New York Mortgage Trust Inc (NYMT) 2021 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust Third Quarter 2021 Results Conference Call. (Operator Instructions). This conference is being recorded on Tuesday, November 2, 2021.

A press release and supplemental financial presentation with New York Mortgage Trust's third quarter 2021 results was released this morning. Both the press release and supplemental financial presentation are available on the Company's website at www.nymtrust.com. Additionally, we are hosting a live webcast of today's call, which you can access in the Events and 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 Exchange Commission.

Now at this time, I would like to introduce Steve Mumma, Chairman and CEO. Please go ahead, Steve.

Thank you, operator. Good morning, everyone, and thank you for being on the call. Jason Serrano, our President, will be speaking to our investment portfolio; and Kristine Nario, our CFO, will be speaking in more detail about our financial results.

We will all be speaking to our supplemental financial presentation that was released this morning and is available on our website. We will allow questions following the conclusion of our presentation.

The company continued to deliver solid results in the third quarter with GAAP earnings per share of $0.10 and comprehensive earnings per share of $0.08. However, the numbers of the quarter were negatively impacted by nonrecurring one-time charges, including $3.4 million in expenses related to the early redemption of our 7.78% Series C preferred stock, which was refinanced into a 6.78% Series F preferred stock, lowering our cost of capital by 100 basis points.

Additionally, we called a 2020 residential securitization that resulted in the acceleration of $1.6 million of deferred debt issuance costs. The loan pools refinanced in August, lowering our cost of debt by approximately 210 basis points. We expect to continue to release the Company's cost of funds with future structured transactions. This trend will have a positive impact on our earnings going forward.

Now turning to Page 6 of the supplemental presentation. You'll see our investment portfolio totaled $3.3 billion, and our market capitalization was $2.2 billion. The portfolio was up approximately $100 million with our market capitalization unchanged from the previous quarter. Our capital is currently allocated at 74% to single-family and 20% to multifamily, with 6% in other assets, which is largely attributable to our liquidity position. We continue to focus on credit investments as we believe we can generate better risk-adjusted returns with more stable funding.

On Slide 7, we highlight some of our key developments during the quarter. We declared a $0.10 common stock dividend. Our book value was $4.74, unchanged from the previous quarter, and we generated a quarterly economic rate of return of 2.1%. As I said before, we redeemed our 2020-1 securitization for $204 million in July and issued $256 million in our 2021-1 loan securitization in August, lowering the average cost of funds by 210 basis points. We also redeemed $105 million of our 7.78% Series C preferred stock and replaced it with $139 million of 6.78% Series F preferred stock, again, lowering our cost of capital by 100 basis points. We continue to focus on longer-term financing options to fund our growing business to help us navigate the ever-changing financial landscape.

On Slide 9, we cover key portfolio metrics on a quarter-over-quarter comparison. Our net interest margin for the third quarter was 3.25%, an increase of 28 basis points from the previous quarter. With our portfolio weighted average asset yield at 6.39%, an improvement of 8 basis points and our funding costs improving by 20 basis points, ending at 3.14%. This was largely due to our refinancing of the 2021 securitization that I previously spoke about. Our leverage ratio remains low at 0.3 times, and our liquidity remains strong as we go into the fourth quarter.

I'd now like to turn the presentation over to Kristine Nario, our CFO. Kristine?

Thank you, Steve. Good morning, everyone, and thank you again for being on the call. In discussing the financial results for the quarter, I will be using some of the information from the quarterly comparative financial information section included in Slides 23 to 30 of the supplemental presentation.

Slide 10 summarizes our activity in the third quarter. We acquired residential loans for $371 million, funded multifamily joint venture and mezzanine lending investments for 53 and $43 million, respectively, and purchased $29 million of investment securities. We sold residential loans for proceeds totaling $50 million and non-Agency RMBS and CMBS for proceeds totaling $133 million.

We also had total repayments of approximately $307 million, primarily from our residential loans that were purchased at a discount. We had net income of $37 million and a comprehensive income of $31.5 million attributable to our common stockholders. Our book value ended at $4.74, unchanged from the previous quarter.

Slide 11 details our financial results. We had net interest income of $31 million, relatively flat as compared to the previous quarter. Our continued investment in higher-yielding business purpose loans during the quarter contributed to the $1.7 million increase in single-family interest income, offset by a $1.5 million decrease in multifamily interest income due to sales of CMBS early in the quarter and payoffs related to our mezzanine lending investments accounted for as loans.

