Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust Second Quarter 2021 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 Friday, August 6, 2021. A press release and supplemental financial presentation with New York Mortgage Trust second quarter 2021 results was released yesterday. Both the press release and supplemental financial presentation are available on the company's Web site 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 Web site.

At this time, management would like me to inform you that certain statements made during the conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although New York Mortgage Trust believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained.

Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release and from time to time in the company's filings with the Securities and Exchange Commission. At this time, I would like to introduce Steve Mumma, Chairman and CEO. Steve, please go ahead..

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

We will be speaking to our supplemental financial presentation that was released yesterday after the market closed and it's available on our website. We will allow questions following conclusion of our presentation. The company had solid second quarter results with our GAAP earnings per share of $0.11 and our comprehensive earnings per share of $0.12.

And our book value increased to $4.74, generating a total economic return for the quarter of 2.8%. Moving over to company's portfolio net margin for the quarter was 55 basis points higher than the previous quarter, benefiting from improvements in asset yields and decreased average funding costs from our liabilities.

The company took advantage of a lower interest rate environment, accessing the market with two capital markets transactions. In April, the company completed a private placement of $100 million of rated senior unsecured notes with a five year term at an interest rate of 5.75%.

In July, the company completed offering of a series of preferred stock for net proceeds of approximately $139 million, with a coupon of 6.875%. Company used approximately $105 million of these proceeds to redeem our 7.875% Series C preferred stock, thereby lowering our cost of capital by 100 basis points.

While, our company did benefited from the lower interest rate environment, we also believe our execution of these two transactions, and improved pricing levels validates the strength of our current balance sheet. Now going to Page 6 in a supplemental, you'll see our investment portfolio totaled $3.2 billion at the end of the quarter.

And our market capitalization was also with $2.2 billion, both unchanged from the previous quarter. Our capital is currently allocated at 77% to single family, and 21% to multifamily. Our portfolio growth continues to focus on credit investments, as we believe we can generate better risk adjusted returns with more stable funding.

On Slide 7, we highlighted some of our key developments during the quarter where we declared a $0.10 common stock dividend, and generated a total rate of return on our common stock of 2.2% for the period. And we currently have a year-to-date total rate of return of 26.6%.

Purchase approximately $258 million in residential loans and close on our second multifamily joint venture investment for $12 million. On our financing efforts, we completed our first BPL revolving securitization for a total amount of $167 million. Jason will speak to this in more detail later in the presentation.

We completed the private placement of rated unsecured notes with a five year term at an interest rate of 5.75%, our lowest cost of term financing in company history. In July, we issued our first rate of preferred stock offering raised approximately $135 million with an initial rate of 6.875%.

We continue to focus on long-term financing options to fund our growing business to help us navigate the ever changing financial landscape. On Slide 9, we go over portfolio metrics on a quarter-over-quarter comparison. As I said before, net margin for the second quarter was 2.97%, an increase of 55 basis points from the previous quarter.

Our portfolio weighted average yield was 6.31%, an improvement of 28 basis points. The increase was largely attributable to the continued rotation out of lower yielding CUSIP securities to higher yielding residential loans, including business purpose loans.

Our funding costs improved by 27 basis points during the quarter, as the impact of calling one of our securitizations late in the first quarter was fully reflected in the second. In July, we called 2020-SP1 residential securitization, in anticipation of issue a new securitization in the third quarter.

The SP1 securitization had an approximate cost of 4%, which we believe we can replace with costs in the low 2% range this quarter. Our leverage remains low with 0.3 times and our liquidity remain strong as we head into the third quarter. At this time, I'd like Kristine Nario, CFO will now go over the financial results in more detail.

Kristine?.

Thank you, Steve. Good morning, everyone, and thank you again for being on the call. In discussing the financial results for the quarter, I will be using some of the information from the quarterly comparative financial information section included in Slides 23 to 30 of the supplemental presentation.

