Yahoo Finance

We are focused on reducing our exposure to multi-family joint venture equity investments, which represent less than 5% of the company’s capital allocation or less than 1% of portfolio assets at the end of the quarter. However, as exposure to JV Equity approaches to zero and allocations to Agency RMBS increases, we expect book value volatilities to subside. With the company’s current liquidity, we are focused on moving from the volatility caused by our JV Equity book to prudently grow the company’s balance sheet for income growth in the year. In the first quarter, we continue to favor short duration residential credit in the form of BPL-Bridge loans and an Agency RMBS with $608 million of acquisitions. Nick will touch more on this later, but we see excellent risk-adjusted returns within these sectors in an economy that could be potentially facing an inflection point.

The Fed’s Chair’s surprised dovish comments late in Q4 is certainly now in the distant past, the market has repriced the rate curve in the first quarter. The five-year treasury yield has retraced some of the steady declines witnessed late last year by jumping from 3.9% to 4.2% in the first quarter. The market anticipated six rate cuts in 2024 starting in March, which has given way to less than two cuts now, with the first cut expected only later in the year. Contending with these assumptions was surprisingly low first quarter GDP print. U.S. growth has slowed from nearly 5% over six months ago to 1.6% today. The result would have been far worse if not for the U.S. economy dipping into personal savings. Holding the savings rate steady from the prior quarter of 3.6% would have resulted in a GDP print of approximately 50 basis points.

Consumer expenditure drawing on savings coupled with record credit card debt utilization is not sustainable method of continuing GDP growth. Also, I wanted to quickly point out that the BEA’s release of the year-over-year core PCE, which is the Fed’s preferred inflation measure, jumped up slightly in March. The story is not the magnitude, but the fact that it’s going in the wrong direction. However, looking deeper into the result, the increase in price was predominantly related to the service sector, which is an imputed number. Observable durable goods prices were lower in the month, which could provide better insight into the future core PCE expectations. In either case, the final 80 basis points to meet the Fed’s inflation target of 2% is proving to be sticky and the market is adjusting to this issue.

We believe the economy is signaling potential late stage cycle conditions, we expect slow-to-moderate growth for the rest of the year and increasing the risk of recession. In response, we continue to take a balanced approach to opportunities by intentionally lowering credit exposure or by avoiding identifiable risks. We believe the fixed income investments, particularly short duration mortgage credit Agency RMBS continue to provide compelling returns within this economic backdrop. Focusing on these assets have led to a 35% first quarter year-over-year increase in adjusted interest income at the company. After seasonality effects which typically depress market activity in Q1. We are focused on increasing interest income to portfolio growth to drive earnings.

We expect to deploy the company’s excess liquidity of $402 million into this higher rate environment. At this time, I will pass the call over to Kristine for additional comments on our financials and then to Nick for portfolio management discussion. Kristine?

Kristine Nario: Thank you, Jason. Good morning. Today, I will focus my commentary on the main drivers of first quarter financial results. Our financial snapshot on Slide 11 covers key portfolio metrics for the quarter. And Slide 25 summarizes the financial results for the quarter. As Jason just covered, the company had undepreciated loss per share of $0.68 in the first quarter as compared to undepreciated earnings per share of $0.37 in the fourth quarter. Our earnings were impacted by our recognition of $0.56 per share of losses primarily on certain multi-family real estate assets held by JV Equity investments due to a decrease in the estimated fair value of the real estate as compared to the carrying costs and the reclassification of one of our JV Equity investments in multi-family properties from held-for-sale to held and used.

We had net interest income of $17.9 million, a contribution of $0.20 per share, up from $0.19 per share in the fourth quarter. Our quarterly adjusted interest income and non-GAAP financial measure increased by $5.6 million to $78.1 million in the first quarter from $72.5 million in the fourth quarter. The increase is due to the growth in our interest earning assets resulting from $608 million in investments made in agency RMBS and short duration business purpose loans. The increase in adjusted interest income was offset by a $2.9 million increase in adjusted interest expense due to the financing of investments made during the quarter. Our interest rate swaps continue to benefit our portfolio, reducing our adjusted interest expense by $8.3 million during the quarter.

Overall, the operations of our consolidated multifamily JV properties contributed a net loss of $0.18 per share during the quarter, an increase from a net loss of $0.08 per share in the fourth quarter. The increase in net loss is a result of, one, an increase in depreciation expense related to operating real estate as a result of the reclassification of certain multifamily real estate assets owned by entities in which we have a JV equity investment from held for sale to held in use at the end of the fourth quarter, second, an increase in lease intangible amortization due to a consolidation of a preferred equity investment at the end of the fourth quarter and a decrease in income from real estate due to the full quarter impact of the deconsolidation of two multifamily real estate assets and as a result of non-recurring income recognized in the fourth quarter related to earnest money proceeds received from a canceled sale.

