Q1 2020 Earnings Call
Thank you were saying by.
The conference operator.
Welcome to the ready Capital Corporation first quarter 2020 earnings Conference call.
A reminder, all participants and listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions to join the question Q you wait press Star then one on the top of Keybanc.
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Just one operator by pressing star Angela.
I would I like to talk <unk> Chief Financial Officer. Please go ahead.
Thank you operator, and good morning, and 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 and uncertainties that could cause actual results could differ materially from what we expect.
Therefore, you should exercise caution in interpreting and relying on that.
We refer you to where I see see filings for a more detailed discussion of the risks that could impact our future operating results.
Financial condition.
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 first quarter 2020 earnings release and our supplemental information.
This morning, we issued a press release with the presentation of our results along with our supplemental financial information presentation.
These materials can be found in the Investor Relations section of the ready capital website and I've been filed with SEC.
We plan to file our first quarter 2020 10-Q this evening.
I will now turn it over to Tom capacity our CEO.
Thanks, Andrew Good morning, we appreciate you joining the call and what are unprecedented and challenging times.
We hope that you and your loved ones are safe and healthy.
The safety of our employees remains the main focus and since March 16th we have work remotely across our four corporate locations in the U.S. without disruption to our operations.
Our first quarter first quarter results, primarily reflect a pre cobot operating environment with the exception uncertain at quarter end fair value adjustments and the implementation of Cecil.
Andrew will take you through quarterly results and Cecil methodology later I'd like to focus my remarks on where.
Our businesses today, and why ready capital diversified model is positioned to whether the current economic environment and prosper during the recovery.
Now turning this period of volatility the combination of a multifaceted business strategy, a well capitalized balance sheet due to our capital raising activities in the fourth quarter 2019, and the highly diversified nature of our small balanced loan strategy with low relative exposure to Colgate sensitive sectors like hospitality positioned the company that will stay.
And the initial shocks of a closed economy.
This is reflected in lower book value erosion of 10% relative to relative to our large counts commercial peers or more highly leveraged residential mortgage Reits. Moreover, 88% of the decrease was due to non cash Cecil reserves and that mark to market decline of MSR and CMBS assets.
In phase one of the covered recession, we initiated a sequential three prong focus on liquidity meeting successfully meeting all margin calls to date book value preservation through preemptive asset management offering for our parents to 10% of our borrowers today and profitability with an emphasis on our three government sponsored.
Businesses, which I'll discuss below.
In phase two which we believe will be a prolonged economic recovery as it covered restrictions. These are all weather all weather business strategy of acquiring distressed small balance commercial or SBC loans, along with gain on sale income from our government sponsored lending businesses and gradual reemergence of SBC direct lending provide a path to profit.
Stability at higher post Covance are always.
In the commercial real estate lending segments, which include our stabilized fixed rate and flooding.
Bridge loan products originations remain minimal as we remain highly disciplined and the deployment of capital. These lending segments phase two current challenges first is the difficulty in underwriting property cash flows in the uncertain environment second is the dislocation in the capital markets, making securitization execution difficult.
Accordingly, we shifted focus from front office production to proactive asset management and book value preservation, which we re purpose staff.
The current portfolio consists of $4.2 billion of loans with pre called at weighted average LTV Tvs of 60%.
This low loan to values square as well with our 2020 forecasts for SBC property price declines of 5% to 10%, which correlates to a 5% projected decline in residential home prices.
As of today, 90% of the portfolio is contractually current compared to 97% at yearend. We will continue to practically work with borrowers to help them get through the challenges presented by club that working to find mutually beneficial solutions.
In our government sponsored lending segments, which includes SP, a seven a freddie Mac small balance multifamily residential mortgage banking lending volumes are strong.
These businesses require modest capital approach to operate and generate healthy gain on sale revenue.
RSV a lending segment continues to originate 70 loans to businesses that remain operational and the secondary market remains open and will benefit from him from inclusion in the pending fenced health program.
In addition, our normal seven activities. In addition to our normal seven activities ready capital has been active in the treasuries Paycheck protection program or PPP.
Which provides for forgivable loans to small businesses in the.
As one of 14 SP approve nonbank lenders when Congress passed legislation in early April we committed to do everything we could provide financial support to small business owners across America during a time when they need at most.
Many small businesses, we interact with nationally we're likely not to have been accepted in round one of PPP at traditional bank lenders generally focused on existing clients and large businesses.