Although there was a decrease in mezzanine investments accounted for as loans, our mezzanine investments accounted for as equity increased during the period, contributing $6.2 million in preferred return during the quarter. As these mezzanine lending investments qualified for loan accounting treatment under GAAP, it would have contributed 39 basis points in net interest margin.

Interest expense on single-family portfolio decreased by $0.6 million, primarily due to the completion of a new RPL strategy loan securitization in the third quarter, replacing a redeemed 2020 RPL strategy securitization at a lower cost. In addition, we recognized the full quarter impact of 58 basis points in interest cost savings related to our BPL securitization that closed in the latter part of the second quarter. We had noninterest income of $49.4 million, mostly from net unrealized gains of $30.1 million due to continued improvement in pricing on our assets, particularly our residential loans and investment in consolidated SLST. We also generated $8.3 million of net realized gains, primarily from the sale of CMBS and non-Agency RMBS and residential loan prepayment activity.

In addition, as discussed earlier, our mezzanine investments accounted towards equity contributed $6.2 million of preferred return. We also generated other income of $0.8 million, which is primarily related to $2.1 million of income recognized by an equity investment that invests in residential opportunities, partially offset by the $1.6 million of loss related to the redemption of a 2020 RPL strategy, loan securitization for an amortized debt issuance cost remaining at the time of redemption.

Included in our results for the quarter is a net loss activity related to multifamily apartment properties in which the company has equity investments. Because of certain control provisions, we consolidate these properties and our financial statements in accordance with GAAP. We received variable distributions from these equity investments on a pro-rata basis and management fees based upon property performance. We also participate in allocation of excess cash on sale of multifamily real estate assets.

We pursue these investments for the potential participation in value appreciation of the underlying real estate. These properties generated operating income of $4 million and incurred interest expense and operating expenses of $1.1 million, $8.5 million, respectively.

After reflecting the share in the losses to the noncontrolling interest of $0.4 million in total, these multifamily apartment properties incurred a net loss of $5.3 million for the quarter. It should be noted that the net loss in these properties includes a $5.7 million of depreciation expense and amortization of lease intangibles related to the real estate. We had total G&A expenses of $12.5 million, relatively flat compared to the previous quarter. We had portfolio operating expenses of $7 million, which increased primarily due to the growth of the business purpose loan portfolio.

Jason will now go over the market and strategy update. Jason?

Thank you, Kristine, and good morning. I will be speaking from Page 13 of slides.

While home price appreciation eased somewhat from a record-setting pace, not much was accomplished due to the current U.S. housing supply deficit. With 5.5 million homes needed to meet short, midterm demand, only 1.2 million homes are now in the market for sale, which is over 1 million units short of the past 20-year average. Additionally, supply chain and labor constraints capped new home construction around 1 million units.

With the demand continuing to outpace supply, we expect U.S. housing credit risk to remain rangebound through 2020 as higher home prices are required to meet outsized demand. Thus, we believe short-term lending for housing, remodeling and fix-and-flip sector provides one of the best ways to play the supply and demand imbalance here. Over the past year, we focused on ramping up a $753 million portfolio, while maintaining strong credit characteristics.

Secondly, while more of a niche market, the Scratch & Dent sector is still an attractive space for us to expand our resources, given the ability to buy new mortgage originations at a 6% discount on average the par. With nearly $0.5 billion of loans purchased, we are -- we provide great flexibility to generate a double-digit return of discounting to purchase the bonds.

Lastly, our origination effort in the multifamily sector provides tremendous value with new mezzanine loans and JV opportunities, also at a double-digit return, with single-family housing supply issues and higher population mobility trends, it's not surprising to see a vacancy rate to a fall 6% national average. The building of fundamental strength of the multifamily market is hard to ignore, and we have a strong pipeline to take advantage of the strong (inaudible) here.

Going to Page 14. The key value proposition of MIT is to find an approach where we can offer an efficient process supported by technology to do more with originators or seller sponsors in these sectors. Because of these relationships fostered over several years and proven capability, we can compete on more dimensions in the just price, which is a key aspect of our portfolio growth. In the quarter, we added $505 million of new investments. Growth was observed in all core strategies. In the BPL sector, we added new origination pipelines that will allow us to continue increasing assets on balance sheet.

In the mortgage sector, originators are still trying to work off technical origination errors from 2020's record origination volume. And with the multiple lending, tailored loans and JV solutions are meeting the needs of mid-sized multifamily sponsors in the South Southeast of the U.S. as we now are processing record volumes for our pipelines.

