Q4 2019 Earnings Call
[music].
Greetings welcome to ready capital Corporation's fourth quarter 2019 earnings conference call. At this time, all participants are not listen only mode. A question and answers that should will follow the former president teach it if any what's your car operator says it story the conference. Please press star Zero and your telephone keypad.
Please note. This conference is being recorded I will now turn the conference over to Andrew Outboard Chief Financial Officer. Thank you you may begin.
Thank you operator, and good morning, Thanks to those of you on the call for joining us this morning.
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 uncertainties that could cause actual results to differ materially from what we expect.
Therefore, you should exercise caution in interpreting and relying on that.
We refer you to our S. You see filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.
During the call, we'll 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 gap a.
A reconciliation of these measures for the most directly comparable GAAP measure is available in our fourth quarter 29, <unk> earnings release, and our supplemental information.
By now everyone should have access to our fourth quarter 29 gene earnings release.
In the supplemental information.
Both can be found in investor section of the ready capital website.
We'll now turn it over to Tom capacity our CEO.
Thanks, Andrew.
Good morning, Thank you for joining our fourth quarter earnings call. In addition to Andrew We also have Tom, but it probably our chief investment officer with Us today.
In light of the recent market volatility.
I'll begin with some observations about our business.
First in regards to our balance sheet. The company is well positioned in terms of both liquidity stress and purchasing power to take advantage of buying opportunities today, we have $130 million or cash available borrowing capacity, providing nine times the coverage of wireless liquidity stress test.
105 million capital raise we executed in December was preceded.
And reducing our recourse leverage under two times.
Thereby improving liquidity risk in volatile markets.
Further as we always do we continue to evaluate the value the value of share buybacks versus accretive investment opportunities.
Second I want to underscore our limited interest rate exposure. The current portfolio is 56% floating rate.
The majority of these loans originated with LIBOR floors.
And with an average premium.
The current LIBOR or up 80 basis points.
Our fixed portfolio, we mitigate our pipeline risk by issuing letters of intent with rate floors equal to the current swap rates plus the spread currently at 350 basis points.
During warehouse periods, we use interest rate swaps to mitigate significant changes in fixed rate loan fair values as we look to lock in cost of funds.
Third in terms of originations the rate decline benefits are small balance commercial or SBC business across products.
Freddie Mac multifamily rates have declined 75 to 100 basis points year over year and with rates as low as 3%.
We can compete with banks that base de facto floors on deposit funding rates.
Our fixed rate pipeline is floored at board a quarter percent and even after likely concessions will now yield a high teens are are we with the ability to that offer rates below 4% on select assets. This product will also be more competitive with banks.
On our bridge lot inventory targeted for the upcoming 600 million dollar CRM collateralized loan obligation at weighted average LIBOR floor of 2.2% and a spread of 3.4% will likely absorb any credit spread widening.
The current pipeline of new originations has a weighted average LIBOR floor of 1.6%.
In our small business had been Australian or SBK segment.
We've been monitoring the SBS response to the krona virus with a specific focus on supply chain disruption in small businesses.
Although we have not yet heard any specifics of the plan.
Certain action might include a disaster recovery logs to small businesses or additional incentives for lenders such as fee waivers or a high loan guarantee percentages as occurred during the prior financial crisis.
Regardless the full faith in credit U.S. guarantee on the SP, a seven day program assures continued access to the secondary market.
The fourth quarter.
2019 acquisition Knight capital.
Which makes working capital advances to small businesses not only adds incremental net interest margin, but with its front end technology provides a real time edge in assessing the credit performance of this sector.
We are receiving over a thousand applications daily which include current and past banks that bid activity.
Proprietary algorithms using this data enabled us to assess changing default risk across the 400, plus small business sectors and geographies.
Second the daily pay nature of these products provides an early indicator of default risk.
We currently have not identified material performance deterioration, but believe.
At this before portfolio surveillance tool provides an edge it credit risk management in the current environment in terms of loss mitigation loan pricing and exposure limits.
In our residential mortgage banking segment.
With the decline in the 10 year U.S. Treasury to approximately 50 basis points. We are entering unprecedented territory in terms of <unk> potential refinancing volume.
Well the mortgage servicing rights will be negatively impacted year to date through February February we recaptured 35% of refinancing borrowers the potential increase in first quarter 20 origination volume is evident in a current lock pipeline of 520 million.
Only 50% over the prior record 2019.
Further average profit margins increased by 130 basis points in in the last two weeks to an all time high.
So in terms of credit risk, we have low relative exposure to sector is impacted by the virus.
[noise] hospitality represents less than 7% and restaurants malls and movie theaters, each represent less than 1% of our gross exposure.
We also have no direct exposure to energy and of our at 13% allocation to office less than 1% is in Houston.
Also in the current stress financing markets, one concerns maturity default on transitional loans, especially the large balance space.
We have held our ground credit terms focusing on acquisition financing with fresh equity first the so called bridged to bridge financing and avoiding ground up construction.
Most importantly, our underwriting emphasize stabilization and refinancing risk.
