New York Mortgage Trust Inc (NYMT) 2021 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust Fourth Quarter and Full Year 2021 Results Conference Call. (Operator Instructions) This conference is being recorded on Friday, February 18, 2022. A press release and supplemental financial presentation with New York Mortgage Trust fourth quarter and full year 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 access in the Events & Presentations section of the company's website. At this time, management would like to inform -- would like me to inform you that certain statements made during the conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although New York Mortgage Trust believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release and from time to time in the company's filings with the Securities and Exchange Commission.

Now at this time, I would like to introduce Steve Mumma, Executive Chairman. Steve, please go ahead.

Thank you, operator. Good morning, everyone, and thank you for being on the call. As the company announced last December and becoming effective this year on January 1st, I've taken a new role as Executive Chairman with the Jason Serrano stepping up to CEO. I leave the company in great hands and look forward to the company's continued success. Now Jason and Kristine will lead you through our fourth quarter financial presentation. Jason?

Thanks, Steve. Good morning, everyone, and thank you for joining our fourth quarter 2021 earnings call. Kristine and I will be speaking to our Q4 2021 supplemental presentation that was released yesterday and is available on our website. We will have questions following the conclusion of our presentation.

Before I begin, I want to thank Steve for 2 decades of service at the company, which he successfully steered from a small Non-Agency originator to what is now internally managed, scalable, diversified credit business. Steve is a true professional and led with exceptional care for the company's shareholders and employees. I'm thankful to have worked alongside side of you Steve for the last 3 years and look forward to following the path you carved for the company's future.

Now turning to Page 7, on key developments. Starting with the financial highlights on Page 7 of the supplemental, I will quickly summarize our quarterly performance, as Kristine will cover this in greater detail. The company generated $0.06 of GAAP earnings per share. undepreciated EPS was $0.02 higher at $0.08 per share. Also book value per share ended at fourth quarter at $4.70 or $4.74 per share on an undepreciated basis.

Due to a fourth quarter increase in direct investments of real property through our multifamily JV program, we will provide a undepreciated earnings and undepreciated book value, which removes noncash expenses related to depreciation and certain amortization expenses related to leasehold intangibles. After the fourth quarter dividend of $0.10 per share, our 2021 total rate of return was 11.7%. And despite our full transition to loan and JV investments, G&A remained close to 2%.

2021 was a transformational year for the company as our capital redeployment strategy was executed in direct loan investments. generated from our single-family origination partners. And as it relates to our multifamily strategy, loans and JVs were generated internally at NYMT by our origination team. In the fourth quarter, we added nearly $800 million of new investments, which set a record for the company. However, our quarterly earnings did not fully benefit from recurring income related to those assets as more than 70% of the investments settled after late November and in December.

With high investment activity, we were able to better optimize our balance sheet as our cash balances dropped below 10% of capitalization or $152 million of unrestricted cash, net of 30-day debt maturities. Working through previous periods of high cash balances allowed us to relever unencumbered assets in the first quarter, which we'll be touching on in a minute. We also continue to utilize mineral recourse leverage for book value protection and lower costs with a preferred stock issue at 7%, which redeemed a 7.75% callable series, reducing capital cost by 75 basis points. Lastly, due to the recent market volatility, we thought it was prudent to add $200 million buyback program, which the Board recently approved.

Now turning to Page 8, subsequent developments. Investment activity accelerated through the first 6 weeks of the new year as $325 million of assets were added. We are now on pace to exceed fourth quarter 2021 investment activity. On the financing side, we have been very active as well with 2 securitizations completed thus far. The first in early January against our RPL portfolio at 2.3% total cost of debt. And in February, we completed our second bridge loan securitization revolver.

Lastly, we redeemed $138 million convertible note, which matured on January 15th. Simply, we are committed to driving company earnings higher by growing our portfolio and have the capability to do so organically through our unencumbered loan book. We are excited to see this capital put to work and the earnings generated in subsequent quarters.

At this time, I'll pass it over to Kristine Nario, our CFO, to provide further detail in our quarterly financial results.

Thank you, Jason. Good morning, everyone, and thank you again for being on the call. In discussing the financial results for the quarter, I'll be using some of the information from the quarterly comparative financial information section included in Slides 29 to 36 of the supplemental presentation. Our financial snapshot on Slide 10 covers key portfolio metrics on a quarter-over-quarter comparison. The company continued to deliver solid results in the fourth quarter with GAAP earnings per share of $0.06 and GAAP book value of $4.70.

