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New York Mortgage Trust Inc (NYMT) Q2 2019 Earnings Call Transcript

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New York Mortgage Trust Inc (NASDAQ: NYMT)
Q2 2019 Earnings Call
Aug 6, 2019, 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 2019 Results Conference Call. [Operator Instructions] This conference is being recorded on Tuesday, August 6, 2019.

A press release with New York Mortgage Trust second quarter 2019 results was released yesterday. The press release is available on the company's website at www.nymtrust.com. Additionally, we are hosting a live webcast of today's call which you can accessed in the Events and Presentations section of the company's website.

At this time management would like me to inform you that certain statements made during the conference call which are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although New York Mortgage Trust believes that expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release, and from time to time in the company's filings with the Securities and Exchange Commission.

Now at this time, I would like to introduce, Steve Mumma, Chairman and CEO. Steve, please go ahead.

Steven R. Mumma -- Chairman & Chief Executive Officer

Thank you, operator. Good morning, everyone, and thank you for being on the call. Jason Serrano, our president will also be speaking this morning with me. The company continues to deliver solid results generating GAAP earnings per share of $0.08 in comprehensive earnings per share of $0.18 for the second quarter. Book value per common share at June 30, 2019 with $5.75 unchanged from March 31, 2019, resulting in an total economic return of 3.5% for the quarter. When combining financial results for the first two quarters of 2019, companies generate a total economic return of 8.8%, which represents an annualized return of 17.7%.

For the six months ended June 30, 2019, We had comprehensive earnings per share of $0.47 exceeding our common dividends paid to date by 17.5%. Our investment team remained active during the second quarter, sourcing and closing on more than $500 million in credit sensitive assets, bringing our total investment portfolio to $4.2 billion at June 30, 2019. To fund a portion of this investment activity, the Company continued to opportunistically access the capital markets during the second quarter raising a total of $136.7 million in common equity see both a follow on offering and utilizing our at the market equity offering program. All of which were executed at levels that were creative to our book value.

In addition, on July 22nd, we completed our fourth overnight offering of the year, issuing 23 million shares, raising approximately $137.5 million, bringing our total capitalization to $1.7 million. Its capital growth benefits the company by increasing our options to access the capital markets. It lowers our overall costs to credit and reduces our fixed expense on a relative basis.

Like to have Jason now speak to the market conditions and some thoughts around our current portfolio strategies. Jason?.

Jason T. Serrano -- President

Thanks, Steve. We are pleased with the strong performance while also maintaining book value quarter-over-quarter. In the second quarter we witnessed general spread tightening, particularly in more liquid strategies within our credit portfolio. Our investment teams were busy in the quarter with approximately $500 million of exposure added between multifamily, single family credit. On the MBS side of the business we continue to rotate out of agency exposure to optimize the portfolio in a slower growth, lower rate environment.

Performance of agency MBS was challenged with lower mortgage rates causing increased prepayment speeds. With premium agency MBS generally higher prepayment speeds decreased the value of the bonds, hedging the premium value due to the duration shortening proved difficult for us and generally the broader market. At the beginning of the year, our total agency exposure was 30% of our investment portfolio today represents 24%. Looking at our active pipeline of opportunities we do expect our planned rotation out of the agency MBS to accelerate in the third quarter allocations away from agency MBS is not indefinite.

However, we do feel the agency MBS thesis is difficult to pursue without incurring excessive risk over the near and likely mid-term. In the multifamily space, we continue to focus on two strategies for capital allocation to generate attractive returns for shareholders. First, we focus on direct mezzanine type origination that is generally structured as a medium term bridge loan to the property sponsor.

Our team continues to source private transactions away from the broader markets through our proprietary network of multifamily property management developers. With our experienced management team, we can offer unique structures to fit the needs of our borrowers'. I'm glad to point out we had a record amount of investment activity with our direct loan program and look to build-off [Phonetic] this effort with opportunity to deliver excellent risk adjusted returns. Another area focus in multifamily credit is investments in the equity portion of secured Freddie Mac, multifamily loan securitizations. As a background, multifamily loans securitized and the term structured vehicles typically ten year deals. Our multifamily asset management team conducts a detailed analysis of each ongoing property, including site visits to high risk properties to determine overall value of the portfolio.

