We're not giving them advanced funding on major capital improvements.

We're viewed as a lender of the choice for a conservative borrower that's willing to take out less dollars and ultimately funding when it improves rent rolls.

Now obviously, the rent rolls are not going to improve as fast enough given the current rate changes.

However, we have a lot of embedded value.

I indicated, if you bang on the cap rate up 100 basis point, it's going to cost you probably about 18%, 19% in value.

Now interest rates go up 50 basis points, is probably going to be 9 basis points in adjusted [DSCR].

So we've stressed this portfolio, we stressed it up significantly and we feel highly confident that the customers will have the capacity to come back to us and get their next round of financing, that's what important.

Okay.

And given those dynamics, cap rates potentially going up 100 basis points that's an 18% hit to the value.

I guess I'm trying to square that with the qualitative factors in your allowance, it doesn't seem like there was much of a change or maybe you can provide some color there?

Yes.

First of all, this is -- these are hypothetical scenarios, you don't adjust your allowance on hypothetical scenarios, okay?

So we don't believe -- when they -- when something gets purchased, we will finance that new purchase at the market and some of these finances we'll refinance that based on a new appraisal.

But if a loan has got 3 or 4 years before its optioned, you do nothing because it doesn't fill -- you don't have to make that GAAP assessment until it comes due, so we're very comfortable with that.

And I indicated before as far this equations going from 50% to 100%, if they happen to be in a position where they stay with us and the LTV, let's say, is slightly higher than what's the regulatory mandate as far as 50% risk rating, we just charge them more interest, we'll charge them a higher spread, and that's how we get paid in value.

Because we're comfortable that over time, we'll work through this changing in the marketplace and our customers are well positioned to take advantage as Mr. Ficalora indicated, dislocations, there will be dislocations, there'll be dislocations for banks that lent on capital improvement, significant capital improvements, and they'll have to figure out how to pay their bills on a monthly basis.

If they default, other customers will come in and buy the asset based on its inherent cash flow and based on an IRR that suits them as an investor in real estate.

And also, one thing you might want to take a look at Page 12 of our presentation.

It actually shows that over the course of the period 12/31/14 through June 30, '19, we actually have a positive entry of 4 versus 0s in every year in charge-offs.

We don't have charge-offs as are typical of other lenders.

This is just a fact.

I understand that this is historical credit quality, but I thought the qualitative factors were there to in fact take into account changes, significant changes perhaps in the industry and therefore this would be something, the rent regulation changes might be something that causes you to reduce your qualitative factors.

We still do incur in our model obviously with GAAP.

So we're going to -- obviously when cheaper comes along we'll adjust that.

Look, the risk in general for the market will be somewhat impactful to many institutions.

We may have a little bit more extension who knows what happens around 2, 3 years down the road and having the asset a little bit longer.

Other than that, this hasn't been a major change in our philosophy as far as credit risk.

On the new originations, the current loan book is all going to come due relatively short, it's when you put the new loans on, you have a -- we have about 24 basis points in qualitative-like adjustments in our allowance for multifamily.

That takes into account market conditions.

That will move around from time to time.

But we are on a very low leverage book, we're an in place cash flow lender.

When the new loans come on and new loans come from other portfolios, we're going to underwrite the probably more conservatively given that you're not giving any potential view on upside potential because it's all dependent upon how much those rent rolls can possible go up.

So clearly if you're in-place cash flow, you should not be as impacted as others that are looking at upside potential.

Our next question is from Austin Nicholas from Stephens.

I appreciate the comments on the risk-weighted assets in kind of the deep dive.

But maybe just thinking about the incremental risk-weighted assets on your portfolio books from the multifamily books.

And then I think more broadly, you mentioned adjusting your underwriting guidelines I think more appropriately.

Can you maybe just dive into the risk-weighted assets I guess question first and then second, talk about maybe what changes were made on the underwriting guidelines depending the market is typically of LTVs, debt service or cap rates?

So obviously, our LTVs are very tight, we're not changing the absolute LTV, I when you're looking holistically at the future value of cash flow you're getting a very little benefit for upside potential depending on the property.

Look, we're not a luxury lender so we have mixed-use properties, we have properties at 50% rent-regulated, 50% non-luxury type market value of rent rolls.

You look at it -- you're going look at it with an abundance of caution going forward because of these rent roll potential changes, these actual changes in the law.

So there's no question that you are going to have an abundance of caution when you look at a credit as the appraisal will and we'll evaluate it in very simple based on in-place cash flows.

The big questions is going to be when the market does adjust for transactions what is a willing buyer going to put a value on their inherent value of their cash flow and what's their hurdle rate of return.

So 0 is not going to be -- there's not going to be any more 0 returns on real estate.

It's going to have some hurdle rate you're trying to -- one's willing to buy over the long term and invest.

