New York Mortgage Trust (NYMT) Q2 2022 Earnings Call Transcript

New York Mortgage Trust (NYMT 1.98%)
Q2 2022 Earnings Call
Aug 03, 2022, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the New York Mortgage Trust second quarter 2022 results conference call. [Operator instructions] This conference is being recorded on Wednesday, August 3, 2022. A press release and supplemental financial presentation with New York Mortgage Trust's second quarter 2022 results was released yesterday.

Both the press release and supplemental financial presentation are available on the company's website at www.nymtrust.com. Additionally, we are hosting a live webcast of today's call, which you can access in the Events & Presentations section of the company's website. At this time, management would like 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 company's filings with the Securities and Exchange Commission. Now at this time, I would like to introduce Jason Serrano, CEO and president. Jason, please go ahead.

Jason Serrano -- President

Thank you very much. Good morning. Thank you for taking the time to join our earnings call this morning. I'm here joined with Kristine Nario-Eng, our CFO.

We are excited to talk to you this morning about the developments in this market. We have seen the market actually transition to a buyer's market for the first time in quite some time. And we believe the construction of our balance sheet will allow us to take advantage of these latest trends. But before we get into this, let's cover our second quarter highlights.

In the quarter, we incurred a loss of $0.22 per share. This was a function largely of an unrealized losses that we incurred on our balance sheet, resulting in a negative 0.4% loss to our book value in the quarter. Now, due to the increase of allocations to -- sorry, to bridge loans over the course of the last 18 months, as well as holding recourse leverage below one times, we were able to limit losses given the extreme volatility that we saw in the interest rate markets. Now after declaring a $0.10 dividend, our quarterly economic return on undepreciated book value resulted in negative 2.5%.

We also, in the quarter, saw an opportunity to repurchase some of our shares, which is the first time we've done that in quite some time. We saw an opportunity to do so, where we repurchased 2.8 million shares in the quarter and 0.9 million shares thereafter -- slightly after the end of the quarter -- beginning of the following quarter. We're able to use an attractive pricing of $2.69 for the company and $2.73 per share. In the quarter, we acquired $890 million of investments.

I'll be talking about how this was a tale of two quarters of activity given the latest moves. The acquisitions was highly dominated in bridge loans, and we also started seeing an opportunity to look to sell and monetize some of our JV positions in multifamily equity, which I'll talk about in a minute. In the quarter, we also obtained $876 million of financing, 77%, which was non mark to market. This allowed us to continuously increase our mark-to-market financing on our balance sheet and also allowed us to finance some of the acquisitions we've made in that quarter.

We ended the quarter with very low leverage at 0.7 times and a recourse leverage ratio and a portfolio basis at 0.6 times. $383 million of cash was held in the balance sheet, and we should be -- we're expecting this number to increase over time as we are seeing opportunities to rotate our balance sheet into higher-yielding assets. At this time, I'll pass the call over to Kristine to talk more thoroughly about our financials. Kristine?

Kristine Nario-Eng -- Chief Financial Officer

Thank you, Jason. 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 24 to 35 of the supplemental presentation. Our financial snapshot on Slide 9 covers key portfolio metrics on a quarter-over-quarter comparison.

The company had GAAP loss per share of $0.22, an undepreciated loss per share of $0.13. We paid a $0.10 per common share dividend, which was unchanged from the previous quarter. GAAP book value per share was $4.06 and undepreciated book value per share ended at $4.24, down 4.7% from March 31 and translated to a negative 2.5% economic return on undepreciated book value during the quarter. Our undepreciated book value decline during the quarter included $0.18 per share of unrealized losses, primarily due to credit spread widening and increase in interest rates that resulted in a decline in the fair values of our residential loans and first loss securities we own in Consolidated SLST.

Our portfolio net interest margin for the quarter was 3.48%, a decrease of 39 basis points from the previous quarter. Rising interest rates in the second quarter impacted our portfolio of financing costs, resulting in an increase of 28 basis points from the prior quarter. We also experienced an 11-basis-point decrease in our portfolio yield on average interest-earning assets driven by a lower yield on our investment in Consolidated SLST, and to a lesser extent, as a result of the overall composition of our BPL bridge loan portfolio with a quarter end weighted average coupon of 8.41%, down from 8.53% at March 31. The company's recourse leverage ratio and portfolio -- portfolio recourse leverage ratio remained low at 0.7 times and 0.6 times, respectively.

Slide 10 details our financial results, and Slide 25 details the components of net interest income. Our portfolio net interest income increased by $1.9 million during the quarter, primarily due to the following. First, we had portfolio interest income of $61.8 million, an increase of $9.3 million as compared to the previous quarter, which is due to our continued investment in higher-yielding BPL bridge loans. This increase was partially offset by an increase in portfolio interest expense of $7.4 million, primarily due to increased utilization of our warehouse facilities to fund purchases of single-family investments during the quarter.