Slide 10, summarizes our activity in the second quarter. We acquired residential loans for $258 million, closed on a multifamily joint venture investment for $12 million, and purchased $19 million of investment securities. We sold residential loans and CMBS for proceeds totaling $15 million.

We also had total repayments of approximately $309 million, primarily from our residential loans. Most of these residential loans were purchased at a discount, and the early payoff of the loans resulted in additional income of approximately $5 million, which is included in realized gain.

We also had four multifamily loans that redeem, which generated $1.5 million of redemption premium income, which is included in other income. We had net income of $43 million and comprehensive income $47 million attributable to our common stockholders. Our book value ended at 4.74 up from 4.71 the previous quarter.

Slide 11 details our financial results, we had net interest income of $31.5 million, an increase of $1.1 million from the previous quarter.

Total net interest income increase from the previous quarter, primarily due to our continued investment in higher yielding business purpose loans, which contributed to the $2.1 million increase in total interest income.

This was partially offset by an increase in total interest expense of $1 million, primarily attributed to the interest expense recognized on the senior unsecured notes issued in April.

We had non-interest income of $43.3 million, mostly from net unrealized gains of $23.9 million due to continued improvement in pricing on our assets, particularly our non-agency RMBS and CMBS securities, residential loans and our investment in consolidated SLST.

In addition, lower interest rates drove modest price appreciation on our agency RMBS securities. We also generated $5 million of net realized gains primarily from residential loan prepayment activity.

In addition, our multifamily preferred equity investments accounted for as equity contributed $6.4 million of income, which includes $5.5 million of preferred return income and $0.8 million of unrealized gains.

Our other equity investments contributed $4.3 million of income, primarily from income recognized on redemption of an equity investment that invested in residential loans. We had total G&A expenses of $12.5 million, an increase of approximately $1.1 million from the previous quarter.

The increase can be attributed to annual awards and equity compensation to non-employee directors during the quarter. We had operating expenses of $10.6 million during the quarter, which included $6.7 million related to our portfolio investments.

This increase primarily due to the growth of the business purpose loan portfolio, and $3.9 million of operating expenses related to multifamily apartment properties that we consolidate in accordance with GAAP.

As I mentioned earlier, included in our results for the quarter is the net income activity related to multifamily apartment properties that we consolidate in our financial statements in accordance with GAAP.

These properties generated operating income of $2.1 million, and incurred interest expense and operating expenses of $0.4 million and $3.9 million, respectively. After reflecting the share in the losses to the non-controlling interest of $1.6 million in total, these multifamily apartment properties incurred a net loss of $0.6 million for the quarter.

It should be noted that the net loss in these properties includes depreciation and amortization related to real estate. The graph on $slide 11, illustrates the change in our book value from June 30. Our book value increased to 4.74 during the quarter and increased 9% from the end of June 2020.

Our stock price has also recovered significantly increasing our price to book ratio to 0.94 from 0.60 at the end of June 2020.

We continue to focus on growing and strengthening our balance sheet by investing in our core strategy, so single family and multifamily investments, and prudent liability management by placing greater emphasis and procuring longer-term and more committed financing arrangements. Jason will now go over the market and strategy update.

Jason?.

Thanks, Kristine. As it relates to our strategy, we continue to favor BPL scratch and dent multifamily lending and JVs. We see strong signals that provide a favorable investment landscape in these areas. On Page 14, starting with BPLs, the overall economic backdrop is very supportive of U.S.

residential housing, in both single family and multifamily, with estimated 5.5 million new housing units required to meet demand. After 1.3 million of expected new builds, the market will continue to be extremely tight in the near-term.

With a significant housing deficit we continue to support single family bridge lending focused on modest home innovation under a one year long. Our borrower alignment is strengthened with a 74% pre-model and 64% post-model LTV.

We have faced increased market competition of late, with new market participants willing to compete on loan price, meaning lower rates and/or structure meaning higher LTVs. We remain consistent with our pricing in this short duration BPL sector.