Our strength comes from the fact that we are hands on and the diligence process and take an active role in the workouts of a problem long. Historically, we have been able to minimize the few instances of losses that occurred in these portfolios to better protect our investments. We are very active in this space and routinely participate in transactions from Freddie Mac subject to our satisfactory outcome of diligence results. K-series Freddie Mac deal volume is expected to remain strong with anticipated issuance of $70 billion per year. We do expect to continue allocate capital to strategy given our capability and strong track record.

Solid fund -- solid trends in multifamily credit continue to underpin fundamental value of our exposure. National vacancy rates now hover at a two decade low or approximately 5%. With a demographic shift poised to keep demand for rental units elevated over the next decade, particularly from millennials who are now the largest generation, in the United States with 73 million people. But where financial capacity for homeownership is lacking. And baby boomers now the second largest, with 72 million people who face downward pressure to downsize in their homes.

We expect the trend of cap rate compression to persist. One of the key risk in multifamily space is the supply side, with new units brought to the market through construction. In the U.S., a part of a [Phonetic] completion of supply growth is currently tracking around 400,000 units annually or two times higher than completions brought the market five years ago. Apartment construction was disproportionately built in primary markets, where developers could obtain higher market rents. Despite sustained low vacancy rates coupled with rent growth, we seek to avoid exposure in primary markets with significant supply expansion or where large development projects are seen on the rise in.

Now, switching over the single-family mortgage market, which is the single largest fixed income asset class in the world with eleven shilling of assets. Our focus on the mortgage credit -- is on the mortgage credit side of the equation. Here we also have two primary investment strategies. First, in performing and credit impaired residential mortgage loans. And second, an esoteric mortgage credit bonds. In this effort is important to note that we have not followed a popular strategy of vertical integration into a mortgage origination platform which is aside, there has been no shortage of willing sellers.

We believe it is imperative to maintain the flexibility to move in and out of the markets, where we can locate compelling opportunities. With a capital originator, we may face pressure to be consistent buyers at loan production in various environments in cycles. Simply, we believe no mortgage sector can offer an indefinite period of attractive risk. We prefer to maintain the flexibility investment -- investing where attractive risk can be sourced from a large selection of sellers. As an example, we purchase loan -- packages from over 80 unique sellers, thus far this year. We offer the market liquidity with certain niche mortgage characteristics where we can move quickly with a deep credit understanding at each subsector such as scratch and dent, fix and flip or credit repair loans that are known as sub performing loans.

In these markets, we allocate [Technical Issues] or 67% of the company's investing activity in the second quarter. On average, we believe we purchase assets at attractive discount to par value, where exposure to lower mortgage rates may increase loan prepayments. In this case, which is quite the opposite of certain agency MBS prepayments, monetize the discount paid on a loan providing for higher investment return. Much like with our multi family effort, our single family securitization investment strategies continue to offer various types of esoteric or securitization asset classes that were created at the financial crisis.

As the aggregate outstanding supply of U.S. securitized product credit has declined for several years and demand for large asset managers insurance companies from mortgage credit investments increased. Spreads continue to grow and tighter in the second quarter alongside of a stable housing fundamentals. Given we are in the flow of the underlying loan trades, we priced the risk of underlying assets in each securitization. With enhanced liquidity of the sector we tend to be more active traders of this securitization market. We typically seek them on price value over one to two year time horizon.

A factor that keeps us busy in this market is that trade is rarely price risk efficiently between home loans, markets and bonds that are secured by similar loans imply fundamental value differences between the two creates opportunity. We believe our platform is uniquely situated to take advantage of this dislocation. A significantly inverted curve in core inflation falling below -- 2012 highs in various developed countries, very much growth very much looks fatigue across the globe. Admittedly, it has been harder for us to find opportunities as credit spreads, especially in securitized products, have tightened over the course of the year.

