Yahoo Finance

Kristine Nario-Eng

Thank you, Jason. Good morning. I will focus on the commentary on the main drivers of our third quarter financial results and refer to the quarterly comparative financial information section of our supplemental. As Jason highlighted our continued focus on investing in assets that provide recurring income resulted in undepreciated earnings per share of $0.39 in the third quarter. As compared to undepreciated loss per share of $0.25 in the second quarter.
Our earnings were positively impacted by valuation improvements on our residential loan and bond portfolios due to changes in interest rates, contributing $1.07 per share of unrealized gains which were partially offset by $0.67 per share in losses, recognizing in our derivative instruments primarily consisting of interest rate swaps.
With the intent of rotating our investment portfolio into interest income earning assets, our investment portfolio increased on a net basis by approximately $1 billion and $1.8 billion during the third quarter and year-to-date respectively ending at $6.9 billion as of September.
As a result, net interest income contribution increased to $0.22 in the current quarter from $0.21 in the second quarter and $0.18 a year ago. Our quarterly adjusted net interest income also increased by $1.4 million to [$28.7 million] in the third quarter from $27.3 million in the second quarter.
And as detailed in slide 27, our yield on average interest earning assets has steadily increased over the last few quarters growing by 23 basis points during the quarter and 48 basis points year-to-date. Net interest spread was slightly lower in the quarter but has increased by 30 basis points year-to-date. Our interest rate swaps also continue to benefit our portfolio reducing average financing costs by 63 basis points and 72 basis points during the quarter and year-to-date respectively.
We continue to make progress in the disposition of our multifamily real estate assets held on balance sheet during the quarter, we disposed of six multifamily real estate assets received and received net proceeds of approximately $34.7 million and realized $13.6 million of net gains for the company. These dispositions had a secondary positive impact that we will benefit from in subsequent quarters.
With these dispositions, we reduced the negative drag from these properties consequently decreasing our net loss from real estate from $13.1 million to $7.5 million during the quarter. We are actively working to dispose of additional multifamily properties and we expect earnings to improve without the negative drag from these assets in the range of $1 million to $1.5 million per quarter.
Although total G&A expenses were essentially flat as compared to the previous quarter, the growth in our residential loan book resulted in an expected increase in portfolio operating expenses of $1.1 million. We also incurred debt issuance expenses of $2.4 million related to the issuance of two securitization deals which were fully expensed in the current quarter and not amortized over a longer time horizon due to our fair value election.
GAAP book value increased by 1.4% during the quarter and adjusted book value per share ended $10.87 down $1.4 from the second quarter. Adjusted book value was lower due to a reduction in the fair value of our amortized cost liabilities caused by decreases in interest rates and a reduction in cumulative depreciation and amortization add back related to our multifamily property.
As of quarter end, the company's recourse leverage ratio and portfolio recourse leverage ratio move higher to 2.6 times and 2.5 times respectively from 2.1 times and 2 times respectively as of June 30, due to our continued financing of investment securities, primarily agency RMBS.
Our portfolio recourse leverage and our credit and other investments stands at 0.8 times up from 0.5 times at June 30, due to acquisitions during the quarter, partially funded by recourse repurchase financing. With our utilization of securitize financing for a credit assets we do not expect to see a linear increase in our credit portfolio recourse leverage with the growth in our credit book.
We paid a $0.20 per common share dividend and change from the prior quarter. We remain committed to maintaining an attractive current yield for our shareholders and as we continue to rotate excess liquidity into reinvestment in assets that generate recurring income while optimizing expenses and growing fee revenue through third party joint venture arrangements, we expect recurrent earnings to move closer to the current dividend.
I will now turn it over to Nick to go over the market and strategy update. Nick.