As mentioned earlier, during the quarter we recognized $50.8 million or $0.56 per share of losses related to the following, first, a $36.2 million or $0.40 per share loss from impairment charges on real estate due primarily to lower net operating income estimates and wider cap rates resulting in lower property valuations as compared to our carrying costs and second, a $14.6 million or $0.16 per share loss related to the reclassification of our multifamily properties from held for sale to held in use as of March 31 as it no longer met the criteria to be held for sale in conformity with GAAP. We continue to market for sale our JV equity investments in three multifamily properties, but we can provide no assurance of the timing or success of our ultimate exit from these investments.

The fair value changes related to our investment portfolio continue to have a significant impact on our earnings. During the quarter, we recognized $39.4 million or $0.43 per share of unrealized losses due to lower asset prices, primarily in our agency RMBS portfolio as a result of increases in interest rates. These losses were offset by $0.54 per share in gains recognized in our derivative instruments, primarily consisting of interest rate swaps and caps. We also recognized $10.5 million or $0.12 per share of realized losses related to the sale of certain non-performing and performing residential loans and losses incurred on foreclosed properties due to lower valuations during the first quarter. We had total G&A of $13.1 million, up from $11.7 million in the previous quarter, primarily due to non-recurring professional fees and consulting fees incurred during the quarter.

We had portfolio operating expenses of $11.3 million, which increased primarily due to debt issuance costs related to securitizations issued during the quarter that were expenses incurred as a result of the fair value option election of the CDOs issued, an increase in expenses related to asset management of our BPL-Bridge portfolio. Adjusted book value per share ended at $11.51, down 9% from year end. The main drivers were – adjusted book value change were $0.75 in basic loss per share, a reduction of $0.20 per share related to our declared dividend and a negative $0.12 per share change in estimated fair value of our amortized cost liabilities. As of quarter end, the company’s recourse leverage ratio and portfolio recourse leverage ratio increased to 1.7 and 1.6, respectively from 1.6 and 1.5 respectively as of December 31.

While our financing leverage remains low relative to historical levels, we would expect our leverage to move higher as we continue to expand our holdings of highly liquid agency RMBS. Our portfolio recourse leverage on our credit book is down at 0.3x when compared to 0.4x from the previous quarter due to the completion of two securitizations this quarter, of which a portion of the proceeds were used to replace recourse repurchased financing. Consequently, our debt, subject to mark to market margin calls reduced to 56% from 58% in prior quarter. The remaining 44% of our debt as of March 31 has no exposure to collateral repricing by our counterparties. We paid a $0.20 per common share dividend unchanged from the prior quarter. We continue to evaluate our dividend policy each quarter and look at the 12 to 18 month projection of not only our net interest income, but also realized gains – realized or capital gains that can be generated from our portfolio.

We remain committed to maintaining an attractive current yield for our shareholders. However, we expect undepreciated earnings per share to remain below the current dividend as we continue to rotate excess liquidity for reinvestment in a more attractively priced market. I will now turn it over to Nick to go over the market and strategy update. Nick?

Nick Mah: Thank you, Kristine. In the first quarter, we saw upside surprises in inflation data amidst a still resilient labor market. This showed just how challenging the last mile of the Fed’s journey to tame inflation was going to be. On a positive note, the healthy economic environment and the strong real money demand for paper have allowed for mortgage and residential credit spreads to remain stable in the quarter. Amidst this market backdrop, we continue to make inroads in our goal of generating more consistent earnings through growth in our investment portfolio. In the quarter, we acquired $608 million of assets, primarily concentrated in $298 million of Agency RMBS and $302 million of BPL loans. Investment activity this quarter has been more evenly balanced between Agency RMBS and BPL, with acquisitions of agencies decreasing and BPL increasing quarter-over-quarter.

The relative value assessment of Agency RMBS has tempered the pace of our Agency RMBS acquisitions due to the tightening of spreads over the past six months. The current coupon mortgage spread to interpolated five and 10-year treasuries was in the high 130 basis points at the end of Q1. Even though this level was relatively unchanged quarter-over-quarter, there were more attractive opportunities for capital deployment in the prior year. For example, in Agency RMBS, our average ZV Spread of spec pool purchases in Q1 was 149 basis points compared to 176 basis points in Q4 of last year. Our Agency RMBS strategy remains unchanged as we see the asset class as complementary to our overall residential credit portfolio. We are targeting current coupon spec pools with current coupons currently in the 5.5% to 6.0% coupon range.