And our signing onto the program, we did not prioritize existing customers or new customers. Our mission was and remains to help as many true small businesses as possible such as local valleys nail salons that local shop owners. The challenge of underwriting these smaller borrowers with significant and often dealt with changing program requirements.
However from the start our goal is to help the smallest of the small without prejudice.
Around one of PPP ready capital approved approximately 40000 applications approaching 3 billion.
Well, there's been some challenges outside our control that have caused some delays in the distribution of funds. We facilitated the funding of 2.1 billion through last Friday and are actively working through the remaining population to disperse funds as quickly as possible.
Ready capital wasn't any position not only of having more PPP loan applications to fund than any other financial institution in round, one, but also the smallest average balance with 50% under 25000 and over 20% comprising sole proprietors.
Now activity in our Freddie Mac multifamily segment remains elevated above prior year years levels due to the decline in the 10 year Treasury to 70 basis points, making freddies.
SPL rates more competitive with banks rates tied to more inelastic deposit rates.
Yesterday, we have closed approximately 200 million, where the current money up pipeline in excess of 175 million.
We expect with rates down nearly 50 basis points that origination levels will continue to remain elevated.
Our residential mortgage banking segment, which continues to perform well despite economic uncertainty is benefiting from refinancing volume from the first quarter decline in the 10 year U.S. Treasury.
The quarterly 691 million in.
First quarter volume was supported by a record 317 million in March topped by April production of 422 million.
With demand in excess of production capacity margins have remain elevated which is reflected in the 9 million.
Dollar quarterly increase in net mortgage banking income.
[laughter] in March Ginnie Mae and the FHLB pay instructed servicers to implement mandatory six month forbearance on existing mortgage backed securities, but what's the service or must continue to advance various amounts of principal and interest in corporate expenses.
Reduce the advanced burden Ginnie Mae announced a servicer advance facility and the G fees curtail the advance obligation from 12 to four months.
As of April month, and approximately 1% of our loans were in forbearance below national averages and we believe we have adequate liquidity to meet peak projected forbearance.
Some of our long term shareholders may know.
Ready capitals beginnings were rooted a decade ago and the acquisition of or over $5 billion in distressed small balance commercial loans post the last recession, we believe that the current economic climate will lead the opportunities that levers that skill set.
These distressed loan acquisitions, typically lead to higher or ways and require minimal fixed overhead.
We will continue to increase liquidity. So that we are able we're in a position to take advantage of the opportunities as they arise.
In addition to the continued operations of the business management of liquidity and the reduction of Mark to market liabilities remains important.
As of May eight the company had total liquidity of approximately 100 million consisting of cash and availability and undrawn committed warehouse lines. Additionally, unencumbered assets up 296 million may provide additional liquidity as we work to pledge them to existing facilities or select selectively market for sale.
Since the start of the covert pandemic. The company has met all obligations related to its mark to market liabilities. These obligations with consistent margin calls and additional funds needed to roll short term repurchase obligations have totaled $96 million.
In addition to liquidity management, we have focused our efforts on reducing short term liabilities, which has included selling securities when pricing levels have been favorable.
Since the December 31st balance sheet, we've reduced the net settlement amount of our short term repo.
35% to 191 million.
We will continue efforts to reduce risk in the portfolio and continue to evaluate capital raising efforts to fund growth opportunities.
Finally, I would like to discuss the status of our loan portfolio and funding sources. Unlike our large balanced peers, our loan portfolio as granular with strong collateral coverage.
The current $4.2 billion portfolio of held for investment consists of over 4500 loans with an average balance of approximately 900000.
99% of the portfolio, our first liens with 60% average loan to value.
Further exposure to covert sensitive sectors is relatively modest.
In our SBC segment collateralized by Investor owned properties, where we have invested 52% of shareholders equity retail is 21% and hospitality, 6% of our total gross loan portfolio.
Average balance of our SBC retail exposure is only 1.5 million reflective of the company's limited exposure to malls and big box retail.
In our SBH segment, where we've invested approximately 10% of shareholders equity total exposure to hospitality in restaurants is approximately 40%.
On the funding side, 64% of a loan portfolio is funded with nonrecourse securitizations in the earliest maturity of our corporate debt is April 2021.
In may the new issue market for commercial mortgage backed securities and CRM collateralized loan obligations is gradually reopening.
As such in addition to this channel we are exploring ways to fund our existing warehouse lines on a non mark to market term basis, including Delevering through asset sales.
We continue to focus substantial resources on proactive asset management and have robust procedures in place for monitoring watchlist assets and migration of loans between risk buckets.