However, the market in which we traffic are very large relative to the capital we are putting to work in each quarter. As the managers here would like to point out, each passing quarter adds more incremental work to meet the same return objectives. Unfortunately, this is where we are today. There are no free lunches out there. We are canvassing the market with our network and chasing down proprietary leads with increased vigor to create healthy investment pipelines across the multifamily, single-family credit.

This effort has afforded us to raise a creative capital in each of the quarters. Our $4.2 billion ask portfolio is under level to three course borrowings at only 1.8 times as of 6/30. We believe this is a conservative strategy of limiting risk formed by financial leverage, which will enable us to better preserve book value over the coming quarters and to take advantage of markets locations. As mentioned earlier, our strength comes from our corporate liquidity, which has never been stronger. Under diverse approach, we are focused on providing attractive dividends generated by deep fundamental credit experience, flexibility and -- verification offered by our platform, lack of operational entanglements and a strong balance sheet.

This is the formula of how we expect to provide real offer to our shareholders. We look forward to discussing our financial performance in subsequent quarters as we expect the strength of our earnings to improve with reallocation of the NBS exposure and seasoning of our credit portfolio.

With that, I'll pass it back to Steve.

Steven R. Mumma -- Chairman & Chief Executive Officer

Thank you. Jason will be available for questions at the end of this presentation. Now let's go through the earnings performance for the second quarter. We had $16.5 million in GAAP net income and $36.6 million in comprehensive net income. Generating net interest income of $25.7 million in portfolio debt margin of 216 basis points for the quarter. Our net margin decreased by 24 basis points, which was primarily related to the timing of cash flows received in the distressed loan portfolio. As many of our loans are accounted for on a cash basis for GAAP purpose.

Our average earnings assets totaled $3.5 million for the quarter, an increase of $251 million from the previous quarter. Bringing the total increase for the year to $822 million or 30% increase from the beginning of the year. We expect our average earning assets in the third quarter to continue to grow as our investment pipeline continues to build. Our investment portfolio totaled $4.2 billion as of 6/30/2019 including $1 billion in agency RMBS securities, with $150 million in equity allocated a strategy or 9.8% of the total capital.

As Jason mentioned earlier, this investment is not a core focus for our investment strategy and we'll continue to represent a smaller percentage of our portfolio. We have $1.8 billion in residential credit as we continue to see opportunities, including subperforming and reperforming loans as well as non-agency securities backed by varying types of residential credit loans.

These investments are currently funded with repo lines, but we continue to evaluate both the rated and unrated markets for possible securitizations in the coming quarters. We have $1.4 billion in multifamily investments, representing 33% of total assets and 40% of our invested capital. In the third quarter, the company expense -- expects to find another Freddie Mac first loss investment for the -- totaling $48 million. A multifamily strategy continues to be a major contributor to the company's performance.

Recognize other income of $8.6 million during the quarter and given the nature of our business in our current accounting requirements, this will continue to be a significant part of our annual earnings, included in this quarter, and the $8.6 million was a total net gain of $12.3 million from our distress in other residential mortgage loans held at Fair Value, which was comprised of $9.9 million of unrealized gains and $2.4 million of realized gains.

We also had $2.1 million, the realized gains from sales during the quarter related to our distress in other residential loans, which were accounted for at carrying value. Yet unrealized losses of $15 million from interest rate swaps accounted for as trading instruments, which were offset by unrealized gains on our available for sale securities of $20.1 million, reported as a component of other comprehensive income.

We also had unrealized gains of $5.2 million, on our consolidated K-Series investments or Freddie Mac first loss securities driven primarily by tightening credit spreads. We had additional $2.17 and other income comprised primarily of $1.7 million in unrealized gains on joint venture equity investments, $1.7 million in income from preferred equity investments accounted for investments in unconsolidated [Phonetic] which otherwise would have been included in that margin, but for accounting purposes must be reflected in other income and $0.5 million of gain on early redemption of a preferred equity investment. The company also recognized that $0.8 million net loss from our interest in a real estate development property after giving effect to a non-controlling interest share of the losses.