Over the quarter, our overall average coupon on the portfolio remained relatively unchanged at 5.84%. We also continue to prioritize lower pay up spec pools, particularly in credit stories like high LTV and low FICO, for some additional prepayment protection. Leverage in this agency strategy is at 8.1 times, which is higher than the last quarter’s ratio of 6.7 times, primarily due to lower bond prices in the quarter. This is still within our acceptable leverage range to manage this strategy. Overall, we believe that Agency RMBS is an asset class that will outperform in this market environment. At these levels, Agency RMBs spreads are anchored at the higher range of historical returns. So we aim to add to our Agency RMBS positions every quarter.

However, we will be opportunistic and continually adjust the pace of purchases based on market spread moves as we did throughout 2023. We believe that uneven economic data and market fluctuations may create periods during the year where spreads move wider and we can ramp up the pace of capital commitment into this sector. Relating to BPLs, we have had recent success in growing the acquisition pipeline from our origination partners. The $302 million of purchases this quarter represents a 30% increase from the prior quarter. These BPL purchases consist of $273 million of BPL-Bridge loans and $29 million of 30 year BPL rental loans. We have restarted our acquisitions of longer term BPL rental loans to prudently add some duration to the portfolio.

The BPL rental program is now also supported by a healthy securitization market for term funding. We are in an advantageous position to source BPL loans given our longstanding market position. We expect continued growth in future acquisitions in both BPL-Bridge and BPL rentals in the coming quarters as we refine pricing and credit guidelines with new and existing origination partners. On BPL-Bridge this remains a core strategy for us as the short duration profile and high carry are suitable for this uncertain market environment. Furthermore, total principal losses remain at a low level, currently below 15 basis points on total purchases to date of $3.8 billion as of the end of the first quarter. We have chosen to pursue BPL-Bridge loans where the credit profile and the liquidity of the underlying assets are sound.

We continue to limit exposure to fin sectors of lending in ground up construction loans and multifamily bridge loans, both combining to comprise only 5% of this quarter’s BPL-Bridge purchases. As I mentioned last quarter, the introduction of rated securitizations in the BPL-Bridge market now confers better financing execution to the more mainstream and credit secure BPL-Bridge product. We are exploring rated securitization vehicles as another future means of funding our BPL-Bridge program. The securitization market has been more conducive to issuance in 2024 thus far, the limited supply of investable residential assets has met an increasing demand for bonds from a broader investor base. We issued two securitizations in the first quarter and we hope to be a more frequent issuer for the rest of the year.

Our first securitization executed this year was a $225 million revolver securitization backed by BPL-Bridge with an effective cost of 7.43%. We are utilizing the two year revolver structure to finance our existing and future BPL-Bridge purchases. The second deal we did this year was a $276 million performing and re-performing loan rated securitization with a 5.75% effective cost issued in March. Although we have not been purchasing any meaningful amount of performing or re-performing loans in the last couple of years, we use the securitization to optimize the financing on some of our existing assets. This year, our increase in purchasing activity in whole loans will allow for us to more consistently access the securitization markets. Shifting our focus to multifamily mezzanine lending, we currently have $207 million of allocated investments.

We are focused on recycling the return capital into similar assets or into our core strategies as the portfolio continues to payoff. Through Q1, a seasonally slow payoff period the annualized payoff rate is at 11%, driven by the resolution of a $6 million loan at a 14% IRR. This annual payoff rate is lower than the historical average of 27%, but we do expect the payoff rate to increase over the year. We continue to see built up equity below our mezzanine position due to the seasoning of the portfolio, which creates incentive for sponsors to unlock equity through a sale or recapitalization. Additionally, overall occupancy numbers at 90% point to a mature and stabilized portfolio. We experienced impairment losses totaling $36 million and additional reclassification losses of $15 million in the quarter, primarily in our JV equity portfolio.

The impairments on our JV equity portfolio in the quarter are driven by several factors. First is the expectation of lower current and future rents at the properties, reflecting supply pressure from competing new builds being delivered in the same markets. This supply glut has the potential to resolve in the future, after which we can expect more normalized rent growth. Operating expenses on average have also been higher, driven by senior debt costs, insurance and property taxes. Finally, cap rates on the properties have also drifted slightly higher due to rates. We do expect that being left with the remaining portfolio of $52 million means that any future losses within this portfolio should be range bound given the size of the exposure. We continue to invest asset management resources to maintain and improve the underlying drivers of higher valuation, such as improving rent growth or value at rehab.

At the same time, we are also continuing to pursue resolutions for assets that are held for sale and to maintain and improve NOI for our held and used assets. At this time, we will open the call for Q&A.

See also

20 Biggest Chemical Companies in Australia, 2024 and

20 Biggest Natural Gas Companies in Australia, 2024.

To continue reading the Q&A session, please click here.