Ready Capital Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 8 speakers on the call.

Operator

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Andrew Alborn.

Operator

Thank you. You may begin.

Speaker 1

Thank you, operator, and good morning to those of you on the call. Some of our comments today will be forward looking statements within the meaning of the federal securities laws. Such statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Therefore, you should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.

Speaker 1

During the call, we will discuss our non GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our Q1 2024 earnings release and our supplemental information which can be found in the Investors section of the Ready Capital website. In addition to Tom and myself on today's call, we are also joined by Adam Zazmer, Ready Capital's Chief Credit Officer. I will now turn it over to Chief Executive Officer, Tom Capasse.

Speaker 2

Thanks, Andrew. Good morning, everyone, and thank you for joining the call today. The persistence of higher rates and inflationary pressures continue to weigh in the commercial real estate sector. At this point in the CRE credit cycle, RC's near term ROE profile is impacted by 3 diverging trends. 1st, reduced ROE from credit impairment in the originated portfolio due to late cycle stress in the multifamily sector.

Speaker 2

2nd, increased ROE from ongoing liquidation of the M and A portfolio, reduced operating expenses and growth in our small business segment. The M and A portfolio comprises assets from the 22 Mosaic and 23 BroadMark acquisitions. And 3rd, more aggressive liquidation of targeted non performing loans in our portfolio. In the quarter, we transferred $655,000,000 of loans into held for sale, taking $146,000,000 valuation allowance against those loans. We have determined that the right path forward for this population, including all office loans without a short term resolution, is to reposition the capital into market yielding and cash flowing investments.

Speaker 2

The NPV of repositioning of this capital is greater than holding these assets through recovery and absorbing carry costs through the process. The book value per share decline of 4.5% will be recaptured through reinvestment and share repurchases. In this regard, for analytical purposes, we have bifurcated our $9,400,000,000 gross portfolio into the originated 87% of the total and M and A portfolios, which is 13%. Before we delve into credit metrics, it's important to reiterate that tail risk in our portfolio is mitigated by 3 factors. 1st, our concentration in multifamily and mixed use at 78% of our portfolio.

Speaker 2

Although overall market multifamily delinquencies increased in the Q1, longer term valuations are supported by demand with the average median home payment $3,000 exceeding rent by 50%. The current distress in multifamily, particularly transitional loans, is a trifecta of higher rates, declining rent growth from oversupply in certain markets and inflationary increases in OpEx. Compared to the peer group as it relates to rent growth, our 2020, 2022 vintages benefited from our proprietary geo tier model, which ranks markets 1 through 5, 1 being the best, with projected negative absorption a major factor. Recent data shows significant dispersion in rent metrics with supply influx in overbuilt markets causing mid single digit rent declines. As of March 31, 91% of our originated portfolio is in markets ranked 3 or better.

Speaker 2

Overall, multifamily industry prices are down 16% from the 22 peak with an additional 5% forecast for the 2024 bottom. Given our going in LTV of 62%, these changes result in a portfolio mark to market under 100% versus office where a 50% decline has created over 100% LTVs. We do not believe the increased delinquency in our multifamily portfolio is indicative of further principal loss. The financial effect will be short term earnings pressure the interim period between defaults and modification, forbearance or refinance. Unlike other CRE sectors subject to the vagaries of the regional bank and CMBS markets, multifamily benefits from the government put with $150,000,000,000 of annual GSE allocation providing a pathway for takeout of bridge loans requiring additional time to execute a business plan.

Speaker 2

Across the $1,300,000,000 of our loans that reached initial maturity over the last 12 months, 42% paid off with 90% of the remaining loans qualifying for extension. 2nd, our concentration in lower to middle market loans. Our $9,400,000,000 total portfolio includes approximately 1800 loans with an average balance of 4,400,000 dollars avoiding single asset concentration risk. In the broader multifamily sector, the disparity on refinance risk is wide where 95% of loans under 20 $5,000,000 paid off at maturity compared to 55 percent of loans over $25,000,000 We've seen this in our originated portfolio where 16% of loans over $25,000,000 dollars are 60 days delinquent compared to 7% of loans under 25%. And last, limited office exposure.

