New York Mortgage Trust Inc (NYMT) 2022 Q4 法說會逐字稿

Good morning ladies and gentlemen, and thank you for standing by. Welcome to The New York Mortgage Trust Fourth Quarter and Full Year 2022 Results Conference Call (Operator Instructions). This conference is being recorded on Thursday, February 23, 2023.

A press release and supplemental financial presentation with New York Mortgage Trust fourth quarter and full year 2022 results was released yesterday. Both the press release and supplemental financial presentation are available on the company's website at www.nymtrust.com. Additionally, we are hosting a live webcast at today's call, which you can access in the Events and Presentation section of the company's website.

At this time, management would like me to inform you that certain statements made during the conference call, which are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although New York Mortgage Trust beliefs expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release and from time to time in the company's filings with the Securities and Exchange Commission.

Now at this time, I would like to introduce Jason Serrano, Chief Executive Officer. Jason, please go ahead.

Thank you, and thanks everybody for joining the fourth quarter earnings call. I'm joined today by our CFO, Kristine Nario; and President, Nick Mah. Nick work alongside of me since 2004 at Fortress, then at Blackstone and more recently at Oak Hill. He joined New York Mortgage Trust in 2018. And after 4 years in the managing director role, I'm excited to have Nick joined the senior management ranks as President at the end of this year, end of 2022, sorry and be available to you today and on future calls.

I'm eager to speak to you today about our fourth quarter results along with a brief first quarter update. I will also discuss how we aligned the company with mark -- with the market and why we feel primed for growth in a high return distressed environment. I'll initially provide commentary around this points and handover to Kristine and Nick to provide greater detail around our financials and portfolio management.

Now, we have been documenting our take on the market roadmap, which is on Page 7 for a few quarters now. We believe our market calls have aligned well with actual quarterly progression and honest assessment from investors in our sector throughout the second half of 2022. And even (inaudible) 2023 likely contains a high degree of buyer's remarks. The market shifted. The market shift starting in April 2022 with the (inaudible) laid out the game plan for historic rate increase due to inflation not witnessed since the 70s.

In one month, the market went from historic securitization financing efficiency to market dislocation. As common bond investors brushed off fears of missing out and instead, sat on the sidelines. And in the mid second quarter of last year, we took decisive action to eliminate near-term investment pipelines at the time we were generating over $1 billion of new acquisitions per quarter. We ended the third quarter with $119 million of investments in mostly short duration VPLs and followed up in the last quarter with just $106 million.

Reducing our portfolio pipeline took great effort. We have the ability to add multiples of our fourth quarter investment activity on our balance sheet. Today, Nick will discuss this in more detail. However, at this time, we don't see a great risk reward proposition to aggregate in this market. We believe opportunity cost of capital right now is extremely high and prudent to wait for better entry points. In many ways, we see this first quarter to be inferior buyer's market than that of the third quarter of last year. Our story is much more than avoiding stapling losses with acquisitions from the second half of last year.

In fact, we avoided tying up capital along profit -- or losing propositions and human capital on managing these assets through a distress environment in downside risk. However, we have a clear path plan to drive EPS higher with portfolio growth through this year and to do so without solutions for investors and incurring costly debt. The question is timing of this redeployment and what are the near-term catalysts to create the opportunity for us? Well, it's difficult to determine the day. What seems apparent is that we are in right now in the right season.

While there are many data points and telling graphs, one can use to judge timing of the market reset. I watched the data supporting these 2 graphs on Page 8 more closely. The graph on the left shows the U.S. consumer has been as abruptly then squeezed out of new loans and credit card products. Credit is what's rove our economy 2022 evidence by nearly $1 trillion of credit card debt that has been added by U.S. consumers, which is record high. Steeply rising credit card balances coupled with higher interest rate paid on such that as crushing household budgets, as high inflation deteriorates savings that many amassed during the pandemic.

Personal savings rate now at 2.7% is one of the lowest points ever. Only 2006 and 2007 witness such vapor thin levels. A large poll by Bankrate recently showed only 57% of Americans can afford 1000 emergency expense. Now that the borrowing merry-go-round has ended. Many Americans will be looking through their monthly expenses and rejecting payments which was that low utility to everyday life. Including selected payment defaults represent little to no near-term consequence. Thus, it is almost certain that delinquencies will dramatically increase in a variety of asset classes, especially with loans originated over the past 18 months to low FICO score borrowers.

Overall, consumption is challenged and will significantly weigh on GDP in 2023. The graph to the right shows a tight escrow relationship between existing home supply and HPA record in the year. For the past 2 years, the market reached historically low supply at less than 2 months of homes inventory on the market. Today we still have very low supply levels at approximately 3 months. Supply is in check and to keep national prices pause in the near-term. As I discussed, the consumer is under significant pressure. Thus it should be -- it should not be a surprise to see supply to pick up from homeowners struggling to make ends meet for equity extraction.