This quarter, we are introducing 2 new metrics on depreciated earnings and undepreciated book value, which are non-GAAP financial measures. Undepreciated earnings represent GAAP net income excluding the company's share and depreciation and lease intangible amortization expenses related to operating real estate. Undepreciated book value represents the company's GAAP book value, excluding the company's share of cumulative depreciation and lease intangible amortization expenses related to operating real estate.

By excluding these noncash adjustments, undepreciated book value reflects the value of the company's rental property portfolio at its undepreciated basis. The company's rental property portfolio primarily includes consolidated multifamily apartment properties. For the fourth quarter, undepreciated earnings per share was $0.08 and an undepreciated book value ended at $4.74, down $0.02 from the previous quarter. Our net interest margin for the fourth quarter was 3.63%, an increase of 38 basis points from the previous quarter.

Our portfolio weighted average asset yield was 6.57%, an improvement of 18 basis points. The increase was largely attributable to our continued investment in higher-yielding business-purpose bridge ones. Our funding costs improved by 20 basis points, ending at 2.94%, largely due to the refinancing of our 2020 RPL strategy securitization in the latter part of the third quarter, which resulted in 210 basis points in cost savings. The company's recourse leverage ratio and portfolio recourse leverage ratio remained low at 0.4x and 0.2x.

Slide 11 details our financial results. We had net interest income of $30.8 million, relatively flat as compared to the previous quarter. Our continued investment in higher-yielding business purpose loans during the quarter contributed to the $0.9 million increase in single-family interest income, offset by a $0.5 million decrease in multifamily interest income, partly due to redemptions of our mezzanine lending investments accounted for as loans.

Although there was a decrease in income from our mezzanine lending investments accounted for as loans, income from our mezzanine lending investments accounted for as equity increased during the period, contributing $7.2 million in preferred return during the quarter. Had these mezzanine lending investments qualified for loan accounting treatment under GAAP, they would have contributed 46 basis points in net interest margin.

Interest expense on our single-family portfolio decreased by $0.3 million, primarily due to the full quarter impact of the previously mentioned RPL refinancing securitization transaction at a lower cost. We had noninterest income of $39.3 million, mostly from net unrealized gains of $15.5 million due to continued improvement in pricing on our assets, particularly our residential loans. We also generated $5.2 million of net realized gains, primarily from residential loan prepayment activity, offset by $4.1 million of net realized losses from sale of Agency RMBS.

The net realized loss from the sale of Agency RMBS was offset by the reversal of unrealized losses recognized in the prior periods. In addition, as discussed earlier, our mezzanine lending investments accounted for as equity contributed $7.2 million of preferred return. We also generated other income of $7.9 million, which is primarily related to $4.8 million of income recognized from equity investments in entities that invest in or originate residential properties and loans and $3.1 million of redemption premium recognized from early repayment of mezzanine lending investments during the quarter.

Included in our results for the quarter is the net loss activity related to our multifamily apartment properties in which the company has equity investments in the form of preferred equity or joint venture equity. Because of certain control provisions, we consolidate these properties in 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 pursue these investments for potential participation and value appreciation of the underlying real estate, which is realized only upon sale of the multifamily assets.

These properties generated operating rental income of $7.6 million and incurred interest expense and operating expenses of 2.1 and $13.5 million, respectively. Operating expenses incurred by these properties during the quarter is primarily related to depreciation expense and amortization of lease intangibles totaling $9.2 million.

After reflecting the share in the losses to the noncontrolling interest of $1.3 million, in total, these multifamily apartment properties incurred a net loss of $6.6 million for the quarter. We had total G&A expenses of $12.5 million, relatively flat compared to the previous quarter. We had portfolio operating expenses of $8.1 million, which increased primarily due to the growth of the business purpose loan portfolio.

Slide 12 summarizes our activity in the fourth quarter. As Jason mentioned earlier, we accelerated our investing activity in the fourth quarter, acquired residential loans for $606 million, funded multifamily joint venture and mezzanine lending investments for 123 and $66 million respectively. We also sold Non-Agency RMBS, Agency RMBS and residential loans for proceeds totaling $194 million. We also had total repayments totaling $333 million, comprised of $245 million from our residential loans, $59 million from our investment securities and $28 million from our mezzanine lending investments.

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

Thanks, Kristine. Turning to Page 14 related to our strategy update. Our core strategies remain unchanged. We believe we are strategically positioned to take advantage of fundamental market strength. With current agency mortgage coupons now at 4%, housing affordability is close to the long-run average, where mortgage costs equals about 23% of first-time homebuyers in cost. Any weakness in housing demand due to higher rates is not likely to correlate lower home prices here.

