Ready Capital Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 9 speakers on the call.

Operator

Greetings, and welcome to the Ready Capital's 2nd Quarter 20 24 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andrew Oborn, Chief Financial Officer.

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 Q2 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 Zazner, 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. While we experienced a challenging quarter marked by what we believe will be bottoming multi family credit fundamentals, we successfully executed several initiatives discussed on our last earnings call. These included active asset management, reallocation of low yield assets, adding accretive leverage, the ongoing exit of the residential mortgage banking and growing our small business lending platform, which together better position the company for earnings growth as we move into 2025. As we've done in prior quarters, we present credit metrics for both the originated CRE and M and A loan portfolios.

Speaker 2

To begin, all credit metrics across our $7,900,000,000 originated CRE loan book improved quarter over quarter. First, 60 day plus delinquencies improved 2 70 basis points to 5.2% as of June 30. Notably, office continues to dramatically underperform our core sector multifamily. Office constitutes only 4% of the portfolio, but represents 16% of the delinquencies with 60 day plus delinquencies of 26% compared to multifamily at 6. Second, a 460 basis point improvement of riskScore 4 and 5 rated loans to 5%.

Speaker 2

And 3rd, non accrual loans declined 120 basis points to 4.6%. Additionally, 91% of accruing loans pay current. The remaining 9%, which feature a PIK component, have an average current mark to market LTV of 86%. The quarterly improvement in credit metrics was a result of 2 active asset management strategies on our part. Through June 30, we have modified 25 loans totaling $801,000,000 in our originated CRE bridge portfolio with 82% completed in the 2nd quarter.

Speaker 2

The modifications focused on projects with healthy fundamentals requiring additional time to stabilize and secure permanent financing. Modifications had the following average metrics: in place debt yield of 5%, term extension of 12 months, 25% included spread reduction of 170 basis points and 50% of sponsors contributed fresh equity. 2nd, we focused on the sale of underperforming assets where the net present value of liquidation exceeded in house asset management strategies in both the originated and M and A portfolios. As discussed last quarter, we transferred $720,000,000 of loans into held for sale comprising 47% originated and 53% M and A. Upon transfer, we recorded $138,000,000 valuation allowance net of tax benefits.

Speaker 2

Through today, $576,000,000 of the portfolio is either under contract to be sold or has closed. These sales are expected to generate incremental annual earnings of $0.24 per share from a reduction in interest and carry cost as well as the income generated from reinvestment. Closed loans were reflected in quarter end credit metrics with potential further improvement from loans closing post quarter end with the earnings accretion benefit beginning in the Q4. Origination activity at our CR loan business totaled $256,000,000 in the quarter, comprising 61% in our transitional and 39 percent Freddie Mac, with the latter experiencing an uptick to $122,000,000 in July. We continue to reposition our M and A portfolio, which consists of assets acquired in the Mosaic and Broadmark mergers to reallocate the capital into our core businesses.

Speaker 2

As of June 30, the loan portfolio totaled $1,100,000,000 across 81 assets with improving credit performance. 60 day plus delinquencies improved 9 10 basis points to 15%. The portfolio has a subpar levered yield of 10.8 percent, but post completion of our loan sales, we expect this portfolio to total $775,000,000 and levered yields to increase to 11.6%. Now one additional observation on our overall CRE portfolio. In the quarter, continued negative migration in office loan credit negatively impacted peers with significant office concentration.

Speaker 2

Our recent asset management activities has further derisked our portfolio. At quarter end office exposure net of specific reserves was reduced to 4% of loan exposure with planned liquidations reducing this to a targeted 3% by year end. Of the 3% remaining, the average loan balance is only $2,800,000 and 85% are performing. Meanwhile, 82% of our portfolio is concentrated in mid market multifamily, where with a nationwide affordability gap driving rental demand, stress primarily relates to negative leverage and the recent rate rally is a green shoot. Now turning to our small business lending segment, origination of SBA 7 loans exceeded target growing 80% year over year to $217,000,000 and puts us on pace to achieve our $1,000,000,000 target run rate by the Q4.

