New York Mortgage Trust, Inc. (NASDAQ:NYMT) reported a strong second quarter in 2024, with adjusted interest income reaching $84 million, a significant increase from the previous year. During the earnings call on August 1, 2024, CEO Jason Serrano outlined strategies to prepare for an economic slowdown, including a portfolio rotation plan aimed at reducing risk and increasing liquidity. The company also highlighted the success of its multifamily mezzanine loans through a joint venture and a focus on sustainable dividends for shareholders.
Key Takeaways
- NYMT's adjusted interest income for Q2 2024 soared to $84 million, up 63% from the same period last year.
- The company is executing a portfolio rotation plan to mitigate economic slowdown risks.
- A joint venture for multifamily mezzanine loans has been announced, with no principal losses reported to date.
- NYMT maintained a $0.20 per share common dividend, consistent with the previous quarter.
- Total acquisitions for the quarter were $934 million, a 54% increase from the prior quarter.
- The company's recourse leverage ratio and portfolio recourse leverage ratio rose to 2.1x and 2x, respectively.
- NYMT aims to maintain an attractive yield and is focused on repositioning its portfolio to prioritize current income.
Company Outlook
- The company plans to increase exposure in the Agency RMBS sector and continue growing its BPL-Bridge loans portfolio.
- NYMT is looking to free up capital from its JV Equity portfolio to focus on core strategies.
- The company is patient in deploying excess capital, balancing current returns against future opportunities.
Bearish Highlights
- Concerns over higher costs and limited supply of homeowners insurance could affect real estate values in specific markets, particularly in the south and multifamily sectors.
- The potential impact on net operating income and increased supply in certain markets is being closely monitored.
Bullish Highlights
- The company has made meaningful progress in achieving higher recurring net interest income.
- NYMT executed its first rated BPL-Bridge securitization in the quarter.
- The company restarted purchases of 30-year BPL-Rental loans, with plans to securitize them later this year.
Misses
- There were no specific financial misses mentioned in the provided summary.
Q&A Highlights
- RPLs in the portfolio are not highly sensitive to interest rates, but a decrease in rates could lead to a slight uptick in prepayment activity.
- The choppiness in credit profiles of RPLs may limit prepayments despite interest rate changes.
- The impact of higher costs and limited supply of homeowners insurance on real estate values is a concern, especially in the short-term rental markets and the south.
In conclusion, NYMT's second quarter results reflected a strong performance in a challenging economic environment. The company's proactive measures to de-risk its portfolio and its strategic acquisitions signal a robust approach to navigating potential slowdowns. Moreover, the maintenance of its dividend and the positive outlook on the Agency RMBS sector and BPL-Bridge loans portfolio indicate a forward-looking stance aimed at delivering value to shareholders.
InvestingPro Insights
New York Mortgage Trust's second quarter performance in 2024 has been a beacon of strength in a tumultuous economic landscape. The company's strategic initiatives appear to be paying off, with a sharp increase in adjusted interest income and a clear focus on sustainable dividends.
InvestingPro Tips for NYMT reveal that while analysts have revised their earnings expectations downwards for the upcoming period, the company has a history of maintaining dividend payments, doing so for 21 consecutive years. This aligns with the company's highlighted success in delivering value to shareholders. On the downside, analysts anticipate a sales decline in the current year and do not expect the company to be profitable this year. However, NYMT's significant dividend yield of 12.35% remains a key attraction for income-focused investors.
From the data front, NYMT's Market Cap stands at $576.09M, which provides a sense of the company's size in the market. The P/E Ratio (adjusted for the last twelve months as of Q1 2024) at -19.35 reflects the challenges the company faces in terms of profitability. Meanwhile, the Price / Book ratio of 0.61 suggests that the stock may be undervalued relative to the company's book value, which could interest value investors.
In the last month, NYMT has seen a strong return of 13.09%, indicating a recent uptick in investor confidence or market conditions favorable to the company's stock. For those interested in exploring further, InvestingPro offers additional tips on NYMT, providing a deeper dive into the company's financial health and stock performance.