These efforts include processing heart shipment forbearance requests frequent communication and updates from borrowers lender updates reporting and liquidity management.
We currently use a risk model, which buckets loans the categories between one and five buckets four and five represent the riskiest that to assets in the portfolio and currently comprise only 9% of total collateral, including those supporting unconsolidated mortgage backed security positions. So with that I'll now turn it over to Andrew.
Thank you Tom beginning with the earnings our results were significantly impacted by the current Hoguet economic climate.
GAAP losses were 98 cents per share.
The quarterly loss was driven by $35 million reserve related to the Q1 implementation of Cecil a 12 million dollar mark to market decline in held for sale CMBS and a 15 million dollar decline in the valuation over residential mortgage servicing rights.
Core earnings were one cents per share.
Core earnings has been adjusted to exclude both the Cecil reserve and the decline in residential MSR values.
But includes the mark to market loss on CMBS and specific reserves on nonperforming loan collateral.
Absent. These two items core earnings would have been 32 cents per share.
Beginning on January Onest 2020, we adopted tesol, the new accounting standard, which requires us to estimate and record a noncash provision.
For future credit losses against all loans in the portfolio not otherwise subject to fair value accounting.
To determine the Cecil reserve, we supplemented our historical track record of Euro losses with securitized loan data licensed from trap.
Although the trip data is not a perfect match given the small bounce focus of our business, we were able to tailor the model to be insightful into our portfolio.
The seasonal reserve on the March 31st balance sheet contains two components, which include the initial reserve on January 1st.
And the change in that reserve on March 30 Onest.
The impact of close to 19 has caused this allows you increased during the first quarter, reflecting the current economic environment.
On January Onest <unk>, we recorded an initial reserve a 6.6 million or 13 cents per share reduction in book value.
At March 31st our assumptions on the economic indicators changed significantly, resulting in an additional $35 million reserve or 68 cents loss per share.
To be clear I want to make it the point that this is a noncash allowance.
The portfolio subject to see so did not incur any losses during the quarter and we suspect that overtime or seasonal reserve may migrate back to levels consistent with our initial implementation on January onest.
The significant decline in the value of our available for sale CMBS Securities was in part driven by the current liquidity in the market explained by periods of course solid.
Based on our analysis, we believe the underlying collateral will support valuations above these distressed marks.
Liquidity returns to the markets over time.
In fact, we have selectively sold a handful positions after quarter end at average premiums of 21% to the March 31st month on Mark.
The 16 million dollar decline in the market value of our residential MSR ours was driven by the historic low tenured us treasury and an increase in our CPR assumptions, which was mitigated by industry, leading 40% retention rate.
We believe that in comparison to prior rate rally the convexity profile of our current MSR book is superior are due to the low absolute level of the 10 year Treasury and limited production in servicing capacity in the mortgage banking industry.
Near term this limits further downside with prospects for improved valuation, even with modest rate increases.
Longer term the dislocation in the mortgage banking industry from coded 19 on GM assesses of eligibility as an MSR purchaser from all three agencies.
That's attractive distressed MSR acquisition opportunities.
Away from Cecil accounting and the MSR declines.
Often ability from net interest margin.
On cell revenue and mortgage banking activities continue to be robust.
Interest income increased $5 million quarter over quarter.
Gain on sale revenue in the 70, and Freddie Mac businesses totaled 2.4 million supported by strong volumes and stabilize sale premiums.
Mortgage banking income reached record levels due to high demand and elevated margins.
On the balance sheet recourse leverage is 2.8 times the quarterly increases due to draws on available borrowing bases and a reduction in stockholders' equity primarily due to non cash diesel reserves and unrealized losses on fair value assets.
The portfolio subject to Mark to Mark the liabilities totaled 1.5 billion, including 775 million a bridge loans and 200 million a fixed rate loans, both slated for securitization before kogut impacted the new issuance markets.
Book value per share decline $1.60 cents to 14 52 per share.
This decline was driven by seasonal unrealized losses and the quarterly dividend.
As we have done in previous quarters. The supplemental deck provided. This morning include summary information on the Companys earnings profile, various operating segments and key financial metrics.
Instead of taking you through the DAC I would love to draw your attention to slides three and five.
Slide three outlines the various ways in which our business has been affected by posted in the strategies. We are undertaking to ensure the long term health of the business.
Slide five provides additional insight into the Cecil reserve implemented in the quarter.
Before turning it back to Tom I would like to Echo his previous comments I hope, you're all safe and sound.