We instead focus on competing with our process where we can take advantage of our experienced team and proven technology to reduce the operational burden of BPL originators, before and after loans are purchased. In the performing loan space, we continue to find value in the scratch and dent sector.

With the collapse primary-secondary mortgage rate, and new curbs on early funding from the cash window for agency channels. We purchase closed loans that were found to have technical issues with the original origination guidelines. Our purchase even at a deep discount helps the originators liquidity.

We have been able to buy loans from over 200 originators in the past few years, with a purchase discount of 7 points on average. We do not compete on price but like BPLs, we buy loans in expedite matter, meeting the needs of our selling partners with the consistent diligence and closing process. This helps us be a preferred counterparty in the space.

Lastly, with a housing deficit, multifamily valuations have also improved with increased rents. In this case, we target selected sub markets facing more acute housing shortages found in the South and Southeast United States. Average multifamily rental rates are up 7% year-over-year, led by double digit gains in markets like Atlanta, Tampa in Raleigh.

In our direct lending and JV business, we focus on low to mid rise properties in secondary markets. We have done so without incurring a loss in any position in the eight years plus investing in the space.

Consistent with the commentary and other strategies, we are focused on hitting all funding timelines for our acquisitions, under a consistent due diligence approach with our sponsors. Again, we compete by providing a trusted process here.

Holding the line on pricing across these strategies in the face of higher competition allowed us to increase our average yield on assets. Turning to Page 14, in a month, our pace of acquisition slowed to $290 million from $364 million last quarter.

While we do see elevated levels of competition, our larger contributor to the client investment activity was related to a focus [Technical Difficulty] opportunities we can take longer to close particularly in the multifamily space. Thus, we expect to see a meaningful increase through allocations in the third quarter with our core strategies.

Turning to Page 15, as we stated on previous calls, we expect our preferred leverage defined as recourse financing to remain low. First, we run an unleveraged strategy within multifamily loan and JV investments, as return on assets is expected to meet yield targets in the low to upper teens.

Second, residential markets, securitization debt or term non-recourse financing is the primary focus point. Our opportunities to continue allocating new purchases alongside of $700 million of unencumbered loans we have on balance to this form of financing.

We are currently working on a number of transactions with bankers in unrated space, and with rating agencies in the rated residential debt offerings.

As discussed on our last call, we expect the securitization market to be even more accommodating to issuers, as the level of demand including replace in band with higher market pay down rates continues to outstrip new supply. As a result, we witnessed financing costs decline about 28 basis points to 2% level in the unrated RPL space.

And in the rated space, AAA financing levels improved approximate 15 basis points in the quarter to a 1% area of cost of debt. We are excited about this proposition to generate equity returns within our portfolio, with reduced leverage risk versus traditional bank repo offerings.

On Page 16, as discussed the current environment is favorable for our strategies. While we are not currently active in the reperforming loan auctions, our $895 million portfolio today with a 4.84% coupon and at 72% LTV would be extremely difficult to replicate in today's market.

With year-over-year housing prices printing at 16% growth rate, the highest level recorded on the Case-Shiller’s index, our equity position with our borrowers continues to improve, which brings a higher degree of alignment and downside protection with our loss mitigation approach.

At $97, our loan valuation is accreting the par alongside of the market improvement. As such, we recently noticed investors to call one of our unrated deals with $300 million of powered loans. In today's market, and as Steve mentioned earlier, we see up to a 200 basis points interest cost savings with the resecuritization of the these loans.

With our business purpose loans, which at the end of the second quarter equals $622 million of asset value, here they are mainly bridge and rehab loans. We have funded these loans without any loss to-date. We believe and apparently many others in today's market finest dry is to fit well within the macros in the housing market.

Our recent new issue revolving securitization in this space paves the way for high teens, low 20s returns on these assets. After launching the deal with $160 million of loans in the second quarter, we continue to utilize the cash built within the structures with $75 million of new loans added to the securitization in July.