For the quarter ended June 30th, 2019, the company had $9.8 million in G&A expenses as compared to $8.9 million in a previous quarter, majority, the increase or $600,000 was related to non-employee equity board compensation, which invested issuance following our annual meeting, which was held in June 2019. During the quarter, we finalized our exit of our third party management. Our final third-party management agreement and do not expect any more management or incentive fees in future quarters.

Well, the last 12 months of the company have been filled with new hires, an increase in capital base to over $1.7 million and the acquisition of more than $2 billion in new credit investments. The NYMT continues to remain focused on fulfilling its objective, to deliver long term stable distributions to our stockholders over changing economic conditions. To that end, the company has delivered a total economic return of 13.7% of the trailing 12 months ended June 30th, 2019, while maintaining a dividend payment rate of $0.20 per share, our 10th straight quarter at this level.

We appreciate your continued support and look forward to speaking about our third quarter results in early November. Our 10-Q will be filed on or about Friday, August 9th with the SEC and we'll be available on our website thereafter.

Operator, if you could please open for questions for Jason and myself. Thank you.

Questions and Answers:

Operator

[Operator Instructions] Your first question is from Doug Harter with Credit Suisse. Please go ahead.

Doug Harter -- Credit Suisse -- Analyst

Thanks. Just hoping you could talk a little bit about the returns you're seeing on that incremental capital deployed, I know in your prepared remarks you said it's kind of more challenging, you know, kind of the returns you're seeing on that incremental capital, how it compares to the existing portfolio, and therefore your appetite to continue to raise capital if the markets remain open to you.

Steven R. Mumma -- Chairman & Chief Executive Officer

Yeah, look, I think the way we feel about raising capital is we would not raise capital we didn't think we could deploy that capital into investments that are going to reach our targeted investment. You know, in our target investment right now, 12% to 13 % ROE, that ROE is going to be supported both by the asset and the financing on that asset, you Know, there's no question, one of the things that we look at is our agency portfolio and given the volatility of rates recently, especially, that investment is difficult to mean -- it's difficult to reach that target. With an extreme amount of leverage on that investment strategy. So if you look at some of our credit strategies, you know, Jason talked about one about distressed residential loans in our multifamily, one couple with the sources of leverage that we can put on those trades. We do believe over a two to three to four year horizon those investments will return that kind of -- will give us that kind of return.

Doug Harter -- Credit Suisse -- Analyst

And then just curious that 12% to 13%, how much of that is kind of current spread income and how much of that is kind of the expected kind of credit roll down, you know, kind of as -- as those season.

Steven R. Mumma -- Chairman & Chief Executive Officer

Yeah, look, I think, I mean you can get a sense of our financials over the last three to four years, which has generally been 60% to 70%, will probably 55% to 70%, and that margin in the balances and other income and many components that other income is realized and unrealized gains and losses on both residential multifamily. You know, when we get in, we're not a core net margin driving business only. We don't think which has to generally rely up a lot of that return on leverage. And so if you look at our leverage at 1.8 times, I think one of the reasons why we can deliver a more stable book value across these environments is that we don't have -- we don't depend on leverage to generate a -- the substantial part of our return. So I think that's really the strategy, and when you have lower leverage, you're going to have to get some of your return from improved credit asset performance, which is what we're targeting.

Doug Harter -- Credit Suisse -- Analyst

And then just just one more on that. I mean, again, your book value performance has been exceptional. But, if we go through a period of volatility, you know, I guess how could we think about that credit, you know, credit improvement piece of it, you know, over, you know, a recession or just a period of -- kind of moderate to kind of widening spreads.

Steven R. Mumma -- Chairman & Chief Executive Officer

Yeah, look, there's very little we can do general market credit spread widening, especially when the market gets a shock, right? So, I mean, we look at two things from the company's standpoint; one, the fundamental creditworthiness of the asset. And so, you know, there's two -- when we look at the credit assets, there's two components, fundamentals and technicals, technicals will be the market reaction to the events outside of our world that impact us and then fundamentals of the underlying assets. So we think the combination of lower leverage and the underwriting due diligence we put on the credit assets puts us in a position to better withstand credit events that come in the future, if we get into a 2000 event, 2008 event.

