New York Mortgage Trust Inc (NYMT) 2019 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by.

Welcome to the New York Mortgage Trust Second Quarter 2019 Results Conference Call.

(Operator Instructions) This conference is being recorded on Tuesday, August 6, 2019.

A press release with New York Mortgage Trust's second quarter 2018 results was released yesterday.

The press release is available on the company's website at www.nymtrust.com.

Additionally, we are hosting a live webcast of today's call, which you can access in the Events and Presentations 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 Steve Mumma, Chairman and CEO.

Steve, please go ahead.

Thank you, operator.

Good morning, everyone, and thank you for being on the call.

Jason Serrano, our President, will also be speaking this morning with me.

The company continued to deliver solid results, generating GAAP earnings per share of $0.08 and comprehensive earnings per share of $0.18 for the second quarter.

Book value per common share at June 30, 2019, was $5.75, unchanged from March 31, 2019, resulting in a total economic return of 3.5% for the quarter.

When combining financial results for the first 2 quarters of 2019, company generated a total economic return of 8.8%, which represents an annualized return of 17.7%.

For the 6 months ended June 30, 2019, we had comprehensive earnings per share of $0.47, exceeding our common dividend paid to date by 17.5%.

Our investment team remained active during the second quarter, sourcing and closing on more than $500 million in credit-sensitive assets, bringing our total investment portfolio to $4.2 billion at June 30, 2019.

To fund a portion of this investment activity, the company continued to opportunistically access the capital markets during the second quarter, raising a total of $136.7 million in common equity through both a follow-on offering and utilizing our at-the-market equity offering program, all of which were executed at levels that were accretive to our book value.

In addition, on July 22, we completed our fourth overnight offering of the year, issuing 23 million shares, raising approximately $137.5 million, bringing our total capitalization to $1.7 billion.

This capital growth benefits the company by increasing our options to access the capital markets.

It lowers overall cost of credit and reduces our fixed expense on a relative basis.

I'd like to have Jason now speak to the market conditions and some thoughts around our current portfolio strategies.

Jason?

Thanks, Steve.

We are pleased with the strong performance while also maintaining book value quarter-over-quarter.

In the second quarter, we witnessed general spread tightening, particularly in more liquid strategies within our credit portfolio.

Our investment teams were busy in the quarter with approximately $500 million of exposure added between multifamily and single-family credit.

On the MBS side of the business, we continue to rotate out of the agency exposure to optimize the portfolio in a slower growth, lower rate environment.

Performance of Agency MBS was challenged with lower mortgage rates causing increased prepayment speeds.

With premium Agency MBS, generally, higher prepayment speeds decrease the value of the bonds.

Hedging the premium value due to the duration shortening proved difficult for us, and generally, the broader market.

At the beginning of the year, our total agency exposure was 30% of our investment portfolio.

Today, it represents 24%.

Looking at our active pipeline of opportunities, we do expect our planned rotation out of Agency MBS to accelerate in the third quarter.

Allocations away from Agency MBS is not indefinite.

However, we do feel the Agency MBS thesis is difficult to pursue without incurring excessive risk over the near and likely midterm.

In the multifamily space, we continue to focus on 2 strategies for capital allocation to generate attractive returns for shareholders.

First, we focus on direct mezzanine type origination that is generally structured as a medium-term bridge loan to the property sponsor.

Our team continues to source private transactions away from the broader markets through our proprietary network of multifamily property management developers.

With our experienced management team, we can offer unique structures to fit the needs of our borrowers.

I'm glad to point out we had a record amount of that investment activity with our direct loan program and look to build off this effort with opportunities to deliver excellent risk-adjusted returns.

Another area of focus in multifamily credit is investments in the equity portion of secured Freddie Mac multifamily loan securitizations.

As a background, multifamily loans are securitized in the term structured vehicles, typically 10-year deals.

Our multifamily asset management team conducts a detailed analysis of each underlying property, including site visits to high-risk properties to determine overall value of the portfolio.

Our strength comes from the fact that we are hands-on in the diligence process and take an active role in the workouts of a problem loan.

Historically, we have been able to minimize a few instances of losses that occurred in these portfolios to better protect our investment.