Like many sectors at this time, the supply side component determined price equilibrium is an overriding factor. December printed another record low. Homes available for sale was below 1 million units. This correlates to 1.8 months of supply in the market, also record low. Extreme and persistent low volume is likely to keep prices pinned at or above inflation rates, particularly in the South.

We continue to see value in these -- in this market through short-term bridge loans where underlying investors can take advantage of a technical squeeze in housing supply and we can benefit from high coupons in a short duration loan. With higher short-term rates, we have 2 fixed rate securitization revolvers at our disposal to generate teens returns.

Secondly, gain on sale has all but evaporated for Agency, Non-Agency and Residential loan originators in the first quarter. While market coupons we set higher, albeit at lower origination volumes, we see an excellent opportunity to pick up deeply discounted paper in scratching that market. Also, secondary and tertiary MSAs in the South and Southeast should continue to benefit from population migration trends as these markets provide a cheaper cost of living alternative.

In a recent large-scale U.S. poll, more than 80% of workers suggest that they would quick their job if employers ask them to report back to the office full time. Thus, work from home is likely to transition from a health measure to retention measure offered by employers to keep talent. We see great opportunity at attractive risk returns in the multifamily sector to take advantage of this migration due to this trend.

Now turning to Page 15 to address our sourcing approach. We recently locked in a flow agreement for 50% of production from a large originator in the BPL space. We are excited about this arrangement and will add to our robust growth in the single-family sector. In the higher rate environment, we have also increased our participation with our originators as we see better value offered. We are an investor of choice because we are scalable, reliable buyer in the market and do not directly compete against our partners.

On the multifamily side and as a way of background, in 2016, we internalized Riverbank, a multifamily originator and asset management platform. Since this time, we funded over $1 billion of loans on our balance sheet, generating a 15% life-to-date return on our assets as we do not utilize leverage within the strategy. We have built up organic sourcing opportunities with hundreds of sponsors.

We are very excited about this program that offers portfolio cross-collateralization roll-up opportunities. We closed our first deal in last November on 11 properties totaling more than 2,800 units. We offer more than just capital to our multifamily regional sponsors. Our asset management platform helps our partners leave certain operational pinch points. As an example, our technology can map into the GL of underlying multifamily properties to automate and review monthly reporting. This is just one of the ways we can help sponsors consolidate their assets -- asset management program.

On Page 16, related to strategy update. Our transformation from 2000 -- from early 2000 (sic) [2020] is evident with each of these graphs. In the first graph, asset sales in early 2020 generated excess cash as we held a defensive posture in Q3 2020. After this time, we held a stubbornly high cash balance with a levered balance sheet. In the second graph, as prices recovered and term financing normalized, we increased our utilization of non-mark-to-market structures to reduce balance sheet risk and lower our cost of funds to optimize our balance sheet.

In the third graph, we monetized our securitization holdings and reinvested the proceeds into higher-yielding loans and JVs. The gestation period for loans and JVs is much longer than bond investments. Some of our larger opportunities such as portfolio roll-ups can take multiple quarters to close, which caused some inefficiency. These 3 graphs demonstrate how we manage through this transformation and how we exhibit patience in doing so. In the fourth quarter, cash was brought below 10%. We quadrupled usage of nonmarket structures and depends on short-term borrowings, while also lowering our cost of funds and we rotated out of security holdings to increase our yield on assets at the greatest level in the company's history.

On Page 18, we are excited about our earnings potential from these activities. With anticipated high investment levels in the new year, we are prepared for a busy first quarter to grow our portfolio by raising cash from mainly unencumbered assets on our balance sheet. We were active in the securitization market on day 1 of the new year. And through -- through March -- sorry, February 15, 2022, we have raised $584 million of cash with keeping a low rate of recourse leverage, which after effect of this funding is only 0.4x.

Simply putting half of the cash generated from the $78 million of total financing completed or in process at either a 9%, 12% or 15% ROE, we can generate a $0.02, $0.03 or $0.04 of incremental EPS respectively. We believe hitting the upside to the growth potential is not out of the equation and we are excited to demonstrate that over the course of the year. Turning to Page 19. We believe we can do so by protecting book value under prudent financing structures, which limit company recourse and mark-to-market risk as illustrated here.