My guess, it's going to be significantly higher than it was 2 years ago because of these rent regulation changes.

I think it's important to note that we have been public for about 25 years now.

And during that period of 25 years, we've charged off 101 basis points.

101 basis points in 25 years, the bank and thrift index during that same period charged off 2,350 basis points.

The difference between us and others is glaring.

It's not an opinion, it's a fact.

And low and behold we have every reason to believe prospectively this wide differential will continue to exist.

Understood.

And then maybe you spoke about the government guarantee business and kind of the attractiveness of that in this environment, I guess can you maybe just speak to what you're seeing from your customers?

And maybe demand for that longer-term government sanctioned product after these rent regulation changes?

And then any comments on how you would expect that to play out over the next couple of years?

I would just comment, Joe will be more active in Washington but I think there has been some real pressure on the mission statement of the agency as far as their view on being such a dominant force in the multifamily space.

At the end of the day, reality kicks in, if you have a cash flow that takes a little bit longer time to get more improvement you'll tend to look out longer in the curve to lock in lower rates for a longer period of time.

So 7- and 10-year money may come into play, traditionally 5-year type lender, 10-year final, 5-year reset.

Average life is 2 to 3 years that may extend a couple years.

We're going to be in that market doesn't mean we're going to be outbidding the agencies, but we're going to be a source to go potentially a little bit longer if a customer wants a couple more years of duration risk.

I mean that's just a function of the fact that they feel that their cash flow may take up a bit more time based on these changing rent rolls.

Yes, there is no escaping the fact that U.S. government does not compete with General Motors to manufacture Buicks.

There is no way in the world they should be in the business of lending aggressively below the market, and they do.

And in the cycle that evolved, most recently, they failed by September.

Others were failing before them and certainly many failed after them, but they failed by September.

The reality is, they're not the appropriate lender, they are the most aggressive lender in the marketplace.

So that change may or may not occur, clearly it is an active pursuit in Washington to make a change and if that change occurs, we will be one of the beneficiaries.

Understood.

That's helpful and maybe just -- you talked about being optimistic on a 5% growth number for next year.

I guess just within that can you maybe break down for us what percentage of that you expect maybe come from multifamily versus maybe more specifically specialty finance and kind of your outlook for growth there?

So again I'm not going to get specific on 2020.

Again, 5% this year was the year of transition.

Remember, we came off of a very volatile $50 billion SIFI line in the sand that we had no growth for many, many years.

We were selling assets in previous years just to stay below $50 billion, they came out with this 5% threshold that we can grow multifamily in light of slowdown in purchased activity, a potential change -- large change in the rent regulatory rule.

We feel that we're going to probably exceed 5%, but right -- for now it's 5% net loan growth and it was contemplated that we couldn't achieved that.

So we feel highly confident we will achieve that for '19.

When we deal with '20, I think you've got to think about, specialty finance will probably grow probably in the 20% to 22% to 25% type CAGR.

And I think there are going to be customers that will probably move more towards the CRE opportunities, right?

Maybe they will move some of their assets on 1031 exchanges out of multifamily into CRE.

But the reality -- and by the way we'll be in other markets and other markets that are contiguous to our New York City markets, you know, New Jersey, areas outside of our immediate Metro area we're very familiar with.

But we will see some additional customers move that way to try to think about where they're going to invest into what they know very well, which is investing in apartment houses.

So we're going to continue being a part with our borrowers.

So I think -- so again historically, 5% is not a big number for us.

When we deal with both the acquisition strategy over the past multiple decades, we were growing on CAGRs in the 25, 30 percentiles when we had funding.

So obviously if that changes the mix and we happen to get an opportunity to acquire liabilities, we can move the number up significantly but absent acquisition, mid-single loan growth is very conservative for us.

Historically it's always been like around 9%, 10% CAGR of multifamily net loan growth.

And maybe just one last one strategic question I guess as you think about M&A can you make some just comments on a strategic view there?

And then any changes given the rate environment?

And then maybe also just the changes in New York City multifamily market?

I'll just comment on M&A, and Joe will go back to the New York multifamily.

I would say on the M&A front, our currency is not there, when we get our currency back we'll be very proactive, we always have been.

We said it multiple times publicly, we're not interested in doing a dilutive tangible value deal so we're open for business, hopefully at a higher stock price.

And we have currency to utilize to create tangible book value creation getting great liabilities to offset some of the wholesale funding that we had and build value over time.

However, immediate benefit is the tangible book value, that's one of our primary goals in M&A and we're going to be very proactive, but it has to make logical sense, it has to be really beneficial.

Shareholders, which we are a very large shareholder, have to be in a position to create immediate value.

I think there's no escaping the fact that we have a demonstrated capacity to actually acquire banks very accretively and to perform in the marketplace very successfully.