Going to Page 15 on our debt structure. On the funding side of the equation, we primarily focus on strategies that do not rely on short-term callable mark-to-market leverage to generate attractive returns. To the extent that leverages part of the strategy, we utilize term securitization market, which helped to significantly lower our mark-to-market repo balances by 90% since the end of 2019.

Repo markets are in full swing. Availability is arguably greater than prior to the pandemic. However, we believe running one of the lowest portfolio REITs in the market now at 0.01, while still being able to deliver an attractive dividend, provides excellent risk-adjusted returns. Furthermore, we can organically grow our balance sheet and dividend by simply reinvesting our cash on balance sheet and through utilization of the securitization market.

Now moving to Page 16, our single-family overview. As in prior quarters here, we show a cross-section of our residential strategy that is now 74% of our capital allocation and predominantly in residential loans. The average LTV at 65% across all loan types is not reported earlier, and study shows that consistently across our investment platform to seek value without sacrificing quality across the market. We prefer to give up some yield with better loan characteristics for a more consistent total return profile over a multi-year period.

As I already discussed, highlights of our strategies in the Dent and Scratch space. I'd like to spend a moment to discuss the $851 million of loans on our balance sheet related to RPL. We stopped pursuing RPL market about 2 years ago due to excess liquidity that we were bidding into, which priced out investors requiring a double-digit return without taking on some kind of risky market-based modeling assumptions. However, our portfolio continues to benefit from strong returns in a book that can't be replicated in this environment.

We invested in this space in 2 forms, through RPLs and through the SLST transaction shown at the bottom under securities. SLST was a portfolio of RPL loans sold by Freddie Mac that contained stable 10-year financing. HPA allowed these securities -- the securitization purchased back until 2019 to deliver at a faster rate, providing considerable downside protection and now upside optionality with respect to a potential vehicle. Strong credit performance supports further potential for book value upside with respect to our issue to securitizations.

On Page 17, starting with the right side of this page, 66% of the RPL loans are now current, which accelerated price accretion from $89 purchase price to now $97. With this result, we can now pull these loans into a rated securitization providing an attractive forward leverage return in the high teens against a 65% LTV loan pool. Also, our Scratch & Dent loan portfolio consistently printed above a 30% CPR, which is a similar trend to general agency originations. We believe similar prepayment trends through our Scratch & Dent book demonstrate the quality of loans we are buying in the Scratch & Dent market and the technical nature of the defects created a (inaudible) origination. We are well compensated here as the average price discount of our prepaid loans is 5 to 7 points below par. A quick recapture discount is why we continue to focus on this market.

Now shifting over to the left side of this Page 17, the story is straightforward. We continue to add our BPLs and Scratch and Dent portfolio and are pleased that our loss rate on both sectors is 0% since we've launched these strategies a few years ago. With larger portfolios, the securitization market, is supportive of our field book.

After redeeming a previously issued securitization, we were able to reissue another deal in the market last quarter, the tightest advancing cost ever in the unrated space, allowing us to save 210 basis points of coupon. With our growing residential loan pipeline, we expect to become a more frequent issuer in the securitization market. We are simultaneously working on a few deals at the moment, look forward to sharing more about this execution soon.

Turning to Page 18 on the BPL market. Our BPL portfolio is now $753 million with just over 1,700 loans on balance sheet. Despite a material increase to market competition over the past 2 years, we have been able to maintain our yield in this sector with an average coupon of over 9%, the strong credit experienced borrowers that focus on low-cost, quick turnaround react project.

Much like a HELOC, there are a lot of moving parts operationally with these loans, such as draw schedules, interim cash activity, payoff requests. Because of our dedicated operations team that manages the loans from boarding to payoff, we offer added value support to our origination partners in this space by helping with the asset management processor. Again, we can win business here on another dimension other than market price.

Turning to Page 19 on our multifamily overview. Our multifamily book of mezzanine lending and JV opportunities is now 20% of our capital. As mentioned earlier, we have focused on lending to 150 to 300 unit garden-style, low-rise properties in secondary insertion markets for the past 8 years with no losses on any investment made here to date.

Our deep credit underwriting of the market, property and sponsors create an opportunity to provide funding solutions across multifamily capital structure. With these solutions, we work to creatively structure a deal that meets sponsors' needs as well as ours. With the vast experience and strong reputation in this market, we are a preferred partner and expect to materially grow this business in the near term by close by working closely with relationships fostered over several years.