Now turning to Page 20. As they go through the single-family overview. And just as a quick note, regarding our single-family allocation, we continue to stay up in credit with high FICO borrowers at low LTVs, targeting 12 to 15 ROEs after effective financing. We began adding DSCR loans in the fourth quarter, which are loans to rental investors. With guaranteed production from a flow agreement and coupons are nearly 100 basis points higher than at the beginning of the year, we feel confident adding exposure here with the intention of gestation to a securitization. This longer-duration mortgage loan requires term financing to prudently generate an equity return. We are confident we can now accumulate attractive levels for a rental loan pool securitization.

Turning to Page 21, our portfolio highlights. While we are hitting our strides on multiple loan asset classes in single-family sector, the performance of our credit assets remain positive. Delinquency rates have flattened out on our RPL book. On our scratch and dent book, we continue to benefit from prepayments on our discounted loan purchases. While we do expect prepayments to slow and durations to lengthen, this presents an opportunity to add these loans to a securitization, an opportunity we have been recently -- we've recently executed acted for compelling go-forward equity returns related to this asset class.

Turning to Page 22 on our BPL bridge strategy. With nearly $1 billion of loans at the end of the fourth quarter, BPL bridge loan continues to be our largest exposure. Performance has been great, which is expected with loans of 65 LTV after repair in a double-digit HPA market. Equity buildup is substantial for the borrowers here that are experienced in our local markets to complete the rehab jobs focused on low-cost projects.

Turning to Page 23, our multifamily portfolio review. 25% of our capital is now allocated to this asset class. We believe this portfolio offers our shareholders a differentiated type of diversification in this market. At ROEs of 12% to 17%, we are at the center of a sector that is in the process of a fundamental landscape change. The market is efficient, workforce housing offering -- the workforce housing offering quality and affordability is an attractive proposition in today's post-COVID marketplace. In the JV portfolio at $272 million, we are looking to -- we are looking forward to sharing the equity upside with our sponsors on property reposition strategies. More on that in a minute.

Turning to Page 24. As expected, performance is excellent. One loan is delinquent and expected to result in a full recovery. Year-over-year rental growth rate for our portfolio was 8%, which is the highest level we have seen for our book. With low LTVs presented here that does not account for valuation changes that have occurred since the opportunity was funded. We expect to continue our record of zero losses in the strategy to date in near term. With $71 million already closed in the first quarter and $152 million in underwriting, portfolio growth, we'll continue from Q4 levels.

Turning to Page 25. The growth we have seen here is exciting with our origination platform. With the close of a portfolio roll-up and recapitalization, we are now on a nonlinear growth trajectory. Joint venture is our leading product and as Kristine mentioned earlier, we will also report undepreciated EPS in book value to remove these noncash costs to our income statement, balance sheet and these measures. We do expect depreciation and amortization costs to grow alongside of our portfolio, particularly amortization because of high growth rates received in rent in today's market. Thus, expect us to continue reporting these measures.

On Page 26, the asset transition plan offered in high-growth submarkets is a case where we invest in lower market quality property as a value play. Typically related to deferred maintenance or a deity concept and utilize a cost-effective CapEx plan that produces a refresh look meeting market at competition. This has been the focus since 2014. While markets do change, we consistently see tenants desire for a neat product at an affordable price point and we expect to meet that growing demand.

Now on Page 27, we believe a diversified portfolio growth strategy centered around recurring income streams will provide stability to earnings in 2022 with industry-leading low company recourse leverage and flexibility aided by our low-cost operating structure. We have taken a more offensive posture to pursue opportunities in the high rate environment for continued portfolio growth. We believe this is the path to enhancing REIT earnings and we believe the time is now.

At this time, I would like to open up the call for questions. Operator?

(Operator Instructions) Our first question or comment comes from the line of Eric Hagen from BTIG.

I think just one for myself. Can you talk about the outlook and the opportunity in the fix and flip space? Really just the competition which has developed there. How much do you guys think you can source in that channel this year with the backdrop being higher interest rates?

Yes. Thank you. We have put together a flow agreement, which give us 50% production of one originator. We've also have increased our participation with few other originators in the market. We do expect our fix and flip volumes to increase from what we presented in the fourth quarter given those arrangements. The market -- because of the recent rate volatility, the market has taken a bit of a step back as it relates to the liquidity on financing related to these assets. The securitization market is -- given the rate increases, is higher and therefore, there's this transition period that has to come with respect to most originators out there with higher coupons.