Speaker 2

The quarterly volume was split 37% from our legacy large loan business up to $5,000,000 63% from our FinTech I Business, which specializes in loans under $500,000 In addition to organic growth, the company has a successful history of acquiring independent standalone operating companies that are complementary tuck ins to core lending strategies, such as I Business in 2019 and Redstone, our Freddie Affordable segment in 2021. This contrasts with our Anworth 2020 and Broadmark 23 acquisitions, which were primarily accretive capital raises. We closed on 2 strategic acquisitions in the quarter for cash, which support origination growth in our small business lending segment through expanded product offerings and increased market share. First, the acquisition of the Madison One Company is one of the largest national USDA lenders. The USDA program provides 80% government guarantees on commercial and real estate loans in rural areas and complements our core 7 offering with similar economics.

Speaker 2

These include gain on sale revenue from the sales of the guaranteed portion, our retained servicing strip and the net interest carry on the retained portion. Forward 12 month originations are expected to be $300,000,000 which adds $0.10 to annual EPS once fully ramped. 2nd, the acquisition of Funding Circle U. S. Platform by I Business, which is expected to increase 7 small loan production by leveraging Funding Circle's leading front end technology and established origination channels.

Speaker 2

Additionally, Funding Circle's core business loan product allows us to monetize leads from SBA 7 turn downs. Integration and rightsizing the platform are expected to be complete by year end with projected 24 hour earnings drag of $0.04 per share and profitability achieved in 20 25 dollars with EPS accretion of $0.05 per share as we move through next year. Looking forward, we believe organic growth in these platforms will over time enable us to comfortably exceed our $1,000,000,000 target and achieve number 3 USA market share. The high ROE capital light element of our small business lending segment is a clear and we believe underappreciated differentiator among our peer group as it provides earnings contribution in a countercyclical manner compared to CRE. Now turning to earnings.

Speaker 2

As outlined over the last two calls, we continue to execute on 4 initiatives to improve EPS by year end. First, the reallocation of low yield assets into 15% levered ROE current yields. As discussed earlier, our sale efforts are expected to generate incremental annual earnings of $0.24 per share upon full reinvestment. 2nd, leverage. Current total leverage at quarter end was 3.5x below our long term target of 4x.

Speaker 2

We continue to pursue adding accretive leverage, including the collapse and re securitization of underlevered CLOs and the rotation into secured and corporate debt when accessible. The annualized EPS contribution from a half turn of leverage at current spreads is $0.08 per share. 3rd, the exit of residential mortgage banking. In the quarter, we completed a sale of 40% of the MSRs at a $3,000,000 premium to our basis with the remaining 60% coming to market shortly with expected settlement in the early Q4. The platform sale is expected to close also in the Q4.

Speaker 2

Total proceeds from the sale of the MSRs in the platform are expected to be approximately $50,000,000 with annual EPS accretion upon reinvestment of approximately $0.04 per share. And 4th, as described earlier, growth of the small business lending platform, which upon stabilization of our recent acquisitions and projected growth, we expect to add an incremental annualized $0.20 per share contribution. The potential annual cumulative earnings impact of these efforts is $0.56 per share. We believe that even probability weighted the success of each, the actions will lead us returning to achieve our 10% annual return target. We're confident about the future earnings potential of the platform.

Speaker 2

At the same time, we're acutely aware of recent challenges, including not reaching our 10% target. Our recent strategic efforts have focused on initiatives that prioritize long term earnings power rather than delivering immediate benefits. The impact of commercial real estate recession has been felt and we believe that the tides are turning in this CRE cycle with green shoots in the form of rate declines and in multifamily peaking deliveries and improving transaction volume. With that, I'll turn it over to Andrew.