We are very active in this space and routinely participate in transactions from Freddie Mac, subject to our satisfactory outcome of diligence results.

K-Series Freddie Mac deal volume is expected to remain strong with anticipated issuance of $70 billion per year.

We do expect to continue to allocate capital to this strategy given our capability and strong track record.

Solid funds -- solid trends in multifamily credit continue to underpin fundamental value of our exposure.

National vacancy rates now hover around a 2-decade low or approximately 5%.

With the demographic shift poised to keep demand for rental units elevated over the next decade, particularly for our millennials, who are now the largest generation in the United States with 73 million people, but where financial capacity for homeownership is lacking, and baby boomers, now the second largest with 72 million people, who face downward pressure to downsize in their homes, we expect the trend of cap rate compression to persist.

One of the key risk in multifamily space is the supply side with new units brought to the market through construction.

In the U.S., a part of the completion of supply growth is currently tracking around 400,000 units annually or 2x higher than the completions brought to market 5 years ago.

Apartment construction was disproportionately built in primary markets, where developers could obtain higher market rents.

Despite sustained low vacancy rates coupled with rent growth, we seek to avoid exposure in primary markets with significant supply expansion or where large development projects are seen on the rising.

Now switching over to single-family mortgage market, which is the single largest fixed income asset class in the world with $11 trillion of assets, our focus on the mortgage -- is on the mortgage credit side of the equation.

Here, we also have 2 primary investment strategies.

First, in performing in credit-impaired residential mortgage loans; and second, in esoteric mortgage credit bonds.

In this effort, it's important to note that we have not followed the popular strategy of vertical integration into a mortgage origination platform, which as a side, there's been no shortage of willing sellers.

We believe it is imperative to maintain the flexibility to move in and out of the markets where we can locate compelling opportunities.

With a captive originator, we may face pressure to be consistent buyers of loan production in various environments and cycles.

Simply, we believe no mortgage sector can offer an indefinite period of attractive risk.

We prefer to maintain the flexibility investment -- investing where attractive risk can be sourced from a large selection of sellers.

As an example, we purchased loan from -- packages from over 80 unique sellers thus far this year.

We offer the market liquidity with certain niche mortgage characteristics, where we can move quickly with a deep credit understanding at each subsector, such as scratch and dent, fix and flip or credit-impaired loans, better known as sub-performing loans.

In these markets, we allocated $238 million or 67% of the company's invested activity in the second quarter.

On average, we believe we purchase assets at attractive discounts to par value, where exposure to lower mortgage rates may increase loan prepayments.

In this case, which is quite the opposite of certain Agency MBS, prepayments monetize the discount paid on loan providing for higher investment return.

Much like with our multifamily effort, our single-family securitization investment strategies continue to offer various types of esoteric or securitization asset classes that were created after the financial crisis.

As the aggregate outstanding supply of U.S. securitized product credit has declined for several years and demand for large asset managers and insurance companies from mortgage credit investments increased, spreads continued to remain tighter in the second quarter alongside of a stable housing fundamentals.

Given we are in the flow of underlying loan trades, we price the risk of underlying assets in each securitization.

With enhanced liquidity of this sector, we tend to be more active traders of the securitization market.

We typically seek to monetize value over 1- to 2-year time horizon.

A factor that keeps us busy in this market is that traders rarely price risk efficiently between whole loans, markets and bonds.

They are secured by similar loans.

Implied fundamental value differences between the two creates opportunity.

We believe our platform is uniquely situated to take advantage of this dislocation.

A significantly inverted curve and core inflation falling below 2012 highs in various developed countries very much -- growth very much looks fatigued across the globe.

Admittedly, it has been harder for us to find opportunities as credit spreads, especially in securitized products, have tightened over the course of the year.

However, the market in which we track the traffic are large relative to the capital we've put into work in each quarter.

As the managers here would like to point out, each passing quarter adds more incremental work to meet the same return objectives.

Unfortunately, this is where we are today.

There are no free lunches out there.

We are canvassing the market with our network and chasing down proprietary leads with increased vigor to create healthy investment pipelines across the multifamily and single-family credit.