And in this period, the liquidity matters tremendously given the change in rates. We have been a consistent buyer of this product with our counterparties. We have been able to help them understand where coupons are going and migrating given just swap rates in the market. So, we've been able to stay ahead of this change and which has helped some of our partners here. S,o we expect to continue to see portfolio growth there, particularly with the fact that we have one originator at 50% of production.

Our next question or comment comes from the line of Stephen Laws from Raymond James.

Jason, can you talk about your comments towards the more offensive posture going forward as you look for new investment opportunity. Where you see the best opportunities you cited the rising rate outlook? And what does maybe and -- also, how do you think about those new investment opportunities versus the stock repurchase with shares around a 25% discount on depreciated book value here?

Yes. So starting with the opportunity and the offensive posture, we have been analyzing, looking at this market. We've had opportunities to buy larger portfolios in 2021, which we passed on. And part of the reason was that the market was offering very efficient and high liquidity financing, particularly in the short term, part of the financing spectrum, which back in 2020, we saw the result of that in securities, long-term securities against short-term repo. The effect here is not as great, obviously, and the financial markets are completely open. It's just -- it's costlier to finance.

So our goal was to focus on the short duration product where we weren't taking a large interest rate risk given the reset of these loans or the payoff of these loans is fairly quick within a year to kind of 15 months and the product would reset into higher loans. We also like the opportunity of taking our borrowers that are resetting or paying off. And I say resetting now more than paying off something because a large part of the fix and flip market is now going into DSCR loan product. So the fix and flip investor is now likely to do a fix to rent.

And with our portfolio, we -- the ability to recapture that bar into a DSCR loan is great as well as resetting these coupons a bit higher in this market, which will give us better NIM earnings on those assets. So that is part of why we are becoming more aggressive in the last couple of months here on our portfolio. We just like the fact that the coupons are at the highest levels we've seen in roughly 2 years. And we're going to take -- continue to take advantage of that.

As it relates to our share buyback program, we see an opportunity to grow our book value and to grow EPS, which will allow our shares to appreciate it if we are able to continue with that plan. Now the opportunity that we're seeing ahead of us today in assets, given that we're taking our -- we have low cash balances. We're taking loans that are unencumbered and encumbering them through securitizations with -- and receiving cash back for that.

We've allocated into investments and investment securities, which will -- investment assets, which will allow us to generate a teens return, which we think will bridge the gap -- from the discount of gap we are currently trading at. So we're seeing an opportunity in the market. And to the extent that we see continued volatility with respect to our shares and the fact that we were not able to hit some of our objectives with respect to our portfolio growth then the consideration is there for a share buyback, which is why we put it and have the board approve this in the last couple of weeks.

Kristine, thinking about the operating real estate portfolio, I appreciate your prepared comments. As we look to model that forward, how should we think about run rate through '22 or kind of an outlook for the revenue and expenses for that -- those investments?

I think it's going to be a little bit significant, more significant so in the first quarter as majority of our JV investments that we closed in 2021 actually closed the latter part of December. So you would expect that number to grow. And as we continue, obviously, to invest in more JV type structures, these numbers, you would expect would also grow.

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

How much do you anticipate taking multifamily up to as a percentage of your capital allocation?

We expect it to grow from here. And the difficulty in answering that question, while we did present our pipelines to kind of estimate that, when you take unencumbered assets off our balance sheet that are in residential loans and you securitize those loans, your percent of market capitalization for that product does decline. If you reinvest that product into an equal allocation, then you expect multifamily to increase from there. We are growing on both sides.

And as I mentioned earlier, we had record volume of acquisitions on both the single-family and the multifamily side in the fourth quarter and we're expecting similar results in the first quarter. There is not a hard target we're looking at. We are opportunistic. We look to see where the best returns are in the market and where we can do so with book value protection. So, there is not a set number we're targeting. It's just a function of what the market is allowing us -- what the market is providing us and where we see the best opportunities. So we'll continue that approach versus a hard target of a certain percent.

And Kristine, you mentioned, I think, in your comments a net loss on multifamily. Was that a GAAP net loss, including the noncash depreciation charges...

Yes, it is a GAAP net loss.

So going forward, we should be starting to look at this depreciated EPS and book value as multifamily growth as a portfolio?

That's correct. That's why we introduced this quarter because we see those numbers getting significant as we go into joint venture equity investments in multifamily properties where we have control.

All right. And then, Jason, given that you guys invest both common and preferred equity into these joint ventures, is your preferred equity -- from the sponsor standpoint, is your preferred equity technically equity when he goes and tries to get a first lien loan on his assets?