Speaker 1

Thanks, Hung. Quarterly GAAP and distributable earnings per common share were a loss of $0.21 and income of $0.07 respectively. Distributable earnings less realized losses on asset sales was $0.19 per common share, equating to a 5.8% return on average stockholders' equity. Earnings were impacted by the following factors. 1st, revenue from net interest income, servicing and gain on sale increased $6,200,000 or 9 percent quarter over quarter to $73,700,000 dollars The change was driven by $2,400,000 of growth in net interest income due to $229,000,000 of net loans returning to accrual and a $3,800,000 increase in gain on sale revenue due to incrementally higher loan sales of 35,000,000 dollars at premiums averaging 11%.

Speaker 1

The levered yield in the portfolio increased to 16.3% due to the liquidation of $140,100,000 of under yielding assets and a higher percentage of accrual loans. 2nd, a net increase in the combined provision for loan loss and valuation allowance of 57,500,000 dollars The movement was the result of both marking loans that are under contract to sell to final execution prices and the markdown of additional loans expected to be sold. For loans under contract or sold, which totals $579,000,000 in unpaid principal balance, the quarterly impact net of tax was a loss of $44,000,000 or $0.26 per share. These sales are expected to reduce interest expense and carry costs by $21,000,000 and generate $121,000,000 in incremental liquidity. For the remaining loans, there was an incremental benefit of $6,800,000 net of the effects of tax.

Speaker 1

In addition to the provision and allowance activity, we liquidated $42,000,000 of REO at a quarterly net loss of 4,100,000 dollars For the remaining REO, we took a $9,100,000 charge off. The cumulative effect of all REO activity in the quarter was a loss of $0.03 per share net of tax. The cumulative year to date effect of all loss, provision and allowance activity related to the disposition of REO and non performing loans is a book value decline of 7.5%. And third, operating costs improved 15% to $65,800,000 Included in our operating expenses are REO charge offs of $9,100,000,000 Absent the effects of REO charge offs, the normalized operating expense ratio was 6.7 percent as a result of cost cutting initiatives completed earlier in the year. We expect operating costs in our core business continue to improve throughout the remainder of the year.

Speaker 1

These improvements will be offset by the effects of the Funding Circle acquisition, which is anticipated to add an additional $8,000,000 or $0.05 per share in operating costs over the next two quarters. On the balance sheet, book value per share was down 3.5 percent to $12.97 per share. The change was primarily due to mark to market or realized losses on loans and REO liquidations and an $18,300,000 reduction to the bargain purchase gain associated with the Broadmark transaction. Our expectation is that the book value per share is reflective of the clearing levels to execute our portfolio repositioning efforts. In the quarter, we repurchased 2,300,000 shares at an average price of $8.61 Liquidity remains healthy with $226,000,000 of unrestricted cash and an additional $40,000,000 in committed but undrawn borrowings.

Speaker 1

With that, we will open the line for questions.

Operator

Thank you. The first question we have is from Crispin Love of Piper Sandler. Please go ahead.

Speaker 3

Thank you. Good morning, everyone. Can you give a little bit more detail on the loan sales that occurred in the quarter? If I'm thinking about it right, you made roughly $460,000,000 of sales, took that $20,000,000 of realized losses on those. First, just how that compared to initial expectations?

Speaker 3

Were there multiple buyers there? I'm curious kind of for the non banks asset managers. And then how would you feel on the progress on I think it should be probably about additional $100,000,000 or so that needs to be sold that's not committed and then timing there? Thank you.

Speaker 2

Yes. Andrew, Adam, you want to comment?

Speaker 1

Yes. Adam, why don't you take the first part on the buyers and then I can walk through the financial effects.

Speaker 4

Yes, sure. I mean, from a buyer's perspective on the loan sales that we put out for bid, we got back roughly 15 individual buyers for the pools that we have in the market. They're mainly regional investors and some local groups specifically where we were liquidating land assets through the Broadmark transaction. These investors at the local level certainly help push up pricing. And we got much more favorable sales prices by kind of the local folks that knew these markets well, as opposed to selling as an outright pool.