However, when observing the demand side, housing affordability is painfully high. U.S. mortgage rates more than doubled from the mid 3% range to above 7% in 2022. Housing expense to income is now approximately 35% higher than last year. New homebuyers and essential demographic for home price growth are faced with even worse affordability, not surprisingly after 2 years of double digit HPA and (inaudible) in the market 2022. This has happened in the previous year. On the ground, conversations should even create greater volatility in large traditional speculum markets such as Phoenix, Las Vegas and in small markets like Boise and Salt Lake. And these markets we see property investors willing to accept prices equal to their basis of 2 years ago, suggesting a home price decline of 25% for these investors.

Thus we see significant home price pressure in these markets in the year despite historically tight housing supply. In summary, unsecured debt and high LTV products particularly late in the late 2021 and 2022 vintage will likely significantly underperform. Housing supply will most likely be pushed higher with the constrained buyer base. New construction, other types of pro forma underwriting will lead supply as these sales are often more distressed as homeowners. These homeowners are not a traditional long-term holder. Delinquencies will follow, financing will become more constrained, which you see as a likely catalyst for the opportunity we are focused on.

Now switching over to quarter results, which you can find on Page 9. We ended the quarter with undepreciated loss per share of negative $0.12. In this quarter, we introduced adjusted book value per share mostly to capture the market -- mark-to-market change on our debt, most of which isn't security issues reform and other non-cash items. Kristine will elaborate further about these measures but as some of you pointed out earlier, we thought it would be helpful for consistency to disclose adjusted book value which declined by 4.8% quarter-over-quarter. Our after effect of our previously declared $0.10 dividend quarterly economic return on adjusted book value was negative 2.4%. Nearly all books that are lost in the quarter were unrealized and expected to be reversed over time. We ended the year with 2.6% G&A expense ratio, which we believe is one of the lowest in the market for the complexities of the sectors we are engaged in. Our low cost platform is deliberate. We focused on our costs and believe we can obtain additional savings in 2023.

As far as quarterly investment activity, our plan was to reduce risk and focus inwardly. As we bought some of our debt in the secondary market, as well as common shares. With a full team effort in both single family and multifamily business, we also strengthen our asset management platform, which we believe will lead us through the distressed opportunity set. We'll have more details around this next quarter at some new pieces of our platform being assembled now.

Finally, after issuing a term securitization in November, we reduced our leverage ratio to point 3 times and ended the quarter with $224 million of cash. Our cash balances will jump around a bit. The goal is to limit cash holdings and drag but under leveraging our portfolio. We want to avoid incurring additional financing costs with additional drawdowns on our facilities without reinvestment targets. Page 10 shows this relationship. We can raise up to $644 million of cash by utilizing financing options available to us with our own portfolio. Thus we can drive EPS higher without dilution to shareholders in an equity raise and also avoid expensive corporate debt placement.

By taking this additional asset based financing, our portfolio leverage would increase 2.4 times, 4.5 times at the company level. Thus we have the flexibility here to obtain incremental financing while also keeping our leverage at market leading multiples. Additional upside exists to our short duration portfolio. We have the luxury of reinvesting our asset turnover at higher yields available today, which the EPS illustration does not capture. We intentionally focused on organic fundraisers through our portfolio to drive earnings higher in a market which presents superior risk adjusted returns with a catalyst that may trigger a downturn now in view, we firmly see our differentiated patient approach as a winning one where our stockholders will benefit from a steadfast path to seeking value in a disrupted environment.

At this time, I'll pass it over to Kristine to provide a deeper dive on our financial results and then Nick on the portfolio. Kristine?

Thank you, Jason. Good morning, everyone. In my comments today, I will focus my commentary on the main drivers of fourth quarter financial results. Our financial snapshot on Slide 9 covers key portfolio metrics for the quarter, and Slide 23 summarizes the financial results for the quarter. The company had undepreciated loss per share of $0.12 in the fourth quarter, an improvement of more than 50% as compared to undepreciated loss per share of $0.27 in the third quarter. The fair value changes related to our investment portfolio, continue to have a significant impact on our earnings. And during the quarter, we recognized $0.11 per share of unrealized losses, primarily due to an increase in interest rates and credit spreads widening that resulted in a decline in the fair values of our residential loans and investment in consolidated SOSC.

We had net interest income of $22.2 million, a contribution of $0.6 per share down from $0.8 per share in the third quarter. The decrease can be attributed to a few factors. First, a decrease in average interest earning assets in our portfolio due to pay downs received during the quarter, as well as our decision to significantly curtail our investment activity starting at the end of the second quarter. In addition, financing costs in our investment portfolio were higher due to increases in base interest rates related to our repurchase agreements and as a result of residential loan securitization that we completed in the fourth quarter.