Total net interest income, which includes interest expense related to our corporate debt and mortgage payable on real estate, decreased to $26.1 million as compared to the previous quarter. As you can see on Slide 25, the increase in non-portfolio-related interest expenses is due to an increase in interest expense related to mortgages payable on real estate of $6.6 million from the previous quarter. This increase is due to the full quarter impact of multifamily joint venture investments consolidated in the previous quarter, additional multifamily joint venture investments entered into and consolidated in the current quarter, and an increase in interest rates affecting 70% of the mortgage payable balance related to real estate or approximately $884 million of unpaid principal balance that is floating rate debt. We had non-interest-related losses of $20.2 million, mostly from net unrealized losses of $67.7 million as a result of increases in interest rates and credit spread widening during the quarter.

This loss was partially offset by a $2.4 million net realized gains from residential loan prepayment activity, $5.7 million of preferred returns generated by our mezzanine lending investments accounted for as equity, and $3.5 million of other income. The other income is primarily comprised of redemption premiums recognized from early repayment of mezzanine lending investments during the quarter and unrealized gains recorded on an investment in an entity that originates residential loans. We also generated $35.9 million of income from real estate, which includes income related to two consolidated multifamily apartment properties in which the company has equity investments in the form of preferred equity or common equity in our single-family rental portfolio. As discussed earlier, our real estate properties incurred interest expense of $13.2 million and also incurred other expense of $70.8 million.

The other expenses incurred by these properties during the quarter are primarily related to depreciation expense and amortization of lease intangibles totaling $52.4 million. After reflecting the share of the losses to the minority partners of $18.9 million, in total, our investments in real estate properties incurred a GAAP net loss of $29.1 million for the quarter. Excluding the company's share in depreciation and lease intangible amortization expenses, these properties generated $4.1 million and $9.6 million of undepreciated earnings during the quarter and year to date, respectively. It is important to note that we pursue these investments for the potential participation in value appreciation of the underlying real estate, which is realized only upon sale of the multifamily assets in the future.

As Jason mentioned earlier, we are continuing to consider opportunities to monetize the appreciated value in this portfolio. As detailed on Slide 28, you'll see that both income from and expenses related to real estate increased in the second quarter. These changes consistent with our expectations are primarily related to the full quarter impact of multifamily joint venture investments made in the previous quarter, as well as additional multifamily joint venture investments made during the current quarter, which required consolidation in our financial statements. We had total G&A expenses of $3.2 million, which decreased compared to the previous quarter due to a decrease in commission expenses.

We had portfolio operating expenses of $12.7 million, which increased primarily due to the growth of our investment portfolio. I will now turn it over to Jason to go over the market and strategy update. Jason?

Jason Serrano -- President

Thank you, Kristine. So the market is clearly undergoing a seismic shift. We laid out on Page 12, a diagram that describes the evolution of where this market and the transmission mechanism that's happening today. Starting with 2021 and up to basically the first quarter of 2022, as we all know that the market had extremely efficient financing, assets were trading at par plus from origination pipelines and the securitization market was very robust.

During this time period, we selected to focus on shorter-duration loans where securitization financing is, while helpful, is not absolutely necessary to execute the strategy. As we've talked about earlier, we did complete securitizations and take advantage of that funding that was available to us. But in the -- really in the second half of the second quarter, markets started changing quite a bit. The market became a discount market in new originated assets given the rate changes we're trading at discounts, and the financing became inefficient.

Inefficient in ways of the rate moved higher and also the buyer base related to the securitizations thinned out. So with respect to that, we saw this pattern starting developing. We became very cautious even related to the short-duration bridge opportunities, which don't necessarily need securitization financing to execute the strategy. Going to 2023, we see a market where there -- we believe there will be likely deep discount assets available to be purchased, where the market shifts from a financing spread model to a ROA or return on asset with no financing required in some of these subsectors that we're looking at.

It will be important at this time to have a portion of the unrestricted cash that will be available to access this market. And we believe this will end up being a market where liquidity and cash availability on an unrestricted basis will lead the opportunity and outperform the market as a whole. At this time, we will -- we look to become aggressive, looking for opportunities where our asset management team could really be deployed to unlock value there. So the flexibility that we have on our -- with the assets we have in our balance sheet that have high turnover related to fixed and flip loans, also with monetization of certain strategies, such as our multifamily equity portfolio, we were able to rotate these assets to higher-yielding returns in a buyer's market.

And we believe that -- the timing of this is the most important aspect of it. It's impossible to time it perfectly and hit the target. But what we're trying to do here is really just hit the side of the barn really as it relates to the timing of the strategy. We're watching opportunities unfold and seeing portfolios from previously originated loans trade at discounts.

But we believe that the market will offer better value over time. So with this selective approach, we expect to be able to drive value and also earnings related to our interest income and realized gains over time as the strategy continues to unfold. Now turning to Page 13. Market themes are very similar, but the way we're executing and the way we're thinking about involving ourselves in the market is a bit different.