Speaker 1

And then in regards to the financial facts, just on a to start on a year to date basis, for loans that have either closed, which is roughly $20,000,000 and loans that are under contract closed that will settle in the Q3, which is roughly $550,000,000 The cumulative impact, the EPS impact for the year was $0.70 That's net of tax. In the quarter, the EPS impact was $0.26 So that'll provide the delta

Speaker 2

from where we are marked

Speaker 1

in March. When you look at what is remaining, it's a little under $130,000,000 in balance, mostly comprised 70% of loans that are 60 plus days delinquent, 50% of that is office. They've been marked down to even further when further than where the trades got cleared. So the trades that did clear, cleared around a 70% level. The rest of the pool has been marked down to roughly $0.50 and it's dependent upon the collateral.

Speaker 1

So for example, office has been marked down roughly to 25%, multi is a little bit higher. That gives you a sense of the financial effects and we expect to continue to move out of that pool as we work through the rest of the year.

Speaker 3

Great. Thank you, Andrew and Adam. Appreciate the color there. And then just on the core earnings trajectory going into the back half of the year, I know you gave a lot of detail in the prepared remarks, but just curious on how you'd expect core earnings to trend to the back half of the year, what the main drivers are and then narrowing the gap between earnings and the dividend to get closer to that 10 I'm

Speaker 1

just

Speaker 3

Just curious on your thoughts there as we get from if we take the 2Q, call it, kind of core earnings less the realized loss of $0.19 and how that builds going forward?

Speaker 2

Yes. I mean, we provided last quarter and this quarter a bridge with respect to the 4 initiatives we're undertaking, the lead one being reallocation of low yielding assets and elimination or reduction of non accruals. But Adam, I'm sorry, Andrew, maybe just comment on terms of the timing and accretion.

Speaker 1

Yes. So when you look at the quarter in the $0.19 I'd say that is a fairly deflated starting point to begin with. So in the quarter, there were a couple of one time items that are included in core like reserves, repair and denial in the SBA, some bad debt expense related to ERC. They continue to wind down of the purchase future receivables book. So the cumulative effect of all those one time items was roughly $0.02 to $0.03 So let's say the starting point is more in the low 20s when you look at core earnings.

Speaker 1

The bridge to dividend coverage really focuses on the items that were in Tom's prepared remarks, starting with this portfolio cleanup exercise that we've undertook. That is expected just from a reduction in carry costs and interest alone to generate $0.03 per share on a quarterly basis. The reinvestment of proceeds, which are expected to be a little north of $120,000,000 at market yield today, produces another $0.02 to $0.03 per quarter depending on the yield. And then when you look at the investments we've made this quarter, mainly into operating platforms rather than our core loan book, and specifically with Madison One, that business should generate anywhere between $15,000,000 to $17,000,000 in annual net income, given that it has an existing servicing asset, etcetera. That should produce another $0.02 to $0.03 per share.

Speaker 1

And then just continued organic growth of our existing SBA business and just repositioning of our the normal cadence of the portfolio. So I do think there's a clear path to getting back to that 9.5%, 10%, 10.5% return level, which would cover the dividend. In terms of the timing, a lot of these items will occur over the next couple of months. So some are more immediate. For example, the reduction in carry costs will happen as soon as trade settle.

Speaker 1

The reinvestment will take throughout the remainder of the year. Madison 1 is going to take a month or 2 to get their pipeline up to speed and get back online. So I do think the full financial effects of these items will not be felt until we move into 2025. When you look at the remainder of 2024, we'll certainly feel some of the benefits of these activities, but we'll also have other items weighing on earnings. For example, Funding Circle is going to have a negative drag on earnings for the next two quarters before it turns profitable.

Speaker 1

But I do believe as we move into 'twenty five, there's a path to getting back to

Speaker 2

the return levels we expect.

Speaker 3

Okay. That's all sounds good. Thank you, Andrew. Thank you, Tom. Appreciate you taking my questions.

Speaker 2

No problem. Appreciate your time.