This effort has afford us to raise accretive capital in each of the quarters.

Our $4.2 billion asset portfolio is underlevered with recourse borrowings at only 1.8x as of 6/30.

We believe this is a conservative strategy of limiting risk formed by the financial leverage, which will enable us to better preserve book value over the coming quarters and to take advantage of market's locations.

As mentioned earlier, our strength comes from our corporate liquidity, which has never been stronger.

Under diverse approach, we are focused on providing attractive dividends generated by deep fundamental credit experience, flexibility and diversification offered by our platform, lack of operational entanglements and a strong balance sheet.

This is the formula of how we expect to provide real offer to our shareholders.

We look forward to discussing our financial performance in subsequent quarters as we expect the strength of our earnings will improve with reallocation of the MBS exposure and seasoning of our credit portfolio.

With that, I'll pass it back to Steve.

Thank you.

Jason will be available for questions at the end of this presentation.

Now let's go through the earnings performance for the second quarter.

We had $16.5 million in GAAP net income and $36.6 million in comprehensive net income.

We generated net interest income of $25.7 million and portfolio net margin of 216 basis points for the quarter.

Our net margin decreased by 24 basis points, which was primarily related to the timing of cash flows received in the distressed loan portfolio as many of our loans are accounted for on a cash basis for GAAP purposes.

Our average earning assets totaled $3.5 billion for the quarter, an increase of $251 million from the previous quarter, bringing the total increase for the year to $822 million or 30% increase from beginning of the year.

We expect our average earning assets in the third quarter to continue to grow as our investment pipeline continues to build.

Our investment portfolio totaled $4.2 billion as of 6/30/2019, including $1 billion in Agency RMBS securities, with $150 million in equity allocated to the strategy or 9.8% of the total capital.

As Jason mentioned earlier, this investment is not a core focus to our investment strategy and will continue to represent a smaller percentage of our portfolio.

We have $1.8 billion in residential credit as we continue to see opportunities, including subperforming and reperforming loans as well as nonagency securities backed by varying types of residential credit loans.

These investments are currently funded with repo lines, but we continue to evaluate both the rated and unrated markets for possible securitizations in the coming quarters.

We have $1.4 billion in multifamily investments, representing 33% of total assets and 40% of our invested capital.

In the third quarter, the company expects to fund another Freddie Mac first loss investment for the -- totaling $48 million.

Our multifamily strategy continues to be a major contributor to the company's performance.

We recognized other income of $8.6 million during the quarter, and given the nature of our business and our current accounting requirements, this will continue to be a significant part of our annual earnings.

Included in this quarter and the $8.6 million was a total net gain of $12.3 million from our distressed and other residential mortgage loans held at fair value, which was comprised of $9.9 million of unrealized gains and $2.4 million of realized gains.

We also had $2.1 million of realized gains from sales during the quarter related to our distressed and other residential loans, which were accounted for at carrying value.

We had unrealized losses of $15 million from interest rate swaps accounted for as trading instruments, which were offset by unrealized gains on our available-for-sale securities of $20.1 million reported as a component of other comprehensive income.

We also had unrealized gains of $5.2 million on our consolidated K-Series investments or Freddie Mac first-loss securities driven primarily by tightening credit spreads.

We had additional $2.7 million in other income, comprised primarily of $1.7 million in unrealized gains on joint venture equity investments, $1.7 million in income from preferred equity investments accounted for investments in unconsolidated entities, which otherwise would have been included in net margin, but for accounting purposes must be reflected in other income, and $0.5 million of gain on early redemption of a preferred equity investment.

The company also recognized a $0.8 million net loss from our interest in a real estate development property after giving effect to a noncontrolling interest share of the losses.

For the quarter ended June 30, 2019, the company had $9.8 million in G&A expenses as compared to $8.9 million in the previous quarter.

Majority of the increase of $600,000 was related to nonemployee equity board compensation, which vested issuance following our annual meeting, which was held in June 2019.

During the quarter, we finalized our exit of our third-party management -- our final third-party management agreement and do not expect any more management or incentive fees in future quarters.