Speaker 2

As of March 31, our office portfolio consisted of 167 assets totaling $456,000,000 only 4.4 percent of our total portfolio. Further, only 11 of those loans had a balance of over $10,000,000 and were concentrated in central business districts. 31% of the office loans are delinquent. We believe that recovery of the current stress in the office sector is long dated and the NPV of repositioning of this capital is greater holding these assets through recovery and absorbing carry costs through the process. As such, 72% or $140,000,000 of our delinquent office loans are included in the population transferred to held for sale.

Speaker 2

Post this transfer and liquidation, our office exposure will decrease to 3.3% of the population. Next, an update on the credit metrics in the originated portfolio. Please refer to Slide 11 in the deck where we present 60 day plus delinquencies, non accrual and 4 to 5 risk rated percentages. Overall, 60 day delinquencies increased to 9.9%, resulting in a rise in the non accrual loans to 7.2%. However, the 4 to 5 risk rated loans, a leading indicator of future 60 day plus, exhibited positive migrations improving 29% to 9.6%.

Speaker 2

46% of our top 10 delinquencies totaling $137,000,000 are included in our held for sale bucket and have been marked to expected liquidation values. Liquidity is being prioritized for capital solutions including refinancing 4, 5 rated loans and protecting our CLOs. As of April 30, we had total liquidity of approximately $170,000,000 Year to date, we have either refinanced or repurchased $114,000,000 of delinquent loans out of the CLOs with another $190,000,000 in process. For example, in March, we refinanced a $68,000,000 loan on a Class family property located in an Austin, Texas submarket, which went delinquent due to high operating costs and lower rents from oversupply. The 18 month extension provides a path to reach projected occupancy of 94% from 90% today and 5% annual rent increases to $16.91 a month, both highly probable given the strength of the submarket and flattening absorption.

Speaker 2

The as is LTV on the new loan is 88%, funds and interest reserve to cover the 18 month term was priced at SOFR plus 5.85 percent resulting in a retained yield of 18%. In terms of projected liquidity through year end, accelerated asset sales will provide an additional $200,000,000 for Capital Solutions. As of the April 25 remittance date, 5 of our CRE CLOs were in breach of either interest coverage or over collateralization tests. To date, we have approved $161,000,000 of loan modifications with another $732,000,000 in process and under review. We expect the cumulative effect of repurchases, refinance and modifications to provide a path for compliance.

Speaker 2

One important factor to reiterate underlying Ready Capital's peer group comparison. We use a 3rd party special servicer, which requires additional lag time and less flexibility to execute modifications. As such, our modification ratio is lower and delinquencies inflated versus the peer group. For example, according to a Deutsche Bank CRE CLO report on April remittances, the top 3 commercial mortgage REITs based on GAAP equity had averaged 71% modifications and under 1% 60 day delinquencies versus 5% and 11% for RC, the 4th largest. We continue to work with our existing special servicer to rectify this issue and if unsuccessful, we'll implement alternatives such as another servicer obtaining our own special servicer rating.

Speaker 2

Furthermore, in our M and A portfolio, please refer to Slide 11 in the deck, overall credit improved. 60 day plus declined 9%, resulting in a 5.6% improvement in the non accrual percentage. Meanwhile, a 16.5% decline in 4.5 risk rating loans suggest future improvement. Turning to earnings. As outlined in our Q4 earnings call, we continue to undertake 5 initiatives to improve ROE.

Speaker 2

First, reallocation of low yield assets from the M and A portfolio into 15% plus levered ROE current yields, such as the 18% Austin refinance previously discussed. As of quarter end, the M and A portfolio had a levered ROE of 7.2%. As it relates to Broadmark specifically, which comprises 51% of the M and A portfolio, we liquidated an additional $50,000,000 of assets or 5% of the original portfolio at our basis. 2nd is leverage. Current total leverage at quarter end was 3.4x below our target of 4x.

Speaker 2

Target leverage will be achieved from both accessing the corporate debt markets and the leveraging of new investments at better advanced rates and terms. In April, we closed $150,000,000 5 year private term loan pricing at SOFR plus 5.50 dollars 3rd, the exit of residential mortgage banking. We continue to target the end of the second quarter to conclude our efforts to divest of our residential mortgage business. To that end, we are under contract to sell 40% of the MSRs with the remaining 60% currently marketed for sale with an expected July settlement. Distributable ROE in the business has lagged at 6.8%.