So in the residential housing markets, we're obviously seeing a slowdown a bit in existing home sales. That's also related to a drop of the existing inventory. We've been at a historically low inventory levels. And the latest changes in inventory level has really been a function of the new home builds, which are not at the same price point as the existing homes and are showing a sequential increase in volume and units available for sale.

But given that the still very low units in the market on an existing basis, less than 1 million units is definitely stabilized markets against the rate increases. In this space, in single-family, we're looking to selectively add here. This is not yet a full market opportunity where we're seeing basically sales at any price related to liquidity concerns, but we believe at some point, we will be able to recognize and earn returns based on that particular market construct. So today, we are selectively adding in more of a whole basis and letting our portfolio rotate and mature and to allowing that to redeploy into future opportunities.

On the originator side, we're definitely seeing strange in the market. Obviously, we've all seen a couple of originators file for bankruptcy. We believe there's more to come, we're in early innings here. And given the stress we've seen to this date, we have seen portfolios trade in the scratch and dent space at a 30-point discount.

Now this is a loan that would be originated and sold into market at 102.5, but three to five months later it's sold at 3 points loss. Now these are -- when you see these types of activities, this is obviously a desperate measure for liquidity and obviously an opportunity for us to provide that liquidity to the origination market. And particularly in the non-QM space that we're seeing some of that opportunity there. So we're not at a point where now where we're seeing kind of warehouse lines being fully liquidated or anything similar to that matter.

But we believe that there will be a time period in the not-too-distant future where that could be available to us. And we're hanging around the hoop for that opportunity. In the multifamily space, the rent rolls and property appreciation is still very strong, particularly in the South with the still positive migration trends and solid job markets. So in that -- with that said, it's an opportunity for us to take some gains that we had built in the portfolio, and we look to do so in the short term.

In the medium term, we definitely see an opportunity to provide GAAP funding for opportunities where the sponsor had a property, particularly in the bridge loan, which we see more than $100 billion of bridge loans produced over the last two years with three-year type of durations. Unfortunately, in this market, you've had LTVs on senior financings come down anywhere from 10% to 15% on an LTV basis. And that presents an opportunity for us to provide GAAP funding at teens returns with very low LTVs. So that is an opportunity that's building, not here today.

The maturity wall of that schedule looks to start coming to fruition in later part of this year, but merely earnestly in beginning of 2023. So that is a definite opportunity and part of the reason why we want to clear cash for, what we think is going to be a very sizable market there. Now turning to Page 14. The portfolio acquisition, I said earlier, we had $890 million of acquisitions in the quarter, but this was really a tale of two quarters.

We had pretty strong proprietary flows in the first half, and unfortunately, for us, we saw the market not moving coupons up with lockstep with funding costs. It was a pretty frustrating environment for us in the back half of the second quarter. And for that reason, we significantly slowed our acquisition pace down there. And it seemed like the originators were really favoring volume versus attractively priced assets, which is the reason why we were seeing discounted sales thereafter, particularly into the third quarter.

So with the market resetting and we'll talk a little bit later about the coupons increasing in these various asset classes, it presents an opportunity for us to jump back in. With that said, we had $304 million of prepayments redemptions. Again, this is related to the fact that we have a very short-duration portfolio. And within the multifamily space, particularly with respect to our assets we have, we're seeing redemptions there that after significant buildup of rent rolls and appreciation in home, it's not surprising that we're being taken out of some of our prepositions given the ability to recap our position or also sell the property.

Turning to Page 15. On the portfolio financing side, we mentioned earlier that we increased the mark-to-market financing. As you see there, $756 million in that graph on the right side. That is a obviously is a continued focus for us.

We want to build availability to the extent that we're looking for the short-term opportunities for -- to invest in this market, to have the availability of non-mark-to-market financing. And we have basically about $600 million of unutilized financing lines today to access this market. So we feel in pretty good position there. We think the market is going to reposition into more of an ROA opportunity where financing is likely not needed.

So I think incrementally, for us, we don't see a big need to continue to increase our financing lines there. But we do look for opportunities to take out assets in the securitization market today and we're looking for opportunities there. Now on Page 16, we added this slide and I think it helps explain a lot of our positioning situations and also and strategy. We've had a number of questions through the quarter.

And our attempt here was to answer some of these questions that came up inter-quarter and it really kind of address our positioning. So on the left side of portfolio assets, again, 35% of our assets are in BPL Bridge, 12- to 18-month duration there, fast reinvestment, or high turnover expectations at high coupons. This is an asset that you wouldn't like to have to roll for two to three years in continuing and trying to keep the portfolio elevated. But again, we entered into this strategy over 18 months ago with the expectation that at some point, we'd move the rotation -- we moved the asset rotation into longer-duration assets at discounted prices.

