New York Mortgage Trust Inc (NYMT) 2021 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust Second Quarter 2021 Results Conference Call. (Operator Instructions) This conference is being recorded on Friday, August 6, 2021. A press release and supplemental financial presentation with New York Mortgage Trust's second quarter 2021 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 of today's call, which you can have access in the Events and Presentations section of the company's website. At this time, management would like me to inform you that certain statements made during the conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although New York Mortgage Trust believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release and from time to time in the company's filings with the Securities and Exchange Commission.

At this time, I would like to introduce Steve Mumma, Chairman and CEO. Steve, please go ahead.

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

We will all be speaking to our supplemental financial presentation that was released yesterday after the market closed and it's available on our website. We will allow questions following the conclusion of our presentation.

The company had solid second quarter results with a GAAP earnings per share of $0.11 and a comprehensive earnings per share of $0.12, and our book value increased to $4.74, generating a total economic return for the quarter of 2.8%. Moreover, the company's portfolio net margin for the quarter was 55 basis points higher than the previous quarter, benefiting from improvements in asset yields and decreased average funding costs from our liabilities.

The company took advantage of the lower interest rate environment, accessing the market with 2 capital markets transactions. In April, the company completed a private placement of $100 million of rated senior unsecured notes with a 5-year term at an interest rate of 5.75%. In July, the company completed offering of its Series F preferred stock for net proceeds of approximately $139 million with a coupon of 6.875%. The company used approximately $105 million of these proceeds to redeem our 7.875% Series C preferred stock, thereby lowering our cost of capital by 100 basis points.

While the company indeed benefited from the lower interest rate environment, we also believe our execution of these 2 transactions and improved pricing levels validates the strength of our current balance sheet.

Now going to Page 6 in the supplemental. You'll see our investment portfolio totaled $3.2 billion at the end of the quarter, and our market capitalization was also -- was $2.2 billion, both unchanged from the previous quarter. Our capital is currently allocated at 77% to single-family and 21% to multifamily. Our portfolio growth continues 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, where we declared a $0.10 common stock dividend and generated a total rate of return on our common stock of 2.2% for the period, and we currently have a year-to-date total rate of return of 26.6%. We purchased approximately $258 million in residential loans and closed on our second multifamily joint venture investment for $12 million. On our financing efforts, we completed our first BPL revolving securitization for a total amount of $167 million. Jason will speak to this in more detail later in the presentation.

We completed a private placement of rated unsecured notes with a 5-year term at an interest rate of 5.75%, our lowest cost of term financing in company history. In July, we issued our first rated preferred stock offering raised approximately $135 million, with an initial rate of 6.875%. We continue to focus on long-term financing options to fund our growing business to help us navigate the ever and changing financial landscape.

On Slide 9, we'll go over portfolio metrics on a quarter-over-quarter comparison. As I said before, our net margin for the second quarter was 2.97%, an increase of 55 basis points from the previous quarter. Our portfolio weighted average yield was 6.31%, an improvement of 28 basis points. The increase was largely attributable to the continued rotation out of lower-yielding CUSIP securities to higher-yielding residential loans, including business purpose loans. Our funding costs improved by 27 basis points during the quarter as the impact of calling 1 of our securitizations late in the first quarter was fully reflected in the second. In July, we called 2020 SP1 residential securitization in anticipation of issuing a new securitization in the third quarter. The SP1 securitization had approximate cost of 4%, which we believe we can replace with costs in the low 2% range this quarter.

Our leverage remains low at 0.3x, and our liquidity remains strong as we head into the third quarter. At this time, I'd like Kristine Nario, our CFO, will now go over the financial results in more detail. 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 second quarter. We acquired residential loans for $258 million, closed on a multifamily joint venture investment for $12 million and purchased $19 million of investment securities. We sold residential loans and CMBS for proceeds totaling $15 million. We also had total repayments of approximately $309 million, primarily from our residential loans. Most of these residential loans were purchased at a discount, and the early payoff of the loans resulted in additional income of approximately $5 million, which is included in realized gain. We also had 4 multifamily loans at redeem, which generated $1.5 million of redemption premium income, which is included in other income.

We had net income of $43 million and comprehensive income of $47 million attributable to our common stockholders. Our book value ended at $4.74, up from 4.71% the previous quarter.