My thoughts or with all who have been impacted by the covert pandemic.
Tom.
Even eight and these unprecedented times ready capital continues to originate and deploy capital across our diverse platform.
Discussed we continue to successfully navigated phase one of the Kobin recession.
With adequate liquidity and small relative declines in book value in subsequent quarters, we will strategically position the company for phase two of the cobot recovery, where are all weather business model, providing for potential net interest income through acquisition of distressed SBC assets, along with gain on sale income from our capital light government sponsored lending segment.
Represents unique earnings potential.
There will certainly take time for the country to emerge from this crisis, but our focus will remain on the areas of the business. We can control and we work as it will work as a team to navigate and emerge the position that builds on past success. We appreciate your patience and support and hope everyone remains healthy and say.
So with that operator, we'll now open it up for questions.
Thank you well now begin the question answer session.
Who joined the question do you made press Star then one when it's all from Keybanc.
Your tone, it's managing a request.
Are you using a speakerphone please pick up your handset before pressing entities.
What are your question. Please press Star then too.
Well pause for a moment as call this trend Q.
The first question comes from Tim Hayes with B. Riley FBR. Please go ahead.
Hey, Good morning, Tom Andrew I hope, you're both doing well.
Hi, My first question you know Andrew you mentioned, some select asset sales so far in the second quarter can you maybe.
Just size that up for us what what you've been selling at what type of discounts to two year basis and.
The and maybe just how you've been able and de leverage.
In light of those asset sales so far.
Yeah, Hey, Tim How're you doing.
The majority and detailed to focus in the CMBS book, they've been selective sales, meaning we are not in a position for selling any parts of the balance sheet.
At least today.
It's been.
Relatively small focused on one particular series thus far.
It's totaled.
Around $35 million in sales in the.
As we said in the script Theres. They were sold at premiums roughly 20% above the March month, and balance sheet and work, but closer to our historical basis.
We continue to explore.
Other sick.
We continue to explore other securities in the portfolio, including CUSIP and whole loans and.
If we see pricing.
We believe to be accretive to the business, we may choose to further sell down parts of both of those books.
Okay got it says so so far not too much on that Brian So I.
Yes. The second part I question was just kind of a quarter up during a quarter to date update on leverage at this point, but I sound like maybe not having moved to add two machines period end.
Yeah, I mean, you know the 2.8 times leverage at.
On March one Dan is a little deceiving we had material increases in our available.
For sale loan portfolios in GFS and Freddie.
Both those are financed at 100%. So there's that number is going to fluctuate. This year. The secured borrowings number is going to fluctuate a lot based on.
How those two businesses perform.
What I will say is as we are rolling repos haircuts are getting slightly wider thus de levering that book and we are.
No well continue to explore ways, whether it's through.
Selected pay downs here and there or taking security is off a repo.
Or trying to convert.
Her March Mark liability is into sort of term nonrecourse facilities, we are going to continue to utilize those tools to de lever the the recourse portion of our balance sheet.
Okay.
That's helpful and then.
Moving over to just the forbearance activity you've seen it I guess, 10% the commercial book in forbearance, So far 7% on the resi side no. What measures have you taken to provide forbearance and you know how have you seen request continued to increase in May I'm. Just curious if there is like an internal estimate.
Where you might see these forbearance rates go on either the commercial or resi side.
It's actually we have yeah. So today, we actually had him.
So I got an undergrad.
Yeah, So certainly actually have Adams asthma or on the call with US Nike runs credit for for all of ready capital. So he is probably best position.
Answer that question, so I'm going to turn it over to him.
Great.
Hey, Dan how how are you there.
So hi, Adam we continue to proactively work with our clients help help get them through these challenges.
[noise] quite client discussions have been collaborative and we recognize that operational cash flow disruption.
Specially in hospitality retail properties, given the nationwide search shutdowns.
Not the bulk of our clients right, but but as common Andrew mentioned yogurt, the 10% that or you know.
Currently evaluating the hardship request will likely execute those forbearance agreement most of them at three months.
No actually move asset managers being used to evaluate.
Loan by loan.
So I school bit 19 impacts operations and cash flow.
General would just looking to ensure that the collateral is well positioned doing going this period of disruption.
We may may allow sponsors utilize reserves for debt service payments that its and some other creative things, but in general call. It between 10 and 15% is what you know.
You know kind of potentially going to actually be forbearances on there's 4500 loans in our portfolio as you know majority of suits in small balance. So we do we do expect that it could increase slightly but I think you know towards the end of March early April.