And that strategy, while, again, not currently available today, we believe that is building, and our strategies will be executed. Going back down on the joint venture portfolio, again, focused recycling, some of the cash, the $399 million of capital we have in equity investments there, as well as kind of the cash side of $383 million, covers 41% of our mark-to-market debt. Because of the high turnover over $300 million per quarter, we're expecting to grow that cash position for the opportunities that we see coming. On the right side, this is, I think, part of the story here that is really helpful to us kind of dig in.

On the securitization side, with $1.1 billion of securitization debt, 100% fixed rate debt there. One thing that may not be obvious to everybody on the call, is that we do not fair market value these liabilities. If we did, we would see a 3.7% increase to our book value. The reason why we don't do that while many of our peers do, is simply while rates are higher and our cost of debt is fairly cheap at 2.77%, -- we still have the obligation of paying debt off at PAR, and therefore, taking a valuation increase on that liability, we think is inappropriate for us to do for balance sheet purposes, which is the reason why we keep it at par.

But that would be a nice pickup if we were to change accounting measures there. Also, maybe not as quite obvious is that our debt outstanding on the corporate side is very low. We have one bond issue outstanding due 2026, close to $100 million of notes outstanding at 5.75%. That's something we refinanced previously and able to step down our financing costs there.

And two, trust preferred outstandings, very favorable financing there with a maturity of 2025. The reason why I point this out is that it's not just the cash we have on our balance sheet that is available, but also, there's the holdbacks related to corporate financing that we need to do for maturity payoffs and looking at a very challenged market in the corporate bond space. It's not something that we have to contend with. And therefore, when you look at our cash, we truly do have the flexibility to invest into this market.

And as I said before, there's opportunities to further reduce our debt to equity as well, which is a very low level at 1.4 times versus our peer average of the 3.7 times debt level, and to further recourse the leverage outstanding there. Now turning to Page 17, just on the single-family portfolio. I did allude to earlier that we're seeing opportunities to invest in wider yields here. On the BPL bridge side, we're seeing about a 2% increase and total assets coupons.

Again, this isn't an opportunity that was -- a very short-duration opportunity that we're investing in. This market was slow to react to rate increases, primarily because of the short duration, which you'd expect. But we're finally seeing that market capitulate with increasing coupons there. There's also been a lower demand base that has been pulling assets through that market.

So the contention of other market participants in this market has obviously thinned out quite a bit, and there's a significant opportunity for us to grow. As long as we continue to see coupons grow there, we'll be active. On the BPL rental side, again, this has been one of the markets where we thought rates should have increased faster. We didn't see it.

We slowed our production or purchasing there from production from originators. Today, we're not a buyer into this market, waiting for the kind of the selling out of the securitization market, which, again, as I said earlier, is very thin and unstable. So this doesn't present an opportunity for us to sort of buy and securitize into this market, which is why we're on hold there. In the scratch and dent space, building liquidity constraints with respect to originators, this is going to be a big opportunity for us.

There are small pockets trading at 30 points discounts, as I said earlier. The market is anywhere from 70% to 90% depending on the assets and also the timing of when those coupons were struck. But we think there's more pressure there and better opportunity over time. On the RPL space, there's nothing really to say.

We've talked about this as a market, we have moved on from quite a bit over a year ago. We have 96% of our assets that are in this strategy that already in term securitization structures where we earn equity return, and that NIM is stable to the securitization. Delinquencies in this portfolio and across our entire book have been very -- very stable. In fact, we're now below kind of 2019 pre-COVID levels on total delinquency base and most of the strategies that we're focused on, particularly in the RPL strategy.

This is high season assets, typical origination age of these loans were pre financial market meltdown in 2007. So lots of seasoning here, very low LTVs, lots of borrower alignment with us as the owner of the loan, and this is going to be, we believe, a stable portfolio going through time. Turning to Page 18. Again, given the size of our business purpose loan strategy, it's important to highlight the characteristics of these loans.

And what we're looking at is we focused on high borrower experience, where the borrowers in our portfolio have had at least 11.5 projects on average actually for previous experience before we lend to them. Delinquencies here is low at 5% on the short-duration book. Typically, this is extension issues where the home is listed for sale or the marketing -- or the construction time line due to completion has extended. But given the low LTV at 73% at the cost of the home or after repair of 66%, and we expect full recovery on that pool.

And also very important, we -- the project rehab costs. As you can see, at least a third of our portfolio has actually very little to no rehab costs. We focused on that point to really keep the duration short and avoid extension risk issues and therefore, why we think we'll have consistent asset turnover. I said earlier, the $300 million per quarter, we expect to continue given the short-duration book.

Now moving over to multifamily. As I said earlier, we're in a whole position for the mezzanine lending opportunities. We have a fantastic book, plenty of equity built up in here. We'll talk about it in a second.