Slide 11 details our financial results. We had net interest income of $31.5 million, an increase of $1.1 million from the previous quarter. Total net interest income increased from the previous quarter, primarily due to our continued investment in higher-yielding business purpose loans, which contributed to the $2.1 million increase in total interest income. This was partially offset by an increase in total interest expense of $1 million, primarily attributed to the interest expense recognized on the senior unsecured notes issued in April. We had noninterest income of $43.3 million, mostly from net unrealized gains of $23.9 million due to continued improvement in pricing on our assets, particularly our non-agency RMBS and CMBS securities, residential loans and our investment in consolidated SLST.

In addition, lower interest rates drove modest price appreciation on our agency RMBS securities. We also generated $5 million of net realized gains, primarily from residential loan prepayment activity. In addition, our multifamily preferred equity investments, accounted for as equity, contributed $6.4 million of income, which includes $5.5 million of preferred return income and $0.8 million of unrealized gains.

Our other equity investments contributed $4.3 million of income, primarily from income recognized on redemption of an equity investment that invested in residential loans.

We had total G&A expenses of $12.5 million, an increase of approximately $1.1 million from the previous quarter. The increase can be attributed to annual awards and equity compensation to nonemployee directors during the quarter.

We had operating expenses of $10.6 million during the quarter, which included $6.7 million related to our portfolio investments. This increase primarily due to the growth of the business purpose loan portfolio and $3.9 million of operating expenses related to multifamily apartment properties that we consolidate in accordance with GAAP.

As I mentioned earlier, included in our results for the quarter is the net income activity related to multifamily apartment properties that we consolidate in our financial statements in accordance with GAAP. These properties generated operating income of $2.1 million and incurred interest expense and operating expenses of $0.4 million and $3.9 million, respectively. After reflecting the share in the losses to the noncontrolling interest of $1.6 million, in total, these multifamily apartment properties incurred a net loss of $0.6 million for the quarter. It should be noted that the net loss in these properties include depreciation and amortization related to real estate.

The graph on Slide 11 illustrates the change in our book value from June 30. Our book value increased to $4.74 during the quarter and increased 9% from the end of June 2020. Our stock price assets also recovered significantly, increasing our price-to-book ratio to 0.94 from 0.60 at the end of June 2020.

We continue to focus on growing and strengthening our balance sheet by investing in our core strategies of single-family and multifamily investments and prudent liability management by placing greater emphasis on procuring longer-term and a more committed financing arrangement.

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

Thanks, Kristine. As it relates to our strategy, we continue to favor BPL Scratch & Dent, multifamily lending and JVs. We see strong signals that provide a favorable investment landscape in these areas.

On Page 14, starting with BPLs. The overall economic backdrop is very supportive of the U.S. residential housing in both single-family and multifamily, with estimated 5.5 million new housing units required to meet demand. After $1.3 million of expected new builds, the market will continue to be extremely tight in the near term. With a significant housing deficit, we continue to support single-family bridge lending focused on modest home renovation under a 1-year loan.

Our borrower alignment is strengthened with the 74% pre model and 64% post model LTV. We have faced increased market competition of late with new market participants willing to compete on one price, meaning more rates and/or structure, meaning higher LTVs. We remain consistent with our pricing in the short duration BPL sector. We instead focus on competing with our process, where we can take advantage of our experienced team and proven technology to reduce the operational burden of BPL originators before and after loans are purchased.

In the performing loan space, we continue to find value in the Scratch & Dent sector with the collapsed primary secondary mortgage rate and new curbs on early funding from the cash window for agency channels, we purchase loans -- close loans that were found to have technical issues with the original origination guidelines. Our purchase even at a deep discount, helps the originator's liquidity. We have been able to buy loans from over 200 originators in the past few years with a purchase discount of 7 points on average, we do not compete on price but like BPLs, we buy loans in an expedited manner, meeting the needs of our selling partners with a consistent diligence and closing process. This helps us be a preferred counterparty in the space.

Lastly, with a housing deficit multifamily valuations have also improved with increased rents. In this case, we target selective submarkets facing more acute housing shortages found in the South, Southeast United States. Average multifamily rental rates are up 7% year-over-year, led by double-digit gains in markets like Atlanta, Tampa and Raleigh. And our direct lending and JV business, we focus on low to mid-rise properties in secondary markets. We have done so without incurring a loss in any position in the 8 years plus investing in this space.