Over the last 12 months, the company has been filled with new hires, an increase in capital base over $1.7 million and the acquisition of more than $2 billion of new credit investments.

The NYMT continues to remain focused on fulfilling its objective to deliver long-term stable distributions to our stockholders over changing economic conditions.

To that end, the company has delivered a total economic return of 13.7% over the trailing 12 months ending June 30, 2019, while maintaining a dividend payment rate of $0.20 per share, our 10th straight quarter at this level.

We appreciate your continued support, and look forward to speaking about our third quarter results in early November.

Our 10-Q will be filed on or about Friday, August 9, with the SEC and will be available on our website thereafter.

Operator, if you could please open for questions for Jason and myself.

Thank you.

(Operator Instructions) Your first question is from Doug Harter with Crédit Suisse.

Just hoping you could talk a little bit about the returns you're seeing on that incremental capital deployed.

I know, in your prepared remarks, you said it's kind of more challenging kind of the returns you're seeing on that incremental capital, how it compares to the existing portfolio, and therefore, your appetite to continue to raise capital if the markets remain open to you?

Yes.

Look, I think the way we feel about raising capital is we would not raise capital.

We didn't think we could deploy that capital into investments that are going to reach our targeted investment.

And our targeted investment right now is 12% to 13% ROE.

That ROE is going to be supported both by the asset and the financing on that asset.

There's no question, one of the things that we look at is our agency portfolio, and given the volatility of rates recently, especially, that investment is difficult to reach that target without the extreme amount of leverage on that investment strategy.

So if you look at some of our credit strategies that Jason talked about, one of that distressed residential loans in our multifamily when coupled with the sources of leverage that we can put on those trades, we do believe over a 2- to 3- to 4-year horizon, those investments will return that kind of -- will give us that kind of return.

And then just curious that 12% to 13%, how much of that is kind of current spread income?

And how much of that is kind of the expected kind of credit roll down kind of as those season?

Yes.

Look, I think -- I mean you could get a sense of our financials over the last 3 to 4 years, which has generally been 60% to 70% -- well, probably 55% to 70% of net margin and the balances in other income and many components of that other income is realized and unrealized gains and losses on both residential and multifamily.

When we get in -- we're not a core net margin driving business only.

We don't think which asset -- generally rely a lot of that return on leverage.

And so if you look at our leverage at 1.8x, I think one of the reasons why we can deliver a more stable book value across these environments is that we don't have -- we don't depend on leverage to generate a substantial part of our return.

So I think that's really the strategy.

And when you have lower leverage, you're going to have to get some of your return from improved credit asset performance, which is what we're targeting.

And then just one more on that.

I mean again, your book value performance has been exceptional.

But if we go through a period of volatility, I guess, how could we think about that credit improvement piece of it over recession or just a period of kind of moderate to kind of widening spreads?

Yes.

Look, there's very little we can do general market credit spread widening, especially when the market gets a shock, right?

So I mean we look at 2 things from the company's standpoint.

One, the fundamental creditworthiness of the asset.

And so there's 2 -- when we look at a credit asset, there's 2 components: fundamentals and technicals.

Technicals will be the market reaction to the events outside of our world that impact us, and then fundamentals of the underlying assets.

So we think the combination of lower leverage and the underwriting due diligence we put on the credit assets puts us in a position to better withstand credit events that come in the future.

Now if we get into a 2000 event -- 2008 event, it becomes difficult for everyone, but we still manage the portfolio where we believe that we could sustain those kind of market reactions.

But the reality of it is, we don't think we're going to see a 2008 event.

We do think credit spreads could widen in the future.

But we think where we sit from a credit standpoint and of exposure, our assets will perform very well, especially relative to other asset classes.

Another way to protect yourself on credit performance is to seek assets where you have downside protection in the asset itself.

So typically, when we're looking at, for example, the SPL market, an area where we're expecting improved credit performance from the borrowers, we're buying assets that are basically below an 80% LTV, and we're buying that asset at a more than a 10% discount.

So in those cases, the protection is built on the extra credit protection you have in the underlying asset and at the discount.