You know, it becomes difficult for everyone, but we still manage the portfolio where we believe that we can sustain those kind of market reactions. But the reality of it is we don't think we're going to see a 2008 event. We do think credit spreads could widen in the future. But we think where we sit from a credit standpoint and of exposure, our assets will perform very well, especially relative to other asset classes.

Doug Harter -- Credit Suisse -- Analyst

Well, I think. Oh, sorry --

Steven R. Mumma -- Chairman & Chief Executive Officer

Another way to protect yourself on credit performance is to seek assets where you have downside protection in the asset itself. So typically when we're looking at, for example, at the SPL market, an area where we're expecting improved credit performance from the borrowers, we're buying assets that are basically below an 80% LTV and we're buying that asset at a more than a 10% discount. So in those cases, the protection is built on the extra credit protection, you have on the underlying asset and at the discount. Initially, with lower -- rates, you expect that these borrowers will have better opportunity to refinance away and basically prepare a loan when their credit improves in the short term.

So in those areas, we look forward to lower rates with a better ability to actually monetize the borrower faster and with a downside credit protection, we have the underlying asset across just about everything that we do. We're looking for LTVs north of 20% lower than par value. So that's been a huge help. And part of the reason why we've been able to keep stability on our asset portfolio pricing.

Doug Harter -- Credit Suisse -- Analyst

I appreciate the insights there, guys. Thank you.

Steven R. Mumma -- Chairman & Chief Executive Officer

Thank you.

Operator

Your next question is with Eric Hagen from KBW. Please go ahead.

Eric Kagan -- KBW -- Analyst

Thanks, John, and good morning. I'm hearing you say just from the opening remarks that both multifamily and resi credit are both attractive. So of the two, which are you more favorably biased to in this environment? And when I say this environment, I'm really kind of zeroing in on the volatility that we've seen over the last even just last week. Thanks.

Steven R. Mumma -- Chairman & Chief Executive Officer

You know, I mean, the last week's volatility is something that we have to digest and see how it plays out. I mean, that's is something that, you know, the Fed eases rates by 25 basis points -- almost immediately we get a talk about increased tariffs and now we have a possible currency board, the markets are down. Rates have rally massively. None of that has really been reflected in the credit markets yet, either technically or empirically or fundamentally, Eric. In terms of allocation between the two, really, I mean, we've been fortunate enough to have access to the capital markets as we continue to trade above book value.

And so we've been able to not really restrict one investment thesis versus the other. We're in asset growing mode right now. And so as long as those yields are both attractive, we will continue to add them until we have to make a choice. But I think right now we continue to try to seek investments that reach the goal of what we said earlier of 12% to 13%. And, you know, that's will drive the decision making.

Eric Kagan -- KBW -- Analyst

Okay. And then on the -- on leverage, just kind of generally, I can see that you're clearly underlevered in the agency segment, but where are you underlevered? In the other two segments of the portfolio?

Steven R. Mumma -- Chairman & Chief Executive Officer

Yeah. Look, I think if you look at our loans, I mean, we have available funding capacity on loans, we have some of the loans that aren't financed. We have securities that are own finance. We have additional leverage, we could add various asset classes. So we may have borrowed against certain asset classes to just not up to the maximum level. So we could safely run the company at 2.5 times to 3 times leverage in our opinion. So that gives us some flexibility of leverage if needed.

Eric Kagan -- KBW -- Analyst

In the resi credit segment, specifically, like, is there -- I'm looking at you guys running maybe a little over one times recourse leverage. What would be the Max leverage that you think you can get based on the makeup of the portfolio today?