Consistent with the commentary and other strategies, we are focused on hitting all funding time lines for our acquisitions under a consistent due diligence approach with our sponsors. Again, we compete by providing a trusted process here, holding the line on pricing across these strategies in the face of higher competition allowed us to increase our average yield on assets.

Turning to Page 14. In the month, our pace of acquisition slowed to $290 million from $364 million last quarter. While we do see elevated levels of competition, our -- a larger contributor to the client investment activity was related to a focus of (inaudible) opportunities, which can take longer to close, particularly in the multifamily space. Thus, we see -- we expect to see a meaningful increase to our allocations in the third quarter with our core strategies.

Turning to Page 15. As was stated on previous calls, we expect our portfolio leverage defined as recourse financing to remain low. First, we run an unleveraged strategy within multifamily loan and JV investments as return on assets is expected to meet -- to meet yield targets in the low to upper teens. Second, residential markets, securitization debt or term nonrecourse financing is a primary focus point. Our opportunity is to continue allocating new purchases alongside of $700 million of unencumbered loans we have on balance to this form of financing. We are currently working on a number of transactions with bankers in unrated space and with rating agencies in the rated residential debt offerings.

As discussed on our last call, we expect the securitization market to even -- to be even more accommodating to issuers as the level of demand, including replacement band with higher market pay down rates, continues to outstrip new supply. As a result, we witnessed financing costs decline about 28 basis points to a 2% level in the unrated NPL space -- RPL space. And in the rated space, triple A financing levels improved approximately 15 basis points in the quarter to a 1% area of cost of debt.

We are excited about this proposition to generate equity returns within our portfolio with reduced leverage risk versus traditional bank offerings, repo offerings.

On Page 16, as discussed, the current environment is favorable for our strategies. While we are not currently active in the reperforming loan auctions, our $895 million portfolio today with a 4.84% coupon and at 72% LTV would be extremely difficult to replicate in today's market, with year-over-year housing prices printing at 16% growth rate, the highest level recorded on the Case-Shiller index, our equity position with borrowers continues to improve, which brings a higher degree of alignment and downside protection with our loss mitigation approach. At $97, our loan valuation is accreting to par alongside of the market improvement. As such, we recently noticed investors to call one of our unrated deals with 300 million [powered] loans.

In today's market, and as Steve mentioned earlier, we see up to 200 basis points interest cost savings with the re-securitization of these loans. With our business purpose loans, which at the end of the second quarter equaled $622 million of asset value. Here, they are mainly bridge and rehab loans. We have funded these loans without any loss to date. We believe, and apparently, many others in today's market, find a strategy to fit well within the macros in the housing market. Our recent new issue revolving securitization in this space paves the way for high teens, low 20s returns on these assets. After launching the deal with $160 million of loans in the second quarter, we continue to utilize the cash built within the structures with $75 million of new loans added to the securitization in July.

Within the performing loan strategy, which is mostly Scratch & Dent loans, we have seen an elevated amount of activity in the quarter, which should bring higher investment pipelines in Q3.

Like the agency market, we have witnessed an increase to the portfolio's prepayment activity. However, unlike the agency market, we benefit from this activity because of a deep discount acquisition cost.

Turning to Page 17. In this quarter, we highlighted this trend here, where we show the purchase price against the exact loans that are prepaid in a particular month. At average acquisition prices between $93 and $95, we captured the discount with loan prepayments mostly above 30 CPR. While pay down activity reduces the portfolio size, the payoffs are accretive to our earnings as we capture the 5% discount.

Turning to Page 18. Finally, in the residential markets, we provide an update for our BPL portfolio. Here, we continue to focus on markets with low housing supply, borrowers with proven experience, low LTV and importantly, low rehab requirements to provide for a quick project turnaround. We believe these characteristics hit a sweet spot in the market with our high level of originator trade support, we believe we can maintain a high level of activity benefiting our pipeline's increasingly competitive market environment.