To gain a more comprehensive understanding of NYMT's financial outlook and stock behavior, interested individuals can access a broader range of InvestingPro Tips at https://www.investing.com/pro/NYMT.
Full transcript - New York Mortgage (NYMT) Q2 2024:
Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust Second Quarter 2024 Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions] This conference is being recorded on Thursday, August 1, 2024. I would now like to turn the call over to Kristi Mussallem, Investor Relations. Please go ahead.
Kristi Mussallem: Thank you, operator, and good morning, everyone. Thank you for joining New York Mortgage Trust's second quarter 2024 earnings call. A press release and supplemental financial presentation with New York Mortgage Trust second quarter 2024 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 and Presentations section of the company’s website. At this time, management would like me to inform you that certain statements made during the conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although New York Mortgage Trust believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday’s press release and from time to time in the company’s filings with the Securities and Exchange Commission. Now at this time, I would like to introduce Jason Serrano, Chief Executive Officer. Jason, please go ahead.
Jason Serrano: Hi, thank you for joining New York Mortgage Trust's second quarter earnings call. Joining me today is Nick Mah, President; and Kristine Nario, CFO. With the U.S. economy that is showing a sequential slowdown of organic growth where personal savings drawdown was a factor stabilized GDP, obvious concerns point inflection point in the economy, at a time where consumer debt is at the highest level ever, and demonstrating evidence that the U.S. consumer is tapped out. Our preparation for a slowdown began after the first rate hike in March 2022, which typically predicts the end of a growth cycle. At this time, we installed a large scale portfolio rotation plan where we have provided updates to this portfolio adjustment each of the past seven quarters. To execute our goal to de-risk the portfolio from longer term credit and transition to a higher level of liquidity, we focused on high current interest-oriented strategies. We understood a reduction to our balance sheet would occur and consequently company earnings would dip in this period. We are pleased to show elevated second quarter adjusted interest income of $84 million, which is a 63% increase from the same period last year. We are still working to improve company income and find ourselves in a great liquidity position to add this momentum over subsequent quarters. While the timing of our balance sheet reduction began in 2022 and frankly could have been better time by delaying such activity for up to two to three quarters, we believe being directionally correct outweighs the loss of earnings potential of being early. Balance sheet flexibility created in this period could bring about multiyear benefit. As a reminder, a year ago we started the phase for balance sheet growth. First, an early goal was to invest real property holdings, mostly related to our multifamily JV equity portfolio, which admittingly took longer to sell and was a primary factor in recent book volatility, which has been disappointing. Given recent sales progress, the portfolio is now immaterial to our book less than 1% of total company holdings. Second, we raised company current interest income, which has been a priority. In the past, we had high allocation strategies with attractive total returns but exhibited low current cash income. As an example, in the multifamily management lending sector, where we originated loans with double-digit returns contained a feature of a partial or total interest pick. While the market today provides an exciting backdrop to reestablish pipelines for multifamily mezzanine investments, we are focused on new funding models for future originations. We are happy to announce we are pursuing a joint venture constructed for NYMT originated multifamily mezzanine loans with a third-party capital provider, which allows up to $300 million of funding. While this venture is still subject to final negotiations of the definitive agreement with the third-party, we are hopeful of an early September launch date. Third, we wanted to remain liquid but also increase company income. Our core strategy is intended to achieve this goal by allocating capital to Agency RMBS and short duration business purpose loans. For different reasons, both investments return of principle is accelerated in a near-term economic slowdown, which allows NYMT to organically raise cash on balance sheet. Furthermore, we anticipated MBS liquidity to spike after the first rate cut, which should be well timed for pursuing opportunities with enhanced returns. Finally, maintaining minimal levels of recourse mark-to-market leverage in the credit space is an absolute goal for NYMT, as the broader market demonstrated initial exuberance for potential accelerated rate cuts, an excellent