Evident in a stabilized portfolio debt yield of 10.7% and an LTV of 61%.
Finally, approximately a third of our bridge portfolio is multifamily which benefits from the GFC safety net.
On the off and our acquisition and special servicing capabilities provides the opportunity to purchase distressed portfolios.
Of transitional loans for which there would be few bidders.
Generally our strategy is a leading senior lender in the SBC sector within 0.8 correlation to home prices in a portfolio loan to value of 60% leaves ready capital defensively position for sustaining a strong relative dividend in adverse markets.
Now turning to 2019.
We ended the year with a strong.
Financial results and are confident about the future given our growing origination franchise and the continued acceptance and progress are ready capital of the capital markets.
To highlight a few of our accomplishments.
Annual origination an acquisition activity in our SBC at Sps loan products grew over 48% to 2.6 billion.
Our residential mortgage banking segment experienced Reg record annual origination volumes of 2.1 billion.
Our 20 1919 core return on equity equaled 9.4%.
We securitized, one and a half billion of SBC and SP, a loans across five transactions and raised an additional 109 million in corporate debt 30 basis points inside a previous issuances and at seven year up to seven year maturities.
Lastly, we continued our efforts to increase liquidity for our shares ending the year with average daily trading volume three times prior levels and the inclusion of our C. In the S&P small cap 600 index.
Turning to fourth quarter results the quarter marked a record for combined SBC NSP, a seven day originations SBC originations totaled 526 million.
$60 million quarter over quarter growth and a 58% increase over the fourth quarter in 2018.
SB seven a originations reached a record 70 million our residential mortgage banking segment originated 586 million of 58% year over year growth.
But the SBC within the SBC origination segment Bridger originations hit a record 305 million, increasing 152 million quarter over quarter, our fixed rate and Freddie Mac loan volumes were 116 million and 105 million respectively.
Bridge and fixed rate SBC loans had a weighted average coupon of 5.1% and a spread of 320 basis points.
Additionally, credit metrics of newly originated loans remained sound with average ltvs of 70% debt service coverage of 1.4 times debt yield of 6.8%.
Gross premiums on Freddie Mac loan sales averaged 2%.
Our record SB seven eight origination volume represented 46% year over year growth and a $22 million increase from the prior quarter.
Average coupon remained stable at prime plus two up but love field premiums decreased slightly to 9.8% due to an increase in the average loan size.
Of loans sold in the quarter.
We acquired 154 million of SBC loans over eight transactions. These loan pools of a weighted average coupon of 5.4% weighted average duration of four years and were price to a 17% levered yield.
Of note was was our entry into the European markets with the acquisition of a $50 million portfolio of transitional loans and a forward flow agreement with the originate are located in Ireland.
The collateral profile similar to our existing bridge portfolio with a whack of 7.1% debt yield of 11.6 debt service coverage of 1.6 times and a loan to value of 66%.
The projected are are we features a yield premium to our U.S. Britain portfolio and we are actively evaluating further expansion in Europe.
Mortgage banking production decreased 70 million to 586 million in the quarter, primarily due to seasonality in a slight increase in treasuries.
Production from our retail channel decreased slightly to 47% and purchase volume remained high at 55%.
Turning to our balance sheet and funding strategy.
Our focus remains on building a diversified portfolio contributing a growing percentage of stable net interest income.
79% of the quarters activity was in the form of portfolio loans that increased our total portfolio to 4.1 billion as we've discussed on prior calls we look to maintain a well balanced capital structure with the appropriate mix of recourse nonrecourse debt.
Consistent with this approach during the quarter, we completed for capital markets transactions.
We completed our six fixed rate transaction stabilize investor loads. The securitization how do you PB at 430 million in advance rate of 88% and the AAA is priced at 2.8%.
We completed our second securitization of SP, a seven day Unguaranteed loans.
The securitization, how do you PB of 131 million and advance rate of 84% and senior pricing of LIBOR plus 250.
In November we added 52 million to our July issuance of seven year baby bonds, the issuance priced at 6.1% yield marking the continued reduction in our corporate funding cost.
Lastly, we successfully raised 105 million an equity capital.
Tactically the secondary achieved the following objectives. It funded our record origination volumes reduced recourse leverage ratios increased liquidity of our shares and expanded our read the retail shareholder base.
Ill now hand, it over to Andrew to discuss our financials.
Thanks, Tom GAAP and core earnings were 43 cents per share marketing a three cents per share increase over Q3.
GAAP and core return on stockholders' equity were 10.9% exceeding our targeted return of 10%.
The 2.7 million quarter over quarter increase in core earnings was attributable to an increase in recurring revenue from net interest income and servicing of 3.9 million.
The addition of 2.4 million in revenue from our Knight capital funding subsidiary.
And a 700000 increase in gain on sale revenue.
Additionally, derivative not designated for hedge accounting at incremental gains of 1.6 million.
Offsetting increased revenue was a 4.5 million dollar decline and net mortgage banking activity and a $2.7 million increase in operating expenses, partially due to the inclusion of the Knight capital operations.