Speaker 2

4th, the growth of small business lending. Our stated long term target for the platform is $1,000,000,000 in annual originations with $194,000,000 in the first quarter, $47,000,000 over the prior quarterly record. To support this growth, we appointed Gary Taylor as CEO of Small Business Lending to continue the dual strategy of large and small loan 7 originations through continued integration of our FinTech I Business with the added benefit of cost efficiencies in loan origination and servicing. Additionally, we're excited to announce this week we signed a definitive purchase agreement to acquire the Madison One Companies, the nation's 2nd largest USDA originator. The transaction is expected to generate over $300,000,000 of USDA volume annually, expanding our government guaranteed small business offerings, while increasing the company's gain on sale earnings.

Speaker 2

And last is OpEx. Given market conditions and expected activity levels, we reduced staffing 11% in April, resulting in annual savings of $8,000,000 Those reductions in addition to $3,000,000 in other fixed operating costs results in a 46 basis point improvement to current ROE. The total 200 basis point to 300 basis point ROE accretion from these five initiatives provides a significant offset to the ROE drag from an increased non accrual percentage as the multifamily credit cycle matures. With that, I'll turn it over to Andrew.

Speaker 1

Thanks, Tom. Quarterly GAAP and distributable earnings per common share were

Speaker 2

a $0.44 loss and

Speaker 1

$0.29 respectively. Distributable earnings of $54,000,000 equates to an 8.6 percent return on average stockholders' equity. Earnings were impacted by the following factors. 1st, revenue from net interest income, servicing income and gain on sale declined 1.6% quarter over quarter. The $4,000,000 decrease in net interest income was driven by the addition of $347,000,000 of non accrual loans and the addition of $97,000,000 of leverage for which proceeds have yet to be invested.

Speaker 1

This was partially offset by $3,700,000 increase in realized gains due to a 25% increase in gain on sale revenue driven by a record quarter in SBA 7A production. The levered yield in the portfolio remain flat quarter over quarter at 11.5% as negative migration was offset by the continued reduction in equity allocated to our previous M and A deals. 2nd, operating costs improved 2% to 71,000,000 dollars Absent the effects of REO impairment and ERC loss reserves, which equaled $18,800,000 and are included in other operating expenses, total operating costs declined 14% to 52,100,000 dollars The improvement was primarily due to a reduction in employment costs associated with staffing reductions and lower professional fees associated with employee retention credit or ERC production. These improvements were partially offset by an additional $3,400,000 of servicing advances made in the quarter. 3rd, a $120,000,000 combined provision for loan loss and valuation allowance.

Speaker 1

56% of the increase relates to specific assets primarily across office properties each slated for liquidation in the coming months. At quarter end, the total provision and valuation allowance equaled 2% of the unpaid principal loan balance. Last, a $27,000,000 reduction in ERC income was offset by $30,200,000 income tax benefit. ERC production in the quarter totaled $2,500,000 and is not expected to increase further going forward. The income tax benefit was the result of restructuring that allowed us to benefit from previously recognized losses.

Speaker 1

On the balance sheet, book value per share was $13.43 compared to $14.10 at December 31. The change was primarily due to the valuation allowance on loans held for sale. This was offset by a $0.07 increase from share repurchases which totaled 2,100,000 shares at an average price of $8.88 In the capital markets, we renewed 4 warehouse facilities totaling over $1,000,000,000 in capacity, each used to support our CRE business. 75% of those renewals were at either net even or improved economics with the other bringing under market terms to market. On a go forward, we expect continued pressure on earnings to persist with the benefits of the initiatives Tom outlined earlier reflected in earnings towards the end of 2024.

Speaker 1

With that, we will open the line for questions.

Operator

Thank you. Our first question comes from Steve DeLaney with JMP Securities. Please proceed with your question.

Speaker 3

Tom and Andrew, you guys have been busy it sounds like. Just a fine point, Andrew, the reserve on the $650,000,000 held for sale, does that work out to about $0.85 per share hit to book value?

Speaker 1

Hey, Steve. Good morning. How are you? Yes, sorry, I was on mute. Yes, that's not right.

Speaker 1

It was a relates to a 4.4% decline in the book value. So doing the math there, it's a little less than

Speaker 4

the 80s and the mid-60s for you.