Operator

The next question we have is from Douglas Harter of UBS. Please go ahead.

Speaker 5

Thanks and good morning. I was hoping you could talk about what is your appetite and what would be the

Speaker 2

It's interesting. There's very limited M and A opportunities because there's only 14 or 15 non bank licenses. Actually, we the there was a lot of hullabaloo in Congress about the funding circle license. So we terminated that in conjunction sorry, the FBA, we facilitated with the FBA the termination of that license and maybe it'll be reallocated. But the punch line is most of the participants are banks.

Speaker 2

This is probably about 1800 of the 5,000 banks in the U. S. That participate. So really the M and A is limited. It's more about looking at acquisition with the current pullback by banks, we're seeing the opportunity to lift out teams, let's say, of specialists.

Speaker 2

We just brought on a team from Andrew, where was that somewhere in the West. But, yes, so we're seeing more and more of that as a way to increase the large the so called large loan above $500,000 And then with respect all that being said, that's really the way to grow the large loan. The smaller side of it, the FinTech, where we're looking at other products like what Funding Circle did, these unsecured loans to small businesses, there could be some opportunities in on the FinTech side. But in the core SBA, given that there's limited licenses, most of the growth in that business, it will be through acquisition of specialist origination teams.

Speaker 5

Great. And then I guess once you kind of hit the $1,000,000,000 run rate and integrate the 2 acquisitions, how do you think about what is kind of the long term growth or intermediate to long term growth you can continue to deliver on that product?

Speaker 2

Well, the market itself is SBA 7a is around $25,000,000,000 to $30,000,000,000 depending upon where you are in the credit cycle. And I don't want to USDA, I think it's maybe another $1,000,000,000 or $2,000,000,000

Speaker 1

That's right.

Speaker 2

So if we we're currently at a run rate of $1,000,000,000 I think the largest is Live Oak that run about Web Manager 3. So our goal is to get to probably around a 1.5 to 2 is our if you will, our 12 to 24 month target with obviously a lot of that being driven by leadership in the small loan component, which is there is an element higher element of minority agreement of businesses, which is supported by the SBA and the current and we would argue both in whatever administration. So I think that will be the big driver of growth. And I think that as far as like an intermediate term target that 1.5 to 2 is achievable based on the dual approach, the unique dual approach of these, the large loan more traditional loan officer based, we call them pod, let's say, specialists in certain industries and certain geographic regions. And since we're national, we're not a bank, we're not constrained by our local market.

Speaker 2

And then the growth of the FinTech via in particular, for example, the funding had about what is it Andrew $4,000,000,000 of existing originations in the U. S. Over the last number of years. And so those borrowers all have wax of, I think it's pushing 40 on these unsecured loans to small businesses. The SBA provides for a longer amortization at around 26%, right Andrew?

Speaker 2

Correct. Yes, 26%. So we're going to obviously, we're going to immediately refi those borrowers and it's accretive to them and we're able to obviously generate strong gain on sale income because these loans trade at higher premiums in the secondary market given that there's limited refinancing risk. So, yes, so that's Doug, to answer your question maybe a little long winded, but that's how we're thinking about that business. And then honestly, I think we don't get enough given that it is somewhat unique versus the peer group.

Speaker 2

I don't think we fully get the credit for the potential earnings accretion on this business, which is countercyclical to CRE.

Speaker 5

Great. Appreciate the answer.

Operator

The next question we have is from Stephen Laws of Raymond James. Please go ahead.

Speaker 6

Hi, good morning. Tom, appreciate all the comments on the earnings ramp, both your prepared remarks and the answer to Crispin's question. Kind of follow-up on that as you think about the different drivers of the earnings ramp, where's the biggest risk in executing that strategy? Is it returns on new investments? Is it credit issues in the existing portfolio?

Speaker 6

Can you talk about the execution risk around getting back to a 10% plus return?

