Jason Weaver: Hey, good morning. I wonder if you could give some context behind the sort of reluctance of regional banks to be involved in RTL and commercial transitional space. Amid what we’re hearing for the last few quarters from more competition from non-banks and how that’s affecting available yields.
Mark Tecotzky: Yes, this is Mark. It doesn’t surprise me that regional banks aren’t involved in this sector. This is a sector where it is a – it’s a heavy underwrite. You need to have a team of people that are knowledgeable about construction costs, construction timelines. It’s not necessarily the kind of expertise you have in a lot of these regional banks. And the other thing is, it’s a lot of work for the dollars you put out as opposed to like lending to a commercial developer, putting a multifamily here. Here we’re putting out money, $250,000, $300,000 at a time and there’s not only the initial underwrite, but there’s also draws you have to supervise. So we like the fact that this sector doesn’t attract regional banks and it doesn’t really attract sort of generic, middle of the fairway mortgage originators.
Yes, the space is competitive, but it always seems like every space we’re in is competitive. I don’t view this space as more competitive now than what it was a few years ago. You’ve had a couple new entrants, but you’ve had some entrants – you had some other people that used to be involved, no longer involved. So we have not had an ability sourcing loans, and we do not feel like guidelines among the competitors have loosened and has pressured us to relax guidelines at all. If anything, we got actually a fair bit tighter in 2022 in terms of our guidelines and how we underwrite.
Jason Weaver: Okay, thank you. And then apologies if I missed it during the prepared remarks, but can you give an updated book value and leverage where you’re seeing that currently?
Mark Tecotzky: So we haven’t given on April yet. Ordinary course, we put out a book value per share estimate for each month end, that will happen later in May. And then in terms of leverage, we haven’t given the precise current leverage amount. Larry did mention in his prepared remarks that we’ve been active deploying in April. And that we also securitize the non-QM loans which come off balance sheet. But net-net leverage has ticked up quarter-to-date. So far we haven’t quantified that, but that’s a color we did provide.
Jason Weaver: All right, thanks for taking my questions.
Mark Tecotzky: Thank you.
Operator: Thank you. Our next question will come from Eric Hagen with BTIG. Please go ahead.
Eric Hagen: Hey, good morning. How are you doing, guys? You talked about being well-hedged for a higher for longer environment. Are those mostly interest rate hedges that you’re talking about? And do you think about adding any credit hedges to help mitigate some of the risk in areas like the bridge portfolio and the CRE portfolio? Or is just the underwriting really kind of the hedge, if you will? Thanks.
Mark Tecotzky: Hey Eric, it’s Mark. So that being well hedged for higher for longer, I mean, I think I would just say, I’d take a step back in that, we’re always well hedged. We’ve always tried to mitigate interest rate risk at the company level by a series of rate hedges. So, I just think Larry’s comments in the prepared remarks is that, if you are in this higher for longer environment, you think our portfolio construction and our sourcing channels can do really well there, commercial bridge, RTL, short spread duration, the commercial bridge, all indexes, SOFR. So that’s the kind of stuff where you get a big yield, a big coupon if the Fed keeps short rates higher. In terms of credit hedges, we’ve had those. Like, we’ve had credit hedges against non-QM for a while.
And they function in two ways. One is just really sort of like overall macroeconomic credit hedge, but the other way they function is hedging spread risk for securitization. In particular like, some of the IG indices now have done really well on the year. Like the current IG index is right around 50. So that to us seems like a hedge where owning protection on that, we have kind of limited downside and it can certainly mitigate NAV volatility of spreads wide. And it was kind of interesting, we priced our non-QM deal right when you had that sort of little like credit cheapening in April, and that IG index widened out 5 or 6 basis points in time of our pricing. And when we priced, we were able to get good execution. But now that we had sold some of that risk into the market, we bought back some of that hedge.
So, I think, the credit hedges, for a long time we had sort of CMBX-specific credit hedges on CMBS B pieces. That’s less of what we’re doing now. CMBX has gotten a little bit less liquid, but the credit hedges you see from us now are more referencing corporate indices. And they’re in part for sort of overall macroeconomic risk, but they’re also to just sort of manage on spread volatility.
Eric Hagen: That’s a great detail. I appreciate that. You mentioned the non-QM execution, let’s talk about that. When you do a securitization at these rates and spreads, can you share kind of what you think is the all-in return, including the ROE on the retained piece of the credit from the transactions, and including any loss estimates you sort of expect that’s embedded in that return profile? Thank you, guys.
Larry Penn: Yes. JR, do you want to take that? Wasn’t sure how much disclosure we normally give.
JR Herlihy: Let me think about that. We don’t give precise ROEs. I think we can speak broadly on, we can start with where we price the AAAs, and we can compare that and the total capital stack. I think mid-teens is where we pencil is kind of the punchline. As we build up to the components of that, let me think about that, Eric, and how we can kind of provide some more color on how we get from A to B. But big picture, mid-teens with, I think, conservative underwriting assumptions going forward is where we’re penciling always on those.
Larry Penn: Yes. Let’s see what we can provide here. So, first of all, when we do a securitization, right, like sometimes those are non-QM securitizations, sometimes they’re consolidated and sometimes they’re not, right. And that’s an accounting distinction, obviously. But we really don’t think of them differently, right. We really are thinking of them always as, okay, we did a securitization and now we’ve transformed our loans into the retained tranches. And we put a value on those retained tranches, right. So if you sort of think of this as a sale of the loans and a purchase of the retained tranches, which it’s not always accounted for that way, but let’s just say we kind of try to think of it that way, then you’re going to recognize a gain or a loss kind of on that securitization, right.