On Page 20, our credit characteristics and coupons have been consistent for many years in the sector and has -- and so has performance with a geographic footprint in the South, Southeast United States, occupancy rates remain high, supported by population shift favoring these regions. Due to higher property valuations, we have seen an increase to loan payoff requests in our portfolio. Our loans are structured with minimum return rules for additional income in these cases in the last quarter, $16 million paid off at a 12.16% lifetime RR or 100 basis points above the contracted coupon.

In summary, on Page 21. We offer our investors a diversified strategy that takes advantage of our opportunities across residential market and cap structure. With a focus on preserving book value, we can officially move in and move out of markets when risk proposition changes. We're excited about our ability to provide attractive risk-adjusted returns to our investors with minimal portfolio leverage.

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

Thank you, Jason and Kristine. Operator, could you please open it up for questions.

(Operator Instructions). Our first question comes from the line of Bose George from KBW.

First, I wanted to ask about the BPL space, we've seen a lot of acquisitions in that space. And you've noted historically that you didn't really want to do that. Just curious of the activity in the space has intensified the competition and changed anything in terms of returns or how you source loan?

Yes. So we have seen a number of those deals on our power plate and have evaluated most of all of them that's been out there. We're finding that we can win business here through our operational platform, which I described earlier, as well as relationships that we've developed back in 2019. And the fact that we were kind of an early entry back into the market in 2020, that helps support some of these originators when they weren't originating loans. So with that experience in the background, we were able to contain and maintain our pipeline.

We are evaluating other platforms. And we really look to move into this market through kind of an operational light type of model, in that -- and this is a market that we believe over time will generally trend to an investor loan product, which is -- was typically called DSCR loans, which is a more of a 30-year term market versus a 1-year bridge loan. So there's a transition that I think the market will start seeing over the course of the next year. And therefore, we're looking for ways to play that transition more so than just staying within the BPL sector.

Okay. No, that makes sense. And then actually, can you just remind me what are --you have that are repo funded? Is there room to take the repo down further?

Yes. We are working on securitizations in the space, which would take one of our -- one of our largest lines we have to date, down roughly 80%. So the securitization that we're looking to complete will remove or reduce our current repo. That's minimal on our balance sheet today, but it will further reduce it based on those securitizations. So hopefully, we will be able to talk more about that next quarter.

Your next question comes from the line of Stephen Laws from Raymond James.

Just sort of a follow-up, I think, to those -- but you guys have made a lot of progress in the quarter on reducing financing costs, both on the securitization as well as the lower cost preferred. And I think that probably really kicks into earnings here in the coming quarters. Is that largely you accomplished mainly what you can do there? Or is there more opportunities here to keep pushing down the cost of capital than the overall portfolio financing costs?

Jay, why don't you take that?

Yes. So with respect to those loan pools, we -- the securitizations we're considering would lower our overall financing costs. The market when we entered last quarter for that very unrated SPL transaction with the lowest panting cost the market has seen at 187 basis points. The market is a bit wider today than that point. We still see in the space, roughly the market is about 75.0 to 100 point basis points higher, but that's still competitive to kind of repo cost out there. And advance rates are roughly the same.

So our goal is to continue to reduce our repo exposure, which would lower our financing costs as well as on a corporate basis. We do have a prep that is callable, and that is something we are looking at as well. So there's some opportunity on our corporate balance sheet as well for our interest cost that could help lower the cost of capital across our balance sheet.

Great. And Kristine, I appreciate the comments around the REO or the real estate operating real estate that you provided. And I may have been writing the numbers down, so apologies if I missed this, but I think you said it was a $5.3 million loss before reflecting appreciation. But can you give -- did you provide an outlook or how we should think about that maybe over the next 12 months as we look out from either improvement there or those assets you look to exit?

Well, the $5.3 million is the net loss, as you indicated, but note that majority of that loss is really related to depreciation expense and amortization of lease intangibles related to that real estate. In terms of the outlook, I mean, the way we look at these investments, it's really -- we pursue these for value appreciation. And so really, the exit upon sale is when we get the benefit of a gain on that. So that's how we kind of look at this investment.

But in terms of estimates for the year, I don't have that in front of me, and I could get back to you if you'd like.