Now turning to Page 19. Switching over to multifamily overview. We have seen a recent decline in senior financing costs within the agency sector by approximately 30 basis points, which sparked an increase in our pipeline with the sponsors, who are seeking cash flowing multifamily property acquisitions. Cash flowing so sponsors can immediately take advantage of the sub-3% senior financing cost. We support these acquisitions within (inaudible) layer to the sponsor's acquisition on average of -- up the 80% LTV. With a contractual coupon of 11.6% and additional early prepayment benefits, the risk-adjusted return here is very attractive.

As I stated earlier, we keep market share in a space with a proven process against tight closing time lines, such as in the case of the 1031 exchange. We started to refocus on JVs this year with a more favorable macro environment in the South, Southeast United States and have looked at multiple recapitalization opportunities alongside the sponsors. The team is very focused in the part of the market by utilizing our large network developed over 10 years of source portfolio opportunities.

Quickly, on the multifamily securities side, we discussed in the previous quarter, we believe the market is fully priced here with yields in the 2% area. As such, we recently liquidated nearly all our positions last month in the sector to move towards a full exit of the sector given the tight market environment.

Turning to Page 20. Lastly, with respect to multifamily performance, not surprisingly, underlying property occupancy rates continue to improve with demand in the local markets. Given the sector strength, we continue to receive prepayment notices from borrowers in our portfolio. As an additional 4 loans prepaid in the quarter providing a 14.7% investment IRR at a 1.4x multiple after all applicable minimum return multiples.

We have very few assets in special service. We continue to work towards a par payoff of the 2 of the 40 assets in this part of the portfolio.

Now turning to Page 21. We thank you for your time to hear an update of our business. The investment team is focused on unlocking new opportunities across the resi loan sectors and multifamily cap structures. Our goal is to deliver high returns with low volatility. We're excited about our new investment prospects and financing arrangements to continue with this success.

At this time, I'll pass it back to Steve.

Thanks, Jason. And operator, you can open it up for questions.

(Operator Instructions) Your first question comes from the line of Doug Harter with Credit Suisse.

Steve, hoping you could talk about the decision to kind of raise the unsecured debt and increase the amount of preferred in the context of kind of the low overall balance sheet leverage and kind of how you weighed those different forms of capital?

Sure. So from the -- I'll do the preferred first, I mean, really, we raised $137 million. We paid -- we deemed $105 million. So we're net up a flight. We still have another preferred equity piece that's out there that can be redeemed that's higher cost at 7.75%. We've raised the 5-year money. It was the first time we did a rated deal. We wanted to test the market and see where we could get. We have seen some of our competitors getting very good execution. And we have a convertible deal that's maturing in early January.

So keeping all that into perspective, we were testing the market on the rated world as a way to replace that convertible deal that's going to be maturing in January. And I think as we look at -- when we think about the preferred, given the size of our balance sheet, it's really trying to continue to lower the overall cost of capital and really not net increasing substantially that preferred channel. So I think over time, you'll see the preferred sort of get rebalanced back to where it's been.

We were up like $35 million relative to what we were after the net pay off. But we still have that 7.75% out there that we're looking at what's the best way to manage that money going into this cycle. And given the outbreak of the Delta variant, we want to make sure we understand the impacts of potential liquidity as we go into the remainder of the year. And so we want to be more conservative as it relates to financing opportunities.

And then just to make sure I understand the revolving securitization. How long is that revolving period? And how -- what size could that could get to?

Yes. So the revolving is really replacing the fast paydowns we have in the portfolio. So the short duration of the loans given the win your maturity and with some extension, anywhere from 12 to 18 months kind of the pay downs expected. We want to make sure we were able to relever those deals into a 2-year revolving structure, which is what that securitization provides. So with that, we can keep the leverage outstanding and efficiently finance our pipelines.

It's a 2-year period that we can continue to reinvest.

So a 2-year period and then it would likely have some…

And then it basically it goes 2 years, then it's 3. Yes, that's right. This is a step-up 3 years later.

And your next question comes Bose George with KBW.

This is actually Mike Smyth on for Bose. So just on the BPLs, you mentioned some of the competition in the space. Can you just talk a little bit about your broader sourcing strategy? And kind of have you seen any decline in expected returns given the increased competition in the market?