Speaker 2

Yes. I think yes, if you just look at the peer group's the 2nd quarter the current quarter's earnings, it's not reinvestment risk even with this rate rally. It's really about negative migration on the existing multifamily additional negative migration, credit migration on the existing multifamily book. And I'll let Andrew I'm sorry, Adam maybe comment on that. But again, we're heavily into the lower middle market in not the hot markets where you're seeing peak deliveries.

Speaker 2

So if I look at kind of our credit dashboard on the strategic refinancings and a number of things we've been doing, Most of these borrowers are in a situation where the negative leverage is really driving it's the main constraint, right? Their caps have rolled off and now there's negative leverage versus the in place cash flows and they have to if it's more heavy transitional there the debt the current cash flow will decline. So they need a bridge over troubled waters to get to execution of their business plan, which is has suffered more from less from aggressive rent increases and more driven or cap rate compression on exit, it's more driven by negative leverage. And we see across our portfolio a lot of the we firmly believe that multifamily, especially lower middle market has bottomed in this quarter or maybe the next quarter, with the caveat that certain markets that have peak deliveries like the Atlanta market, for example, are may have a longer trajectory. But again, the underlying fundamentals with the if you look at pre COVID pre COVID rent was only 6% advantage over a monthly mortgage payment.

Speaker 2

Even today with the rate rally, it's still about a 58% difference now. So the demand is there. We're in the affordable segment and we just these so that's the big risk is negative migration, which in our multifamily book, which due to those factors we think is a low risk.

Speaker 6

Yes, I appreciate the comments on that Tom. Just kind of curious where you view the risk getting back there, but it seems like you've got it laid out pretty well. I wanted to talk about, I guess to follow-up on that, right, credit, the 60 day 8Q and the CRE portfolio down to low 6s from around 10. Where do you expect that to stabilize? Is it going to be a little volatile near term?

Speaker 6

Do you expect it to continue trending down? What's the normalized level for the type of assets and borrowers you have in your portfolio?

Speaker 1

Yes. Hey, it's Adam.

Speaker 4

Yes, I mean, listen, we believe certainly the first half of twenty twenty four will have been the most challenging part of the cycle. Delinquency levels, they will remain volatile through the next 12 months, 18 months. Levels move up and down as new assets experience issues and others get resolved. I think a lot of the work that we have done on the liquidation side is certainly going to reduce those exposures specifically on liquidation of some of the larger office assets. So I think that's going to be a net positive.

Speaker 4

And from a peak perspective, still it's certainly Q1 around that 10% number today at 6.3%. We think we hit the peak and we don't expect the CRE portfolio to exceed the Q1 levels. Certainly concentrating the most resilient and liquid asset class multifamily, which is over 70% of the portfolio. And we expect this sector to rebound nicely as rate and economic fundamentals improve. And I think from where our basis is in these transactions, we think the long term valuations are certainly supported by continued affordability issues in the SFR sector, and then we which is particularly beneficial to the area of the multifamily arena where we focus, which is the workforce housing.

Speaker 4

So, coupled with a lot of the mod progress that we have made for extremely cooperative borrowers that really needed more time to execute their business plan. So again, I think the worst is certainly behind us. On the multifamily side, made a lot of progress in working through the M and A portfolios. So yes, I think we've already hit our peak.

Speaker 6

Great. And lastly, Tom, again, buybacks, how do you consider how do you think about capital allocation to buybacks versus new investments. You're pretty active in Q2 fairly close to where the stock is now, below 70% of quarter end book. So just wanted to get your thoughts on capital allocation between those options as you grow leverage?

Speaker 2

Andrew, you want to comment?

Speaker 1

Yes. So we have approximately $42,000,000 left in our program. Liquidity today remains very healthy, over $250,000,000 The sales we described earlier as well as GMFS and some other initiatives are going to bring in additional liquidity. So I certainly think the share repurchase program depending on where the stock is trading and other uses of capital, which include new investments as well as protecting the existing portfolio be a tool we use to try to deliver value here. But I certainly think the liquidity position of the company allows us that opportunity.