But at a 12% coupon, we have never experienced a loss in this asset class since we started originating loans in this space many years ago. And this is an opportunity that we think is growing. On the joint venture equity opportunity, we stepped into this opportunity to catch the tailwinds of the migration changes that were happening in the southern part of the United States. We thought there were better value to be held as an equity position versus a mezz position, particularly in the southern part of the United States.

And therefore, we started looking at this equity opportunity back in late 2020, early 2021. We think we hit the market well with respect to timing, and we look forward to monetize part of this portfolio. Turning to Page 20. Just to give more detail on our portfolio as it relates to multifamily, a lot of questions have come up on this point.

As you can see on the top left corner, as it relates to the portfolio or the properties behind our mezz loans, 95% are occupied. Rent growth has been extremely strong. 2021, our underlying properties had 8% rent growth and 2022, at 12%. This is a portfolio we expect to, at some point, to be redeemed on most of these -- on the 28 different positions over time.

And in the quarter, we had two loans that were outstanding of $10 million were paid off. What we like about this strategy is with the coupon in the 11.8%, there's upside opportunity here as we have minimum prepay multiples once the asset is paid off, in this case, 1.42 times multiple. Given the increase of rents and value of properties, we do expect to continue seeing these prepay multiples increasing given the early prepayment trends that we're seeing in our book. And again, very strong performance.

Only one loan currently is delinquent at 1.5% of the entire position. We expect this asset given the LTV to pay off at par. Now turning to Page 21. This, again, is a new page, a little bit more disclosure here on our JV equity position.

These are obviously 20 assets here that we are an equity position on that -- where there's no cross-correlation with respect to the underlying asset. So these 20 assets own outright. As you can see in the second last column on the right gives our equity position in these properties, anywhere from 70% to kind of 95% ownership position. We gave the vintage of when the assets were acquired, particularly to show where some of the buildup in rent growth has happened.

As I've noted here in 2021, we've had rent growth of 16% and then 17% respectively in 2022. We thought -- we think we timed the market well here, particularly in the markets that we're involved in. Most are in the southern part of the United States and some secondary markets, such as Oklahoma City, that has been kind of -- have been receiving some strength from some of the Dallas growth that's been there and pricing people out of that market to Oklahoma City, as an example. But this is an asset with high occupancy where there's a transition story that we initially saw available to us to move rents up, particularly related to capex expenses or management changes.

And we've been looking to execute that strategy across the $255 million of equity that we have outstanding in this market. The market rallying in the southern part and the thesis that we'd see demand there back in 2020 has really paid off, and we were really excited about the opportunities we have to either monetize the portfolio or look at a corporate kind of structure opportunity here. So we're looking at all different opportunities here to monetize this book. And finally, on this last page here, we are, as I said earlier, in the face of a market transition that's clearly unfolding.

The luxury that we have and has been built over the past year and a half has been being able to have a high asset rotation portfolio where we can redeploy our cash that is truly unrestricted into this market at higher-yielding opportunities. In an environment where deployable capital will be truly what differentiates us from the market and will be available to provide liquidity to the market in various areas, we're excited about this opportunity and talk to you further about it. So at this time, I'd like to pass the call over to the operator for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question comes from the line of Doug Harter with Credit Suisse. Your line is open.

Doug Harter -- Credit Suisse -- Analyst

Thanks, and good morning. Just on the multifamily JV portfolio. Can you talk about where you might -- what type of embedded gains you might have on that and remind us if that asset is mark to market on the balance sheet?

Jason Serrano -- President

Yeah. So I'll start with the mark to market. These assets are held at cost basis less depreciation and amortization on a depreciated basis. And obviously, that is below our cost basis.

So that's where we currently hold these assets on our balance sheet today. We are looking at -- we've had some reverse inquiry on our portfolio and other kind of corporate transaction opportunities. We look forward to sharing more about that in the coming quarter. But at this moment, this is still in the kind of preliminary stage.

I mean, we're showing here some movement growth that can help understand the valuation increases that we've seen in our portfolio. But that's not something we're going to comment on this call.

Doug Harter -- Credit Suisse -- Analyst

All right. And then as you think about the potential for some sort of monetization event, I guess how do you think about the timing of wanting to do that to line up with the opportunities that, I guess, you see building over the coming months? I guess, just how do you think about kind of matching up the timing?

Jason Serrano -- President

Yeah. So I mean, we have enough cash that is coming through our BPL portfolio to access that opportunity. So it necessarily doesn't depend on rotating our multifamily equity book for that. We think that the -- while -- if we just keep it within the multifamily sector, the opportunity for I just described earlier, which is that kind of that bridge lending GAAP funding capital that we think will be necessary more in 2023, is a more of a medium-term opportunity for us, while we think the monetization of components of this portfolio or a corporate transaction is more of a short-term opportunity.

Doug Harter -- Credit Suisse -- Analyst

Great. Appreciate it. Thank you.