Steven R. Mumma -- Chairman & Chief Executive Officer

I mean, obviously, different asset classes such as performing loans versus sub performing loans at different leverage ratios. But, you know, we're seeing advance rates offered to the market anywhere from 95% on performing to, you know, in the 85% kind of market standard on subperforming and on both of those were basically 10% below leverage ratios. And we also have assets where we have not levered, where we think we can generate a double digit return based on the different qualities that asset and prepayments or monetization of the asset itself.

On securitizations you know, we can go to roughly 90% of leverage and that's an area we have not taken full leverage. And again, some assets we do not have levered because of our trading kind of methodology and looking at dislocations and taking advantage of this location to the trade. So a lot of the return on that asset class comes from a thesis of -- basically a credit spread tightening on the particular asset for various reason. And that's where the return is generated versus holding the asset to maturity with leverage that provides net income, you know, double -- equal to double digit return. So I think the reason why we're on the leverage, because our thesis is basically in and being able to monetize the discount that we bought the asset versus holding it to a maturity with high leverage.

Eric Kagan -- KBW -- Analyst

Got it. And then -- just on the distressed residential side, specifically, what does the supply picture look like over the next, just call it, 12 months? I mean, who's selling paper? And how much do you think will come to market, again, just over the next, call it, year? Thanks.

Steven R. Mumma -- Chairman & Chief Executive Officer

Right. So different -- one end of the market that has seen supply shrink quite dramatically isn't that in the non-performing loans side fortune for us, that's not where we're focused on loans there 24 month delinquent type of [Technical Issues] there's been only about $4 billion of supply there. On the RPL side of the equation you know, we're looking at $17 billion of supply thus far this year and we expect that to be continued grow. This portfolio is available out there in the billions of dollars. Typically we've seen is that banks have basically modified a large portion of their portfolio that were delinquent from 2010 to 2000 to today. And those loans not all of them have made it to a full performance ratio a lot of those loans still continue to pay and then default after a period of time.

So what the banks are doing is they're trying to basically clean up that those portfolios through sales, which are in the billions. Fannie, Freddie also sell these loans in the billions on a quarter-over-quarter basis. This is really a consequence of bad modifications that didn't get completed or didn't get -- didn't meet the borrower's needs as it relates to either payment reduction or LTE reduction. And those loans we're seeing in the market to be purchased. And that's why we're looking at more directed modification programs that are fitting the need for the bar -- on a case by case basis with -- higher touch servicing efforts is what our goal is and what we've been doing. So there's still some incremental supply out there and it keeps the market busy, but you know there is -- the -- when you talk about RPLs is a big spectrum of borrowers that are 24 month current borrowers are delinquent that only a couple of months. And we're generally focused in the case where borrowers have either recently paid or recently defaulted where we think we can keep the borrower paying over a period of time through more intense servicing efforts.

Eric Kagan -- KBW -- Analyst

Interesting. Thank you very much for the comments.

Steven R. Mumma -- Chairman & Chief Executive Officer

Thanks, Eric.

Operator

Your next question is from Matthew Howlett with Nomura. Please go ahead. Your line is open.

Matthew Howlett -- Nomura Securities -- Analyst

Hi, guys. Thanks for taking my question. Just getting back to the margin, and I appreciate the complexities with the GAAP financials, and I hear you with the -- the residentially the not performing to give you some of the cash accrual yield you have to recognize that as they could -- analysts and myself to look at the margin, we sort of focusing on that net interest spread. Anything can -- I mean the margin was 240, the reported margin was 240 last quarter, you kind of ended at 216 with the top line compression. Anything that's normalized that you can point us to? And will we continue to see good progress on that net interest spread, which has been going up consistently the last few quarters?

Steven R. Mumma -- Chairman & Chief Executive Officer

Yes. Look, I think when you -- one correlation you could definitely look at is, to the extent that the leverage increases in the overall company, you would expect the net margin to decrease right.

Matthew Howlett -- Nomura Securities -- Analyst

Right.

Steven R. Mumma -- Chairman & Chief Executive Officer

So as we add securities and put financing on that of four times to five times, those securities are going to have a lower yield than in some of our multifamily assets -- multifamily assets tend to have a much higher yield. So when you look at that 240 or 216, it's really a barbell strategy of lower yielding residential assets relative to higher yielding multifamily, but the leverage ratio relative and multifamily versus resi is four to five times difference.