While securitizations might incur greater interest expense relative to repurchase agreements, financings in general, they reduce our exposure to mark-to-market risks and allow us to better manage our liquidity. Securitizations also lock in financing costs versus floating rate repo, in that sense, if the Fed aggressively raises above expectations, it may even reduce interest expense versus repo over the medium term. Unlike in the third quarter, we had minimal sale activity, which resulted in a decrease in realized gains and other income during the quarter.

Also, as previously discussed, due to increases in interest rates and continued credit spread widening, prices on a majority of the assets in our portfolio declined during the quarter. Of the $42 million of unrealized losses, $35 million or $0.9 per share are attributed to residential loans, seldom securitization vehicles. Unlike some of our peers, we do not mark our securitization liabilities to fair value. Therefore, there is no corresponding unrealized gain recognized in our securitization liabilities to offset unrealized losses on the assets held in the securitization. More on this point later.

Total general, administrative and operating expenses amounted to $68.2 million for the quarter, down from $91.6 million in the previous quarter, primarily due to one, reduction in amortization expense as a result of lease intangibles related to consolidated real estate. Being fully amortized in the prior quarter. Two, reduction in depreciation expense due to the application of held for sale accounting to consolidate real estate in the disposal group. And finally, due to residential loan portfolio runoff and minimal purchase activity, which will reduce portfolio operating expenses.

Note that these numbers will reflect the reclassification of interest expense related to our mortgages payable on consolidated real estate operating expenses in the fourth quarter and in prior periods. This quarter, we introduced a new metric. Adjusted book value, which is a non-GAAP financial measure replacing undepreciated book value. When presented in prior periods, undepreciate book value reflected the value for single family rental properties and JV equity investments that after undepreciated basis. Like, scooting from gap book value, the company's share of depreciation and lease intangible amortization expenses related to the operating real estate.

Since we began disclosing undepreciated book value, we identified additional items as materially affecting our book value and believe they should also be incorporated to provide a more useful non-GAAP measure. Accordingly, adjusted book value begins with the same calculation as undepreciated book value and includes 2 additional adjustments to GAAP book value. First, we exclude the adjustment of redeemable NCI to an estimated redemption value. Redeemable NCI represents third party ownership in one of our consolidated JV structures. These third party owners have the ability to sell their ownership interest to us once a year for cash, which then increases our ownership stake in the consolidated JV structure.

However, because the corresponding real estate are not reported at fair value, where unrealized gains or losses are taken into income, the adjustment of the redeemable NCI directly affects our GAAP book value. By excluding this adjustment, adjusted book value more closely aligned the accounting treatment applied to the real estate reflects our JV equity investments against at their undepreciated basis. Second, we adjust our liabilities at finance or investment portfolio to fair value. Most of our assets except our single family and consolidated multifamily real estate are financial instruments that are carried at fair value.

However, unlike our use of fair value option for these assets, the CDOs issued by our residential loan securitizations and corporate debt to finance or investment portfolio assets are carried at amortized costs on our balance sheet. By adjusting these financing instruments to fair value, adjusted book value reflects the company's net equity and investments on a comparable fair value basis. We believe that adjusted book value provides investors a more useful and consistent measure of our value and facilitates a comparison of our financial performance to that of our peers.

As Jason mentioned earlier, adjusted book value per share ended at 3.97%, down 4.8% from September 30 and translated to a negative 2.4% economic return on adjusted book value during the quarter. Consistent with our efforts to further strengthen our balance sheet and reduce mark-to-market risk, we completed a securitization of our business purpose loan rental book. With the completion of this securitization as of December 31, the company's recourse leverage ratio and portfolio leverage ratio decreased to 0.3x and 0.25x, respectively, from 0.5x and 0.4x, respectively, as of September 30.

In addition, as indicated on Slide 13, only 13% of our total financing arrangements, which include CDOs or securitization structures is subject to mark-to-market margin call risk, down from 23% at September 30. You can also see on Slide 13 that we have limited corporate bond maturity exposure. We have $100 million of unsecured fixed debt due in 2026 and $45 million of subordinated bonds due in 2035. This helps us maximize our liquidity, particularly in dislocated markets. We paid a $0.10 per common share dividend, which was unchanged from the prior quarter. It's been the company's policy not to provide guidance or forward dividend projections. We evaluate our dividend policy each quarter and look at the 12- to 18-month projection of not only our net interest income, but also realize our capital gains that can be generated from our investment portfolio.

And with that, I will now turn it over to Nick to go over the market and strategy update. Nick?