Yes, Steve, I think when we -- so because of accounting requirements, we consolidate these, we still look at all these investors at what our actual net dollar investment is in these properties. And so we evaluate them more on a net basis as opposed to a gross basis. And that gross basis, as Kristine mentioned, generates a lot of depreciation expense. So there is going to be a negative component in our earnings going forward.

That's going to be related to these properties, which we will spend as that grows in size because we are increasing our pace in our JV investing. And to the extent that we fall into the control category for accounting, we're going to have to consolidate, which will then put additional expense pressure on the P&L, but it doesn't really put any pressure back to the Company from an actual cash flow standpoint.

So we will continue going forward to spend more time disclosing that information and describing it and how it actually impacts the actual earnings in the Company. But for this quarter, it was $5.3 million on 377 million shares, so a little over $0.01 a share drag on the actual earnings.

Great. Appreciate the color there, Steve. And lastly, just touching base on the BPL, no leverage on those assets. If you looked at something like a CLO, where you have a replenishment period that helps offset the shorter duration of those loans or there other type structures where you would consider adding some financing? Are you really just happy running that BPL portfolio with no leverage for the foreseeable future?

Yes. So we actually do have leverage against our BPL loans. We did a securitization this year. That is a revolving structure. So it allows us to replenish the loans as they pay off, and that's a financing balance of around $180 million that we have related to that securitization. So that's a deal that we have been utilizing with new investments and payoffs coming in, where we continue to add back to that securitization.

Your next question comes from the line of Doug Harter from Credit Suisse.

As you guys execute on the securitization and take down the repo substantially, how do you think about kind of replenishing that? Do you think you have the ability to kind of grow the asset base as you do that and kind of ramp the repo line back up or just kind of thoughts around that?

Yes. What's interesting is that the balance that we're -- the securitization we're looking to do is an asset class study that we're no longer active in at the moment due to pricing, which is the RPO space. So we're looking at a rated securitization in the RPL space, which would reduce some repo balance there, but there would not be replenishment in that particular account because that strategy is something we've moved on from a pricing and correct that to an interesting place for us. But what we're going to be doing is basically looking at the BPL and Scratch and Dent market and potentially even DSCR loans as a way of growing our loan -- our residential loan book.

And in this case, we'd be taking loans from our RPL repo account and securing those loans in a great expiration. So the net effect, that cash would be minimal, but that is not something we're looking to replace and relever.

Can you just -- those 2 kinds of asset classes where you're looking to grow kind of have given you nice returns, but kind of the offset seems but they seem to be very short duration. Just -- can you talk about your ability or confidence to be able to grow those short-duration assets?

Yes. We have a number of originating partners that are there in the market that we've been (inaudible). We think we could do more with those partners that we've been working with and have strategies with them to increase our portfolio pipeline, which is really starting to show it off in the fourth quarter here. But there are scenarios we're looking at to lock up pipelines in the space and to reduce the variability with respect to our pipelines in this market. A market is a great market.

You're right to point out that it is a shorter duration and kind of reinvestment of that cash that comes back on annual basis becomes challenging. We believe the market will end up kind of pushing into a longer duration type of market for these types of loans. In previous years, the fix-and-flip market was a contractor that sold the home and, therefore, paid off the loan.

From some of the pipelines, we're seeing 40%, if not more, of the loans are now going into a rated -- sorry, going into a 30-year term refinance of their fix-and-flip loan versus selling the home and in paying off, that we think there's ways to take advantage of that, but particularly with our own portfolio and recapture that borrowed back for a longer duration loan.

So those are types of things we're going to be looking at and have been looking at for the last 6 months, if not longer. And we think we could be close to executing something in that space shortly, which would add duration to our portfolio and reduce the investment timelines that we currently are facing.

And then just a follow-up on that. Can you just talk about how the yields might change as you go from kind of the shorter duration fix-and-flip to kind of a longer longer-term asset?

Yes. So the yields that were -- the coupons are obviously higher on the short-dated fix-and-flip loans than what we're seeing, obviously, in the 30-year kind of DSCR industrial loans. But the -- I would argue that the securitization market acceptance of those loans is probably the greatest at of all the markets that we're looking at. So execution that we're seeing in the space is excellent for these types of loans, taking a 4.5%, 5% loan and loan fall drop into securitization.

Our hesitancy in the space has simply been the fact that you don't want to build a book here and not have enough size to execute through securitization and hold in repo for a long period of time.

So therefore, we have not entered the space until we feel confident that we can originate or buy enough loans to execute securitization with a short time period. We're getting more comfortable with that with the pipeline that we are working on right now, and that's something that we're going to evaluate in the quarter.