opportunity to pursue non-recourse term funding structures at tighter spreads have developed. We continue to take advantage of pricing this market for funding needs. I also want to mention that we're seeing opportunities within our own capital structure. As reinvestments accelerate and we continue to build out interest income, we evaluate opportunities to repurchase shares at a significant discount against our high performing book that contains elevated concentrations of agency and cash on balance sheet. Lastly, we also look for additional accretive funding sources and seek to properly time the execution to maximize earnings impact. On balance sheet, we opportunistically issued $60 million senior unsecured notes at 9.125% [ph] rate in the quarter for additional funding anticipation of wider spread opportunity in the agency space. Furthermore, given our extensive experience previously managing third-party capital at scale, we've evaluated several opportunities focused on the right elements to seek external funding. Page 8 of our supplemental illustrates our thought process related to this utilization. We look for the overlap of three factors, areas of team expertise and proven track record, strategies that provide compelling risk adjusted returns at scale and investments needs of third parties and our own balance sheet. As an example, delayed recognition of return or a low rate of current cash income will be a factor in seeking third-party capital. We are focused on current cash income. As such, we see our multifamily mezzanine loans a great fit for external capital funding. We are one of the largest originators of these loans over the past decade and carry an impeccable track record in a market where we have witnessed a significant pullback of regional bank lending when capital solutions are required against a $500 billion of CRE loans reaching maturity in each of the next four years. We are excited to utilize our platform backed by a third-party capital provider who is focused on attractive total return opportunities. We are encouraged that our portfolio reconstruction, which began just over two years ago, is well situated for accommodative monetary policy response from the Fed. We believe this decision will enable the company to generate sustainable earnings on a variety of on and off balance sheet options. At this time, I'll pass the call over to Kristine to discuss our financials. Kristine?
Kristine Nario: Thank you, Jason. Good morning. Today, I will focus my commentary on the main drivers of our second quarter financial results. I will also be highlighting some of the information from the quarterly comparative financial information section included in Slides 27 to 36 of the supplemental presentation. Our financial snapshot on Slide 12 covers key portfolio metrics for the quarter and Slide 26 summarizes the financial results for the quarter. The company had undepreciated loss per share of $0.25 in the second quarter as compared to undepreciated loss per share of $0.68 in the first quarter. We experienced a solid momentum in our portfolio acquisitions and the first half of the year as we continue to utilize our excess liquidity and rotate our lower yielding multifamily real property exposure into business purpose loans and Agency RMBS, increasing our investment portfolio on a net basis by approximately $0.6 billion and $0.8 billion during the second quarter and year-to-date, respectively, ending at $5.9 billion as of June 30. As a result, net interest income contribution increased to $0.21 in the current quarter from $0.20 in the first quarter. Our quarterly adjusted net interest income, a non-GAAP financial measure, also increased by $1.1 million to $27.3 million in the second quarter from $26.2 million in the first quarter. And as detailed in Slide 27, our net interest spread has steadily increased over the last few quarters, growing by two basis points during the quarter and 31 basis points year-to-date. Our interest rate swaps also continue to benefit our portfolio, reducing our average financing costs by 75 and 78 basis points during the quarter and year-to-date, respectively. We have also reduced our net loss from real estate from $16.4 million to $13.1 million, primarily due to the disposition of two multifamily properties which resulted in deconsolidation. We continue to make progress in the disposition of our multifamily real estate assets and after quarter-end disposed of four underperforming assets. We expect earnings to improve without the negative drag from these assets in the range of $2 million to $2.5 million per quarter. Volatility in interest rates continued to impact valuation of our investments. During the quarter, we recognized $16.5 million or $0.18 per share of unrealized losses due to lower asset prices, primarily in our Agency RMBS portfolio. As a result of increases in interest rates in the final days of the quarter, which has subsequently reversed. However, these unrealized losses were mostly offset by $0.17 per share in gains recognized in our derivative instruments, primarily consisting of interest