Hi Kristine, and good morning, everyone. I will walk you through our overall portfolio positioning. Starting first with overall portfolio acquisitions, we have meaningfully slowed down our pipeline of purchases across both residential and multifamily. This really started at the end of the second quarter of 2022, and that trend continues through the fourth quarter. Our fourth quarter 2022 acquisitions at $106 million is 89% lower than our prior peak of acquisitions in the second quarter of last year. We have achieved this significant reduction of activity due to our flexible purchasing arrangements and the minimal economic entanglements that we have with our various trading counterparties.

Overall, the portfolio's prepayments and redemptions have outpaced our investments over the last 2 quarters, which was part of the plan. We do, however, have an eye towards the future. We continue to stay actively engaged with our partners to bolster our ability to scale up our investments when the time is right. We continue to test and refine our credit criteria in the market to ascertain the availability of the different types of assets that we historically buy. We have also continued to onboard new originators, borrowers and trading partners during this temporary lull in purchase activity.

Now delving into single family. If you look across the board in our resi portfolio, we have consciously targeted a lower LTV profile to create a margin of safety. The portfolio across the board has LTVs in the 60s, which, in most cases, should be sufficient for par payoff even in a challenging economic environment. Furthermore, the parts and purchases in the second quarter of 2022 as housing prices peaked also means that we have less exposure to the loans that are most offside on underwriting versus what we have recently experienced, which was several months of home price declines. From a financing standpoint, we have most of our BPL rental and RPL loans in securitizations or similar structures.

We moved the majority of our rental loan collateral into a securitization in the fourth quarter, further reducing mark-to-market margin call exposure. We continue to prioritize utilizing non-mark-to-market financings for our assets, in particular for assets that may have more duration or inherent price volatility. If you're looking at Page 17 of our supplemental, you can see that the total portfolio leverage ratios are quite high for an asset class like RPLs at 18.6x. This is due to the total portfolio leverage being a GAAP measure and does not factor in the change of the valuation of liabilities against the shifting valuation of the underlying assets. If we were to adjust for this valuation of liabilities, similar to our adjusted book value concept that Kristine mentioned earlier, the total portfolio leverage for RPLs will be closer to 7x.

Moving on, we continue to see value in concentrating our portfolio in short-term BPL bridge loans. The duration of these loans keeps the turnover of the portfolio high while also generating a compelling near-term return opportunity. We are seeing coupons widen under a more conservative credit box, and this allows us the flexibility to grow the portfolio within this asset class or to rotate when we see other opportunities.

As an organization, we continue to invest in asset management resources for bridge and our other resi loans that will differentiate our ability to capitalize on secondary market opportunities in the future. I will note that unlike other parts of the resi portfolio where delinquencies have been relatively stable quarter-over-quarter, the delinquencies in bridge loans has increased from 8% to 13.5%. This is due to the late-stage cycle of the bridge portfolio, given the limited amount of new investment activity in the last 2 quarters and also due to the corresponding short tenor of these assets.

The majority of these delinquencies are due to loans not making their expected balloon payment at maturity, which occurs frequently in this space, and it's often worked through by our asset managers to an extension, a sale or refinance. Overall, the portfolio has experienced de minimis amounts of realized principal losses, less than 1 basis points of the $2.9 billion of bridge loan purchases we have made to date. On the multifamily side, the positive demographic trends in our target markets in the south and southeast still remain at play. What is attractive about the evolving opportunity here in mezz-lending is the further downside protection that we can get access to given lower senior financing leverage generally available in the market.

We should be able to access a thicker mezzanine tranche with approximately 5 to 10 additional LTV points of cushion, which should serve as additional credit enhancement in a recessionary environment. It is, however, important to note that valuation declines has thus far been muted in our portfolio, given the availability of cost-efficient senior financing and strong underlying fundamentals. As we mentioned in the previous quarter, we are waiting for yield in mezz-lending to move towards the 13% to 15% range. This has started to materialize in some respects, and we hope to build a small pipeline here.

As the growing maturity wall of senior debt coming due in 2023 and 2024, but with equivalent senior financing only available at lower leverage points, there is an opportunity for mezz-lending on -- to provide mezz-lending on a GAAP basis. We believe the yield profile will continue to move towards the 13% to 15% target over the coming months due to this dynamic.

On multifamily JV, as we previously discussed, we are in the process of divesting the assets in our portfolio, and that is ongoing. Relating to the multifamily portfolio performance, once again, fundamentals are strong. The portfolio experienced rental growth of 11% in 2022 after an 8% growth in 2021. Portfolio occupancy is stable at 93% at the end of 2022. The resolutions in our portfolio also continued to occur at expectation with $36 million paying off at a 12.5% IRR.