Well, the -- yes, so the -- there's -- the way we look at it, we call mezz -- in the presentation, we call it mezz lending. And the mezz lending is basically a second priority in the cap structure for the sponsor. And in certain cases, there's provisions on a second or a mezz loan as it relates to recapitalization of the first. So, it is a hybrid security instrument where it has debt features and equity features. debt features in the form of a coupon and equity features in the form of PIK and other tax-related measures. So, from the sponsor's perspective, it does give them flexibility as it relates to senior financing, as it relates to pref versus a mezzanine loan. Although the features of both those are very similar as it relates to our return.

And given all that, should we look at these as control investments? Or is there a scenario where they could become control investments?

There's going to be scenarios for preferred equity type investments that could be controlled when we have to take over the property. If the property is not doing well or some things being done by the operator that's not in accordance with our agreement, there's, I think, a couple of instances in the prior years where we took over these properties. And by taking them over, we were able to make the property better and actually not incur any loss in those properties.

Our next question or comment comes from the line of Doug Harter from Credit Suisse.

Can you talk about how loan pricing has changed in 2022 given some of the backup we've seen in securitization spreads and pricing?

Yes. So I could speak to our portfolio directly. So we -- looking at the latest changes for this week, we believe that we've estimated about a 1.5% of loss to book value through the first quarter. That's related to this -- our securities that we still have in our balance sheet and in most of the longer-duration mortgage loans that we have on the balance sheet as well, where a lot of those -- where that losses have -- we believe that losses have been incurred. The market as a whole, I mean, there's -- depending on what the underlying coupons are and what the duration is -- it's more than just simply looking at swap rates and taking a duration and taking a price change from there. It's also some liquidity measures on some of the lower coupon assets.

So, when your financing cost is greater than the spread or your asset coupons, really doesn't know how much leverage you applied about. So, staying away from those low coupon asset class has been a priority for us, which is why we focused on short-duration high coupon bridge. And we delayed our DSCR investment strategy until better half of fourth quarter and mainly starting in the first quarter.

The market is resetting and securitizations are also resetting. There's been a couple of deals that have been pulled off the market, simply because the -- nobody wants to step into a bond deal and have it marked down a few points next day when rates move another 25 basis points up. So, I think the market is waiting to be set. There's still plenty of capital on the sidelines for all these assets and the securitizations. But there's kind of a wait-and-see approach in the market and so rates kind of settle out.

I guess just then on your ability to deploy capital, are there opportunities to take advantage of others kind of hesitancy given kind of your current defensive positioning? Or do you kind of take that wait-and-see approach given the current volatility?

No. We freed up we freed up capital on our balance sheet with early -- with securitizations early in the quarter simply to take advantage of some illiquidity in the market that will allow us to buy at lower prices. We are open for business. We have been looking at larger portfolios from originator pipelines that kind of got stuck without being able to place into the market and warehouse lines that we're timing out.

Our interest and our market presence in Scratch and Dent, that market really helps us see a lot of activity, not just related to agency origination that is now Scratch and Dent, but just origination overall that can kind of get put in a period of hold where the buyer backed out and now they're kind of shopping that loan pool in the market as all. We are evaluating opportunities to that end and we expect to continue seeing it. We are absolutely looking to take advantage of this technical change that's happened in the market and at a deeper discounts.

Our next question or comment comes from the line of Matthew Erdner from JonesTrading.

Asking a question on behalf of Jason Stewart. So with the partnership with BPL rental, what kind of origination volume are you guys seeing from them? And what should we expect in the first quarter of this year and moving forward?

Yes. What we liked about our partnership here is that the originator has shown kind of a hockey stick origination growth that we are excited about. And they continue to add new staffing to build out the business. And right now, at current rates of origination, we expect a minimum of $0.5 billion of loans in this first year, but they are growing and we do expect to be able to grow that portfolio along with them.

On top of it, we also have opportunity to purchase loans that we are seeing from other originators that it's not necessarily a contractual flow agreement, but we have been a very consistent buyer every month with these originators, which is what -- when you look at our asset acquisition strategies in the BPL space, you can see consistent purchases that was around $250 million a month, now that number is going up, as you saw last quarter, and we'll definitely be higher in the first quarter this year overall. So, this is just a partnership that allows us to bring liquidity in certain markets such as this to originate and there's potentially other originators that could follow in this kind of process with us. We think there's a low cost way for us to benefit from origination platforms.

Yes, that's great. And then are they located in the areas where you guys have been active before?