Yes. The market, we've definitely seen an increase in competition, really over the last few months now. There has been a -- the story is very popular. It's a very strong macro tailwind that supports the assets. So it's not surprising that other market participants are looking to enter into the space or increasing their funding availability. As it relates to our pipelines, we're buying loans from the same originators that we've been working with over the past few years. We mentioned earlier, we haven't reduced our yield requirements in the space despite the fact that the market overall has -- is trading at a tighter level.

We do so because we believe that our operational capability and a lot of the hand holding going back and forth with the originators on the closing process as well as afterwards. A lot of the originators are also the servicer of the loans post origination date. So there's a lot of servicing needs and a lot of help we can provide with -- as it relates to updating the portfolio.

So in all those cases, we find ourselves in a position, where we're able to continue buying loans at the previously -- at yields that have been consistent for us for the last 6 months. And we believe we're able to do that because we're able to move quickly with these originators and provide a level of service as a buyer that we think is differentiated. So I hope that answers your question.

And then a lot of peers have taken equity stakes in originators or acquired originators to kind of secure sourcing and improve the economics here. Is this something you could look to do? Or on the other side of that do you know if any of your origination partners have had any changes to their ownership structure?

Yes. We've talked to just about all the market participants in the space on the origination side. We've evaluated a number of those opportunities that end up being a capital market transaction or acquisition or entering into a GP of a structure of one of the originators in the market. So we've kind of seen it all. We've evaluated alongside with other market participants. We've decided not to pursue a capital markets activity through a purchase, simply because we believe we can maintain the levels that we're purchasing.

This is, again, a market that is pretty finicky. It's shut down in March 2020. Valuations on the loan originators are pretty volatile given the short time lines of the loans themselves and how fast the market can basically just stop the investment activity. So we didn't feel it's prudent to spend that type capital for the pipelines that are available. And also, we view this market as a trade and the trade continues to be a strength and a strategy given the macro environment.

But this is a bit of a new market. Yes, hard money lending has been around for as long as the mortgage industry has been around. But this type of financing and with the efficiency of the securitization market is providing for a kind of new stage investment opportunity, and that could easily change quickly. I think we would prefer to look at more long-dated strategies in the BPL market. As I mentioned earlier, our focus has been on the short duration part of the market with the fix and flip type of loans. There are opportunities in the investor loan or debt service coverage ratio space that we're evaluating. But at this point, we're comfortable where we stand with respect to our pipelines and the fix and flip strategy.

And then just one more for me. Can you provide an update on how book values trended since quarter end?

Yes. Look, I mean, we don't typically -- we don't give specific forward-looking statements as it relates to dividends and/or book value, but we -- given where the market is, and certainly, there was a little bit of a backup and race this morning with the issue of the employment numbers. But given the strength of the credit markets, we would say that our book value is probably up slightly.

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

Maybe a bigger picture question. Reading some articles just about the different agency multifamily guidelines, maybe those caps are going up, maybe loosening standards and some shifts there. How does that create an opportunity for you, maybe on kick outs or EBOs or other? How does that potentially, what's going on in D.C. change, either positively or negatively your pipeline of potential investment opportunities?

Yes. I mean, certainly, we look at those things as it relates -- not so much directly to us because we're a co-investor in these properties, providing mezzanine capital. But certainly, to the extent that they reduce programs where you get supplemental financing on the existing property that's beneficial to us as they increase their limits. And it's really not the limits of lending that hurts us. If they increase the amount of money that they'll lend against the property at the agency level, that certainly squeezes into where we play. However, there's so many opportunities right now providing additional capital. And what -- we started to do JV investing again, quite frankly, because we think there's just better opportunities in some cases on certain properties to participate at the JV level.

Certainly, with properties that are -- we would consider A like properties, B plus to A. Those are probably JV equity investment opportunities versus where we look at the B to B plus properties where they're going to be lifted from a B to B plus or A is a better mezzanine opportunity. And so that's why we continue to increase our touch space into the multifamily area. But yes, we are keenly aware of what's going on in the agency space and watching what Washington is doing is probably going to be a drive to affordable housing, too, that -- those are areas we'll look at also going forward.

Jason and Kristine kind of for both of you, but I guess you called the deal in Q3. Jason, how much more opportunity as we think about those calls next year? Is there some percentage maybe or some amount you think continue to be called? And then, Kristine, from a 3Q standpoint, how should we think about the gains that will hit in 3Q from that call? And additionally, any gains on -- I thought it was $90 million of CMBS sales, but I think Jason said maybe all of the $147 million. So any gains in Q3 or losses on those sales?