Delinquencies remain low in our mezz book with only 1 loan delinquent that is expected to pay off. We are pleased with the performance of this portfolio, and we will leverage the extensive sourcing and asset management ability of our team to drive further returns here in the future.

With that, I will pass it back to Jason for any closing comments.

Thank you, Nick. We are primed to utilize our strong liquidity under our low-cost structure to afford greater flexibility. While we remain selective across the residential housing sector in anticipation of near-term market dislocation, so we can participate in what we see as a coming buyers market. We want to invest through our asset management platform, and we believe this will be key to unlocking value in this distressed cycle. So at this time, we'd like to pass the call back to the operator and open it up for questions.

Thank you. At this time, we will conduct a question-and-answer session (Operator Instructions). Our first question comes from Stephen Laws with Raymond James.

Jason, I guess to start, first question for you. When you look at the JV multifamily of the JV equity portfolio, I think you've announced your intent to monetize that in September. So it's been 5 months. Can you talk about where you stand with making some traction on monetizing some of those assets and kind of how you see that playing out over the course of the year I think that's across roughly what, 20 assets, I think?

Yes. Thank you. It's 19 assets. We are looking at a variety of options. We have assets that are out in the market for sale. We have investors looking at different components of our book to take us out of our -- even our LP position. We're in conversations on different parts of the portfolio. So it's active. I mean, as you can understand, the market was very quiet in December, legging into it in January. We see some pent-up demand given lack of investment activity in multifamily space over the last couple of months. The market kind of shut down prematurely in November, given some of the volatility that was out there. But we're getting good traction on investors taking a look at our properties, and we look forward to sharing more details about that.

As we said earlier on calls, we're not going to provide for guidance on time lines or total returns related to those assets as they're being marketed now. And obviously, it's too speculative at this point to provide further detail there.

Okay. Appreciate the comments, Jason. To maybe follow up on -- as you look forward, I know Kristine made a comment around the dividend, I believe, that it kind of takes a 12- or 18-month outlook. But when we think about the somewhat unknown kind of monetization process of those investments, and it sounds like from the deck in prepared remarks, you guys are currently pretty patient right now as far as new investment activity, leverage kind of ticked down. Are there thoughts to kind of what run rate earnings are going to be for the next year? And does it make any sense to bring the dividend down near-term and take it back up once you've kind of rotated capital and redeployed into new investments?

I know you used the word aggressive position the company to aggressively move in your closing the deck. Kind of just wanted to get your thoughts around earnings through the year and how that compares to where the dividend currently is?

Yes. So as you may recall, our company has historically been a company of kind of 2 paths for earnings. One is through the interest income, the other is through realized gains. So what -- when we look at our -- and as Kristine mentioned, we look at our dividend policy and the dividend with our Board. We're looking at 18-month forecast based on both activity related to interest income and costs and also activity related to realize gains. We have over $300 million portfolio of assets where we have not recognized any gains on those assets to date due to our GAAP measures. And so that provides a little bit of difficulty on kind of smoothing out a earnings calendar given the volatility of when these assets are sold and what those results look like.

So when we look at the entirety of our portfolio and look at what we're doing on a quarterly basis for these inwardly kind of investment concepts, which is repurchases of our debt, selective purchases of assets in the market, we see that the purpose of providing the $0.10 dividend for the fourth quarter. And this is something that we discuss with the Board regularly. So we as a company, we do not provide forward guidance on our dividend. However, the point that you're bringing is that we have slowed investment activity, we see a better opportunity in the future. And the only other thing I'd add into that equation that you're looking at for earnings is the realized activity that we can generate through our sales.

So we're going to look at all those things together and we'll continuously set what we believe is a prudent dividend policy going forward.

Thanks for that color. Lastly, and you touched on it in your comments there, but you've repurchased some of your debt both in Q4 and again in February. Can you talk about the decisions behind that capital allocation and really what makes that attractive to you right now given you're generally cautious on your other options?

Yes. So when we look at the market and look at the capital we have to deploy, we do see teams returns opportunity in single-family, multifamily, mostly within the bridge loan opportunity space and within multifamily pre-mezzanine lending. We do -- we believe we can achieve that. Now the question is, are we better -- what are the opportunity cost of that capital today by allocating to a 14% return when we have been circling around and seeing these opportunities that we think will percolate in the near-term, that could provide greater returns than that. So in a market where we're trading at a discount, it's difficult to raise new capital that won't be dilutive to our shareholders.

Instead, we'd rather hold that cash back and wait for that better return. And it's really a forecast over kind of a 2- to 3-year total return on our capital versus making that incremental return in the next couple of months. So that's kind of the view that we're taking on the asset deployment. As it relates to repurchases, we do see in the secondary market, we traffic that market quite a bit. And we do see opportunities to buy some of our securitization debt back at discounts. We find that accretive, obviously, you can monetize this account immediately on those assets on that debt, but also provides us greater flexibility for calling transactions in the future, given our bigger equity piece that we have through the creation of monetizing that debt that we just repurchased. It gives us more flexibility on that capital stack going forward.