Initially, with lower rates, you expect that these borrowers will have better opportunity to refinance away and basically prepay our loan when their credit improves in the short term.

So in those areas, we look forward to lower rates with a better ability to actually monetize the bar faster.

And with the downside credit protection we have on the underlying asset across just about everything that we do, we're looking for LTVs north of 20% lower than par value.

So that's been a huge help and part of the reason why we've been able to keep stability on our asset portfolio pricing.

Your next question is with Eric Hagen from KBW.

I'm hearing you say, just from the opening remarks, that both multifamily and resi credit are both attractive.

So of the two, which are you more favorably biased to in this environment?

And when I say this environment, I'm really kind of zeroing in on the volatility that we've seen over the last -- even just the last week.

I mean the last week's volatility is something that we have to digest and see how it plays out.

I mean that's something that -- the Fed eases rates by 25 basis points.

We -- almost immediately, we get a talk about increased tariffs.

And now we have a possible currency war, the markets are down.

Rates have rallied massively.

None of that has really been reflected in the credit markets yet, either technically or empirically or fundamentally, Eric.

And in terms of allocation between the two, really, I mean we've been fortunate enough to have access to the capital markets as we continue to trade above book value.

And so we've been able to not really restrict one investment thesis versus the other.

We're in asset-growing mode right now.

And so as long as those fields are both attractive, we will continue to add them until we have to make a choice.

But I think right now, we continue to try to seek investments that reach the goal of what we said earlier of 12% to 13%, and that's what will drive the decision making.

Okay.

And then one the -- on leverage, just kind of generally, I can see that you're clearly underlevered in the agency segment, but where are you underlevered in the other 2 segments of the portfolio?

Yes.

Look, I think if you look at our loans, I mean we have available funding capacity on loans.

We have some of the loans that aren't financed.

We have securities that are on finance.

We have additional leverage we could add to various asset classes.

So we may have borrowings against certain asset classes, just not up to the maximum level.

So we could safely run the company at 2.5x to 3x leverage in our opinion.

So that gives us some flexibility of leverage, if needed.

In the resi credit segment, specifically, like, is there -- I'm looking at you guys running maybe a little over 1x recourse leverage.

What would be the max leverage that you think you can get based on the makeup of the portfolio today?

I mean obviously, different asset classes such as performing loans versus subperforming loans at different leverage ratios.

But we're seeing advanced rates offered to the market anywhere from 95% on performing to in the 85% kind of market standard on subperforming.

And on both of those, we're basically 10% below leverage ratios.

And we also have the assets where we have not levered, where we think we can generate a double-digit return based on the different qualities of that asset and prepayments or monetization of the asset itself.

On securitizations, we can go to roughly 90% of leverage.

And that's an area we have not taken full leverage.

And again, some assets, we do not have levered because of our trading kind of methodology and looking at dislocations and taking advantage of dislocation to the trade.

So a lot of the return in that asset class comes from a thesis of -- basically, a credit spread tightening on that particular asset for various reason, and that's where the return is generated versus holding the asset to maturity with leverage that provides net income double -- equal to double-digit return.

So I think the reason why we're on the leverage because our thesis is basically in and being able to monetize the discount that we bought the asset versus holding it to a maturity with high leverage.

Got it.

And then just on the distressed residential side specifically, what does the supply picture look like over the next, just call it, 12 months?

I mean who is selling the paper?

And how much do you think will come to market, again, just over the next, call it, a year?

Right.

So different -- one end of the market that has seen supply shrink quite dramatically is in that -- in the nonperforming loan side.

Fortunate for us, that's not where we're focused on loans that are 24-month delinquent type of

(technical difficulty)

There's been only about $4 billion of supply there.

On the RPL side of the equation, we're looking at $17 billion of supply thus far this year, and we expect that to be -- continue to grow.

This portfolio is available out there in the billions of dollars.

Typically, we've seen is that banks have basically modified a large portion of their portfolio that were delinquent from 2010 to 2000 -- to today.

And those loans, not all of them have made it to a full performance ratio.

A lot of those loans still continue to pay and then default after a period of time.

So what the banks are doing is they're trying to basically clean up that -- those portfolios through sales, which are in the billions.