Key balance sheet items include the net addition of 280 million in portfolio loans. The addition of 43 million a purchase future receivables from the consolidation of Knight capital.
And the securitization of 586 million of SBC NSP a loans. Additionally, the balance sheet reflects the aforementioned issuance a baby bonds and common equity.
With the completion of the SBH securitization. We are required to include 485 million a guaranteed seven eight loans previously sold on both the asset side and the liability side of the balance sheet.
This gross up does not affect bottom line net income.
Recourse leverage decreased from 2.3 times to 1.9 times as a result of two securitizations and the equity issuance.
The anticipated completion of our fourth celo is expected to further reduce recourse leverage by <unk> 0.5 times.
Turning to the earnings deck slide three cents worth key items and metrics for the quarter of note is the dividend coverage core or are we above 10% and record combine SBC and SB eight origination volumes.
Adjusted net book value per share job four cents the 16 12.
Slide four provide summary highlights for the year, including a core return on equity of 9.4%, a 50% year over year increase in SBC. It at the originations and acquisition activity and 385 million dollar growth in enterprise value.
Slide five details the composition of Rcs return on equity core or are we have 10.9% exceeded our target return of 10% topline Levered returns declined 270 basis points due to the effects of a decrease in leverage and reduced income from mortgage banking activities. This decline was offset by an increase in.
Realized gains on sale of Sta, and Freddie Mac loans.
Recovery in the value of certain derivative positions.
And a reduction in operating expense ratios.
We expect to continue to leverage increased scale to drive topline returns without a substantial increase in fixed operating costs.
Slide six shows trends in origination volumes quarter over quarter details on fourth quarter originations are included on slide seven.
Through the end of February we have originated $290 million in SBC portfolio loans, and 70 million in SBC and SB eight loans held for sale bolt outpacing prior year levels.
Our SBC origination segment is summarized on slide eight.
Levered yields in the portfolio remains stable at 12%.
This segment, which accounts for 59% of our invested equity continues to experience low delinquencies.
And a strong credit profile with average ltvs, 60%.
The current money up pipeline of 493 million, well add $2 million to $328 million of close loans.
Slide nine covers our SP a segment the increased gross levered yield is due to a $1.8 million increase in loan sale volumes and an increase in leverage due to the completion of our second SP, a securitization and a reduction in funding costs.
Loan sale premiums declined to 9.8% due to increased loan balances.
And delinquencies fell to 3.1 person.
Slide 10 shows summary information for do you acquired portfolio Levered yields in the portfolio remained above above 12% while returns from our joint venture investments declined 110 basis point.
Our residential mortgage banking segment as highlighted on slide 11 production decreased 71 million from Q3 record levels margins also decreased in both channels with the 35 basis point decline in third party originations.
At a 10 basis point decline into retail channel.
We saw marginal growth in the servicing portfolio as increased payoffs were offset by retention rates in excess of 30%.
Slide 12 is new and shows the composition of our investments by segment.
And earning asset income contribution by product type.
The remaining slides discuss rcs portfolio composition capital structure leverage and warehouse facilities.
I would like to touch on the expected effects of Cecil on our consolidated financial statements.
We expect the initial credit loss reserve to be between 19, and 26 basis points on the outstanding downloads of our performing loans.
This equates to additional reserves between 7.8 and 10.5 billion.
The Cecil reserve will fluctuate quarter over quarter, depending on the composition of our portfolio economic conditions and portfolio growth.
Now I'll turn it over to Tom for some final thoughts before we take questions.
Thank you Andrew.
We had a record year on many key areas of the business in 2019, we believe the quarterly results and full year demonstrate ready capitals ability to effectively originate and deployed capital in an accretive manner across our diverse platform.
The current environment, notwithstanding an understanding it will have an impact in 2020, we remain confident that we will continue to build in the progress we have made.
In the past few years to create value for our stakeholders.
With our diversification in terms of both business lines and portfolio risk focused on the defensive niche in the commercial real estate market.
We believe we are positioned better than many of our large balance commercial brother and facing a higher beta to a stressed economic environment.
We do recognize that at least in the near term we are in a fluid and uncertain market environment.
Given the uncertainties surrounding the Corona virus situation. There are many unknowns as we sit here today.
Well, we do want to provide a couple of thoughts as you work to model our current year results.
In addition to the typical seasonality inherent in our business.
There are other factors that could influence our results near term both headwinds and Tailwinds.
The headwinds include the risk of the krona virus tipping us into a recession, but the resulting increase in portfolio defaults for which our portfolio diversification and focus on the SBC sector our risk mitigant.
Our related headwind is delayed ability to access the capital markets for and higher incremental cost of securitized and recourse debt.
So we know unusual or is resiliency in the former in the current market.
As for Tailwinds, the recent Treasury rally favors our gain on sale businesses and.
The ongoing repricing of risk a higher incremental are are we on new investments.
Finally, the current market underscores the all weather nature ready cabs business model lending and bull markets in buying distressed assets in bear markets.