Within the performing loan strategy, which is mostly scratching out loans, we have seen an elevated amount of activity in the quarter, which should bring higher investment pipelines in Q3. Like the agency market, we have witnessed an increase to propose prepayment activity.

However, unlike the agency market, we benefit from this activity because of a deep discount acquisition cost. Turning to Page 17, in this quarter, we highlighted this trend here, where we show the purchase price against exact loans are prepaid in a particular month.

At average acquisition price between $93, $95 we captured the discount with loan prepayment, mostly above 30 CPR. While pay down activity reduces the portfolio size, the payoffs are accretive to our earnings as we capture the 5% discount. Turning to Page 18, finally, the residential markets we provide an updates for our BPL portfolio.

Here, we continue to focus on markets with low housing supply bars with proven experience, low LTV, and importantly, low rehab requirements provide for a quick project turnaround. We believe these characteristics hit a sweet spot in the market.

With our high level of originator trade support, we believe we can maintain a high level of activity benefiting our pipelines increasingly competitive market environments.

Now turning to Page 19, switching over to multifamily overview, we have seen a recent decline in senior financing costs within the agency sector by approximate 30 basis points, which sparked an increase in our pipeline with sponsors who are seeking cash flowing multifamily property acquisitions.

Cash flowing sponsors can immediately take advantage of the sub 3% senior financing cost. We support these acquisitions within as a profit layer to the sponsors' acquisition on average up 80% LTV. With a contractual coupon of 11.6% and additional early prepayment benefits, the risk adjusted return here is very attractive.

As I stated earlier, we keep market share in a space with a proven process against tight closing timelines, such as in the case of a 1031 exchange. We started to refocus on JVs this year with a more favorable macro environment in the South, Southeast, United States, and have looked at multiple recapitalization opportunities alongside the sponsors.

The team is very focused in the part of the market by utilizing our large network developed over 10-years of source portfolio opportunities. Quickly on the multifamily security side, we discussed in the previous quarter, we believe the market is fully priced here with yields in the 2% area.

As such, we recently liquidated nearly all our positions last month in this sector to move towards a full exit of this sector given the tight market environment. Turning to Page 20, lastly, with respect to multifamily performance, not surprisingly underlying property, occupancy rates continue improve with demand in the local markets.

Given the sectors strength we continue to receive prepayment notices from borrowers in our portfolio, as an additional four loans prepaid in the quarter providing a 14.7% investment IRR at a 1.4 times multiple, after all applicable minimum return multiples. We have very few assets in special service.

We continue to work towards a par pay off of the two of the 40 assets in this part of the portfolio. Now turning to Page 21, we thank you for your time to hear an update of our business. The investment team is focused on unlocking new opportunities across the resi loan sectors and multifamily cap structures.

Our goal is to deliver high returns with low volatility. We're excited about our new investment prospects and financing arrangements to continue with this success. At this time, I'll pass it back to Steve..

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

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

Thanks.

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

Sure. So onto the preferred first, I mean, really, we raised $137 million, we deemed $105 million. So we're net up a slight, we still have another preferred equity piece that's out there that can be redeemed. That's higher cost of seven and three quarters. We’ve raised the five year money, it was the first time we did a rated deal.

We wanted to test the market and see where we could get we've seen some of our competitors getting very good execution. And we have a convertible deal that's maturing in early January. So keeping all that into perspective, we were testing the market on the rated world as a way to replace that convertible deal, that's going to be maturing in January.

And I think as we look at when we think about the preferred, given the size of our balance sheet, it's really trying to continue to lower the overall cost of capital, and that really not net increasing substantially that preferred channel. So I'd think over time, you'll see the preferred sort of get rebalanced back to where it's been.

We were up like $35 million relative to where we're after the net pay off. But we still have that seven and three quarters out there that we're looking at what's the best way to manage that money going into this cycle.

And, given the outbreak of the Delta variant, we want to make sure we understand the impacts of potential liquidity as we go into the remainder of the year. And so, we want to be more conservative as it relates to financing opportunities..