But to the extent that that happens, we would be able to kind of move into the securitization space there and unlock value with respect to our current portfolio on the detail loans that are refinancing as well as the loans that we're seeing that are available to us that we have not moved on simply because of the risk of being able to accumulate enough loans for securitization.

So we feel that at the moment that there's enough loans there with the kind of quality that we're looking for to execute a securitization. And in that case, we'd look to move into that space.

Our next question comes from the line of Eric Hagen from BTIG.

Yes. So from the perspective of an equity investor with assets, feeling like there are maybe more or less price for very low credit losses already. What would you say is the upside in the Scratch and Dent and re-performing loan opportunity? And then the second question is in the commercial mezz loans, what's your risk attachment point or how much credit subordination do you have in those loans? The same question effectively applies to the preferred equity, like how much credit cushion is beneath your preferred slice in those investments?

Yes. So with respect to the RPL and Scratch & Dent loans, I guess your question is, what is the upside remaining in that portfolio given a credit losses? Is that the question? Yes. So that's a portfolio on Scratch & Dent side where, given the size, we could look to (inaudible) for those types of loans as we wait. And those loans are very lightly levered. We're experiencing about a 30% CPR rate on our portfolio.

Part of the hesitancy of moving that book into securitization is simply the fact that the durations have shortened on that portfolio given the refinance activity. And being able to pick up to 6 points of discount over the last 6 months has been something that we'd rather do outside securitization, therefore, you wouldn't benefit from the longer duration term get outstanding for your equity return.

So there's still upside there in that we own those loans that we discount on our balance sheet, and we still -- we believe the refinance rate or the CPR rate activity will continue to expand at a high rate. To the extent that we're -- we can move a portion of the loans into securitization. We believe that the equity returns on that -- the pull given the coupon of those loans can generate a double-digit return to securitization. So it's really timing for us to make that decision or potentially sell loans in a portfolio sale to generate kind of an equity return on those loss.

And on BPL, that's just -- sorry, RPL. That's a market where, at this point, it's mature for us. The loans have been revalued higher given the 2/3 of the portfolio is current on our payment from where we bought those loans almost double and as well as the fact that the FICO scores continue to improve, the borrower's credit continues to improve, and the LTVs are in the 65% range today, which is a very strong portfolio for securitization and would be one of the kind of lower LTV RPL securitizations done in the market.

So we feel pretty good about the ability to finance those loans through securitization and we believe that the equity return upon separation of those loans is double-digit. So the point there is to add leverage through the securitization market to earn out the return of those loans over the course of the remaining life.

And then on multifamily, if you turn to Page 19, the average LTV that we originate to is about 80% and for JV equities in the 82% range. So our credit subordination there would be the 20% in the cap structure to the extent that we are in providing them as loan with a 11.5% coupon at 1.74% DSCR level, we feel that's a very attractive level. Again, have not received, have not incurred a dollar of loss in this portfolio since the beginning over the last 6, 7 years, origination of these types of loans.

And we're -- today, we're seeing one of the largest increases to pipeline activity in the quarter that we've seen in the history of the Company. We're seeing a lot of opportunity where investors are coming into the South, Southeast part of the United States, looking to take advantage of the of the rent rate increases pushing that market given the mobility of tenants moving to those markets and taking out a mezz loan or JV with us is something that is becoming more attractive given our footprint in that market and understanding of those assets in that market. So we're very busy, and we look to continue to grow that part book substantially over the next quarter.

Our next question comes from the line of Christopher Nolan from Ladenburg Thalmann.

Steve, given the prospect of Fed paper and Fed tightening in 2022, how do you think that will impact the Scratch and Dent and BPL markets?

Jason, do you want to take it or do you want me to?

I'll take it. So the first impact we'll see is on the securitization market. I mean, obviously, one of the things that we're seeing is a flattening of the curve. Flattening of the curve, typically, is a negative for securitization something and for repo financing as well. While we don't utilize repo financing, the market does in whole. And the effect there was that you can't efficiently finance your assets as well as you did prior with the flattening of the curve.

In that case, we have -- part of the reason we're not as aggressive in the space as other market participants is simply because we are looking for better price points on this market and do expect that the efficiency of the repo markets will cause prices to come down from where they are today in our various asset classes. So we see just basically over excess liquidity in the market in various aspects of the market that they within the RPL market, which is we're not a player there today.