Operator

Thank you. And our next question comes from the line of Jim Metzger from FactSet. Your line is now open. Jim Metzger, your line is now open.

Jason Serrano -- President

I guess we can move to the next question.

Operator

Our next question is from the line of Christopher Nolan from Ladenburg Tallman. Your line is open.

Christopher Nolan -- Ladenburg Thalmann and Company -- Analyst

Thank you. Can you hear me?

Jason Serrano -- President

Yes.

Christopher Nolan -- Ladenburg Thalmann and Company -- Analyst

Oh, I didn't hear my name announced. Just a bunch of questions. And related to the strategy, should we -- what -- I know you mentioned gap funding in your terminology. I mean, should we look at that as hard money lending? Or are you directly investing in additional common equity into these properties? I mean, what sort of strategies are you looking to invest in?

Jason Serrano -- President

Yeah. We think the opportunity is going to circle around -- when we say gap funding, what I mean by that, in particular, is that we -- senior lending in the multifamily space was mid- to high 70s, and we're seeing regional community banks, etc., cut back their LTV in this market environment to anywhere from 50 to 65, even into low 70s. So we think there's about 10% to 15% minimum of kind of where -- if you were going to refinance a particular asset, which is going to be a bridge loan that's coming up for maturity, then you'll need some additional capital to get that asset recapitalized. And then that's where we can come in.

And we see -- that's where we see the opportunity. So it would be in the form of lending, the -- and not equity. And the opportunity from a duration standpoint, we believe the loans will be quite short and really attempting for allowing the underlying sponsor to access probably more favorable funding through this time period, particularly in kind of 10-year fixed funding that is available through the agencies. So the -- what is -- what we little discuss here is that the fact that there's a very strong agency senior financing market for multifamily properties across this country within Fannie and Freddie Mac.

And that has very much stabilized the funding source of the opportunity for underlying sponsors, and why we believe that this market will outperform through this next cycle, simply because that funding is strong. And with respect to Fannie and Freddie, they have budgets for financing availability that they're going to provide to the market, and they've consistently been kind of under budget, particularly as the market has slowed. So there's plenty of available funding for good assets with good stories behind good managers. And those are the assets that we want to help support in this new cycle.

Christopher Nolan -- Ladenburg Thalmann and Company -- Analyst

And as a follow-up, are you looking -- it sounds like the sponsors are coming from a point of weakness. And I mean, are they being compelled by their banker or Fannie Mae to raise the equity? And if that's the case, do you have any protections in terms of the sponsor sort of going belly up? I mean, are you putting the title of the property in Escrow or something? It's -- because you're sort of going into potentially dangerous waters at time. Just a little clarification would be helpful.

Jason Serrano -- President

Yeah. So I mean, the opportunity is a case where there's no real requirement coming from Fannie or Freddie for this purpose. It's really a function of the debt structures that were produced back in 2020-2021, which were, for the most part, $100 billion plus of short duration, two- to three-year senior financing. So there is a maturity wall that is in front of many of these sponsors across the United States.

And the question is how do they get through that and get through that. To get through it meaning, if they're not going to sell the property and they want to recapitalize, this is the opportunity for us. So this is not necessarily coming from a distressed point of view in that the property has gotten where DSCR ratio has dropped below one times. This is coming from strength of the sponsor in that they want to continue holding these assets.

They don't want to liquidate today, but they've obviously seen a buildup in rental rate increases and property value through their holding period from when they struck these loans back a couple of years ago. So the opportunity for us is to be that lender where they can access that senior paper at -- or a senior fixed rate paper with 10-year maturities, which is obviously very stable for them, so they can continue on with their planning -- their business plan with the property. That's where we see the opportunity today. Obviously, a lot could change from now until then.

We wanted to highlight that if we're -- the rotation that we're looking at with respect to our portfolio is not in continuing in the equity strategy, but more on the lending side is what we're looking to allocate in the future.

Christopher Nolan -- Ladenburg Thalmann and Company -- Analyst

And then finally, are you seeing with more of your sponsors where their cap rates where they invest in these properties is now -- their funding costs are now higher than their cap rates?

Jason Serrano -- President

So when you talk about cap rates, there's many ways to look at it. And the interesting point about cap rates in this market is you typically don't have the types of rental increases that we -- that I just described earlier in these markets. So when you look at a cap rate at a purchase cap rate, typically, you have inflationary type of rent rolls, where here you're having double-digit rent rolls. So if somebody entered in a property at a 4.25% cap rate in the market is 5.25% today, that is off of assumption that the 4.25% you haven't had rent rate -- haven't any income gains in the portfolio through rental rate increases.

And so while the cap rates have moved out up to 100 basis points, you do also have rent raises that have also offset some of those costs and therefore, could support higher coupons in this market. So it's really a function of where that asset is located and what kind of rent rolls they've seen, where that -- what your point here you're driving, which is how can they fund these properties when the costs are greater than their return, it could be offset. So it really depends on the market. Typically, what we're seeing in the south is that there -- the gains on the portfolio have outstripped the increased funding costs, and that's keeping the opportunity very much in focus for those sponsors.