Great.

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

Yeah. So the revolving is really replacing the fast pay downs we have in the portfolio. So the short duration of the loans given weighing maturity and with some extension, anywhere from 12 to 18-months kind of the pay downs expected.

We want to make sure we were able to relever those deals into a two year revolving structure, which is what that securitization provides. So, with that, we can keep the leverage outstanding and efficiently finance our pipelines..

The two year period that we can continue to reinvest..

So a two year period and then it would likely have some duration after that..

And then it basically give us two years, then it's three yeah, that's right. This is a step up three years later..

Okay. That's helpful. Thank you..

Thanks, Doug..

Your next question comes from the line of Bose George with KBW..

Hey, everyone, this is actually Mike Smith on for Bose. So just some of the BPLs, you mentioned some of the competition in the space.

Can you just talk a little bit about your broader sourcing strategy? And kind of have you seen any decline in expected returns, given the increased competition in the market?.

Yeah, in the market, we've definitely seen an increase in competition, really over the last few months now. There has been -- the story is very popular, it's a very strong macro tailwind that supports the asset. So it's not surprising other market participants are looking to enter into this space, or increasing their funding availability.

As relates to our pipelines, we're buying loans from the same originators that we've been working with over the past few years. As I mentioned earlier, we haven't reduced our yield requirements in the space, despite the fact that the market overall is trading at a tighter level.

We do so, because we believe that our operational capability and a lot of the hand holding going back and forth with the originators on the closing process, as well as afterwards, a lot of originators are also the service driven loans post origination date.

So there's a lot of servicing needs, and a lot of help we can provide with as relates to updating the portfolio. So, on all those cases, we find ourselves in position where we're able to continue buying loans at previously -- at yields that have been consistent for us for the last six months.

And, we believe we're able to do that, because we're able to move quickly with these originators, and provide a level of service as a buyer that we think is differentiated. So, hope that answers your question..

No, that's helpful. And then a lot of peers have taken equity stakes in originators or acquired originators, to kind of secure sourcing and improve economics here.

Is this something you could look to do? Or, on the other side of that, do you know if any of your origination partners have had any changes to their ownership structure?.

Yeah, we've talked to just about all the market participants in the space on origination side. We've evaluated a number of those opportunities that end up being a capital market transaction, and where acquisition or entering into a GP of a structure of one of the originators in the market.

So we've kind of seen it all, we've evaluated alongside with other market participants. We've decided not to pursue a capital market activity through a purchase, simply because we believe we can maintain the levels that we're purchasing. This is, again, a market that is pretty finicky. It shut down in March 2020.

Valuations on annoying originators are pretty volatile, given the short timelines of the loans themselves, and how fast the market can basically just stop the investment activity. So we didn't feel it's prudent to spend that type of capital for the pipeline's that are available.

And also, we view this market as a trade, and the trade continues to be a strengthened strategy, given the macro environment. But, this is a bit of a new market. Yes, hard money lending has been around for as long as the mortgage industry has been around.

But this type of financing and with the efficiency of the securitization market, is providing for kind of new stage investment opportunity. And, that could easily change quickly. I think we prefer to look at more long dated strategies in the BPL market.

As I mentioned earlier, our focus has been on the short duration part of the market with the fix and flip type of loans. There are opportunities in the investor loan or debt service coverage ratio space that we are evaluating. But, at this point, we're comfortable where we stand with respect to our pipelines and the fix and flip strategy..

Great. That's helpful.

And then just one more for me, can you provide an update on how book value has trended since quarter-end?.

Yeah, look, I mean, we don't typically -- we don't give specific forward-looking statements as relates to dividends and/or book value. But, given where the market is, and certainly there was a little bit of a backup and raise this morning with the issue of the employment numbers.

But, given the strength of the credit markets, we would say that our book value is probably up slightly..

Great. Thanks for taking the questions..

Sure, thanks..