Fannie/Freddie also sell these loans in the billions on a quarter-over-quarter basis.

This is really a consequence of bad modifications that didn't get completed or didn't get -- make -- didn't meet the borrowers' needs as it relates to either payment reduction or LTV reduction.

And those loans we're seeing in the market to be purchased.

And that's why we're looking at more directed modification programs that are fitting the need for the bar on a case-by-case basis with higher-touch servicing efforts is what our goal is and what we've been doing.

So there's still some incremental supply out there and it keeps the market busy.

But there is -- the -- when you talk about RPLs, there's a big spectrum of borrowers that are 24-month current or borrowers that are delinquent that only a couple of months.

And we're generally focused in the case where borrowers have either recently paid or recently defaulted where we think we can keep the borrower paying over a period of time through more intense servicing efforts.

Your next question is from Matthew Howlett with Nomura.

Just you're getting back to the margin, and I appreciate the complexities with the GAAP financials, and I hear you, with the -- residentially, the nonperforming to give us some of the cash accrual yield you have to recognize that as they could.

Analysts and myself look at the margin, we sort of focus in on that net interest spread.

Anything can -- the margin was 240 -- the reported margin was 240 last quarter, you get down to 216 with the top line compression.

Anything that's normalized that you can point us to?

And will we continue to see good progress on that net interest spread, which has been going up consistently in the last few quarters?

Yes.

Look, I think when you -- one correlation you could definitely look at is to the extent that the leverage increases in the overall company, you would expect the net margin to decrease, right?

So as we add securities and put financing on that of 4 to 5x, those securities are going to have a lower yield than some of our multifamily assets.

The multifamily assets tend to have a much higher yield.

So when you look at that 240 or 216, it's really a barbell strategy of lower-yielding residential assets relative to higher yield in multifamily, but the leverage ratio relative in multifamily versus resi is 4 to 5x difference.

So it's hard to pinpoint exactly where that margin is going to go.

I think over the last 6 quarters, we've tended to gyrate between probably a low of 2% and a high of 260%, 275%.

And I think if you look into those periods of the higher-yielding assets, it's probably periods where we've added much more multifamily versus residential.

I think this quarter, we added 63% residential.

So while the net margin dropped, part of that drop was really related to the increase in leverage of some of the lower-yielding residential assets.

But in general, Matt, I would say, it's going to be between 2% and 2.5%.

Another fact that comes to play is that we have $1 billion of distressed mortgage loans, which generally has some J curve attached to it, meaning that the borrowers -- the extent we're buying delinquent loans, they're just delinquent, do not provide for a payment.

And then over time, as we work with the borrower, more consistent payments do come and that drives higher net interest margin.

Just to give you a sense, 2/3 of loans that we purchased were delinquent at purchase.

After service and transfer and working with the borrower, today, we have the inverse, 2/3 of those borrowers actually are paying on a consistent basis.

So that -- as we board loans that are in the SPL spectrum, I think those are the assets where we have the most J curve effect, where net interest margin would be delayed because of the borrower's payment performance.

Got you.

Directionally, though, the overall net -- the gross net spread income, that's going to continue to go up as you deploy capital and it's been increasing at a very fast rate.

But you expect -- the expectations for that to continue to increase as you grow the portfolio?

That's right.

Dollar net margin, using -- dollar net margin.

Yes.

Absolutely.

No, absolutely.

Great.

And then moving -- I just wanted,-- for us, we're not -- you're sort of fresh mover in the multifamily K-Series program.

And you mentioned that you're going to target a deal in Q3, and then we've also known the real pickup in your direct preferred mezzanine lending business.

Can you just go over what's the sort of return characteristic profile of each one?

And is -- the case here is you've always had this consistent market right up in these gains and subs, is that going to continue even in today's credit spread environment?

Look, we -- the market increased in value on the K-Series bond.

If you think about when we got into that investment in 2011, we entered into those trades.

We were earning high double-digit yields on those investments, 18% to 19%.

Today, that's a high single-digit yield investment.

And so if you think about that roll down the curve on a 10-year asset that has no prepayment capabilities, there's a tremendous amount of duration in that asset class.