rate swaps. We also recognized $7.5 million or $0.08 per share of losses, primarily incurred on foreclosed properties or REO still on balance sheet, which are carried at lower-of-cost-or-market due to lower valuations during the quarter. We had total G&A expenses of $11.6 million, down from $13.1 million in the previous quarter, primarily due to decreases in compensation costs and non-recurring professional fees. We had portfolio operating expenses of $7.4 million, which declined slightly from the prior quarter. We also incurred a one-time expense of $4.6 million related to the issuance of senior unsecured notes and a residential securitization which Nick will touch on later. Adjusted book value per share ended at $11.02, down 4.3% from the first quarter. The main drivers are $0.29 in basic loss per share. Our declared dividend of $0.20 per share and a $0.05 per share reduction in cumulative depreciation and amortization add-back attributable to a consolidated multifamily property for which impairment was recognized during the quarter. As of quarter-end, the company's recourse leverage ratio and portfolio recourse leverage ratio moved higher to 2.1x and 2x respectively, from 1.7 times and 1.6, respectively as of March 31. Due to the continued expansion of our Agency RMBS strategy and the issuance of $60 million in unsecured notes in June. Our portfolio recourse leverage on our credit book stands at 0.5 times, up from 0.3 times at March 31 due to acquisitions during the quarter partially funded by recourse repurchase financing. However, we do not expect portfolio recourse leverage in our credit book to exceed one times as we intend to continue to prioritize procuring longer term and non mark-to-market financing arrangements for certain parts of our credit portfolio. We paid a $0.20 per share common dividend unchanged from the prior quarter. We continue to evaluate our dividend policy each quarter and look at the 12 months to 18 months projection of not only our net interest income, but also realized gains or capital gains that can be generated from an investment portfolio. We remain committed to maintaining an attractive current yield for our shareholders and we expect underappreciated earnings per share to move closer to the current dividend as we continue to rotate excess liquidity for reinvestment and assets that generate recurring income while optimizing expenses. I will now turn it over to Nick to go over the market and strategy update. Nick?
Nick Mah: Nick thank you, Kristine. As Jason discussed, readings of softening inflation and signs of a cooling labor market have heightened expectations for potential rate cuts later this year. The active growth of the portfolio over the past several quarters aligns with what is likely a more favorable period for fixed income assets in the near future. We have made meaningful progress in our goal of achieving a higher rate of recurring net interest income through the deployment of our available capital. In the quarter, we had $934 million of total acquisitions, representing a 54% increase from the prior quarter. We are pleased to have growing volumes in our core strategies of Agency RMBS and BPL loans. In Agency RMBS, we purchased $467 million in the quarter and we continue to be opportunistic in the cadence of our deployment activity. More than half of the quarter's agency purchases, or $252 million, occurred in late June when Treasury yields and mortgage spreads move wider. In BPL's we purchased $412 million of loans in the quarter. BPL acquisitions were split across $344 million of BPL-Bridge loans and $68 million of BPL-Rental loans. In BPL-Bridge loans, we continue to drive higher volumes through our partnership of originators and we'll expect this trend to continue in the third quarter. Delving first into Agency RMBS. Current coupon mortgage spreads widened by 10 basis points to 148 basis points in the quarter. The minor difference in quarter-over-quarter spread levels belied the larger intra quarter moves in both spreads and rates. In conjunction with issuing a senior unsecured corporate bond deal in late June, we took advantage of relatively higher spreads late in the quarter to increase the pace of acquisitions. Having no near term corporate maturities or other obligations afforded us the flexibility to focus our available capital on portfolio growth. At $2.6 billion of market value, the Agency RMBS portfolio represents 44% of our asset portfolio and 20% of our capital allocation. Strategically, we continue to target higher carry assets. In the quarter, we predominantly purchased 6% coupon lower payout spec pools, increasing the spec pool portfolio WACC by three basis points to 5.87%. Agency RMBS remains a core strategy for us at these historically wider spread levels. We believe that Agency RMBS is a liquid asset class that can outperform through a future rate easing cycle. It also can exhibit resiliency through a recessionary environment at which time we can rotate the capital into discounted higher return opportunities. We intend to increase our exposure in this sector as it