Speaker 3

Okay, got it. And Tom, the held for sale, the $650,000,000 reminds me a little bit about what we used to call, what was it, good bank, bad bank back in RTC days, I guess, or back in the S and L crisis before that. How comprehensive, I mean, in terms of identifying across different segments of the portfolio, is this primarily one group, whether it's bridge loans or is it pretty comprehensive a little bit of everything? And what's your confidence level that you've circled 80%, 90% of the problems you're likely to have? Thank you.

Speaker 2

Yes. It makes sense. And in terms of and I'll hand it off Adam, maybe you can kind of give Steve a little bit even more detail in terms of the selection of the population. But what we've done analytically in this quarter is we've separated the gross portfolio into the originated portfolio, which includes the small amount of acquisitions that we've done over the years, as well as the M and A portfolio. So we selected from both of those with the idea to do a net present value analysis where the discount versus book is recaptured via the significant reinvestment opportunities we have, which are 15 to 20 low-20s depending upon the either direct lending or acquisitions and Yes.

Speaker 2

Hey Steve. In terms of the selection of the

Speaker 5

Yes. Hey, Steve. In terms of the selection of the portfolio, certainly office, as Tom highlighted, our office exposure relative to our peers is still fairly low. But I think as we evaluate the net present value of really repositioning our capital, we think that that's greater than holding these office assets through recovery and absorbing legal costs to foreclose and carry costs to operate the property. So certainly, office is a big component of that.

Speaker 5

Secondly, I'd say on the BroadMark side, I think the continued high mortgage rates and construction cost have certainly continued to impact our residential land and development portfolio from that merger, especially in secondary and tertiary markets. So it's really the non core assets and really assets that would ultimately have large carry costs.

Speaker 3

And not part of your core ongoing lending programs is what I'm gathering? That's exactly right. Yes.

Speaker 5

That's exactly right. That's true. It's same

Speaker 3

transaction not from your own targeting that market and your own underwriting within ReadyCap.

Speaker 5

That's exactly right, Steve.

Speaker 2

Yes. And so Steve, it's really more of a as we said in the Q4, this was the most impactful in terms of ROE accretion, selling lower low yielding assets with long duration, which is essentially what this portfolio comprising Broadmark. And after this, our office will be down to nearly 3 a little over 3%. So that's how we selected the population.

Operator

Our next question comes from Jade Rahmani with KBW. Please proceed with your question.

Speaker 6

Thank you very much. What do you think distributable earnings would have been excluding the tax benefit? And what's a reasonable range do you think going forward? I estimated in our note $0.14 but wanted to get your comment on that.

Speaker 1

Yes. So when you look at the tax benefit, roughly $20,000,000 related to of the total related to the restructuring, which equates around $0.12 The one thing I will say is given the structure of the business, it does provide us the ability on a continual basis to optimize sort of the tax impact of our operating companies. And so, certainly an outsized tax benefit this quarter, but I do expect that line item to be somewhat volatile as those businesses evolve. On a go forward basis, when you look at core earnings, I think there are several moving pieces here to take into account. I think the first is when you look at the pace of putting non accrual loans back on accrual status that certainly will have the one of the largest impacts.

Speaker 1

So the revenue, the lost revenue on our non accrual population today is a little under $60,000,000 If you think about as we work with our special servicer to move through that, that equates to roughly $0.35 in annual core earnings, which is highly impactful. The next is obviously transitioning over that held for sale population, where the yields in that portfolio are negative today. So as that negative yield gets repositioned into market yielding assets, you're seeing go forward EPS accretion of in the range of 0 point $2 to 0 point 15 dollars So there's a variety of moving pieces and what you will see as we work through those issues and clear out some of the under yielding assets that some of the sort of larger one time items that have occurred over the last quarters, ERC income, some of the tax benefits get replaced by a more steady stream of revenue that is approaching our 10% target.

Speaker 6

So just to put that together, distributable earnings was $0.29 There was around $0.12 of tax benefit related to restructuring. So that gets to $0.17 And then there's $0.35 per year or $0.09 per quarter of income from non accruals. So

Speaker 1

Lost income, lost income.

Speaker 6

Yes. So that's $0.12 remaining is what DE could be like until you redeploy capital?