Yes. I'll start with the call. So we recently issued a notice to our -- to the investors that are in one of our securitizations that was done a year ago. So the non call period is coming up. And that's why we're looking to call. Again, we think we can save about 200 basis points up to 200 basis points of interest cost and also re-lever the transaction, which is helpful. We do have other deals outstanding, and those deals would also be -- we'll also be looking to make calls in this market given at this point on the unrated space, the financing that is available is probably the best -- is the best that we've ever seen in the NPL space or the unrated space, NPL RPL, unrated space.

In RPL rated space, part of what we're going to do is transition the loans that have been paying for quite some time and transition those into a rated deal, which I mentioned earlier. We're -- be looking to issue one of those deals in the near term, and we see senior financing costs at the 1% financing level. So clearly, all these securitization strategies beat the financing terms that financing costs, you see it in the repo space, which is another reason to do the securitizations, but it's very attractive against a legacy portfolio of assets we own that have, obviously, coupons and LTVs that we -- very hard to replicate in today's market with the purchase prices that are available.

As it relates to the sales of our -- of the CMBS, sold most of the assets, we still have a few remaining that we're looking at this quarter as well. But we were able to sell those consistent with our valuation on those bonds given the monthly market process there.

Right. So we sold -- just to be a little bit more specific, we sold CMBs for $90 million. That's a majority of them. But -- and the marks or the price that we've exited is close to what we marked at quarter end. And as to answer your question, as it relates to any gains or losses on the securitization that we're going to call, it's not really a concept for that. There's not going to be any gain or loss recognized for that.

Right. And just to be clear, this situation we're looking to flip the loans back into the market, which then you would recognize again. Our goal here is to re-securitize the assets under a more efficient financing.

Yes. Steve, since those weren't remix and since those were our loans to begin with, we didn't recognize a gain, putting them into the securitization. So it was just a financing transaction, and that's why it doesn't generate any extra P&L that you see other guys calling deals. Those are deals that they bought in the marketplace. And so those weren't their loans initially. So that's where they have the ability to bring those loans back and generate a gain.

Your next question comes from the line of Eric Hagen with BTIG.

One more follow-up on the 2020 S&P one that you're calling. I guess the specific question is, what kind of advance rates do you expect to get? Like in the end, how much capital are you expected to free up from the opportunity? And then the second question, is what's your lifetime expected loss rate at this point for the SLST deal that you own? Like when you guys book a yield that shows up in earnings, what kind of default and severity rates are embedded in that yield? And is there any upside from loans paying down even faster?

I'll start with the securitization. We had a deal outstanding a year. We're taking about $310 million of loans back into the market through a resecuritization. The amount of capital that we'll be freeing up in that deal is not material from our total capital. The reason to do the deal is to gain access to better financing levels. And we use the NPL market financing market as basically a gestation period for our RPL rated strategy. So that would be done in another 1 year deal. So it's really a cost of capital consideration there, not as a means to kind of unlock fresh capital for new investment purchases.

And the SLST, Eric, we don't really -- we don't disclose specifics on defaults and other parameters around the SLST deal. But certainly, prepayment speeds increases helped that deal, right? To the extent that you're taking back loans that sit in the pool of your projecting losses, it's helpful to the bond. But just given the overall healthiness of the housing market and increased valuations, that certainly supports a lot of the loans in those deals.

And then one on operating expenses. Forgive me if you said this, but the operating expenses, I assume, included deal expenses during the quarter. And so if you strip those out, what's the kind of…

No, the deal expenses get capitalized to the cost of a debt.

Right. That's right. Eric. Any securitization debt issuance cost is included in the cost of the debt.

So the $10.6 million in operating expenses for the quarter. Maybe I missed it in your opening remarks, but what was -- what's driving that?

The $10.6 million, there's an increase because of an increase in our portfolio of business purpose loans. So that increases that. But we also have a portion of that related to our multifamily properties that we consolidate in accordance with GAAP. This is a VIE consolidation, which increased that operating expense number this quarter.

I'm really just kind of looking for a run rate operating so that run rate operating expense.