We entered 2020 with tremendous competitive momentum in liquidity, which will carry us through the this market and beyond we're excited to build on our success and we thank you for your time and continued support so with that operator, we'll now open it up for questions.
Thank you if you would like to ask a question. Please press star one I know.
Had a confirmation cola indicate your line is in the question Q you May Press Star too if you would like to remove your question from the Q.
Participants using speaker equipment and may be necessary to pick up there before pressing the star.
Our first question is from Tim Hayes with B. Riley FBR. Please proceed with your question.
Hey, good morning, guys, congrats on a great quarter and thanks for taking my questions.
My first one Tom I appreciate the introductory comments on credit, but if we can to circle back to retail in hospitality exposure in the portfolio and a retail accounts for 17% of total SBC.
Not including the explosion is SBH portfolio were nearly a quarter of that seems pretty vulnerable with restaurants and lodging. How do you see these loans performing over the next several months I assume there's been no indicators over the past few weeks into spin such a short timeframe, but still a little bit more on unexpected performance there in a stress scenario where the outbreak.
Continues to spread throughout the country and then you could just maybe touch on the ltvs or any other covenant protection you have that gives you confidence in your basis.
Yes.
Good good questions and obviously given the current.
Current market conditions, so just to drill down if you look at your first question was on the SPX Bob.
While business loan portfolio. So if you look at page 13.
You will see that.
And the lower right, you'll see that kind of lodging hotels and restaurants is about.
20% of the total.
SP a portfolio.
Secondly, it the other thing I'll point out is that the net equity invested in the business.
Which you can see on page.
Five.
In terms of the equity allocation to the business is 8%.
So the at risk capital is one fifth of eight or about call. It that was 2%.
So that just I want to clarify that.
Secondly.
As mitigate number two.
Announced last night, a 50 billion dollar SBH packaging and to clarify we're still trying to figure out exactly what all that is but one thing where we are clear we talk to the.
Our trade Association this morning, and the large majority of that is for.
Basically making disaster loans at zero percent, 2% to 3% interest rates to just these types of businesses lodging.
Hotel and what have you that would be directly affected by what we all hope is a temporary disruption in their revenues and so these are loans to allow them to can pay their operating expenses into essentially a bridge over troubled waters. So that those two men against it to 2% exposure, it's and number two it.
It's yeah, there's significant coverage in the in the industry, then I'm sorry in the.
In the from in terms of the government safety net so thats the Sps, let your second question.
I think relates to our.
[music].
Our as our SBC or small balance commercial portfolio and in there that's.
That's retail for just the SBK.
So just to clarify what you're actually you're asking about the 17% exposure in our portfolio. It relates to retail in SBC collateral correct correct. Okay. So that's on page 13, so as we reiterated in the past.
Our our retail is not malls right it's not.
It's not the larger ABSSSI class mall.
What what our retail is exponential small strip strip stores.
That I think the average balances around 1.7 million.
Typical mall mall average mall.
Commercial real estate loan is around 25 million. So these are in small strip strip locations.
Which we feel we will not be as impacted by the yes. The obvious decline in economic activity, because they're going to be that kind of neighborhoods. The neighborhood store you go to too.
Get your Gotta.
Get the pharmacy or pick up a pizza.
So the.
Yes. So we have limited we have limited big box exposure and therefore, we think the impact on our retail will be substantially less than what you'll see obviously in the mall space.
The only thing a lot there is lot of these law.
T I reserves in them. So there is some cushion embedded in.
In the in the properties and so.
Okay.
Good to now.
And then if you guys. You said that's helpful. I appreciate those comments and then but if you could maybe give us an overview of the of the resources you have at waterfall to workout troubled credits or bring takeover the keys.
If need be if defaults materially increase.
Yes, I think thats defensively, that's one of the benefits that we as a.
Externally manage read by one of the largest structured credit managers globally.
With a focus on buying distressed assets in particular real estate secured assets have so we have.
It during the last credit crisis, we bought $5 billion, a small balance commercial loans, we worked out 6000.
Small business and small balance commercial.
Defaulted assets, so we have in place a.
Assist them, we call way MKM waterfall controlled asset management to wrap technology that enables us to plug and play with special Servicers not just here in the U.S., but but in Europe as well and.
We had staff in our asset management team you leveraging that technology.
About 30 to 30 to 35 people.
To bring to bear.
So we actually.
Besides just a defensive side.
Managing the credit risk in our portfolio, we have a enterprise risk management, we have where we have surveillance across our entire.
Book of business.
Waterfalls gross assets are roughly.
18 billion.
Of which we are.
Were 4 billion of that.
The of that large felt that large pie. So so I think both in terms of the ability to earn detect.
Early defaults.
And then put the appropriate resources with our special servicers onto the potential workout and utilization of that technology.
Defensively will probably better positioned than most.
Most of the real estate lenders in our space and finally on the offense. We view this as an opportunity to obviously by other people's problems. The way we did in the last credit crisis.
Right right that makes sense and I guess just.
On that comment there you know how have supply band.
Of new SBC loans, when I say, new not new vintage, but just you know when supply been for SBC loans over the past few weeks are you seeing more distressed selling are you able to pick up the loans at greener discounts and where's that coming from.