Speaker 1

No, sorry, just to be clear. The non accrual assets are earning euro today, right? So as they got and so the impact of those in the quartering stays nothing. So as those come back into accrual status through via the work that we're doing with the special servicer, the financial impact on a go forward basis will be a positive.

Speaker 6

Were those non accruals on non accrual through the quarter?

Speaker 1

The majority of them, except for the additional ones I mentioned in the comments, were there for the quarter.

Speaker 6

Okay. And then the next question would just be the loans held for sale, do you know what the delinquency rate in that pool is?

Speaker 1

Yes. So out of that, the total pool that moved there, 70% of that is in some state of delinquency.

Speaker 6

Okay. I guess the constitution of that is the majority of that the acquired loans from Broadmark and Mosaic or is it originated loans?

Speaker 1

It is a little less than an even foot. So 40% of that is coming from our M and A bucket and 53% is coming from, as Tom described, an RC loan. So it's really basically an even split.

Speaker 6

And then just lastly, the GMFS transaction, do you already have a signed sale agreement? And is that expected? Could you give a range of consideration that's expected?

Speaker 1

Yes. So it's being it will be broken up into 3 different components. The first two are the sale of the MSRs broken into the retail and non retail, which is roughly 40% of the non, 60% are in the retail. The non retail, we do have agreements to sell. The multiple on that is in the low to mid-5s, which is right around where we were marked at year end.

Speaker 1

The retail component is currently getting ready to go to market. I suspect that the execution there is also in the range of our mark. And then the last component will be the sale of the platform, which we do not have under contract yet, but suspect that that will take the form of book value plus an earn out or book value plus a slight premium in earn out. Our expectation is that all of this gets cleared up over the next 3 to 4 months.

Speaker 6

What's the range of proceeds just adding all that together?

Speaker 1

Yes, we expect the net proceeds after financing to be somewhere between $70,000,000 $80,000,000

Speaker 6

Thanks a lot.

Operator

Our next question is from Douglas Harter with UBS. Please proceed with your question.

Speaker 5

Hi, this is Corey Johnson on for Doug. Historically, you've generally issued about 2 to 3 CLOs per year. I don't believe you issued any year to date despite the CMBS market opening up. Could you maybe explain a little bit about like why that is the case? Andrew, do you want to

Speaker 2

touch on that? I mean, obviously, the origination volume is down currently, but maybe just discuss on the overall CRE CL strategy.

Speaker 1

Yes. So I think the drop off is just as Tom mentioned that bridge originations have been lower in the platform this year. As I look at our backlog and our future pipeline, I think there is a chance we bring a CLO to market as we move towards the end of the year, potentially in the Q1 of next year. It will continue to be a core part of how we finance the business. I think the structure it takes, whether it's a static or managed GL, whether we outsource special servicing or we converted special servicer, all things we're working through in advance of that PLO.

Speaker 1

But it certainly will continue to be a core part of our financing strategy.

Speaker 4

Great. Thank you.

Speaker 7

That was it for me. Thanks.

Operator

Our next question comes from Stephen Laws with Raymond James. Please proceed with your question.

Speaker 5

Hi, good morning. Appreciate the comments so far. I wanted to touch base on the follow-up on your comments in the prepared remarks about CLO and servicer. What is the process or timeline as far as changing your servicer or moving that internal? And your CLOs are static.

Speaker 5

I know you talked about that and the impact that has a lot on the last call, but how would changing the service or change your ability to either buy out loans before they DQ or replace them or modify more quickly?

Speaker 2

Adam, you want to comment on that?

Speaker 3

Yes. Hey, this is Adam.

Speaker 5

Yes, I'll just make some commentary on that. I mean, in terms of replacing the servicer, given that we're the directing certificate holder, we can certainly do that very easily. We just need to line up an alternative rated servicer to put into the CLL. So that would allow us to move quickly. And then also we'd have certainly significant flexibility on the modification front, utilizing our own extremely experienced team that knows these assets well, etcetera.

Speaker 5

I'd say from the servicing standpoint, the issues really that we've been experiencing is that it's taking too long for the 3rd party servicer to efficiently process the resolutions. We're certainly encouraging them to have a great sense of urgency to effectuate what's really a backlog of pending resolutions. So, once we assuming that we can get the special services there in terms of moving quicker, we've got like half a dozen modifications that are pending effectively north of $500,000,000 which we think is high probability to get a very strong number of them resolved in this quarter. Second, I think you asked about us becoming a rated special servicer. That full process from start to finish would take somewhere from 6 to 9 months.