Yes. Well, they are -- it's BP origination. Their focus is mostly in the DSCR space. They do fix and flip as well. We are -- part of the hesitancy of going to the DSCR market was simply volume and being a secondary market buyer portfolio, but it not a great way to grow a securitization book, given the lack of consistency and the fact that you do want to adjusted for a securitization portfolio takeout. We would only look at the space if we had kind of guaranteed pipelines, which we do today, which is why that strategy is now one of our focal points that we just walked through.

Their BPL fix and flip book is growing and we expect that to grow faster than their DSCR book. But again, this is one of many that we speak to and we buy loans from them. And we're just -- in this case, it was originators who was concerned about rate movements and also concerned about liquidity as it relates to their operation and having a consistent buyer and that can come in and take loans off their balance sheet every month or once a week was important. So, the funding time lines also increased related to this opportunity for them, which was helpful to relieve cash and to put it back into the market and for us to acquire assets.

Our next question comment comes from the line of Bose George from KBW.

In terms of sort of where you are in the transformation, you guys obviously put a lot of money to work in 4Q again in 1Q. What -- is there a way to think about what inning you're in, in terms of the transformation to a more normalized ROE?

Yes. I mean the -- what Kristine walked through in our net purchase activity for the quarter, I think it's helpful to kind of cement that point. We added $324 million of net investment activity for the quarter. It's been a struggle to add net incrementally positive to our balance sheet, simply because of our asset sales that we've conducted in the securitization space. We sold $193 million last quarter. We are sort of at the end of that cycle for our security sales that we have on our balance sheet, which is -- will be helpful, obviously, to continue to grow net positive our balance sheet going forward.

So for those reasons, we do expect our further growth, prepayment and redemption activity. We had very high payoffs in our Scratch and Dent portfolio, which was a positive given we bought those loans at discounts that we think that's going to moderate as well. RPL prepayments have been kind of consistent in the kind of mid-single to high single-digit range. That product is less sensitive to rates. They have high coupons already and it's more of a change of life plan for the borrower that prepays that loan after 10 years of paying on that loan.

And in multifamily, we -- with the roll-up opportunities that we're focusing on and working in this new environment in the Southeast part of the United States, we have really hit our stride with sourcing. We do speak to hundreds of sponsors. We do -- and so it is an 80-20 rule here, where 20% of our business comes -- 20% of the sponsors provide that 80% of the business. And we're going to continue being able to grow in those Southern markets with the migration that we see. We're excited about the growth that our portfolio experience and the reason why we provided a projection or at least a hypothetical relating to our EPS movements related to the asset growth.

And then actually, in terms of returns, can you just talk about the returns on the operating real estate, just how that compares to the incremental returns on other assets?

Sorry, relating to JVs or the pref?

The JVs, yes.

So the JVs, we're targeting about 12% to 17% of return, but that's going to be over the life of the investment, which would include kind of like an exit when we sell the property and that's what we're looking to do. I mean you'll see the pop at the end. But over time, what you'll see is property income less expenses, which would include depreciation and amortization expenses. And then at the end, you'll see a gain, a capital gain essentially.

Yes. The important note is that those assets are held at basis and we take depreciation against that, those assets every quarter. So o the extent that we've had an 8% increase in rental rates in the first quarter and that's not going -- the gain on those assets is not going to be represented on our balance sheet as we hold it at cost. So it's cost accounting on those assets with depreciation to Kristine's point, the gain -- to expect a gain that we are working towards on a transformation of the property itself through CapEx plans or maintenance deferment cleanups is what we're -- how we generate our return as well as the rental payments we receive on a monthly basis.

And actually, I don't know if you said this already, what's the typical life for those properties?

Yes. thanks for mentioning that, Yes, it's an important distinction. Part of the growth strategy for us also has been the fact that our mezzanine and prep portfolio is more of a shorter-duration instrument. Typically, what happens is that the sponsor takes our pref values fir CapEx, improves the property and then looks to either recap the property or sell the property to get paid on that improvement. So, we've seen that duration anywhere from kind of like 2.5 to 4.5 years as the property gets transitioned.

We do expect the JVs to be of bit of longer duration and the fact that we are equity alongside of the sponsor and making decisions on that sale, have opportunity to take back the property in the case of a sale. So, if the sponsor's time lines are a bit shorter than ours, we have the opportunity to hold that property through a longer lifetime, which we really enjoy a lot of the sponsors will focus on IR. We're focusing on MOIC and IR and total cash. So we love -- we think there's a great income producing asset, is inflation protected, and we don't mind taking these assets for a bit of a longer duration if need be. But we do expect it to be a bit longer than our pref.