Well right now obviously that you don't before arguably the credit cycles, turning before the credit cycle turn most of what we're buying was performing legacy loans from.
Adam Securitizations or sales of noncore assets by banks.
So I think the supply we had a pretty good year on acquisitions until this year of what the past year It was roughly.
Going under it but.
To answer your question no I don't think we've begun to see any opportunity to move up to buy distressed loan portfolio Oh, yeah as far as this this obviously only happened it were 30 days into this year on to see generally speaking in terms of.
You look at the prior credit cycles, it will take about a quarter to two quarters before you see the real distress in the portfolios.
Okay.
Got it and then just one more for me and I'll hop back in the Q.
You mentioned highlighting.
Or that you were evaluating buybacks and just wondering how you think about the are are we on that investment here.
Yes, your core business with the stock trading at a near 30% discount to Buck in 13.7% dividend yield.
Yes, Tim the current plan, we haven't played at those levels.
We think the total accretion of book value.
He is around 100 basis points. So it's it's a matter of balancing making sure we have enough liquidity on the balance sheet to.
Turn to weather the uncertainty that we've been experiencing.
Last week or two.
Making sure that we're able to fun, what I'll call more selective.
Origination opportunities in office and the obvious accretion.
Buybacks, Joe we are going to continue to evaluate that on a daily basis in the context of our our pipeline as well as sort of some the risk management procedures and making sure.
There is ample liquidity so.
It's something we're discussing daily.
Okay got it thanks for taking my question.
I've actually did one footnote to the started prior question on the.
Asset.
A special servicing we did it higher for asset management specialist in the read last quarter.
To in source some of that.
Similar to supplement the.
The services provided by the external manager in particular with a particular focus on average portfolio.
Got it that's helpful.
Yes.
Thanks.
Our next question is from Jade Rahmani with KBW. Please proceed.
Thank you very much I'm just.
High level question, how are you thinking about earnings per share for the coming year.
Looking at the consensus is I think about $1.69 I, we're estimating $1.59 and we are factoring in the full share count, which will impact the first quarter. So the last few quarters have ranged from 37 cents to as high as 43 cents, but that was on a lower share count.
So thinking about in the pipeline that you have underway.
But the tons and what's in place now is there some kind of a range or directionally.
Any guidance you can provide.
[noise] engineered our goal is.
Your dividend coverage for 2020, I think there's a lot of moving pieces here, obviously, the the current mark adds or.
Causing us to be a little bit more cautious in you know deploying capital at some of the rates we were over the last few months without being sad.
Those businesses are bars that require very little capital, mainly our Friday.
Backlog to residential business as well as RSV a platform are all seeing sort of record origination volume. So you're going have lot of especially in the first quarter going up a lot of gain on sale revenue offset by.
What may end up being through March.
More tampered originations in terms of.
Alan sheet loans.
I also think there is seasonality into business. If you look historically at how our business has performed especially in the SBH space, We've seen no Q4.
Much stronger quarters than Q1 has historically been so we do believe there is can be ramp just meet been seasonality and I also.
I believe that with the additional equity, which is providing a lot of safety in the balance sheet today and it's also going to take time to deploy that in a in a prudent matter. So our goal is to dividend coverage for for the year. We're certainly.
Hope all that.
The opportunities to continue at these growth rates again, I think we have the capabilities to do that but thats our goal.
Yes, the only thing I would add to that Jade is obviously the.
Most companies across the border pulling guidance.
I will just take a couple of one point on our business mix, which will inevitably a change depending upon where the path of this from an economic standpoint, but in the event that we are base cases, this tips us into a.
Minor two minor to 92 type recession, and if that happened it in the second third and fourth quarter, we're going to be buying more we're going to be allocating more of equity capital to buying distressed assets.
Already seeing.
One way or concern we have is not so much into our portfolio, but the larger balance bridge. There was a lot of froth in that market, which is now going to come to come to the surface and so we've already already tightened pricing and pulled back on certain sectors. So they are always on incremental loans being made in this environment are going to are going to be probably another thing.
400 basis points higher.
But volumes will be will be lower so I think just a bit by point im trying to make is depending upon the.
The at where we had in terms of the second third and fourth quarter. This year in terms of the.
A recession or no recession of B or a V recovery or you recovery, we're well positioned to reallocate our capital to see the buying distressed assets or making loans and a more conservative basis.
In terms of the pipeline appreciate the numbers you gave us.
In the release about what to.
Funded so far on what's on hand, but.
What's the gestation period for that pipeline and in terms of current market conditions, meaning today.
Is there a stall in the pipeline is our deals.
Being pulled from the market or any deals being canceled I'm starting to hear about CMBS loans that.
You know this the originators are not sure. They can securitize. So a few of those have fallen out.
What can you say about current market conditions.
Well that's a good question you have to answer that by E. Bike segment right. Because there were again our platform is very unique in that we're in we're in.
A number of different verticals. So number one in terms of the small balance commercial.
Focusing on the bridge.