Speaker 5

I think we have a solid team in place, strong guidelines, pretty good technology and whatnot. But I think again that would be like 6 to 9 months. So we're certainly we're continuing to have regular conversations with that 3rd party special servicer, but we're also, as Tom and Andrew noted earlier, certainly exploring other alternatives to give us more flexibility as we work through the crisis here.

Speaker 2

Yes. And just to add to Adam's comments, we've had as recently as this week put in place an action plan with the existing servicer. We do have a relationship with another special servicer who is a lot with a lot of experience in the transitional loan space. So that is definitely an option we're pursuing and pursuing it aggressively.

Speaker 5

Great. And as a follow-up to the previous question as rewarding future CLOs and issuance, do you really think about that as new origination volume or any deals going to be collapsed with collateral rolled in? And as you think about those structures, will you look to do managed deals? Do you feel like you get better pricing with the static nature that you have with the existing? How do you think about how you will structure those future CLOs?

Speaker 2

Historically, we Ready Capital, if you look at the universe of is probably what Adam a dozen or more issuers, market peaked at about $30,000,000 a year in 2021, 2022. We're the 4th largest issuer since inception. Our deals unequivocally have the most investor friendly structures. And that's A, static B, our triggers. Our triggers, like for example, what's the OC test, Adam, is 2 and the industry is 5.

Speaker 2

So that's how we structure the deal. And we did actually, 1 in the end. 1% even worse or even more conservative or investor friendly. So that did afford us pricing on the triples best in class in the peer group. Now in the current market, we're probably now more leaning.

Speaker 2

We're looking at refis in our existing book and leaning more towards the managed structure. But they were through the external manager, which manages our securitizations, we're one of the largest issuers across a broad array of ABS sectors. And I think at this stage of the credit cycle, we'll probably lean more towards more flexibility in exchange for slightly higher spreads on the triples.

Speaker 5

Great. And then just I was just saying just Tom just in terms of the I think the pool would be really a combination of legacy assets, some collapses, some new issuance And I think the top one, I think certainly evaluating the managed structure or some hybrid structure with certainly greater flexibility. Great. Appreciate the color on this. Thank you.

Speaker 2

Thanks for your questions.

Operator

Our next question comes from Crispin Love with Piper Sandler. Please proceed with your question.

Speaker 4

Thanks. Good morning, everyone. Just looking at the delinquency rates on the lower middle market slide of the presentation, first, do those rates include the loans held for sale? And if so, what would those delinquency rates look like absent the $655,000,000 of loans held for sale on a portfolio basis? And any other color that you think would be helpful?

Speaker 2

Yes, Adam or Andrew?

Speaker 4

Yes, I'm looking at that. I'm just looking at

Speaker 2

Go ahead, Aaron.

Speaker 5

Andrew, go ahead.

Speaker 1

Those numbers do include the delinquency rates from the held for sale loan. So it's inclusive of the entire portfolio. When you look at the held for sale delinquency rates,

Speaker 2

as I

Speaker 1

said before, they're much higher. So roughly 70% of that population is in some state of delinquency. So on a comparative basis, once those are sold, we expect the delinquency rate to come down quite a bit.

Speaker 4

Okay, great. That's helpful. And then just following up on Jade's question earlier, just how do you expect the movement of loans held for sale to impact near term net interest income and distributable earnings? And I guess just relatedly, what are your near term projections for core ROE? Andrew, it sounded like you said that you expected to trend closer to the 10% target, but just curious over the next couple of quarters?

Speaker 1

Yes. So in the short term, on a net interest income standpoint, I think this population of loans will continue to have very minimal effect given that the majority of them are not accruing today. As we move out of them and we are working to do so over the next 3 months and that capital gets repositioned either into new originations at market yields or refinancing of existing loans at market yields, it should add an incremental 12 to 15 of go forward EPS, right? So the combination of that repositioning and the modification work that's being done in the CLOs, which we expect to have, let's call it a $0.09 per quarter impact on EPS, pushes as we move to the back of this year, core earnings back towards that 10% target. I think in the interim period though, while we work through those, the financial effect will be fairly de minimis.