It was where we saw the biggest wave.
So we're just getting through that in our servicer to get you got the Mexican.
Actually I would just want to add one thing and Adam to that in our US script there was.
I referenced a forbearance on the Oh Gee MFS side, it it's not 1% of a 7%, but that's consistent with on the residential MSR is that's consistent with the current national average them you have adequate liquidity currently to fund those advances.
And Tom do you have an estimate I know Fannie may put an estimate out there for when they see forbearance rates go language I guess is kind of at the high end of a of what Adam's comments were broadly, but just curious if you have an estimated.
I capital need for those.
Advances and if we do kind of hit that.
Estimate.
I'm, sorry to estimate for GFS as it relates to their peak projected advances.
Yes, correct, you're talking about the Mark Yes, I'm going to do you want to I think art for their market South southeast is probably more like in the a 15% area.
200 eat did you do you have a a view in terms of yet sizing Fritz I referred in good.
Yeah, Tim is going to be hard to put a year on estimate out there based on just the level of uncertainty in the number.
So, we're probably going to hold off on putting out an estimate at this time.
Okay. That's fine I know, it's a fluid situation. So we'll just look for update as they add across but that's it for me front I'll hop back in the queue, but I. Appreciate you got to taking my questions and I stay well.
Next I'd like to Egypt.
The next question comes from Steve Delaney with GMP Securities. Please go ahead.
Good morning, Tom and Andrew and first thank you for your strong unpatriotic supported the P.P. program.
A question on that is how much continuing opportunity beyond the 3 billion and reported applications or do you see and can you disclose what this fee revenue opportunity was for ready capital in participating in that program. Thanks.
But Andrew I can comment on the program more broadly.
And then maybe you can talk about the second part of Steves question, but as it relates to the Pp pub PPP program. It has evolved very significantly based on feedback from small businesses and what have you and so you know round. One went as you everybody knows went very quickly.
Around too high I think a Andrew has around 40% left and it's been much slower and a lot of that has to do with the the concern that you may have seen in the broader press about the methodology for.
The the forgiveness application of and forgiveness, which were still waiting which were there depending guidance from the S.P.A.. So I think that significantly slowed down the a the volume and round to in London in large part because of the conundrum of a small business that you know may have to retain staff today, but not.
Not sure if I can reopen tomorrow, so im as Andr I, just make that broad observation in terms of the program maybe his comment on terms of the yes costs involved in this program.
Yeah, Good morning, Steve So.
You know what all lets say is in the program the gross fees.
Better prescribed.
In the program Docs are gonna gets shared amongst a variety of partners.
Those include agents, who referred loans there they will include financing costs sewage.
Include bolt the cost of the carry as well as some split or the.
A project economics on the fee as well as.
Split on the fee in the event, we have sold loans so.
It's hard for me to pin down the exact number just given that the population is moving in.
And your methods and which we've chosen to fund these loans is diverse but what I can say Steve is I think the the gross fees will be materially.
Cut down to the net economics.
Ultimately result.
On the ready capital due to income statement.
Gotcha, well you did the right thing and and hopefully.
It wasn't about a profit opportunity you did the right thing it hopefully you'll you'll at least break even or make a little bit out of it for your for your efforts and we appreciate it.
I want my following its basically.
Go ahead, Andrew I'm, sorry, sorry, just.
Yeah, just to clarify I I do you expect that ready capital.
We'll earn revenue through this program. So I don't want to give the impression it's been a sort of a break even effort.
You know based on somebody information, we put out there you know one can deduce that gross feeds.
On that population of loans in excess of $100 million.
That hundred million dollars, what im saying is going to be materially reduced.
You know over the next when we get to the final numbers, but certainly don't want to give you the impression that.
It was a breakeven number for us.
Okay. Thanks for that clarification, you mentioned you had remaining short term repo up 190 million I assume that was a March 31 figure.
Two questions on that I mean can you give us an updated I think you have sold some Oh you mentioned you sold some securities 35 million can you give us a current up to date figure for short term repo and just generally described with the nature of the collateral would be underneath that recur. Thanks.
Yeah, so that the majority of securities we haven't repo include.
Retained bombs from our fixed rate program.
Freddie Mac securities from or SPL program, and some selective bonds, we've acquired over the years the hundred $91 million is.
A net settlement amount today, so the gross loan amount net whatever margin we paid.
Since the last fall as I said earlier, we had.
Tom selectively paid down or sold certain securities, which has also further reduce that number.