So what we're trying to do is here is to provide more options for us and at the same time, have something that we're buying is accretive and lowers the risk profile for the company. So that's -- we do see them in the market. We're not -- there's some that we're not looking at buying all the asphalt of debt that we see in the market related to our securities, but we do see some that make more sense than others.

And then obviously, just take it a little bit further. And on share repurchases, we -- I'm sure this question will come up. We do see opportunities to utilize our capital for share repurchases. It's accretive to our balance sheet at a discount in the market. We just re-upped our repurchase program, $200 million, and we'll continuously look into the market for opportunities there. And the last thing I'll mention is one of the other ways of kind of bridging the gap, if you will, on earnings for interest income as we wait for this opportunity is outside of the credit markets. And in that area, we're looking at agencies as a way of deferring some of the kind of the running cost today, putting assets to work and having downside protection through a principal protected asset class.

So I think the expectation is in the next quarter that you will see that we're starting to leg into the agency market. And we'll do so even more so if we feel like this opportunity or the catalyst I described earlier is taking longer to develop.

Our next question comes from Doug Harter with Credit Suisse.

Just on that last point about possibly deploying some capital into agency. I guess how do you think about the volatility of that capital and kind of the risk that you're willing to take with that capital as it's -- as you kind of -- it sounds like you're viewing it more as a placeholder versus kind of the core strategy?

That's right. We've traditionally -- our company has originally invested in agency market. We've had a position there for quite some time. We took it off when we felt like there was a better opportunity in the credit space. And we've been looking at this sector ever since we took it off, it's just not a core strategy for us, but it is a strategy of more of a cash management tool. And obviously, the market has experienced quite a bit of volatility in the agency space given rates, which is the reason why we haven't allocated to that to date despite the low investment activity. We've always had that as an option for us and we decided against it.

We do see parts of the market that look interesting for that particular vet today. And yes, you're right, it is a shorter-term strategy hold. But I can see going through this cycle that we actually may keep a position in that space on a near- or medium-term basis, just then on a near-term basis. So we're -- we've been trafficking in this market, and we believe it's -- we're at a time now where we can start legging into the trade, given some of the volatility has passed. Now there's definitely more volatility to come. We look to fully interest rate hedge our position to mute some of that volatility from the rate markets and look for agency assets that have a better degree of extension given some of the spec pools that are out there. So we'll be focusing on that part of the market, but doing so solely and taking consideration the volatility that may come.

And then earlier, you guys mentioned that you're still kind of prioritizing the shorter duration BPL loans. Can you just talk about kind of (inaudible) way kind of the advantages of those shorter duration versus the opportunity to kind of lock in spreads that are relatively wide today for a longer duration?

Sure, Doug. This is Nick. We still believe that there is probably going to be more compelling opportunities for assets with potentially more credit risk or potentially more duration in the future. So that's really what's informing us in terms of trying to focus more on the short-term bridge. And furthermore, that can also build -- potentially build up interest income, which is something that we do have lots of parts of our portfolio that have -- could potentially already have embedded realized gains, such as our multifamily JV. So it would be good to balance that with residential products of shorter duration that generates a high degree of interest income.

I'll add to that point real quick, which is something that we've been looking at and feel is likely to happen in the near-term. But there's a lot of market participants that went into the BPL space that doesn't have the asset management capability to manage that through distress cycle. I mean, if you can go back to 2007, have a lot of originators origining loans, once like, went above 3%, kind of the wheels fall off for asset management on those portfolios, which allowed all types of anomalies in asset management for those delinquencies.

We see similar patterns here in this space where you have an investor that came in and bought a portfolio they back it up with a strong asset management capability, but we looked at it as more of a performing asset class. So we see opportunities where we can step in and help those problems that may emulate through poor management, and that's where some of the distressed and dislocation, we think, will be attractive for us to leg in to.

So when I said earlier that we're focused on inwardly in our asset management capability, we see an opportunity for both service income -- fee income, managing -- helping manage others with their portfolios as well as taking out portfolios down that are difficult to manage for those investors.

And just you mentioned the delinquency rate on the portfolio today. I guess if you could just give us a context of kind of where that run kind of a range that you've experienced kind of in your portfolio over time?