There will be those deals will more likely than not closed but with tighter covenants.
Because the competition will be will be less ones that we have some concerns on in terms of it just step back in that space you look at the ability for reef refinancing both the execution of the business plan and the refinancing.
And with respect to that will probably tightened up on debt yields, which I'd point out are already at 10 point on our existing portfolio are nearly 11%.
As well as.
Stabilized LTV. So you might have some paul there because of credit tightening, but I think we'll we'll be well most of that will close.
In the Freddie business, it's obviously a balloon.
Because of the fact that its government sponsored financing and a lot of these properties are existing assets less for acquisitions at this point. So there will be that pipeline was it will increase and you'll see the same pull through a rate.
The fixed rate portfolio, there will be some.
The decline a falloff in that.
Pipeline more than the others because of the fact as you pointed out that the CMBS market has stalled.
Although I'd point out I will make one the editorial comment on that secure securitized debt, let us into the last hellhole, it's actually the Angel and this this this current market.
Because deals are still getting done, albeit at significantly wider spreads.
But one of areas that has been affected has been CMBS markets and maybe some fallout in that pipeline and finally the SBK.
The pipeline, we don't we expect maybe at 10, 20% ball out there mostly in the sectors that are most affected by the.
You know by that buys the virus, which is the lodging hospitality and.
And what have you. So so overall there'll be a small fallout.
In those sectors offset by Simon I'm, sorry, finally, the residential mortgage banking.
Obviously, we're in we're an unprecedented territory our pipeline there are locked in that was 5.85 20, 50% above our prior peak in the last rate rally in 20.
2019, so I think on balance our deal at the elasticities fallout for our port business in relation to others that are for example that a CMBS conduit business with large balance loans, we're hearing that they're pulling about over 50% of the pipelines.
So sorry for the long winded answer, but that that just wanted to highlight that by segment.
No. Thanks, that's helpful and I appreciate the diversity of the business. It's also helpful to see slide 12 that shows the earnings break out because I think that that's something that investors have been grappling with.
Turning to the repo market are you seeing any margin calls or any changes in how repo lenders are behaving currently.
No we havent been seeing large margin calls on any of our.
Retain bonds, we did take the types of extending short term repo out six months so any.
Short term repo rolling into next month, we did extend.
Without a real change in the weighted average cost of those repos obviously.
A change compared to different terms, but so we have extended short term repo is out we but no change. Your question, we have not seen significant margin calls in that book.
Thanks, very much for taking the questions.
Thank you.
Our next question is from Stephen laws with Raymond James. Please proceed.
Hi, good morning.
Okay.
Can you.
Give us the details on the buyback what is the remaining authorization in place I was looking through some filings earlier, but couldn't find the.
Yes, we haven't used it yet it's 25 million.
Okay.
A follow up.
Okay.
Gary after.
Oh, no I'll, just say to follow up on the pipeline question that Jay covered can you maybe talk a little more about the hotel or.
How do you view those loans currently in the pipeline now is that you mentioned, some better protection or covenants, but but are you significantly increasing pricing or is it is it.
More draconian, where you where you are simply not looking to add exposure in that capacity.
In the current environment.
Yeah Weve.
What we've done our our pricing, our chief credit officer, and the individual that our president of that business.
Work together to essentially implement a plan where.
We are essentially.
Pulling hotel deals and not quoting them currently in our bridge bridge business in a very limited weighing on the fixed component.
So that so that so thats, what we how we're focusing on.
Essentially risk based pricing by both.
Reducing or eliminating for the time being sectors most exposed to the virus.
If you will the highest beta to the decline in economic activity and we're also.
In our ASP business, we're limiting restaurant and some of the other asset classes.
But as of today, we have 7% in hotels.
I think the average balance on that exposure was around $2 million.
So it's so we're very much better positioned obviously than some of the lark balance rights, which might have.
The $150 million bridge financing outstanding to a.
Hey.
Urban hotel, it's going to be significantly affected by the current market conditions.
Yep.
We should color there and then thinking about the operating expense and I guess, the due diligence side, but.
Travels being restricted.
Well as not domestically, but some companies.
I have limited travel, yes, how do you guys handle the underwriting process as far as site visits or our site checks well.
Can you do it.
Online that we you expenses go down less travel expenses go up because you'll have to use third party people can you talk a little bit about how the current environment is going to impact the expense side and the due diligence process.
It's.
It segment by segment.
But the whereas whereas the greatest expense for underwriting is in the small balance commercial space, both with respect to bridge and the fixed in the Freddie and there Weve developed.
Economies in terms of using third party firms, where appropriate is probably about a third of our total underwriting not on the bridge based on the Freddie Mac in the fixed so we have those those resources available and then just again the practical aspect is that.
No.
We yes, we use local appraisers for these assets, we have a network of.
Establish appraisal should we track on there there.
How their other appraisals there in terms of subsequent defaults and loss severity.
And we have recall that we have a staff we have offices in Dallas and.
New Jersey, but most of our staff is.
A lot of it is con is are they work out of their homes or smaller offices. So.