Speaker 1

Okay, great. And then just one last question. When do you

Speaker 4

think the loans held for sale will be sold? And are you already in discussions with buyers for these loans? And just any detail on what kind of buyers are looking at them, whether it's asset managers or mortgage REITs or mortgage finance companies, just anything there would be awesome. Thank you.

Speaker 2

Yes. I mean, Andrew, maybe sorry Adam, maybe you can comment on the overall strategy with specific brokers. And I would comment though and in terms of buyers wouldn't definitely not a lot of mortgage REITs, it's more private credit funds that have raised a lot of capital around the distressed CRE space and as well as mom and pop for these smaller Broadmark assets. But Andrew, Adam maybe you can comment on that.

Speaker 5

Yes, sure. I mean, listen, we've got a very large portfolio. This subset of loans, certainly very granular, mixed bags of mostly NPL and REO. I'd say a lot of the assets are already with brokers and or have purchase and sale agreements executed. So specifically around the REO bucket, the majority of those are with individual brokers in the market.

Speaker 5

On the loan side, the plan is to likely go out in a bulk sale on wholesale across a few different pools. I think the buyer for these, I think it's going to be regional folks that want to take these assets on given that they're NPL and really come up with a new business plan to redevelop the assets. And then certainly there's going to be debt funds looking at these assets for some of the larger office deals, where they can come in with operating partners for development.

Speaker 4

Great. Thank you. I appreciate you all taking my questions.

Operator

Our next question comes from Matt Howlett with B. Riley Securities. Please proceed with your question.

Speaker 7

Hey, thanks for taking my question. Just big first question from a high level, I mean, Tom, where are we in the commercial real estate cycle? Mean, I'm assuming a lot of these delinquencies were 21 low cap rate vintages. Can you give us an indication whether you think the worst is over here?

Speaker 2

Yes. I mean there's 8 food groups in the Moody's End Crief and there's 8 answers to that question. But the one that's relevant for Ready is obviously multi and that's 80% of our exposure. So to answer that very briefly, yes, we believe that it's rotational bottoms in submarkets, which are tied to supply hitting the market that the multifamily starts were up since 20 20, I think, to the early this year or late last year up like 50%, 60%. They're now down year over year at 35%.

Speaker 2

So what you're seeing is price declines and therefore rent declines in select submarkets where there's a lot of supply hitting the market. So certain markets, so to figure the bottoms in each of the markets, you look at the amount of supply and how long it takes to absorb that excess supply before the market bottoms. And overall, we were down 16% in multifamily prices. We think we have another 5% to go. But broadly speaking, we think the bottom is sometime in the later half of twenty twenty four with significant variations in markets.

Speaker 2

And again to reemphasize what we said in the earnings call, we use a geo tier model for years to break markets 1 through 5 and one major input in model is negative absorber supply and negative absorption. So we've dodged a lot of the big bullets like in Austin, Texas for example. But that's so that's so we think at the end of the day, the multifamily valuations are floored based on the huge delta in buy versus rent. The average monthly payment in United States now is nearly $3,000 for a medium priced home and the average rent is a little under $2,000 That's a 50 year high. So that will underpin the demand for apartments in relation to as single family and also create a floor multifamily valuations, which is why we're highly confident in our legacy book because of the going in LTV of low 60s.

Speaker 2

Even with these declines, there's a government take out through Fannie Freddie and they just need some time to work through the business plans and but the valuations we think are unlike office, which is a we think a 5 year secular decline, multifamily is solid.

Speaker 7

Got you. The way you explain it makes complete sense now. I appreciate that additional color. And perhaps I should have started off with the first question. I should congratulate buying back shares here, selling loans and buying back shares at 100% upside potentially.

Speaker 7

What can you tell me in terms of the pace of repurchases are up in April versus Q1? Would you like to see that April base continue? Could we see Dutch tenders when you get big pools of capital in? Just curious on share repurchase of EPIC really come in everybody therefore for buying that shares.

Speaker 2

Thanks. Ann, do you want to comment?