Speaker 6

Great. I do have one more, sorry. You mentioned the servicer and your CLOs in the last couple of calls and potentially changing that to bring it in house. Any update on that?

Speaker 2

Adam, you want to comment? We've actually had some yes, pretty positive experience this quarter with the servicer?

Speaker 4

Yes. The majority of the improvement certainly on our Bridge side is due to the collaboration with our 3rd party special servicer. Certainly quicker speeds to resolve what was in the first half really a heavy backlog of relief requests submitted by our clients. We have in process now an additional 10 plus mods totaling about $300,000,000 that we expect to execute in short order here. And we really feel the 3rd party special service are now as a like I mentioned, really greatest sense of urgency is being more proactive to effectuate the pending resolutions.

Speaker 4

So, yes, I mean things have certainly improved. I think they're on the same page with us in terms of executing these industry standard mods and again, giving our clients more time and more breathing room in a tough market to stabilize the assets and achieve permanent financing.

Speaker 6

Great. Appreciate the comments this morning.

Operator

The next question we have is from Jade Rahmani of KBW. Please go ahead.

Speaker 7

Hi, this is actually Jason Safshan on for Jade. For my first question, it would be helpful to hear what was earnings excluding the tax gain and how long do you expect the tax gains to continue for? And on that note, what do you estimate as the current economic run rate of distributable earnings?

Speaker 1

Yes. So the tax activity in the quarter is actually a little different than what occurred in the Q1. So the tax activity in this quarter was directly related to the loan sale activity. So tax benefits directly related to losses or valuation allowances or reserves on loans that are liquidating. So I don't think you can look at the tax items this quarter in isolation.

Speaker 1

A little different than last quarter where the tax activity was specifically related restructuring within the organization to monetize certain NOLs. So this is a direct offset to those losses. And then as we described previously, we do believe that the activities that we laid out in our remarks and that I commented on provide path forward towards covering that $0.30 dividend. We think that path takes us into $0.25 With that being said, the dividend is set at right around 9.5% on value today. So given our target of 10%, we think as this cycle works its way through that the platform is also pushed beyond that.

Speaker 1

We don't think that occurs until we move into the back half

Speaker 3

of twenty twenty five though.

Speaker 7

Got it. Thank you. And just to move to delinquencies, how much of the decline in DQs was related to the loan portfolios that you sold? And separately, it would be helpful to hear more color on how delinquency rates within CLOs are calculated because we noticed some differences between the reported rates and the implied rates based on interest payments received in the remittance reports? Thank you.

Speaker 1

Yes. So in terms of I'll take the first one and let Adam take the second half. When we look at delinquency rates in the portfolio today, we only sold through June 30, dollars 20,000,000 of what we are of the full population that we are under contract to sell. So the impact on the reduction in delinquencies in this quarter's number was only about $15,000,000 so very minimal. The majority of it was driven by modifications and natural improvement in credit.

Speaker 1

Adam, I'll let you take the second one.

Speaker 4

Yes. I think from how the delinquencies are reported, the public information on the CLOs would, I think, look different than what's in our numbers today, given that our when you look at our bridge portfolio in the supplemental deck and you look at the delinquency rates, that is the total bridge portfolio. So that's not just what's in the CLOs, that includes what's on our balance sheet. So I think there's a difference there. And then I think again, I think it's just really a timing aspect of when those remittance reports are out, when the information is published, depending on which research report you're looking at.

Speaker 4

I think we've certainly seen over the past few months a wide range of delinquency rates across all the issuers depending on what report you look at and the timing of it.

Speaker 7

Great. Thank you.

Speaker 6

Sure.

Operator

The next question we have is from Christopher Nolan of Ladenburg Thalmann. Please go ahead.

Speaker 8

Hey, guys. Andrew, is it fair to say that the allowance valuation allowance volumes are really a function of how much you're transferring to hold for held for sale?

Speaker 1

Yes. The majority of the reduction in CECL this quarter was directly related to that.