And then just one last one. You mentioned it earlier, but what was the book value quarter-to-date, again? Was that 0.5%, just to…

The undepreciated book value is $474 million, down $0.02.

In the quarter -- since the end of the quarter, like what was the change?

It's down about 0.5%.

0.5%.

I'm sorry, if the question was related to first quarter book value decline. We see about a 1.5% decline to date through this week. I thought was the question, sorry.

Yes, that was it. Yes. I mean, you said it earlier, I missed it.

Our next question or comment comes from the line of Matthew Howlett from B. Riley.

Just a couple of questions on the capital deployment. If I just were to assume it happened on October 1st, all of it. I mean, so is there $0.02? Is that sort of dividend coverage or you're getting close to that. Just curious on what the impact would have been.

The impact, if we were to add these assets in October, hypothetically. Yes. I mean the impact is essentially what you're seeing on that hypothetical page that we presented. And in simple math, you look at the average -- you look at the addition to the numerator in that quarter related to a full year -- full quarter cycle of interest earnings and then you can see the incremental impact there. So, it's pretty straightforward, which is why we presented it and that's our expectation when you -- if you were to add those assets.

So when we look at dividend coverage, we should really look at the run rate of the company and that is sort of the example you gave.

Yes. That I look there.

And second question, congrats on paying off the high cost convertible. Sort of what's -- when you look at the unsecured side? What are you seeing out there? Your cost of capital has come down, you've been able to issue cheaper? And would you look to replace that something else on the balance sheet?

Yes. So we speak regularly with bankers in the space on corporate finance opportunities that's available, very few in a number of calls this year is despite of higher rates. There's a couple of interesting transactions that are out there as it relates to whole business securitizations, which is securing a particular part of your asset portfolio and issuing debt off of that portfolio. So it's like a whole business kind of securitization related to a particular asset pool. That is something that has evolved over the course of the last couple of years. that product offering, I remember back in 2007 was pretty popular and that seemed to come back in the last 6 months.

I mentioned it not because we're actually considering doing a deal in that space, not simply because there are new structures that we're seeing, which we're evaluating. Right now, we have plenty of cash on our balance sheet with respect to the financing that we've completed and are expected to complete. So we're not in the market at the moment, looking for a corporate finance opportunity related to particular asset pool. But during the course of the year, depending on where our portfolio migrates and also with the opportunities on the sourcing side, we definitely will continue evaluating that. But we have plenty of liquidity for our pipelines that we have established.

And on the subject of lower cost of capital, when I look at NYMT's history, we just had a great history of diversification, first mover in certain asset classes. When I look at the 2 sort of residential and multifamily, particularly the recent growth and the roll-up strategy of the JVs, would you see these 2 strategies coexisting together? Could they be -- want to be spun out? I mean do you think there are synergies of having them together? Or would you look at some point to try to enhance the value of the multifamily business by spinning it out or some other type of corporate restructuring?

Yes, it's an interesting question. We believe at the moment, it offers our shareholders interesting diversification that is, I think, unique in the market today. I definitely believe that the story -- we've talked more about the origination platform today because we believe it's an important part of the value of the company and our sourcing capability, particularly the fact that we are internally sourcing and originating those loans. And it's an asset class that has produced roughly $100 million of origination volume net over the course of the year, and now we're obviously seeing opportunities to increase that.

So as that business continues to grow, we'll evaluate the opportunity and see what is in the best interest of our shareholders as it relates to that portfolio and rest of the book. But at the moment, I think it provides a great diversification strategy for those that are looking at both residential markets and looking at the strength of the multifamily market that we have within our balance sheet today.

Yes. I just look at all the sort of -- there's been a lot of private equity activity in real estate Southeast and just look at that portfolio may not be getting the credit that it deserves and your cost of capital should be lower as it relates to that strategy.

Yes. I mean, private equity -- the property REITs have had a great run. They have some trade above book value. Obviously, depreciation plays a big role there. But there's been a lot of -- there's been a big increase in valuations of those underlying properties given rent rate -- growth rates. And today, we're following that same path as it relates to GAAP accounting and we hope our shareholders see the value of that asset on our balance sheet.

Yes. We're certainly familiar with that. We'll look forward to it and congrats again.

I'm showing no additional questions in the queue at this time. I would like to turn the conference back over to Mr. Serrano for any closing remarks.

Yes. Thank you, everybody, for being on the call today and we look forward to speaking to you on our Q1 2020 earnings call. Great. Have a great day. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.