aligns with our broader portfolio management strategy. On BPL-Bridge loans, we have been expanding our pipeline of future loan purchases. To date, we have purchased from 15 different originator and aggregator companies and we are currently actively buying from eight of them. From the beginning, we have chosen to participate in the BPL-Bridge business with a light operating model by being an investor and not an originator in the BPL-Bridge space. Over the past few years, buying from external sellers has allowed us the flexibility to scale up and down with the market opportunity. Furthermore, we bear a lower operational cost while still being able to gain exposure to assets at compelling coupons. More importantly, however, we have avoided subsectors such as multifamily bridge and more involved projects like ground up construction. It is at these fringes where default management tends to be difficult for loss avoidance. Our reasons for being selective are for downside protection and to maximize liquidity and finance ability of the loans that we buy. Tangentially, our tighter credit criteria has coincided with the advent of rated securitizations, where financing execution on our type of collateral profile has been superior. In the quarter, we executed our first rated BPL-Bridge securitization, which was the third such deal in history. Overall, our $244 million deal provided a higher advance rate and a savings of over 80 basis points on overall rate than what was available on whole loan repo. Execution of our rated securitization has also delivered a comparable advance rate to our unrated deal that we did in the first quarter, but also an approximate 65 basis points of savings on overall rate. Our intent is to use the rated securitization structure as the preferred source of financing for our BPL-Bridge business on a go forward basis. Also this year we restarted the purchases of 30 year BPL-Rental loans after pausing the program in 2022 due to the rising rate environment. Given the improvement in securitization market execution and the evolving economic landscape, we are comfortable selectively adding some duration in the residential credit portfolio today. The pace of purchases should arrive at the critical mass for securitization later this year. Moving on to multifamily. Starting first with JV Equity. With the JV Equity portfolio now at $39 million, this constitutes less than 1% of our overall portfolio, and we now have limited exposure of this asset class on our balance sheet. We continue to make progress relating to dispositions of this portfolio and we aim to free up the remaining capital to rotate into our core strategies. In our supplemental presentation, we have isolated the cross collateralized mezzanine lending asset, which was historically at certain points combined with our JV Equity category, this asset is one mezzanine loan over 13 properties with a cross collateralization benefit to NYMT. We also provided additional information on the loan on Page 21. The cross collateralized mezzanine lending position has many similarities in profile compared to our mezzanine lending book. The average adjusted LTVs are in the 80s and the average portfolio coupons are in the low double digits. An even more favorable trait is that 100% of the cross collateralized mezzanine lending properties have senior debt above us that is either a low fixed rate or is hedged with an existing interest rate cap. This has the benefit of maintaining lower and predictable senior debt service payments that are accretive to the underlying property NOI. Across the mezzanine portfolio in general, the collateral performance continues to be remarkable. We have not experienced a principal loss to date on any mezzanine or cross collateralized mezzanine lending position since our initial investment into this asset class in 2012. Currently in the portfolio, there is only one delinquent loan and only one other loan that was either restructured or extended. Mezzanine loans are held at fair value with marks reflective of the status and performance of the loan. As Jason discussed, mezzanine lending may be a better fit for third-party capital instead of the REIT balance sheet, as the asset generally generates a higher total return than a current return. Our strong track record, along with our deep experience in sourcing and managing this asset class, provides us with the ability to raise and deploy third-party capital to take advantage of what we see as compelling future opportunities in this space. We will now open the call for Q&A.
Operator: Thank you. [Operator Instructions] Our first question comes from Doug Harter with UBS. Please go ahead.
Doug Harter: Thanks. Can you just talk a little bit more about the decision to continue to hold a high level of liquidity and the trade-offs that you see there, the potential for wider spreads at some point in the future, but kind of offsetting that is the strong securitization markets you talked about kind of where you see returns today and kind of how that would compare to kind of the returns you think you might see in the future?