Speaker 8

And given that's trending down and given the comments on the call saying that you think you saw the peak in terms of multifamily. Should we expect the valuation allowance charges to go down in the second half?

Speaker 1

I don't think we're quite in a position yet to start drastically reducing the CECL reserve. When you look at across all of our product types, we actually did for loans that are not held for sale, we did take it up slightly across all of our CRE products. The 7 allowance came down slightly in the quarter. But I don't think what you'll see is a reduction in seesaw as we move forward, just given that there is some level of uncertainty as we move through the next couple of quarters here.

Speaker 8

Great. And Tom, given your comments on the focus on workforce housing and so forth, all you said was true. The one point that you're missing though is that's a segment of multifamily, which is really vulnerable to rent regulation, rent stabilization, rent control, things like that. Given that you guys have a nationwide portfolio, are you keeping an eye for that? And any comments you can make on that?

Speaker 2

Yes. No, just to underscore that, just that we definitively have very little, if any, exposure to rent regulation. What Andrew meant when work for us, it's not the rent regulated, which is kind of the lower tier of the market. I think 80% of the median income based on rent regulations. We focus on the middle income, kind of A minus B plus in suburban areas with middle income individuals rather than Class A Manhattan or CBD.

Speaker 2

So they have very little of any of our portfolio has any exposure to rent regulation. I think what Andrew I'm sorry, Adam, what was that? It was like even the New York some of the stuff we purchased from the banks in the New York area, it's less than what percent of our total exposure?

Speaker 4

Yes. It's a very it's less than 1% of the portfolio has any rent regulated, rent controlled, stabilized, etcetera, in the New York City metro area for sure.

Speaker 2

But you're right, that being so bottom line is we have no exposure to that risk, but that is definitely a risk. We see that through our the activity of our ReadyCap affordable, the old Redstone business, which is deep in that market. Now they don't they're in the LTIC market where there's very limited defaults. But there's definitely a lot of volatility in that market with respect to pending initiatives in various municipalities throughout the U. S.

Speaker 8

Great. Final question on Funding Circle. Given that's a fintech company and I presume it's sort of populated by guys who are very sharp on current trends in terms of online lending and so forth. Strategically, what does that imply in terms of how Ready Capital can utilize that platform for other things? Any thoughts on that?

Speaker 2

Yes. So they definitely have a very complementary platform to our current front end technology, the loan originations, the algorithms that I Business uses, they have a longer track record with again their primary they were owned by 1 of the larger UK based entity, which is one of the larger providers of credit to small businesses on an unsecured basis, the so called SMEs in the UK, actually external manager has a significant funding relationship with them. So we're very familiar with the quality of their originations. This business was deemed non core and they've sold it. So the first, there's kind of a twofold approach to harvesting the value in the platform.

Speaker 2

1 is to obviously just immediately cross sell the $4,000,000,000 of borrowers that have current unsecured loans in north of 35% and we can refinance near in mid-twenty percent. So that's 1. 2 is reduce OpEx where there's overlap between the two platforms. And again, they're both tech oriented, so that is already underway and very limited execution risk. And the third is, as you're indicating, the potential for bolt on products, which the most obvious would be unsecured loans that don't meet the SBA guidelines, equipment leasing, etcetera.

Speaker 2

And so that's kind of stage 3 of how we would generate the value from the platform. But again, the interesting thing about this whole small business, it's a very small percentage. It's very difficult to deploy capital given the inherent leverage in the government programs. So we will consider looking at the flow programs on unsecured small business loans, which we see a sell in the secondary market or to the extent where we have capital and it's ROE accretive hold on balance sheet.

Speaker 8

Great. Thank you for the comments.

Operator

There are no further questions at this time. And I would like to turn the floor back over to Tom Capasse for any closing remarks.

Speaker 2

Yes. We appreciate the comments and the participation. I look forward to the next quarter's earnings call.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your line.

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Earnings Conference Call
Ready Capital Q2 2024
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