Speaker 1

Yes. So we have $50,000,000 remaining on our existing share repurchase program. I think we will continue to utilize the program while also balancing the need to use liquidity both in terms of protecting our CLOs as well as putting money to work in a very attractive environment. As you mentioned, the return profile on repurchasing shares is very attractive at these levels. And certainly as we as proceeds come in from sales and payoffs, we'll evaluate whether the $50,000,000 is a sufficient amount allocated to the repurchase when we get through it all.

Speaker 1

But I do expect that repurchases assuming liquidity levels remain healthy, margin risk in the portfolio remains really small. I do expect it to be a part of what we do going forward. My

Speaker 7

$0.02 for what it's worth is if you can put capital where it's something that could be worth 100% up for us. I know you're getting 20% on new investments, but clearly share repurchases at these type of discounts, NAV, just look like the best use of capital. I mean, obviously, in the context of all the other liquidity that you're managing. And I appreciate you guys are out there doing it, and it's nice to see. Last question, Andrew, what was the coupon on the term loan?

Speaker 7

And then we're seeing the REITs out now issuing 5 year paper, 8%, 9% unsecured. What is what can you tell me on the non secured side? Maybe you're going to be out in the market? Is that a channel open to you?

Speaker 1

Yes. So the term loan price is SOFR plus $5.50 on a not tax affected though. So we will be able to tax back the interest cost of this issuance, which will bring it down into the 7s. In terms of accessing other corporate markets, certainly see deals get done and we explore them on a continuous basis. And I do think as we move forward and we evaluate the liquidity needs of the company, it will we'll consider all options.

Speaker 7

Great. Look forward to that. Thanks everybody.

Operator

Our next question comes from Jade Rahmani with KBW. Please proceed with your question.

Speaker 6

Thank you very much. Can you give any color on the other income line, which is around $15,000,000 and also the other operating expenses, which was about 30,000,000 dollars

Speaker 1

Yes. So in the other income, the biggest driver is going to be the contingent equity rate, which was offset by losses that are also included in core. So the net impact of that is 0. On the operating side, the biggest one in there is impairment on REO, which flow through that through that line item. That was roughly $17,000,000 in the quarter.

Speaker 1

There's also carry costs on REO like tax expenses, etcetera, that flow through there. But the main one was the REO impairment this quarter.

Speaker 6

So I guess on the $15,000,000 of other income, I mean in the 10 ks, the description is that it includes a whole variety of stuff, your 10 Q is not out, but origination income, change in repair and denial reserve, employee retention, credit consulting income, are those line items expected to continue?

Speaker 1

Origination income will continue. So a little flow through there are mainly fees received from Redstone. That was down slightly down $2,000,000 quarter over quarter. So that will be a continuous item. The repair and denial reserve relates to the reserve we put on the books on the guaranteed portion of 7 loans.

Speaker 1

In the event that a loan goes delinquent and we do have to repair the SBA for that default. The reason it's there in the income line item is that when we purchased the business from CIT, there is a fairly large reserve put in there. I would expect that dollar, that line item to get smaller over time. Employee retention credit income in that line item was down $27,000,000 quarter over quarter. It's now included $2,500,000 in Q1.

Speaker 1

I would expect that to trend towards euro as we move throughout the other throughout the rest of the year. And then, the contingent equity right, which is sort of the last remaining bucket that's flowing through there, will also fade away as we get to the end of the Mosaic transaction. So the main items inside other income absent other things that come through the business in the future really is going to be our origination income.

Speaker 6

Okay. That's great. And then capital plans aside from a potential CLO, are you contemplating anything at this point?

Speaker 1

We are not.

Speaker 6

Okay. I thought there was a plan for some sort of unsecured debt or preferred, I guess, the term loan was issued and maybe that's what you were previously referring to?

Speaker 1

Yes. With the execution of the term loan, the proceeds from the sale of the held for sale loans, as well as just the natural liquidity projections in the business, we're pretty well positioned for the immediate term. Obviously, as we've moved to the back half of the year, we will balance the opportunity set on the investment side with the opportunities for raising additional debt at that point. But in the short term, the liquidity forecast for the company is quite healthy.

Speaker 6

Thanks a lot.

Operator

We have reached the end of the question and answer session. I'd now like to turn the call back over to Tom Capasse for closing comments.

Speaker 2

I appreciate everybody's time and look forward to the second quarter earnings call.

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Earnings Conference Call
Ready Capital Q1 2024
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