Nick Mah: Yes, I'll start that, Jason. The opportunity that we see in front of us today has there's call like two different avenues you can go down. One in which there's a core asset class that's available, that has the double-digit teams type of equity returns after financing or securitization, that is more limited in total scale given just general lack of production in the market, lack of transaction activity as well. There is a growing area in the market that has, that is generally new to the market from the previous, let's call it three to four years, which is a larger scale of what's called multifamily middle market origination activity and ground up activity. So when we do see volume in the market, we have to be careful on which part of the market we're focused on and where we're being selective in our growth. So the purchase path that the pace that we're utilizing is, is in the consideration of the selective nature of the assets that we're seeing available and the growth pattern that takes place there. On the agency side, there are – it’s been very volatile over the past six months. We’ve been very selective on when to enter into the market. We do want to grow our, as Nick mentioned, grow our portfolio in that space, but we’re looking for a better opportunities to leg in over the course of the year. Spreads have moved out wider just recently and we took advantage of that in large form, and we’ll continue to look for kind of mispricing of the market to legend. So we want to be patient. Assets we’re buying today have a five-year consequence, and we’re looking at more of a medium term to long-term value proposition for our excess capital today.
Doug Harter: Great. Appreciate it. Thank you, Jason.
Operator: Thank you. Our next question comes from Jason Weaver with JonesTrading. Please go ahead.
Jason Weaver: Hey, good morning. Along with some of the softer economic data we’ve seen as of late, I think we’ve had a 70 basis point rally in the 10-year, and then we’re talking about possible rate cuts coming up with high probability of them being priced in right now. Nick, you said you were focusing on the 6.0 coupon sector and agencies, and I’m just curious about what you think about how you’re thinking about prepay risk going forward. I did see one comment from a famous fixed income investor yesterday that expects the 10-year trade in the low 3s by this time next year. So taking that into account.
Nick Mah: Yes. I think clearly there has been a fair amount of movement in terms of expectation of rates. And I would say generally speaking, this has been positive to the agency space in general as interest rate volatility and the spectrum of potential interest rate paths in the future declining. So we do think that there is an ability for spreads to tighten from here. In the longer term, clearly there’s going to be pocket of time where things widen out and tighten in. So as Jason alluded to, we try to be opportunistic on that. To answer your question, yes, we have been targeting the 6% coupons because of the higher credit [ph] profile. We do have in our residential credit book, more discounted assets there due to a different kind of coupon profile that has the ability to accrete if rates continue to come down and spreads continue to tighten. With that said though, we are continuously looking at our agency strategy and I think that we’re going to start gravitating a little bit more towards belly [ph] coupons as well. So diversifying a little bit, given the size of the agency portfolio has grown to where it is today.
Jason Weaver: Got it. Thank you for that. And then, Jason, I appreciate your comments regarding the repositioning of the portfolio and focusing more towards on current income. I was wondering with that, taking that into account, how do you think about the sustainability of the dividend and then also the visibility of the sustainability of the dividend within your reporting as you complete that transition?
Jason Serrano: Yes. I’ll start with the comments and I’ll pass it over to Kristine. We evaluate this with our Board every single month and look at the projections we have relating to our growth plan with respect to our assets, as well as our liability structures and the excess spread and NIM that we’re achieving on our book. There are a number of parts of our portfolio that were underperforming or for our current income approach. One of those is JV equity. Another one is within the SFR space. And those asset classes were oriented as total return, but don’t meet the current dividend as a portfolio holding. So in those cases, we’re looking to rotate those assets into either a program or into other assets that can achieve our goals. So that’s just one component of our portfolio that is kind of underneath the surface here that actually has real earnings potential that’s kind of hidden behind the scenes. And with respect to that, I’ll pass it over to Kristine to kind of enumerate other items.
Kristine Nario: Yes. So essentially, we’re comfortable with our progress and continuing to move closer to our current dividend. As Jason mentioned, we’ve increased activity as it relates to our investing. We’ve rotated some of our lower yielding assets into more – into assets that generate recurring income. And we’ve also implemented measures to optimize our expenses, essentially eliminating higher operating cost strategies such as our JV book, and we see other opportunities in lowering our operating costs.