And finally, the only two things I'll add is.
Well, we you could use things like Google Street views and what have you to supplement all of it but at the end of the day the.
The issue around travel and.
Most of most of what we do is local the people that are praising the properties in underwriting our local they getnet car. They look at the building and there is no con they're not inc. communal areas. So I think thats really that's not going to be a major impact on our business either cost or.
Turn times.
Appreciate the details on that and thank you for taking my questions.
Yep.
Our next question is from Christian with Piper. Please proceed.
Hi, guys. Thanks for taking my questions following up on that.
Expense question, but ask just a little bit differently.
2020 is pressured by headwinds related.
The crown of ours, which I think we could see over the next couple of quarters are there expense levers that you think you could hole.
The next couple of quarters to kind of make up for any shortfall. If there is any.
Yeah, I mean, certainly we're going to manage the expense load of the business for both current and expected.
Growth.
It's hard to be honest, it's hard for to provide specifics on what that might be given that I just.
No the uncertainty is pretty pronounced but yes, I think we are always going to manage the business.
On the expense side.
For not only current activity, but we.
We need to staff up where activity is going to be in three six months. So.
We will all we'll we'll manage to those expectations as we see the pipeline mover, yes, I can give us a variable cost factor in the origination business to the extent.
We haven't distressed assets were going to step up on the the problem asset special servicing side lessened origination and the flip and flip and flip flop at three nations pick up so there is a variable cost component to our.
Operating expenses within the lending and acquisition businesses that we are able to.
Rely on to provide a buffer for.
A decline in for example decline origination volume in a pickup in distressed asset acquisitions.
Okay, and then for the fourth quarter I think residential mortgage originations saw.
11% sequential decrease and that's falling more record third quarter. You guys have can you talk about what drove that is part of that having into it you guys are mostly focused on purchase or is there any other factors at play there that caused that kind of sequential decrease that theyve got the overall market.
Well, you know as price, mainly driven by rate breaker and yes.
Okay.
We and our saga.
Yes go ahead.
Actually I was going to say that are historically, our mortgage banking sector residential mortgage banking segment in the what do I think what most efficient in the industry based on benchmarking that we've done.
With some cancelled but they tend to follow the the 10 year treasury and with a lot less volatility around that because of the fact that there have a bigger focus on purchase than most other.
The industry averages as a whole.
Okay, and then just one last one from me so looking at the 40 something given I'm just curious how you're thinking about the 40 something right now and if you're talking about cognizant and the next quarter is and I understand there could be a lot of volatility near term, let's say if you weren't.
Yes able to cover it for a quarter or to do you think that could be a risk to cut it even if you feel better longer term.
You know that that's obviously a.
And answering question in this environment I think we had our our board is currently committed to maintaining the current dividend and we we see again the ability to pivot from.
If lending volumes go down then we can pivot to asset acquisition.
Probably historically higher yields we look across the credit cycle. They are always on distressed SBC. We're in the upper teens low twentys last cycle. So I think.
There is no crystal ball, but I think our diversified business model enables us gives us more confidence in the sustainability of the dividend in a stressed economic environment.
Hey, guys. Thanks for taking my questions.
Thanks.
Our next question is from Steve Delaney with JMP Securities. Please proceed.
Thanks for taking the question and congrats on a strong close to 2019.
Tom you've you've been around the securitization markets for over 30 years.
I think we all expect not only see spread widening, but possibly even the markets to be frozen for a short period of time.
What are you hearing what has been or what is your expectation from how your warehouse lenders, who are going to behave and how much flexibility do you think they will afford you for slow down and loans moving through the pipeline to enter securitization. Thank you.
Yeah, Thanks, Steve and.
Yeah, we've been around been around the track couple of times in these markets.
But at this it's interesting this time because of the all of the rules that have been put in place.
Everything to the bankruptcy code to the capital charges by banks to the to the way that the to the more since the vocal role is more of a service orientation by the by the larger Counterparties on the Street I I, we see the street acting incredibly.
Responsible in the current economic environment in terms of margin calls and how they assign marks to assets.
The the securitized debt markets themselves are holding up much more.
Much.
More strongly as measured by credit spread widening.
I think everybody in particular view the housing market is it safe Haven for risk assets in this current currency sort of sell off so the on balance.
As it affects our specific business given that more benign or calm in the storm in our markets as compared to other markets.
In the.
In terms of the of the impact on our business with funding.
The the fixed rate product would would probably be held in warehouse and we have a long term warehouse lines for that.
For that yeah that portion of that vertical in our business. The second one is the CRM the bridge portfolio, which.
Relies on the.
So called CRB collateralized loan market that.
Yes, I think last year that was around 15 billion or so.
Obviously going to be little bit less this year.
So that actually double line it was in the market as of the.
Today.
I'm sorry yesterday.
And we havent deal pending and.
It looks like the deals can get done, but much wider spreads, but I will point out that.
We've been doing some analysis on our bridge portfolio the.
The the floors, which currently average around 2%.
The LIBOR floor of the such that even if we did a deal at wider spreads.