Our price does not reflect the consistency of our balance sheet, the consistency of our performance.

And in normal hold it will ultimately readjust appropriately.

We are not performing at levels as good as we performed in the past.

We're performing at levels better than the market continuously.

So we should be literally trading at a significant premium to the market.

And low and behold as we move more in that direction, we'll utilize that stronger currency to do highly creative deals.

I think as I already said, it's exciting to look at 2020 versus '19 given the current shape of the curve, given the anticipation of (inaudible) or we'll call it bias for leaving, that we're going to have a very significant EPS growth year-over-year comps, and that should bode well for our valuation going forward.

So we're excited about what we did on the operating side, but there's more work to go there, and we'll update our investors every quarter.

But we're laser focused on what we can control, which is operating expenses, and obviously, being a liability sensitive institution, if there is an adjustment towards the short end of the curve, we'll benefit greatly from it.

Our next question is from Collyn Gilbert, KBW.

Just quickly on the loan growth outlook, Tom, 5% for the year.

I know third quarter seasonably is slower so should we still anticipate kind of that seasonal slowdown in the third quarter and then a reacceleration?

No?

No.

Look, obviously, I would say this year the dynamic is somewhat different, there's always been (inaudible) but the reality is we had a real adjustment because of these rent regulatory changes.

So obviously, having a $2 billion pipeline, of that $1.4 billion is a new money pipeline you typically pull that pipeline.

So you just assume that we're going to continuously grow on both in the third and fourth quarter so we're excited about that and again, I think 5% is highly achievable.

And I'm not going to say we're going to double that growth but you can do the simple math, depending on how much refinances, what we have -- what we can see right now of that portfolio, 7% of it is our own refinancing and they're taking out some more dollars with their created value and that is going to add to the portfolio.

I think there is going to be more and some other portfolios.

So we're excited about the opportunities, we see about 30% of that coming today, that number will only increase.

We're going to be very mindful of what happens on property transaction.

But I don't think 5% is an indication of what the CMA approach is, eventually there'll be a purchase market come back and that will also fuel future growth into 2020, probably at lower prices as Mr. Ficalora indicated, dislocation will occur, and we're going to lend it on a cash flow basis and it is going to be based on a customer's willingness to put money to work, cash on cash and then put leverage on it with a hurdle rate of return.

Now I don't have the answer of what the hurdle rate return is going to be today but I view it is going to be very conservative and we are a conservative lender.

We're optimistic about '19 on the growth side but -- and I'd love to say where it was -- if I could see in '20, it's way too soon.

But definitely for '19, we feel very confident that the only real changes is a change in margin, our margin will go up sooner than my last discussion on the call, it will happen in '19 versus '20 and then you'll see margin expansion every quarter thereafter going into 2020.

So you're looking -- if you do that dynamic and run it through your model, we're looking at significant EPS comp up.

Got it, okay.

And Tom you had mentioned that maybe some of the borrower behavior shifts to longer duration structures.

What is your all's appetite for adding 10-year paper?

How would you be thinking about incorporating that into your book?

Well we'll be opportunistic as it comes.

I think we'll wait and see what, but obviously, if someone wants a 7-year deal we've always offered 7 and from time to time we offer 10, but no one is as competitive on the 10-year side, so we'll gauge that business, we'll gauge our customer base, new business will probably be less than excitable for us because, you know, let them go to the agency, but if it is our own customer base and they're locking in what they've created, and they want a couple more years, we'll accommodate that.

We have an appetite to be there for our customers, especially in times of dislocation.

So we've done it before, we've adjusted turns before, to be accommodative for them to create value, we're going to have to do the same in this environment.

Okay.

Okay, that's helpful and then just one final question.

Can could you tell us what the actual dollar amount is of funding that is going to be indexed off of Fed funds that is going to reprice automatically when the Fed drops?

I'd say that on the CD side that will be.

$4 billion, $5 billion?

$4 billion, $5 billion right out of the on the CD side and the borrowings are more forward.

So that's a significant adjustment, day 1, and I think what is more exciting is that every quarter $3 billion or $4 billion of CDs are going to reprice, so they're not getting 2.50% anymore and definitely not getting 2.85%.

So we're at between 1.75% and at least 2.10% is the highest rate offering we have on the banking floor right now.

So that was 2.85% last year.

So that's a very exciting dynamic and that's clearly, as the CD customers come to their maturity they have to roll their CDs, the highest share we offer today is 2.10%, the shorter duration is at 2% or 1.99%, and I'll say liquid type CDs are 1.75% and that's adjusted for today's anticipated rate adjustment.

Our next question is from Peter Winter from Wedbush Securities.

You guys have done a very nice job on the expenses and I'm just wondering you mentioned that expenses should be flat 2020 versus 2019.

And I was just under the impression that you guys still had some expense initiatives in the works?