Jason Weaver: Got it. All right. Thanks, guys. That’s helpful color.
Operator: Thank you. Our next question comes from Bose George with KBW. Please go ahead.
Frank Labetti: Hi. Good morning, guys. This is actually Frank Labetti filling in for Bose. Can we get an update on adjusted book value quarter to date, please?
Jason Serrano: Sure. We estimate adjusted book value to be up somewhere between 2% to 3% quarter to date.
Frank Labetti: Awesome. Thank you. And then to the extent the Fed does cut multiple times over the next year, how does that change your outlook for the portfolio going forward?
Jason Serrano: I think that will be a positive outcome for the portfolio. And I think we are trying to position ourselves by growing the book and by picking the assets that we are picking to be able to capitalize on that. So we believe that if the rate cuts come and arguable as to whether or not it’s going to be one or two or several more this year, but we do believe that that will lead to a repricing of the rate curve and would be positive for fixed income assets. So, yes, I think we have that firmly in mind as we’re ramping on the portfolio and our asset selection is also gearing towards that eventual outcome.
Frank Labetti: Thank you.
Operator: Thank you. Our next question comes from Eric Hagen with BTIG. Please go ahead.
Eric Hagen: Hey, thanks. Good morning. Just following up on maybe some of the interest rate sensitivity. I mean, I know that we don’t typically think of RPLs as being very interest rate sensitive, or maybe as interest rate sensitive as agency loans, but is it reasonable to expect a pickup in voluntary prepayment activity if your – in your portfolio if rates are coming down?
Nick Mah: And are you mentioning, are you talking about RTLs or RPLs like transitional loans?
Eric Hagen: Sorry, the reperforming loans, the legacy reperforming loans in your portfolio?
Nick Mah: Yes, legacy reperforming. We believe that at the margin, there could be a higher increase in prepayments. The prepayment rate right now, it’s somewhere in the mid-single digits. A lot of these borrowers are, have pretty out of the money coupons relative to where on the run coupons are. So we believe that could increase, but not substantially. Also, RPLs have a history of potential choppy pay credit profiles. So that also creates somewhat of a cap in terms of the prepayments. But overall, as we have seen historically, when rates do come down and there are other options for these borrowers, we do expect prepayments to move up slightly.
Eric Hagen: Okay. Just a little bit more on the resi credit portfolio. I mean, how do you think real estate values might respond to the higher costs and the more limited supply of homeowners insurance? Do you see that being a risk for housing values? And is there a way to potentially even manage that risk?
Jason Serrano: Yes, this is Jason. So overall, that is absolutely happening, particularly in the south and also within the multifamily space as well. And that definitely is a headwind to further HPA growth. I think where you see that the concern that I have with respect to that, and also taxes going higher due to increase in valuations is in the short-term rental markets. And in those markets, particularly with those slowdown of rentals throughout the month and increase in costs, you can see an increase in supply on the market. Given the NOI those short-term investment – short-term rental investments have waned. So I think that’s part of the reason why you’re seeing historical increase in supply in markets like Austin, where literally in the last six months you just had a massive pickup in supply side. The supply side has kept the market intact given the high funding costs as well as the higher levels of home prices and lack of affordability. So when you look through all that, you still have a supermajority part of the country that has a fixed rate mortgage that is not affected, but – and then incrementally that insurance cost weighs in. But it’s still a smaller piece of the entire puzzle. It’s where the NOI gets really impacted, and I think that’s where our concerns are. So those are the markets that we’re watching very carefully and particularly within our BPL bridge book is where we’re looking to minimize exposure.
Eric Hagen: That’s interesting comments. Thank you so much. Thank you. I’m showing no further questions at this time. I’d now like to turn it back to Jason Serrano for closing remarks.
Jason Serrano: Well, thank you all very much for joining us on this call, and we look forward to speaking to you about our third quarter results. Have a great day.
Operator: Thank you for your participation in today’s conference. This concludes the program. You may now disconnect.
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