Nicholas Mah

Thanks Kristine. The long awaited set pivot materialized in September with a sizable 50 basis points cut closing out an overall positive quarter for fixed income markets. Recently, however, volatility has increased due to robust labor market data, we are well positioned with a diversified mix of agency RMBS and credit investments to navigate this evolving market.
As Jason mentioned earlier, we also have meaningful capability and capacity to take advantage of market opportunities ahead. We made over $1 billion of residential investments in the third quarter led by $372 million of agency RMBS $378 million of short duration BPL bridge loans and $232 million of 30 year BPL rental loans.
We have achieved seven consecutive quarters of increasing whole loan purchases. This steady uptick in capital deployment has been directly correlated with the growth and durability of overall adjusted interest income. Alongside the growth of our home loan investments, we were also a more active issuer of securitizations this year. We have now completed a total of six securitizations in 2024 across several sectors making this our most active year of issuance in the firm's history.
Not only have base rates been trending lower but a healthy economy has been germane to lower credit spreads. Overall execution of these deals has improved compared to conventional repo financing. Trimming out financing of our loans into non-mark to market securitizations will contribute to more stable liquidity management in the future.
In executing our BPL bridge securitizations, we currently have $706 million of revolving debt that we can recycle to fund future purchases. We also have access to additional financing from $2.2 billion of available home loan repo capacity.
With the combination of revolving securitizations and repo, we can more efficiently utilize leverage and fund future investments. As we mentioned previously, our conservative loan selection criteria also fits well within the parameters of rated BPL bridge securitizations. We have now completed 2 rated BPL bridge deals executing on our second one in the third quarter with a $238 million size at a 5.65% effective cost of funds.
This represents 112 basis points lower effective cost compared to our inaugural rated BPL bridge deal issued in the second quarter and more than 140 basis points lower effective cost compared to repo. These incremental cost savings will aid in bolstering future net interest income.
We have restarted our BPL rental program this year and recently issued our first securitization in this sector since 2022. We were dormant in the BPL rental asset class for several quarters during a period of tightening monetary policy where the market experience heightened pricing volatility.
However, at the end of the fed hiking cycle came into view, we pivoted to increasing our exposure to BPL rental loans. Generally BPL rental loans have prepayment protection through prepayment penalties which can be beneficial in the declining rate environment.
Like our philosophy in BPL bridge, we target high quality loans with strong characteristics and shy away from the incremental yield at the periphery of credit eligibility.
We will continue to opportunistically participate in this strategy on a go forward basis with the goal of continuing to finance these assets through securitization. In agency RMBS, current coupon mortgage spreads declined from 148 basis points to 129 basis points in the quarter as interest rate volatility declined.
Given the decline in spreads, we have slowed the pace of acquisitions with a 20% drop in agency purchase volume quarter over quarter overall. Overall however, the portfolio is still growing. The agency RMBS book is now almost $3 billion which constitutes 42% of our asset portfolio and 23% of our capital allocation.
We expect the portfolio to continue to grow as Agency RMBS remains a core strategy for us in the near term. The strategy trades at historically widespread and provides diversification for the credit portfolio. Furthermore, the liquidity in our agency RMBS strategy allows us to rotate from this asset class when other opportunities arise or to lean into the strategy when spreads move wider. Our target assets are still current coupon spec pools due to the favorable carry profile. But we have also started to diversify our purchases to include some belly coupons as well.
The weighted average coupon of spec pools purchased was [5.34] this quarter across a mix of [65] and [4.5] coupon specs in BPL Bridge, we have invested over $4.5 billion to date since the inception of our strategy in 2019. We are focused on traditional credit profiles within this sector. Because of this, we have been rewarded by improving credit fundamentals along with preferential execution and bond investor interest in our rated securitization program.
We experienced a steady increase in our portfolio size through our acquisition pipeline with delinquencies continuing to decline on both an absolute and percentage basis.
We continue to avoid niche strategies such as ground up construction and multifamily lending with these assets accounting for only 18% of our overall BPL bridge portfolio.
The percentage of these niche sectors in our portfolio continues to decline, given the focus on more traditional bridge product for our ongoing acquisitions. In multifamily, we expect continued redemptions in our mezzanine lending and cross collateralized mezzanine lending portfolios. The strength of the portfolio lies in our borrowers having a combination of fixed rate, senior debt or hedged floating rate senior debt, keeping financing costs lower and supporting overall NOY at the property level.
In the third quarter, our combined mezzanine lending and cross collateralized mezzanine lending portfolio redeemed at an approximately 6% rate. We will reallocate this and future redemption proceeds into our core strategies to further drive interest income growth.
As we noted last quarter, we look forward to deploying capital into multifamily strategies through third party capital partnerships. We are proactively building a pipeline of investments in parallel to onboarding a JV partner in this space.
We will now open up the call for Q&A. operator.