Yes. So that run rate operating is a little difficult because -- I mean, you really should look at it -- we have a-- it's 2 different lines, right? We have $6.7 million in expenses related to the portfolio. The $3.9 million is really going to jump around based on -- if we end up consolidating a multifamily property, all of a sudden, you can have a jump. That's really not really a jump in direct expenses to us, but it's just because we have to consolidate their activity up. But the operating expense line certainly is related to our portfolio. And the growth of that operating expense in the portfolio is 100% related to our BPL portfolio growth. So the way those loans are booked they are just a higher expense ratio to service those loans. So that drives that number up as we grow that portfolio.

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

On your multifamily equity investments, are those into common equity or preferred equity?

The multifamily investments, we have preferred equity, but we also have JV equity, which would be on the common.

The preferred equity investments that show up as equity, Chris. It's really from an accounting standpoint. They have the similar characteristics of what we would classify the other stuff as preferred loans. But because of certain legal requirements within the documentation, they end up being accounted for it as equity, but we're earning an interest rate on them. The JV is absolutely true equity in the sense that we are participating in it at the equity level, but the preferred -- all our preferred investments have a coupon associated with them.

So the preferred is really secured to some degree by the underlying.

That's -- it is secured, 100%. It's -- there's equity below it. That's subordinating it and it's -- and the preferred is secured to the property.

What sort of cap rates are -- does the -- your JV partner or you go into these multifamily properties with?

I mean, I think the markets that we participate in, in the South and Southeast, obviously, the cap rates have been compressed. But what's really -- we're really looking when we get into these transactions, not so much the entry cap rate it's the exit cap rate. And so we're looking -- those cap rates seem to have some ability to compress for us to hit our exit multiple targets. So we don't really have a specific cap rate, minimum or maximum, it really depends on the property-specific and where it is located in the opportunity to change that cap rate. So we don't really have a specific cap rate in mind.

And remember, the opportunities that we're focused on are transitional plays for the most part. So what we're really focused on is what the new management teams' transition business plan is for the property. There's 2 forms. It's either management improvement or there's some deferred maintenance that needs to be addressed with respect to the property that could help with the rent rate increases.

So we look for those plays where that could happen. Also it shortens the duration of the proffer offering as well, simply because typically, a sponsor would come in and look to basically take our loan out once the management plan has been executed and then opt to take a 10-year senior loan out from Freddie Mac or Fannie Mae, for that matter. But also in -- and we do focus on ground up construction as well outside of just the transitional story within multifamily.

And there, we're looking at very similar -- very similar markets with opportunities, where there's just a deficit of housing demand, especially with the migration trends in the United States from Northeast down to Southeast. So we're seeing opportunities where very high rent rate increases very low -- very high occupancy rates. And therefore, analysis of these markets, we find it very favorable to add new product into some of these secondary and tertiary markets, where we're aligning ourselves with the sponsor.

And I guess, sort of given that collapse of that building in Florida and given you're investing in properties, which -- I understand, low to medium rise, but do you expect construction, renovation or maintenance cost to increase substantially on these properties?

Relative to what we saw in Miami, no, we don't lend or have exposure in that market to those type of properties. Again, we're mostly in the secondary tertiary markets to mostly garden-style apartments. And there -- it's the types of maintenance or deferred maintenance that we see when we're looking to get into these deal for the transitional play is more aesthetic improvements to the property that are dated; kitchens, bathrooms and communal areas.

Yes. Chris, we have a very healthy program, and we have a large asset management team for those very reasons to go out and review properties to make sure we understand what are the physical needs to maintain that property. But Jason is 100% accurate in saying that the majority of the stuff is really to update and bring forward units to market standard.

(Operator Instructions) Your next question comes from the line of Matthew Howlett with B. Riley.

When I model the portfolio margin out, I mean, it went up sequentially. I hear you with -- you've got to keep on calling these securitizations and issuing new ones that probably is the lowest securitization rates we've ever seen. How does -- that margin can you sustain that sort of 3% on a GAAP basis? Or is it going to move around to the mix shift? Or could you just give us a little bit on how to model that?