Christopher Nolan -- Ladenburg Thalmann and Company -- Analyst

Great. Thank you.

Operator

Thank you. Our next question is from the line of Eric Hagen with BTIG. Your line is now open.

Eric Hagen -- BTIG -- Analyst

Hey, thanks. Maybe just a couple for me. When you talk about this being a buyer's market, would you say that the hurdle rate you're aiming to achieve has also changed, or would you say that the hurdle rate has changed specifically for the bridge product? And then in the SLST portfolio, can you repeat what the mark-to-market changes were last quarter? And based on the way the asset is financed there, can you relever that debt? Or is that not releverable? Thanks.

Jason Serrano -- President

Yeah, no worries. So as it relates to buyers' market, what we're seeing is for the first time in many quarters that the discounted portfolios are trading in this market. Obviously, the market was very efficiently financed earlier. We didn't see discounts on new originated products other than in the scratch and dent spaces, which we've been playing for quite some time.

But in BPLs and DSCR and non-QM, we did not see that, and we're obviously seeing it now. And we believe that opportunity will be building. So with respect to your question on increase of returns, yes, we definitely expect the returns and the different strategies that we're focusing on to increase. We talked about on-the-run coupons in BPLs 200 basis points higher, and that is obviously an easy story to understand, and that any new investment there would be a 2% increase in coupon.

But -- what we're -- the focus is really, there's a lot of origination product out there that was originated without really being priced in to deal with the financing cost increases on 30-year kind of loan products. And that's where we're seeing some of the market get stuck and where our liquidity may be used in the future. So that is an unfolding story. It's not here or now, but there's definitely markings that are showing that that could accelerate, particularly in early 2023.

As it relates to SLST, I'll pass that over to Kristine.

Kristine Nario-Eng -- Chief Financial Officer

For SLST, you'll see it on Slide 26, Eric. First quarter, we had about $15 million of losses there unrealized, and we have, for the second quarter, about $4 million in losses. And then as to your question as it relates to being levered, so we own first loss securities in the securitization, as well as IO securities. So what -- we can lever that, we can put it out on repo to answer your question.

Jason Serrano -- President

Yes. And furthermore, we could also look to securitize it. At this point, obviously, it's a difficult market for the securitization space, given the fact this is an RPL book with staple financing from Freddie Mac, we prefer to not finance it through a securitization strategy just yet. But that's something that is available to us.

Eric Hagen -- BTIG -- Analyst

Got you. Thanks for the perspective.

Operator

Thank you. And our next question comes from the line of Stephen Laws with Raymond James. Your line is now open.

Stephen Laws -- Raymond James -- Analyst

Hi, good morning. I wanted to follow up, I guess, a little bit on Doug and on others questions around the real estate. How should we think about -- I think you have one asset under contract for Q3. How should we think about the gain that we need to put into our model, and then just think about modeling that going forward?

Jason Serrano -- President

Yeah. So I mean, again, we talked about where our basis is in these assets, and we've talked about some of the market input factors that are creating an output of a higher value with respect to these properties. At this point, we're not going to comment on future realized gain activity with respect to that portfolio. This is obviously a developing situation for us.

We have been responding to both reverse inquiry and as well as some other market opportunities that are there. We hope to share more color with respect to this book on our next call and further explain where this portfolio is going. But at this point, it's too premature to have that discussion.

Stephen Laws -- Raymond James -- Analyst

OK, fair enough. Following Doug again with leverage, but gradually moving higher here, talking about the recourse metric. And it sounds like there's great opportunities now. You've got some monetizations in the pipeline coming.

So how do we think about what you see as a normalized or steady state or target leverage number, so to speak, as we think about how capital is being deployed and what the expected kind of repayments and sales look like?

Jason Serrano -- President

Yes. So with respect to leverage, we expect leverage to stay low in this kind of context. We did increase our leverage -- recourse leverage -- with respect to some of the strong growth we had in the quarter, the first half of that quarter. That's why we've seen an increase of our leverage there.

It was just a function of our pipelines. But given where we stand today and some of the monetization themes that we're talking about, as well as an asset opportunity, where it may not require financing to achieve that targeted return. We don't see material increases to this. In fact, we think it should go the other way, which is a decrease of our leverage ratios over time.

And that's a function of just having more unlevered, unencumbered assets on our balance sheet in this new market environment.

Stephen Laws -- Raymond James -- Analyst

Great. And then lastly, maybe for Kristine. I appreciate the new Slide 16, and I know Jason touched on some of the fixed rate debt. But can you maybe talk about a net interest rate sensitivity or exposure? I think in your prepared remarks, you mentioned some floating rate debt on the real estate.

But maybe as you think about those sides of the balance sheet, how do you view the net sensitivity to, say, 50, 100 bps increase in rates?