So Peter, it's Tom.

I would say that we're very proud of what we've done, we've came off of a $660 million run rate, we're down to the low 500s and we're going through a major system conversion occurring at the end of the year and after that we will reevaluate the company's dynamic of efficiencies and systems that we could further look at potential efficiencies in 2020.

But conservatively that's a big adjustment, that's a 25% adjustment year over -- over the past 18 months in our comp structure and our overall operating structure, that is substantial.

We are very laser-focused on looking at controlling expenses given our current returns like I said before we're not a 70 basis point, 75 basis points return on asset company, we should be somewhere north of 1%.

These strategies that we put in place over the past few years given the dynamic of the Fed tightening, our goal is to get back to that 1% plus ROA, we feel highly confident we're moving in that right direction going into 2020 OpEx will be a focus of ours, we're being conservative, we'd like to hopefully beat again.

We came in -- this quarter we came in better than expected because we could control that.

So I'm giving you short-term guidance in Q3 it is going to be around the same level and may come in a little bit better.

Definitely Q4 will be interesting given that the conversion should occur, we should be successful in getting it done and then we'll look at 2020 as being the next opportunity.

And there'll be a certain point in time where what is the true efficiency ratio for this company?

Are we going to get in the low 30s?

It's possible but I already -- I had kind of guided to 2020, low 40% efficiency ratio to 2020 is a meaningful adjustment coming from a higher 52% -- 0.52, which is a significant drop over the past 2 years.

And then, Tom, just on that point on the efficiency ratio for 2020, that is a full year number that you're giving, low 40s?

Yes.

Yes, low 40s for full year 2020.

Obviously, margins are thin, we're getting a lot of it from the top line, right?

I told you on the call that we're going to see margin expand every quarter assuming we have these 2 adjustments to short-term interest rate, 1 today and 1 at the end of the year, if it doesn't happen that may adjust it but clearly that is in my forecast for 2020.

So you're getting a lot of the benefit, not so much on the reduction of OpEx, you're getting it from the NII finally going up.

I think one of the analyst came out this morning and talked about the 13 quarters of drop in our NII, but the good news, we're coming to the end of that we going to see increase every quarter of NII and that's what's going to drive the profitability of the bank.

So given that outlook, progression in the margin and NII growth and the loan growth for 2020, do you think the efficiency ratio could drop below 40 by 4Q?

Yes.

I think it is possible by the end of 4Q, yes, I mean the big picture is that I'm giving a conservative view of 2020.

If the curve happens to steepen it could be potentially lower than that, so that's obviously a positive thing, but I'm looking at a relatively difficult interest rate environment and I'm giving you EPS comps that are substantial based on forecast.

I mean these are forecasts, obviously, and it's not a specific number forecast, but if you do the simple math, margin going up every quarter, expenses relatively flat, asset growth, you're going to have the efficiency ratio let's just say projected for 2020 low 40s, 43% to 45% I think it's more towards the low end of that range.

Your next question is from Brocker Vandervliet from UBS.

There was a story in the Journal this morning, I wondered if you could just react to it, perhaps.

Large transaction, $1 billion plus, 28 units the sponsors are actually shifting from market rate units to rent-stabilized, apparently to capture a New York tax break for rent-stabilized units.

Very unusual transaction, I thought, but do you think that type of thing where people shift actually to rent-stabilized to capture that tax break becomes more popular and a bit of a solution for landlords and valuations?

I think it's the circumstances building by building.

It's not going to, that's right, it is not going to always work.

There may be unique circumstances where that works, but it doesn't work anywhere.

But to have the opportunity zone tax credit out there is a substantial real estate play right now that is going to be utilized by many billionaires that look at the -- actually exempting themselves from tax status, which is the best possibility.

And then if you look at the fact that non-luxury will be different than luxury.

So the non-luxury is average rent, of, let's say $2,500, under $3,000, which is not that much different than the rent-stabilized that may be an interesting dynamic.

They will do what it takes to make money, they will be in the marketplace looking at opportunity as real estate investors like I indicated before, with a hurdle rate of return that works for them with leverage.

The question is how much leverage is where bank to loan put out, we happen to be low leverage so we're going to be super-conservative but I truly believe that this is simple math, it's about cash flow, putting a capitalization rate on it and what is the NII as far as going forward and is the NII going to be impaired.

Lenders should look at it more conservatively now, because there may be some erosion of NII for the NOI.

So that is important to understand you have to look at with an abundance of caution given the change and we happen to be viewed in the marketplace as a low risk lender.

This concludes the question-and-answer session.

I would like to turn the floor back to management for any closing comments.

Thank you, and certainly we look forward to speaking with you again at the end of the next quarter and the performance for the 3 and 6 months ended September 30, 2019, has now been presented.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you again for your participation.