And that can come back to us in a positive way with respect to pricing if the curve continues to flatten, and there's more opportunity for us to buy loans at a cheaper dollar value than what's currently offered today. So we see it as more of an opportunity than a risk given our cash and low leverage in the space and ability to kind of step into this market at a cheaper valuation in the future.

So in that case, where would you think to take leverage up in the event that you do have an opportunity to buy assets at a more attractive price point?

Yes, the leverage would be more -- would be outside the repo market. And because we're not using repo, the A mark participant would -- could generate a better short-term levered return on that asset. To the extent that repo markets pull back to the extent that the curve flattens, then there's an opportunity for us to kind of step in cheaper valuations, and we would look to use our current non-mark-to-market finance facility for the securitization market loans. To the extent that we are -- we've aggregated a large pool. We would use a repo line as a gestation period to then securitize, but that would be on a short-term basis.

And I believe it will be a material impact to our current leverage. So that would be how we would use it.

Your next question comes from the line of Jason Stewart from JonesTrading.

Maybe you could talk a little bit about how you evaluate the whole loan bid and RPL versus doing a securitization? And maybe whether -- how that sort of logic and thought process might change as you consider redeploying the capital into other areas like the multifamily mezz sector?

Yes. This has been very strong in the RPL space. There's also been a lower or lack of supply available to be purchased with Fannie/Freddie customer supply, which is a big funding big supply source for the market as well. Banks haven't been as active in the past as well.

So the supply that is out there, it's a little bit -- and we've seen a run-up in pricing. And in areas where really the buyer is an unlevered buyer at this point where it would not be -- it’s more of an insurance company type of day versus a (inaudible) because it's partly generated double-digit return based on loans in that space.

So over time, we believe that market will lighten up and to be a better opportunity for us to look back into that space. We absolutely see other opportunities in the multifamily space. We're -- as I said earlier, we have record kind of setting pipelines in that area. And given the conservative underwriting and the sponsors that we've been working with for over 7 years in the space, there's an opportunity for us to look at kind of portfolio opportunities in this space in the south and as well as single opportunity, which is we've been doing for the past 7 years.

We think we can grow our portfolio through some cross securitization opportunities as well as some other deal. So we actually do expect the capitalization percent of our book to be allocated more heavily towards multifamily space in the next quarter.

I guess my question is more so, is there an opportunity for you to hit that whole on bid instead of re-securitizing and then redeploying that capital?

Hitting the whole that's available on the market today, we just don't see -- yes, we don't see it as an attractive opportunity today. The types of scenarios you have to run to generate that return, you have to extrapolate a lot of the positive aspect of the housing market today for a long period of time, we're not comfortable with. So you just don't see an opportunity to consistently generate a double-digit return on that across without short-term price volatility. And we're very focused on protecting our book value in this market. So we just -- we're kind of a past today on that asset class. Even though, to your point, you could potentially take a whole pull-down securitize immediately and earn that NIM over that securitization. Today, you just don't see a double-digit return by pursuing that, given if you could just sort of take a ton demand on points securitizing it in the same day. Which is not powerful, but that we just don't see double-digit return there.

Okay. Okay. Fair enough. And then in the multifamily side, maybe you could talk about the types of projects that you're seeing a little bit of more marginal competition for and where you see the sweet spot. I mean you mentioned secondary and tertiary markets in the Southeast, does size play part in that as a geography? I mean where do you see the sweet spot for where you're deploying capital in terms of project-specific characteristics?

Yes. So if you look at Page 20 of our multifamily section, it gives kind of a state breakdown of where we are. And what I want about this market here is that we have -- we tried to stay in front of where the migration is going. For example, Nashville was a hot market for us a couple of years ago, and we've transferred and moved on to marketplace Chattanooga outside of Nashville and Texas, Florida and kind of the southeast part of the United States, has been a very exciting opportunity for us in that market as it relates to new market entrants moving in and taking down collateral taking on pools. The staple financing you can get from Freddie Mac 10-year financing is very attractive in 3% range on 10-year financing.

So there's still an opportunity there to responses to lever these low-rise projects. And today, we offer mezz or JV financing in some ways that is looked at as an alternative to kind of equity contribution. And we -- there are -- especially on the JV side, there's opportunities for us to earn fees on other parts of the business outside of just a collection of interest, which we're evaluating and pursuing. So operating more as a partner to the sponsor versus just old lender is something we've been evaluating and pursuing as well.