Yes. So the numbers that I quoted earlier was on the BPL Bridge. That delinquency range is on the higher end of where we have historically experienced but there hasn't been a time period where our -- the pace of our investments in that particular asset class has slowed. So a couple of -- over the last couple of quarters, we have not really invested a lot in there. So our overall portfolio seasoning has just been at the back end. So as I mentioned earlier, there is -- it's fairly common for borrowers as they approach maturity to either in an effort to preserve capital and then pay it off after a refinance or a sale that they do go delinquent.

So from our perspective, we monitor this very closely. We -- in fact, one of the things that we do is we actually try to engage the borrower to execute extensions and try to charge the appropriate amount for these extensions because the cost of capital of that debt on our balance sheet is high. So for borrowers to just extend comfortably is something which we will not do. So we want to engage these borrowers. We will charge them the appropriate offer extensions. And that sometimes that negotiation results in some amount of delinquency as we work that through.

So overall, we continue to monitor the progress of the performance of the portfolio. We're still very happy with where it is. Given the seasoning of the portfolio, a lot of these projects, when they're complete, we'll still be profitable for these investors. So we don't see the distress in that particular area to come. So with that, we're going to continue to focus on asset management, and we're going to continue to monitor the levels of delinquency, but this is something that we expected as we slow down investment activity over the last couple of quarters.

(Operator Instructions) Our next question comes from Bose George with KBW.

This is actually Mike Smyth on for Bose. Maybe just one-one on credit in the BPL business. How much of the pickup in delinquency rate has been driven by home sales freezing up versus the lack of availability of permanent financing? Do you see any trends here or is it kind of mix across the board?

I will say that probably what these borrowers feel more is the fact that there is just less lending available, generally speaking. So a lot of these borrowers who would require more time to finish these projects would typically seek out refinancings. And the refinancing availability is just lower. So because of that, we tend to work with these borrowers to keep them with us and then sizing the return or the extension fees that we would charge appropriately.

One thing I'd like to add there is that you have a portfolio that we purposely have targeted low percent of capital required for the completion, right? So we looked at projects with easy to complete. But even in those situations, if anybody is finishing a home and refurbishing different parts of the house, I mean, the time lines that from a -- early 2021 origination, the talents have extended to get work done, and that's just a fact across the entire United States. So it's not surprising to see that you have sell of the portfolio that needs more time to finish the project, which is where a lot of the extensions and delinquencies come up that Nick is referring to.

So we want to provide that time line to complete the job, even though it is a lower percent of total value of the home that we've approved for completions, but we do so in making it aligning the bar with us, and that's the point of the cost, which is additional return on our investment related to those assets. We don't make it easy. We want the alignment. We want to make it difficult and make it somewhat painful to have those extensions put in place. But we do see that there is lots of situations where it pops up where the bar needs more time to complete where the house is under a sale agreement and it's a 45-day close with the financing, it just takes time. So we allow for those types of things.

And then maybe just from an asset management perspective, what's the time line usually look like fees, et cetera, in terms of kind of getting these loans resolved? And then can you kind of talk about the capacity on your end to the extent the delinquency rate continues to increase from this 13%, 14% range?

Sure. So we have an internal asset management team that has capacity to take on significantly more of these delinquencies. It's also important to note that we have servicers and asset managers on this portfolio on the third-party side that is doing a lot of the leg work in terms of communication with the borrowers and making sure that these borrowers understand what our processes are relating to extensions and so on and so forth.

In terms of timing, it usually takes, let's say, if someone approaches that maturity, usually takes anywhere between, let's say, 3 to 6 months to resolve. In some cases, sooner, it really depends on what the -- what -- why they are -- why it's taking longer. Is it -- are they waiting for a sale or are they waiting for refinance? And then with regards to just making sure that the cost of capital is aligned, we are seeing our extension fees increase over the past, let's say, 6 to 12 months. So typically now, we're charging 100 to 200 basis points for a 3-month extension. And that -- the 100 to 200 basis points will be dependent on whether or not that is paid upfront or is paid in the back end.

That's really helpful color. And maybe just one more, have you seen any changes to your book size so far in the first quarter?

Yes. So the quarter-to-date, we estimate our adjusted book value to be up between 3% to 4%.

(Operator Instructions) Our next question comes from Christopher Nolan with Ladenburg.

Nick, welcome. Kristine, the decline in interest expenses quarter-over-quarter, was that related to -- last quarter had interest expense from mortgage payables. Was that absent this quarter?

No. It was reclassified from interest expense to expenses related to real estate, Chris. So that resulted in that number being lower. But if you look at our filings and our press release, those have been reclassified also and shown in the prior periods as being reclassed to expenses related to operating real estate.

So it's just a shifting categories, right?

That's right.

And then on the follow-up on the multifamily, I have noticed that the interest coverage quarter-over-quarter has declined from 170, 179 to 150. But the LTVs have remained relatively steady quarter-over-quarter. How frequently are the valuations done that go into that LTV formula?