Question and Answer Session

Operator

(Operator Instructions)
Bose George, KBW.

Bose George

Everyone, good morning. In terms of your book value now, you noted that the JV piece now is pretty small. So do you feel like your book value is largely bottomed or is there stuff on the in the multifamily piece that we should keep an eye on as well?

Jason Serrano

Yeah, thank you. As we noted in prior quarters, the book value volatility stemmed from our JV Equity book, as we noted, we have $19 million remaining in that position.
And in that position, there's seven total assets, on the seven, four of them we have near term, near site visibility into resolutions, our current holding value represents the the price of receiving in those LOIs and then the remaining three is roughly about $1.4 million of total value.
So when you look through where that volatility has come from, it has been centered around the JVE book and the fact that we're very close to actually winding down nearly all the assets with remaining value of $1.4 million after these OIs in place, we see that book value, that volatility will have given you this portfolio has now moved on.

Bose George

Okay, great. Thanks. And then actually can we just get an update on book value quarter to date? Any changes?

Nicholas Mah

Sure. As of this week, we see adjusted book value down somewhere between 1% to 2%.

Bose George

Okay, great. Thanks.

Operator

Jason Weaver, Janney Montgomery.

Jason Weaver

Hey, good morning. Thanks for taking the question. Jason maybe Nick, could you just give us a high level take on where you see gross ROE by strategy and maybe specifically on the agency side and the BPL side.

Nicholas Mah

Sure. So I'll start with the BPL bridge side since we've done a few securitizations. Recently this year, I've have a pretty decent color in terms of where things are pricing out. So execution there continues to be very robust, just given the advent of rated BPL securitizations this particular year. So for that particular strategy, we do see 20%-plus percent type gross ROEs on that on a leverage basis.
On the agency side, there's been a fair amount of volatility. So end of the quarter, relatively tight on a these spread basis has widened out to today a little bit wider. So I would say that there ROE somewhere in the mid teens. In terms of some of the other strategies that we have, we mentioned BPL rental strategy, which we've also had recent securitization trends. We see that something in the mid to high teens type ROEs.

Jason Weaver

Okay. Thanks. And then on the agency side, given that you mentioned the volatility, I mean spreads are wider. So are we probably at the higher end of that range? Have you shifted capital allocation at all into that leaning into the widening?

Nicholas Mah

Yeah, so I mean, you're seeing it from our activity that we're pretty market driven on the agency strategy, the trend line will still be higher. We intend to grow this portfolio, but we don't have to do it all in one particular quarter. So last particular quarter as spreads are tightened in, we have the emphasized agencies now with wider spreads, we expect to be more active in the agency space.

Jason Weaver

Okay, thanks. Just one last question on the overall. Just macro just curious, your take, I know multifamily on the JV side is down to something pretty nominal both. And how is this increase in volatility rate, volatility impacted CRE and maybe especially multifamily deal activity.

Jason Serrano

Yeah. So on the deal activity side, it certainly has slowed overall, activity in the market purchase activity of properties. We have a putting together the final touches of a JV agreement where we're focused on adding mezzanine loans to a third party capital. We noted last quarter that could be up to about $300 million. And what we're seeing, overall relating to our pipelines in that asset class for that third party capital is that it's definitely, lower year on year, quarter over quarter. I think this latest rate move deal activity was starting to be positive quarter.
And then all of a sudden, those who did not lock in fixed rate coupons or didn't have the hedges in place, we saw properties come off market and purchases that ended up just moving away. So I think overall, particularly with respect to the election, there's not a lot of folks in the space that want to put long term duration risk on their balance sheet and then looking forward towards -- looking at what are the economic plans of whoever is in office and what that would mean for rates and, deficit growth, et cetera to then step into the market as a whole.
So, the market is, I think has been basically been curved a little bit as it relates to the timing of activity. We're not going to see a lot of activity in November in this space and then generally December, cyclically is a low month. So I think you're going to see robust activity back into January and February given the slowdown of the last two months of this year.

Jason Weaver

Great. Thanks guys. Appreciate it.

Operator

(Operator Instructions)
This concludes the question and answer session. I would now like to turn it back to Jason Serrano for closing remarks.

Jason Serrano

Thank you for your time this morning. We look forward to sharing our fourth quarter financial results early next year. Have a great day.

Operator

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