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

Hi, good morning, Steve. Jason, Kristine. Steve, maybe a bigger picture question, reading some articles just about the different agency multifamily guidelines, maybe those caps coming up maybe loosening of standards and some shifts there.

How does that create an opportunity for you to maybe on kick outs or EBOs or other? How does that potentially -- what's going on in DC changed either positively or negatively your pipeline of potential investment opportunities?.

Yeah, I mean, certainly, we look at those things as it relates not so much directly to us, because we're co-investor in these properties, providing mezzanine capital. But certainly to the extent that they reduce programs where you get supplemental financing on existing property that's beneficial to us, as they increase their limits.

It's really not the limits of lending that hurts us, if they increase the amount of money that they'll lend against a property at the agency level that certainly squeezes into where we play. However, there's so many opportunities right now providing additional capital.

And, one that we started to do JV investing again, quite frankly, because we think there's just better opportunities, in some cases on certain properties to participate at the JV level.

Certainly, with properties that we would consider A like properties, B plus to A, those are probably JV plus equity investment opportunities, versus where we look at the B to B plus properties where they're going to be lifted from a B to B plus or A is a better mezzanine opportunity.

And so, that's why we continue to increase our touch base into the multifamily area. But yeah, we are keenly aware of what's going on in the agency space. And watching what Washington's doing is probably going to be a drive to affordable housing to those are areas we'll look at also going forward..

Great. Thanks for the comments on that, Steve. Jason and Kristine, for both of you, but I guess, you called to deal in Q3.

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

So any gains in Q3 or losses on those sales?.

I'll start with the call. So, we recently issued a notice to the investors that are in one of our securitizations, that was done a year ago. So the non-call period is coming up.

And that's why we're looking to call, again, we think we could save about 200 basis points up to 200 basis points of interest cost and also relever the transaction, which is awful.

We do have other deals outstanding and those deals would also be -- we'll also be looking to make calls in this market given, at this point on the unrated space, the financing that it's available is probably the best is the best that we've ever seen in the MPL space or the unrated space. NPL, RPL unrated space.

In our RPL rated space, part of what we're going to do is transition the loans that have been paying for quite some time and transition those into rated deal, which I mentioned earlier. We are looking to issue one of those deals in the near-term. And we see senior financing cost at 1.1% financing level.

So clearly, all the securitization strategies beat the financing terms that -- financing costs you see in the repo space, which is another reason to do the securitizations, but it's very attractive against a legacy portfolio of assets we own, that have obviously coupons and LTVs that very hard to replicate in today's market with the purchase prices that are available.

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

Right. So, just to be a little bit more specific, we sold CMBS for $90 million that's majority of them. But, and the marks, or the price that we've exited is close to what we marked it at quarter-end.

And as to answer your question as it relates to any gains or losses on the securitization that we're going to call, it's not really a concept, so that there's not going to be any gain or loss recognized for that..

Right. And just likewise this situation we're looking to flip the loans back into the market, which then you'd recognize again. Our goal here is to resecuritize the assets under more efficient financing..

Steve, since those weren't remix and since those were our loans to begin with, we didn't recognize the gain putting them into the securitization. So it was just a financing transaction. That's why it doesn't generate any extra p, now that you see other guys calling deals, those are deals that they bought in the marketplace.

And so those weren't their loans initially. So that's where they have the ability to bring those loans back and generate a gain..

Perfect. I appreciate all of your comments on that topic. Thank you very much..

Sure..

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

Thanks. Good morning. One more follow-up on the 2020-SP1 that you're calling.

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

I'll start with the securitization, we had a deal outstanding a year. We're taking about $310 million -- $310 million of loans back into the market through resecuritization. The amount of capital that we will be freeing up in that deal is not material from our total capital.

The reason do the deal is to gain access to better financing levels, and we use them to financing market as basically a gestation period for RPL rated strategy. So that would be done in another one year deal. So it's really a cost of capital consideration there, not as a means to kind of unlock fresh capital for new investment purchases..