So the valuations are done for our held for sale portfolio on a quarterly basis as part of our impairment exercise. In terms of the portfolio, that's not for sale or not part of the disposal group, that appraisal is really done on a yearly basis, consistent with our agreements. So that is updated yearly. So portion would be quarterly -- a portion of it will be quarterly. That's the $244 million portfolio that we have will be refreshed quarterly, and then the $140-something million that we have on one JV structure will be refreshed yearly.

So is it fair to say that the DSCR ratios are current, but the LTVs are lagging?

Yes, that's a fair statement.

And then is the intention for the multifamily mezz portfolio to just simply run that off given the more defensive characteristic of your investment approach you says?

Yes. So in the multifamily space, given that is also kind of a short duration financing that we put in place, we are seeing -- as we report every quarter, we are seeing high paydowns related to that portfolio. What we do see in that space is the catalyst there is related to about $120 billion of senior financing that will be coming due over the next 18 months. And that capital that is -- that debt financing on multifamily profits across the United States that is coming due is coming due with LTVs or advance rates that are 10% to 15% lower than they were at the time of financing.

So we're -- the market -- the lending market has obviously lowered their advance rate given the turmoil that the market is experiencing. And what is -- what we see as an opportunity there is basically GAAP funding on a short-term basis related to some of that refinancing activities take place. We think we can do that, as Nick mentioned on the call, we think we can do that at 10% to 15% royalties than we have today on our portfolio and origination and also raise our coupon anywhere from 200, 300 basis points from where we are today.

So we're kind of targeting a 14% to 15% kind of coupon in that space with total turn economics on make-wholes that would put us in the teens. We're not quite there yet in the market. It's definitely wider, and it's wider quarter-over-quarter sequentially. But there will be some pressure that we're going to see in that space on the refinancing side. So I wouldn't say that it's going to be a roll down of the portfolio. It's more of a wait and see in this bridge loan GAAP funding opportunity that we think is coming to a market soon.

(Operator Instructions) Our next question comes from Eric Hagen with BTIG.

I hope you guys are doing all right. A couple for me. Is any of the multifamily portfolio pledged as collateral for financing? And are those assets included in the unencumbered assets that you advertise having? And then the $26.5 million margin call that you received in the fourth quarter, can you describe which assets in the portfolio drove that margin call and when in the quarter it was kind of concentrated? Like, is that $26.5 million like a net margin call for the quarter kind of like how big did it maybe get when spreads were really wide in October?

So I'll answer the first question. So the unencumbered, the multifamily portfolio is not levered. So there's no leverage on them. And then the unencumbered assets that we do disclose in our supplemental does not include that portfolio as well. In terms of the margin call, that's mostly related to residential loans, and that's the number that we've actually paid out during the quarter.

Was that a net margin call for the quarter? Like in October, when spreads were really wide, what was the margin call you may have received in the loan portfolio?

That's the gross number, Eric.

That's the first number. We have -- if you look at our portfolio, we have a very -- a small portion of it on mark-to-market repo. A lot of it is non-mark-to-market facilities or securitizations, hence a smaller number.

(Operator Instructions) Our next question comes from [Wes Martins] with JLS.

My name is Wes, I'm a small investor. Just looking at the results and the (inaudible) in the room for me is the 4:1 split. I just wanted to know what was your main focus, main reason for turning the 4:1 split?

Yes. So I mean, obviously, nothing material occurs from a reverse split of our shares. We do find that some of our investors who could afford more flexibility in our share activity in the market through better liquidity with a higher share price, which is simply the reason why we did that. It does bring some liquidity to the market given the share price at that level versus below $5 level. So obviously, not much of a change materially to the company or to the metrics, simply it was a measure for helping on the balance liquidity for our shares.

And how -- the next step that interest rate hike, they're talking about more interest rate hikes. How is that going to affect the bottom line here?

Are you referring to the future expected Fed hike?

Yes, exactly.

So I mean, look, we have obviously have endured historic rate increases in our portfolio to date. We have a very short duration portfolio in both multifamily and single family. When you look at our assets, they're paying off at a high rate. We had a fit of our portfolio that paid down -- that paid off in the last quarter through our portfolio reduction. We have our multifamily JV equity assets, which benefit from inflation through higher rental rates. We also have caps against those positions for our financing costs that exists. So we feel that we're well covered there. So -- and ultimately, we think, see it as an opportunity where the assets could be kind of shaken out a little bit further in the market and part of the catalyst that we see to legging into better risk-adjusted returns in the future.

I'm showing no further questions at this time. I'd now like to turn it back to Jason Serrano for closing remarks.

Yes. Thank you for spending time with us this morning. We look forward to discussing our Q1 results on our next call. Have a great day.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.