Yes. I mean 2 things you got to keep in mind when you look at our margin. One, we have very low leverage, right? So that margin is being calculated by an asset yield of 6.31% and then the cost of debt. But that debt is a smaller portion relative to our assets. So that being -- that's one comment. The second comment is, as we get out of the CUSIP securities and we focus more on BPL loans and multifamily investing, those are certainly higher coupon assets than Scratch & Dent and some of our old RPL loan portfolios.

So I think that's where you'll see some movement around. And as it relates to the cost of debt, I mean, certainly, as we go through and reprice our warehouse lines that come due in the fourth quarter, we'll look to be tightening that up. But you are correct in saying that the securitization market has never been tighter as it relates to rates. And then Jason, maybe you want to add something to that.

Yes. I mean, just the sale of our securities book, which we sold most of our multifamily securities last quarter will improve. Our total interest-earning assets yield. So it's more of a rotation, given the increase in values we've seen in that space. We saw -- basically, we believe it's about a 2% total yield kind of yield to that securities portfolio when we sold those bonds, and that's replacing into a mostly BPL and multifamily type of space. So rotation on top of utilization of our cash and lower financing costs with respect to securitization should continue to improve our net interest margin.

Did you say high teens on that BPL securitization that you saw on the retained security? You said -- did I hear you speak to that?

Yes. That's right. I mean the highlight is simply, you're looking at high single-digit type of coupon with our financing costs dropped I believe, about 58 basis points on that deal. So when you look at and model through the securitization leverage that's there with respect to the financing costs, you easily can get to a 20% level on those types of -- on those assets.

On the equity at…

Yes, return of the equity of the securization. Yes. That's right.

And would you -- go ahead.

Yes. Yes, that's right. I mean the -- there's not many markets where you could achieve that type of return. It's really related to the fact that it's a short duration loan. Where it's similar to our multifamily business. This is a bridge play into an improvement story. So they're willing -- the contractors are willing to take a higher cost of debt to turn that into a flip or we're seeing more cases now turning into a rental property that with taking back the property as an interest as an investment property itself. So that's why that cost of debt is there. There's lots of management requirements on managing the draws, making sure that improvements are going accordingly. So those other reasons typically why you have a higher cost of capital for that type of debt, which we benefit from.

And you lock in the financing via the trust and it's a revolving trust like a credit card deal? Does it work like a credit card deal, where you pay it down and you keep on putting a new receivable into it?

Yes. For 2 years, we can recycle the pay downs that we received in that securitization, our fixed cost of capital there. So in credit card deals, the recycling happens much more frequently. In these types of deals, it's maybe 1 or 2 times a month where you look at the paydowns and you recycle with new portfolio opportunities. So the -- like a CLO, as an example, you're able to enter, add new assets to that portfolio over the course of 2 years, which is what you'd like to see on a 1.5, 1 year duration type of asset, when you're doing a securitization, which is why we opted for that structure.

And then I guess on the unencumbered $700 million I mean unencumbered, I mean, can -- how much of that is -- are you going to finance? I mean can you just sort of give us the cadence on how -- what you're going to do with that over the next sort of 12 months?

Yes. I mean, we're looking at -- as you mentioned earlier, the -- we're kind of seeing historically low securitization costs across different industries. Right. So we're looking at the assets we have in that book and pairing with our pipeline assets and looking to optimize our securitizations within both in the on rated and the RPO space. So we are evaluating that piece of -- on a residential loan book to add, we think, is prudent leverage to that portfolio.

And the last question with the pricing on the Series F, the other deals, they're not -- I mean, over the next couple of years, you're going to become callable the other preferred, right? I mean presumably you are looking at that…

(inaudible) fairly callable. The Series C 7.75 is currently callable. The other 2 have a couple of years.

I know that's the Series C is trading up -- Series F is trading up. I mean, do you think you could potentially test the 6%, right? I mean, over time, you see the preferred…

I mean, we are consistently current -- we're constantly, constantly is the word I'm looking for, monitoring those markets to try to optimize our capital cost structure. No question.

At this time, there are no further questions. I would like to turn the call back over to Mr. Steve Mumma.

Thank you, operator, and thank you, everyone, for being on the call today. Enjoy the rest of your summer. And be safe and be smart around Covid. We look forward to talking to you about our third quarter results in November. Have a great day.

Ladies and gentlemen, this concludes today's conference call. We thank you for participating. You may now disconnect.