In the SLST, Eric, we don't disclose specifics on defaults and other parameters around the SLST deal. But, certainly prepayment speeds increases help that deal to the extent that you're taking back loans that sit in a pool of your projecting losses, it's helpful to the bond.

But, just given the overall healthiness of the housing market and increased valuations that certainly supports a lot of the loans and as deals..

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

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

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

Okay. So that $10.6 million in operating expenses for the quarter, maybe I missed it in your opening remarks.

But what’s driving that?.

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

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

Yeah. So that run rate operating is a little difficult, because, you really should look at it, we have it as two different lines, right. We have $6.7 million in expenses related to portfolio.

The $3.9 million is really going to jump around based on if we ended up consolidate a multifamily property, all of a sudden, you can have a jump that's really not really a jump in direct expenses to us, but it's just because we have to consolidate their activity up. But the operating expense line certainly is related to our portfolio.

And the growth of that operating expense in the portfolio is 100% related to our BPL portfolio growth. So the way those loans are booked are just a higher expense ratio to services those loans, so that drives that number up as we grow that portfolio..

Got it. Thanks for the color..

Sure. Thanks for the questions, Eric..

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

Hey, guys.

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

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

The preferred equity investments that show up as equity, Chris, it's really from an accounting standpoint. They've the similar characteristics of what we would cost by the other stuff as preferred loans. But because of certain legal requirements within the documentation, they end up being accounted for as equity.

But we're earning an interest rate on them. The JV is absolutely true equity, in the sense that we are participating at the equity level. But all our preferred investments have a coupon associated with them..

Okay.

So the preferred is really secure to some degree by the underlying?.

It is secured 100%. There's equity below it, that's subordinating it and it’s in the preferred to secure it to the property..

And then what sort of cap rates goes to your JV partner? Are you going to these multifamily properties with?.

I think the markets that we participate in, in the South and Southeast, obviously, the cap rates have been compressed. But, we're really looking when we get into these transactions, not so much the entry cap rate it’s the exit cap rate. And so we're looking, those cap rates seem to have some ability to compress for us to hit our exit multiple targets.

So, we don't really have a specific cap rate, minimum or maximum. It really depends on a property specific and where it is located in the opportunity to change that cap rate. So we don't really have a specific cap rate in mind..

And remember that the opportunities that we're focused on are transitional plays for the most part. So what we're really focused on is what the new management teams' transition. The plan is for the property.

There's two forms, it's either management improvement, or there's some deferred maintenance that needs to be addressed with respect to the property that could help with the rent rate increases.

So we look for those plays, where that could happen, also it shortens the duration of the profit offering as well, simply because typically a sponsor would come in and look to basically take our loan out once the management plan has been executed, and then opt to take a 10-year senior loan out from Freddie Mac, or Fannie Mae for that matter.

Also, we do focus in granite construction as well, outside of just the transitional story within multifamily. And there, we're looking at very similar markets with opportunities where there's just a deficit of housing demand, especially with the migration trends in the United States, from Northeast down the Southeast.

So we're seeing opportunities where very high rent rate increases, very high occupancy rates, and therefore, analysis of these markets. We find very favorable to add new product into some of the secondary and tertiary markets, where we're lining ourselves with the sponsor..

And I guess, sort of given that collapse that building in Florida, and given you're investing in properties, which I understand low to medium rise.

But do you expect construction, renovation or maintenance costs to increase substantially on these properties?.

Relative to what we saw in Miami, no. We don't lend or have exposure in that market to those type of properties. We're mostly in secondary-tertiary markets to mostly garden style apartments in there.

It's the types of maintenance or deferred maintenance that we see when we're looking to get into this deal for the transitional play is more aesthetic improvements to the property that are dated kitchens, bathrooms, and communal areas..

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

Thank you..

[Operator Instructions] Next question comes from the line of Matthew Howlett with B. Riley..