But the markets in general, I mean, the markets like that, Austin, Texas has obviously been an extremely hot market, lots of appraisal increase there, lots of growth rate, increase in rental rates. And we're seeing a lot of our book being refinanced out that market simply because of the gains in kind of appraisal side. We're in the sub -- not only are we in the tertiary market there but also in asset costs that are class B + transitional type of assets. That either have some type of management overhaul that could add value to the property or some kind of deferred maintenance project that needs to be instituted in our capital helps with the deferred maintenance projects that they're looking to complete. So that's where we kind of finance stacking as well.

Your last question comes from the line of Matthew Howlett from B. Riley.

Just 2 questions on the funding. Did you say you had an unsecured debt that was callable here? Is that the convertible or upcoming, will be callable sometime in the future? And then 2, on the securitization, are you now at critical mass where you're going to start issuing off your own shelf? I mean are you -- I mean, is it -- your big it if not start issuing a name that will improve funding costs over time versus selling it into a conduit?

Yes. We've issued off our own shelf, and we continue to offer our own shelf, both in the BPL space and the RPL space. I'll let Jason go into further that. But as it relates to the callable side, we have a callable preferred that's still outstanding with a 7.75% coupon. We have a 5-year convertible debt instrument issued by the Company that's going to mature in January of 2022. So there will be some changeover in capital structure if there's opportunities there. But I'll let Jason speak further the securitization -- sorry, Jason.

Yes. So on the securitization side, we do have a shelf out that we've issued deals out of mint, so with different ticker names relating to the asset cost. And so we're able to do this ourselves and the Company has been able to issue through their own shelf for a number of years. So we typically don't sell into a condo deal in this space.

Got it. Okay. So the names out there you have your own shelf. Got you. And I guess just a final question. On -- when we all know you recognize the balance sheet has got a lot of room to grow here. What -- for modeling purposes, I sort of look at $4 billion or $5 billion mark in investment portfolio. What can you tell us in terms of how to think about the cadence for growth of that investment portfolio over the next 12 months?

I think over the next 12 months, certainly, we have plenty of room to grow the balance sheet without adding additional capital. I mean, we've said before, we're sitting at $3.3 billion. We certainly have room to go to $4 billion pretty easily from a capital standpoint. We've had tremendous asset purchase success this year. We've just seen a huge amount of prepayments coming from a lot of the asset classes. That's -- and so it's been difficult growing that portfolio. We are working on some transactions, hopefully, that we can talk about in our fourth quarter call that should accelerate some of the pipeline opportunities. Jason, go ahead, too.

Yes. I think you covered it. I mean, we put $505 million out in the third quarter. We do expect to meet those type of numbers given our pipelines. The refinancing activity, while from a total capital growth, it's -- obviously, it proved capable, but it does come with respect to either prepayments with the discount on a Scratch and Dent or multifamily prepayments that have deal maintenance kind of clauses, RPL loans a discount as well.

So in our space, prepayments generally are a positive aspect to return, and that's by design. Some of the asset costs we're considering will have a longer duration kind of whole period on those loans, which would allow growth to become more regular in the space. And through positional execution, just kind of looking at the NIM distributions as a form of the investment versus a discounted asset held on the balance sheet that is likely levered. So those are the types of opportunities we're looking at. But to Steve's point earlier, we do have pipelines that multifamily, I said earlier, is extremely strong. And there's a number of pipeline strategies that we've talked to some of our origination partners on the BPL and DSCR side that we were very excited about. And hopefully, we can talk more about that in the first quarter of next year.

Great. So just a way to think about the excess capital position of the Company is one in which the portfolio could easily meet or exceed $4 billion?

That's correct. Absolutely. That's correct. Yes. Go ahead, Jason.

No, what we're excited about here is that we can increase our EPS by deploying more cash on the balance sheet and taking some of the right leverage after costs we have and moving those into securitization, which is what the RPL deals I described earlier. Those are -- I put in my notes earlier, those are kind of organic growth opportunities where we don't depend on third-party capital and simply just by pursuing the deal that we just talked about in our fourth quarter. So from our standpoint, we can control the growth here without needing a kind of third-party or capital markets event for us.

There are no questions at this time. I would now like to turn the call back over to Mr. Steve Mumma for any closing remarks.

Thank you, operator, and thank you, everyone, for being on the call. We all look forward to speaking about the fourth quarter and our year in 2021. Thanks, everyone. Be safe.

This concludes today's conference call. You may now disconnect. Thank you for participating.