Kristine Nario-Eng -- Chief Financial Officer

We should expect that to go up in the future as it relates to our floating rate debt. But if you look at our multifamily investments, especially the consolidated investments, that's really looking at our share in the equity there. So it's not a full kind of pick-up in terms of gains and losses. It's going to depend -- it's still going to be related to like the performance of the property.

So what we would expect on multifamily is that as they continue to improve the property, there will be rental growth there. So you'll see income as it relates to our consolidated JV investments to improve.

Jason Serrano -- President

And as it relates to -- looking at Page -- on this page here, where we broke out the corporate debt, a lot of the repo financing we've conducted is in the BPL space, and that is a short-duration strategy. So while we expect funding costs to increase there, we also expect the portfolio to decline. So the full effect of kind of the rate increase over a two- to three-year period wouldn't be felt in that portfolio.

Stephen Laws -- Raymond James -- Analyst

Great. Thanks for your time.

Operator

Thank you. Our next question is from Matthew Howlett with B. Riley Financials. Your line is now open.

Matthew Howlett -- B. Riley Financial -- Analyst

Hey, good morning. Thanks for taking my question. Jason, just on the dividend, you've got a lot of moving parts here. I really like the strategy, and I appreciate the Page 26 here.

Are you going to be generating a lot of gains here, it looks like going forward? I think previously, you've talked about getting NII up to cover the dividend, like a sort of a lot of mortgage rates try to do. I mean, how should investors look at earnings and dividend coverage going forward? Or is just something we have to always sort of take in realized gains as part of the core strategy?

Jason Serrano -- President

Yeah. I mean, that's been consistent with our activity for many years now where a component of our return is in the realized gain sector -- a section of our balance sheet, income statement. And we did see opportunities to increase interest income in our portfolio through these higher-yielding strategies in the BPL space and other related strategies, and pref lending within our mezzanine book. However, the market is not functioning well at this point, given the inefficient financing in the securitization market to continue looking to grow interest income through a kind of a levered yield basis, leverage model.

So as the market transitions into -- what we see is unfolding today -- transitions into a lower-levered opportunity with discounted asset availability, obviously, the story changes a bit into expectation of not only interest income but also in unrealized gain activity through that discount that we would be looking to purchase those assets. So that is going to be a function of our story and has been for quite some time. Our dividend policy is an 18-month forecast on earnings, including the realized gain activity and not a look back in the last three months of interest income. So it's a very complete picture of where we expect our earnings to come in, obviously, given the unrealized activity.

It's typically choppy. You don't have a smooth process as it relates to asset liquidations. So it needs to -- the dividend policy needs to be over a more extended period of time to capture the unrealized gain activity that we expect to generate through the portfolio.

Matthew Howlett -- B. Riley Financial -- Analyst

OK. So we have to think about this different than what we typically model. You see in mortgage rates and the strategy obviously is different than what you see in some of the larger mortgage rates out there. So I certainly -- I understand that.

And the second thing was you also -- I mean, we'll wait for details obviously on the multifamily gains and the sales are going to come with that, but you mentioned also -- I think you said corporate strategic alternatives, would -- are you speaking of something like a spin-off, another subsidiary with regards to multifamily investments?

Jason Serrano -- President

Yes. So all options are on the table. I mean, we're coming from a position of strength. We have a great portfolio, and we see the market as demand, an increased demand for what we have generated here.

So whether corporate or a monetization through a sale, we're looking at both options. We did put one asset and purchased a sale agreement, just to see how the market is functioning relating to some of the earlier gains we had. It's gone extremely well. So I think everything you said is on the table, and we're going to look to maximize value for our shareholders in the most efficient and least cost manner for this book.

So this is a -- we're focused on timing, we're focusing on efficiency, and we're going to focus on the total expected value that we think we've generated and being able to monetize that fully. And any of those options are on the table for us to evaluate, and we'll be working through that over the course of the quarter.

Matthew Howlett -- B. Riley Financial -- Analyst

Good. And I just -- I was glad to see you guys buying back stock. It just looks like the book is understated, and it's quite -- I'm happy to see you taking advantage of the discount. Thanks for taking my questions.

Operator

Thank you. I would now like to turn the conference back to management for closing remarks.

Jason Serrano -- President

Well, thanks, everyone, for joining the call. We really appreciate your support and the time you spent with us. Looking forward to speaking to you again on our third quarter call. Have a great day, and enjoy the rest of your summer.

Take care.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Jason Serrano -- President

Kristine Nario-Eng -- Chief Financial Officer

Doug Harter -- Credit Suisse -- Analyst

Christopher Nolan -- Ladenburg Thalmann and Company -- Analyst

Eric Hagen -- BTIG -- Analyst

Stephen Laws -- Raymond James -- Analyst

Matthew Howlett -- B. Riley Financial -- Analyst

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