So, you know, it's hard to pinpoint exactly where that margin is going to go, I think over the last six quarters, we've tended to generate between probably a low of 2% and a high of 2.60%, 2.75%. And I think if you look in those periods of the higher yielding assets, it's probably periods where we've added much more multifamily versus residential. I think this quarter we added 63% residential so while the net margin drop part of that drop was really related to the increase in leverage with some of the lower yielding residential assets. But you know, in general, Matt, I would say it's going to be between 2% and 2.5%.

Jason T. Serrano -- President

Another fact that comes to play, that we had $1 billion of distressed mortgage loans, which generally have some J curve attached to it, meaning that the borrowers -- to the extent we're buying delinquent loans, they're just delinquent do not provide for payment and then over time as we work with the bar, more consistent payments do come in that drives higher net interest margin. Just to give you sense, two thirds of loans that we purchase were delinquent at purchase after service and transfer and working with the borrower. Today, we have the inverse two-thirds of those borrowers actually are paying on a consistent basis. So you know that, you know, as we board loans --that are in the SPL spectrum, I think those are the assets where we have the most J curve effect, where net interest margin would be delayed because of the borrower's payment performance.

Matthew Howlett -- Nomura Securities -- Analyst

Got you. Directionally, though, the overall net -- the gross net just spread income and that's going to continue to go up -- as you deploy capital and it's been increasing at a very saturable. Do you expect the expectations for that to continue to increase as you grow the portfolio?

Steven R. Mumma -- Chairman & Chief Executive Officer

That's right, dollar net margin, you mean dollar net margin. Yes. Absolutely. No, absolutely.

Matthew Howlett -- Nomura Securities -- Analyst

Great. And then, you're moving, I just want to you know, for us, we're not -- you're sort of fresh mover in the multifamily K-series program. And you mentioned that you're going to target a deal in 3Q. And then we've also known that real pick up in your direct, you know, preferred mezzanine lending business. It can't just go over. What's the sort of return characteristic profile of each one -- and is the K-series, you've always had this consistent market right up in the -- these games and subs that going to continue even in today's credit spread environment?

Steven R. Mumma -- Chairman & Chief Executive Officer

Look, you know, we -- the market increase in value and the K-series bond. If you think about when we got into that investment in 2011 we entered into those trades, we were in -- we were earning high double digit yield on those investments 18% to 19%. Today that's a high single digit yield investment. And so if you think about that, roll down the curve on a 10 year asset that has no prepayment capabilities. There's a tremendous amount of duration in that asset class. So as you generate, you know, incremental improvements in yield of 25 basis points, it's a huge dollar price pickup across $600 million to $700 million portfolio. So what's driving the credit spread in is supply demand.

In my opinion and fundamentals on the multifamily, but -- last year and a half is probably as much technical factors in terms of supply and demand as opposed to fundamental credit. I mean, our assets are performing outstanding across all of our exposure, which is over $14 billion of loans. I think we've had three loans go bad, of which we've had minimal losses on those loans that we've been able to work out with the special servicer. So it's a great performing asset class. And I think to the credit of the agencies, they've been able to increase the market knowledge of these asset classes, which is improved, spread tightening. I mean, it's our detriment, but from a liquidity standpoint and availability standpoint, those assets had outstanding performance.

Matthew Howlett -- Nomura Securities -- Analyst

Just a last one for me on just on. You know, there's some moving parts on the operating expense line, it sounds like you had some onetime comp issues going forward you're adding people to great, I think you said that you've paid your sort of last external management fee. Just overall, I mean that operating expense ratio that should be let to continue to decline as you grow? And sort of what's the outlook overall? I know you provided some guidance earlier in the year? Thanks a lot.