Lets say, we just sold to the high investment grade tranches are are we still higher than it was before the that the.
Before this this market sell up so in that in that segment. However, we do decide not to printed deal at wider spreads. We have also have long term financing in place for that that bridge portfolio.
And as far as the other asset classes, there are less dependent right SB a seven day, we can that's government guaranteed we can.
We sell those every little every month and then Freddie Mac, that's where has spot on balance sheet Bye Bye bye bye Freddie.
And.
So I, so I think given our so I think in short we're very well funded across the board even are relatively small Irish portfolio is is fundamental under a long term facility with a large European bank. So I think you know as far as.
Our approach to these markets were very conservative on leverage and and we go into this.
Crisis.
Much better position I would say than some of our some other of the other.
Mortgage Reits out there that are more dependent on market sensitive liabilities.
Great. That's that's very helpful color. Thank you Tom and one final one just if you will indulge me as a former former public company CFO.
The question about the dividend.
I wanted the strongest comments to me that you made in this call was the increasing opportune opportunities from.
Hey, somewhat distressed market and you want to be able be in a position to be liquid be able to play offense.
Just a thought is that it ballston I know, we've got to watch it but on the dividend that you've already commented on.
Would it make sense at some point to convert part of your dividend to a stock dividend instead of cash which meets the redistribution rules, but allows you to retain cash to go after 15% to 20%.
Or are we type opportunities in the short term and then.
Communicating to the shareholders. It you know we think we can do a better job with your money here and this unique opportunity just just a final thought there. Thank you.
Let's see that's very very astute and we have considered that obviously with the sell off across the board in the the DTF re indices were no exception obviously.
The one.
That does enable us to grow book value to reinvest Ed.
Cyclical Lehigh are always.
Again in the last cycle, we bought 5 billion at would that with realized IR ours in the upper teens low twentys. So the one caveat the one offset to that is the obvious dilution that occurs by issuing shares below book at charge and but that is something that we would consider in terms of.
At a point in the cycle, where the are always in the business our highest that's a very accretive way.
To boost.
Look value and.
Yeah, and and reinvest at much higher always.
Thanks for the comments.
You see it.
Our next question is from Christopher Nolan with Ladenburg Thalmann. Please proceed.
Tom how are you thinking about leverage higher lower.
Same 2.0 level going forward.
Yes.
So current Leverages the is right around that led to a level we think.
No the siloed, depending on when that gets done we'll reduce that by half a turn but it's going to be.
Sure the d. the continuous cycle.
Levering a de levering on a recourse basis to that 2.0 number.
I don't think we're real comfortable going much higher than that 2.0 number.
Part of region for.
The additional capital we raised in December.
Great.
And.
In the use of capital where do you put buybacks.
No.
As opposed to making acquisitions.
Relative to use with comparable.
Or we're currently I mean is that that we that question there has to be repriced and every every risk every market in terms of credit spreads and lending margins and reinvestment rates on let's say a third party acquisitions. So I would say obviously the hurdle are we hurdle has gone up in the current environment versus looking at the accretion from buybacks and the.
Impact the knock on impact on liquidity right you want to get you won't have the opposite it's a two at store because obviously buying back at today's distressed by advised as an immediate impact it reduces your your your share count in your equity base on the flip side as Steve was referring to previously having the ability to grow book value and reinvest in the current.
Permit is has has a long term impact so we tend to view buybacks and short answer your question remodel I got a higher are we in a and reinvestment period of probably three years in terms of mentioning that when we bought that is something we are actively that's in our waterfall of opportunities that's definitely on the near.
The top of the less.
Great and Tom finally in the past you guys have been guiding for 10% to 11% core or are we.
Given the changing market conditions.
How that changed.
It's really hard to say as a as of today. If you told me, we're going to going into a recession. There's a lot of distressed assets I would say.
And we have looked at the other other point the other important thing in the in these cycles with.
Permanent capital vehicles and mortgage rates in particular is the availability of capital recourse debt and what have you, which is obviously would be.
More constrained in that environment. So.
It's hard to if we had.
Incremental availability of capital and we had a lot of distressed assets I would say they are we would be more an 11% range.
But you know.
On a downside scenario, we have this kind of what you you recession limited availability capital it it.
It would be more R&D, the upper singles to 10% range.
So that.
That's how we tend to think about that the one thing I will I will add there just aren't on it we're in the cycle you're going to see after having been seen for four of these cycles over the last 330 years.
What you're going to see with a number of these mortgage Reits, even with the Cecil has a lot of credit reserving and knock on impacts on reducing the dividend.
Because of the typical impact in a cycle.
And I think we are really well positioned versus the other peers because of the diversity of our asset because of that nature of our sector and small balance commercial being more akin to housing and the diversification of our our asset base.
Great Thats part of the question.
Hi, Thanks.
We have reached another question and answer session I would like to turn the conference back over to management for closing remarks.
Thank you everybody we appreciate.
You are taking the time today and we're on top markets and we think we're going to where we're pretty well positioned to.
Capitalize on it and we.
Look forward to the next quarterly earnings call.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.