Hey, guys, good morning. Thanks for taking my question. When I model the portfolio margin out, I mean it went up sequentially. I hear you with you're going to keep on calling the securitizations and issuing new ones that would probably is the lowest securitization rates we've ever seen.

We've had that margin, can we sustain that sort of 3% on a GAAP basis? Or, is it good to move around do the mix shift? Or, could just give us a little bit on how to model that?.

Yeah, I mean, two things you got to keep in mind when you look at our margin. One, we have very low leverage, right. So that margin is being calculated by an asset yield of 631 and then a cost of debt. But that debt is a smaller portion relative to our assets. So that’s one comment.

The second comment is, as we get out of the CUSIP securities, and we focus more on BPL loans and multifamily investing, those are certainly higher coupon assets, than scratch and dent and some of our old RPL loan portfolios. So, I think that's where you'll see some movement around.

And as it relates to the cost of debt, I mean, certainly as we go through and reprice our warehouse lines that come due in the fourth quarter, we'll look to be tightening that up. But, you are correct in saying that, the securitization market has never been tighter as it relates to rates.

And Jason, maybe you want to add something?.

Yeah, I mean, just the sale of our securities book, which we sold most of our multifamily securities last quarter will improve our total interest earning assets yield. So it's more of a rotation, given the increase in values we've seen in that space.

We've saw basically, we believe it is about a 2% total yield kind of yield to that securities portfolio, when we sold those bonds. And that's replacing into mostly BPL and multifamily type of space.

So, the rotation on top of utilization of our cash and lower financing costs with respect securitization should continue to improve our net interest margin..

Did you stay high teens on that BPL securitization that you saw on the retain securities? Did I hear you correctly there?.

Yeah. That's right. I mean, the highlight is simply you're looking at high single digit type of coupon with our financing costs drop it at least about 50 basis points on that deal. So when you look at the model through the securitization leverage that's there, with respect to the financing costs easily can get to a 20% level on those assets.

Yeah, return on equity of the securitization. Yep, that's right. Yes, that's right. I mean, there's not many markets where you could achieve that type of return. It's really related to the fact that it's a short duration loan. Similar to our multifamily business, this is a bridge play into an improvement story.

So the contractors are willing to take a higher cost of debt to turn that into a flip, or we're seeing more cases now turning into a rental property that with taking back the property as an investment property itself. So, that's why that cost of debt is there.

There's lots of management requirements on managing the draws, making sure that improvements are going accordingly. So, those are other reasons, typically why you have a higher cost of capital for that type of debt which we benefit from..

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

Yeah, for two years, we can recycle the pay downs that we received in that securitization, our fixed cost of capital there. So, in credit card deals, the recycling happens much more frequently. And in these types of deals, it's maybe one or two times a month, where you look at the pay downs and recycle with new portfolio opportunities.

So, like a CLO as an example, you're able to enter, add new assets to that portfolio over the course of two years, which is what you'd like to see on a one and a half, one year duration type of asset when you're doing securitization, which is why we opted for that structure..

Great. Got it. Okay. And then, I guess on the unencumbered $700 million unencumbered.

How much of that are you going to finance? I mean, can you just sort of give us the cadence on what you're going to do with that over the next sort of 12-months?.

Yeah. I mean, we're looking at, as you mentioned earlier, we're kind of seeing historically low securitization costs across all different industries. So, we're looking at the assets we have in that book and parent with our pipeline assets, and looking to optimize our securitizations within both in the unrated and the RPL space.

So, we are evaluating that piece on our residential loan book to add. We think it’s prudent leverage to that portfolio..

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

We have one that’s currently callable. The Series C seven and three quarters is currently callable. The other two have a couple years..

I know that’s the Series C is trading, Series F is trading up. I mean, do you think you could potentially test a 6% rate? I mean, over time, you see the preferred stock coming down….

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

But that's going to have a significant impact if you can do a great. Okay. That's it for me. Thanks so much, Steve. Thanks, Jason..

Thanks, Matt. Have a great day..

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

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

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