So as you generate incremental improvements in yield of 25 basis points, it's a huge dollar price pickup across $600 million to $700 million portfolio.

So what's driving the credit spreads in is supply and demand, in my opinion, and fundamentals on the multifamily.

But over the last 1.5 years, it's probably as much technical factors in terms of supply and demand as opposed to fundamental credit.

I mean our assets are performing outstanding across all of our exposure, which is over $14 billion of loans.

I think we've had 3 loans go bad, of which we've had minimal losses on those loans that we've been able to work out with the special servicer.

So it's a great performing asset class.

And I think to the credit of the agencies, they've been able to increase the market knowledge of these asset classes, which has improved spread tightening.

I mean it's to our detriment, but from a liquidity standpoint and availability standpoint, those assets had an outstanding performance.

Great.

Just a last one for me on -- just on, there's some moving parts here on the operating expense line.

It sounds like you had some one-time comp issues.

Going forward and you're adding people, it's great, and I think you said that you've paid your sort of last external management fee.

Just overall, I mean is that operating expense ratio that -- should we let that to continue to decline as you grow?

And sort of what's the outlook overall?

I know you provided some guidance earlier in the year.

Okay.

Yes.

Look, from an expense standpoint, Matt, the -- we've hired the majority of our senior asset managers, if you will, in the company.

I mean we will continue to add support staff, but not significant expense increase.

So I would say that if you take out the $600,000 one-time shot that happens every year, it's $150 million a quarter if you want to annualize it.

The runway where we are is approximately where we're going to be in the near future.

(Operator Instructions) Your next question is from Christopher Nolan with Ladenburg Thalmann.

What is the effect on your cost of funds for the most recent Fed rate cut?

Look, the majority -- well, all of our repos are going to be -- are going to trade-off of LIBOR with some kind of base, either implicit or explicit, implicit would be the repos on the securities.

So that's an immediate 25 basis points drop.

And then on our bank borrowings that are funding the loans, that's also an immediate 25 basis point drop as well as any kind of LIBOR indication of forward easing.

So it's definitely beneficial to the company, for sure, in that regard.

But -- and that's why we would look at possibly as rates continue to trend lower, we'll obviously look at securitization execution to lock in some longer-term funding.

But it's an immediate impact.

Also you mentioned earlier that you can take the leverage of 2.5 to 3x, which is consistent with your comments in past calls.

Would you -- or just given the changing economic environment, these were tending towards a lower -- targeting a lower ratio -- leverage ratio to achieve your ROE target?

Yes.

I mean look, if you're asking us to digest the last 2 days events, I mean obviously, we would be more hesitant to put more leverage on the books.

I think we always run the company in that -- we always look at the company's risk to leverage as the key fundamental issue that we have to manage on a day-in and day-out business.

Historically, companies that have come under financial distress, it's not really been the assets, it's how you finance the assets, and that's sort of our mantra.

And so we spend a lot of time thinking about how we finance the assets.

But I think, given the last 2 days of events, clearly, we would be hesitant to increase leverage.

However, fundamentally, we will look at the actual assets that we're putting on leverage would also dictate that decisioning.

Final question.

Given your stock has only traded about 3% above NAV, I mean you can utilize the ATM, is the intent to continue to raise equity capital while the market's open?

Look, I think, when we raise capital, it's twofold.

One, we want to make sure we can accretively add it to our capital base.

And two, we have -- we believe that we have investments in the pipeline strong enough to support our current dividend yields.

And so those are the two things that we're trying to do.

And we would always optimistically look to use it.

And if we don't, the ATM program is one source to add capital to the marketplace.

The overnight program is a way to generate more capital in shorter period of time as generally related to an investment that we see in the horizon that's coming, that's larger in size.

But yes, as long as we are able to raise accretive capital, we will continue to evaluate it.

There are no further questions at this time.

I now turn the call back over to Mr. Steve Mumma.

Thank you, operator.

And thank you, everyone, for being on the call.

Jason and I look forward to speaking next November about our third quarter results.

Thank you, everyone.

Have a good day.

This concludes today's call.

You may now disconnect.