Steven R. Mumma -- Chairman & Chief Executive Officer

Okay. Yeah, look from an expense standpoint, Matt, the -- we've hired the majority of our senior asset managers, if you want, if you will, in the company, I mean, we will continue to add support staff, but not significant expense increase. So, I would -- I would say that if you take out these $600,000 one time shot, that happens every year, it's 150 quarter, if you want to annualize it. The runway where we are is approximately where we're going to be, in the near future.

Matthew Howlett -- Nomura Securities -- Analyst

Great. Appreciate it. Thanks, guys.

Steven R. Mumma -- Chairman & Chief Executive Officer

Thanks. Thank you.

Operator

[Operator Instruction] Your next question is from Christopher Nolan with Ladenburg Solman. Please go ahead.

Christopher Nolan -- Ladenburg Solman -- Analyst

What's the effect on your cost of funds for -- this is the most recent fed rate cut?

Steven R. Mumma -- Chairman & Chief Executive Officer

Look the majority of -- all of our repos are going to be, are going to trade-off of LIBOR with some kind of base, either implicit or explicit, implicit would be the repos on its securities, so that's an immediate 25 basis points drop, and then on our bank borrowings that are funding the loans, it's also an immediate 25 basis point drop as well as any kind of LIBOR indication of forward easing. So it's definitely beneficial to the company for sure in that regard, but that's why we would look at possibly as rates continue to trend lower, we'll obviously look at securitization execution to lock in some longer term funding -- also, the immediate impact.

Christopher Nolan -- Ladenburg Solman -- Analyst

Also, you mentioned earlier that you can take the leverage of 2.5 of 3 times, which is consistent with your comments in past calls. Would you or just given a changing economic environment, these for tending toward a lower -- targeting a lower ratio -- leverage ratio to achieve your ROE target?

Steven R. Mumma -- Chairman & Chief Executive Officer

Yeah, I mean, look, if you're asking us to digest the last two days events, I mean, obviously, we would be more hesitant to put more leverage on the books. I think we always run the company, and we always look at the companies risk to leverage as the key fundamental issue that we have to manage on a day in and day out business. You know, historically, companies that have come under financial distress, it's not really been the assets, it's how you finance the assets, and that's sort of our mantra. And so we spend a lot of time thinking about how we finance the assets, but I mean, given the last two days of events, clearly, we would be hesitant to increase leverage. However, fundamentally, we will look at the actual assets that we're putting on leverage would also dictate that decisioning.

Christopher Nolan -- Ladenburg Solman -- Analyst

Final question. Given your stock is only trading about 3% above NAV, I mean, you can utilize the ATM, is the intent to continue to raise equity capital while the markets open.

Steven R. Mumma -- Chairman & Chief Executive Officer

Look, I think when we raise capital, it's twofold one, we want to make sure we can creatively add it to our capital base and two we have -- we believe that we have investments in the pipeline strong enough to support our current dividend yields. And so those are the two things that we're trying to do and we would always optimistically look to use it. And if we don't, you know, the ATM program is one source to add capital to the marketplace. The overnight program is a way to generate more capital in a shorter period of time as it generally related to an investment that we see in the horizon that's coming that's larger in size. But yes, as long as we are able to raise a accretive capital, we will continue to evaluate it.

Christopher Nolan -- Ladenburg Solman -- Analyst

Great. Thanks for taking my question.

Steven R. Mumma -- Chairman & Chief Executive Officer

Thanks.

Operator

There are no further questions at this time. I now turn the call back over to Mr. Steve Mumma.

Steven R. Mumma -- Chairman & Chief Executive Officer

Thank you, operator, and thank you, everyone, for being on the call. Jason, I look forward to speaking next November about our third quarter results. Thank you. Everyone have a good day.

Operator

[Operator Closing Remarks]

Duration: 40 minutes

Call participants:

Steven R. Mumma -- Chairman & Chief Executive Officer

Jason T. Serrano -- President

Doug Harter -- Credit Suisse -- Analyst

Eric Kagan -- KBW -- Analyst

Matthew Howlett -- Nomura Securities -- Analyst

Christopher Nolan -- Ladenburg Solman -- Analyst

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