What I'll say is that that number has decreased through April.
Just due to haircuts widening.
In when those securities role.
So the number or the net number probably is around 175 million today.
Okay, just based on the de levering in April from the natural roles.
Thank you both of your comments.
Thanks, Steve.
Thank you.
The next question comes from Jade Rahmani with KBW. Please go ahead.
Thank you very much and appreciate your time consideration hope you're all well then in good health one to ask just high level do you expect ready capital to be profitable for the next.
For the year, perhaps excluding the noncash charges in the first quarter.
Yes, so jade obviously, the the noncash charges in the first quarter were significant.
Absent those.
Reduces back then it it's it's clearly very uncertain and a lot of it will depend on.
How the economic recovery unfolds, but given strong gain on sale business activity.
Given PPP economics.
And given our projections on where we think.
I'm sort of port portfolio defaults will go we do believe that ready capital will be profitable and 21.
Okay, and 100 million in fee earnings that you referenced was that risk with respect to ask Barry originations and that'd be a gross revenue number [noise].
Can you give any sense for what the net profit contribution might be.
Yes, it seemed to be clear D. The 100 million I referenced just specifically related to the PPP. So within the P. program. The gross Bds on those originations ranged from 5% to 1% depending on loan size.
5% being paid.
For low and that are under 350 now based on Com Toms comments earlier, the majority of report portfolio falls in that bucket. So the gross fee earned.
Is going to be that 5%.
And.
The balance of PPP loans originated.
Now there are prescribed agent fees in the program that come right off the top if that loan was referred into ready capital and then there are very it's.
Ways in which that he after the agent fees paid is being allocated amongst all the partners who are contributing within our population to get those funds in the hands in the small business. So.
You know that's how that number is going to come down off of that 100 million dollar number I reference it's hard for me to pin down at this time, what that net numbers going to be.
So I'm going to hold off on Tom Green, there, but I suspect you know it's going to be the in the range of let's call it 35% to 50% of that number.
The 100 million is that a fee revenue numbers that and originated balance under the PPP program.
That is the fee revenue number.
Okay, So potentially earnings from that program and the second quarter can be 35% of the 100 million.
That's correct.
Okay.
Thank you for that.
Can you go through arranger, perhaps cash sources and uses for the balance of the and if you expect the company to be cash flow positive [noise].
Yeah, So certainly.
We've made the decision over the last leased six weeks to really curtail any de.
Lending or investing opportunities that require use of capital. So we have not originated bridge or fixed loans. During this period of time.
And I suspect that we will continue to be highly selective in in when we choose to do so over the next few months until we have.
You know more certainty in.
The economy, you know you or other business segments are those gain on sale businesses. They don't require any capital with seven a is.
Cash neutral Freddies, how should we drilled you've invested cash neutral and so no. Our active lending activities are not requiring the use of the balance sheet.
Continued uses of cash will include you know.
Fixed operating expenses.
Including our employees rent things like that which we will continue to adjust and rightsized to the business activities.
And then management of our.
Mark to market liabilities on the sources side, it's going to continue to be.
Revenue generated from.
Active lending segments as well as just the normal PNR.
From the company. Additionally.
In the event, we see the right opportunities to do so we will.
Valuate selling certain parts of our portfolio to generate liquidity.
Okay. Thanks for that in terms of margin call risk can you give a number with respect to the value of loan balances subject for margin calls.
And secondly, if theres also any cash management triggers within the silos that you've issued.
Yeah. So right now we have around $1.5 billion loans on.
Warehouse.
[music].
So that's the number that's you know of exposure there on the loan portfolio, what I'll say as our lenders have been very constructive in our conversations and continued to be supportive.
Of their involvement in the sbcs space.
Maybe I'll turn it over to add to talk a little bit about.
How we're managing those relationships and then your question on the CLL.
Yeah, Hey, how are you at so yeah, I mean I think.
You know it in and in regards to our warehouse lenders certainly transparency as key walking them through.
Low level assessment that we have oh of each of the assets on the line. So we haven't really really good dialogue with our partner is a lot of good gionee.
Regarding the topic that we're getting clients.
Our thoughts around value will be at that so no certainly we're gonna made maintain that in and produce whatever.
It is required from our house partners to help help to that so this is Charlie <unk> in regard to your question on the COO as you know.
These loans are you know because there's a lot of structuring that goes these loans this cash flow sweeps interest reserves.
So you know depending on the situation of asset managers go through a they know they could be situations where.
Yeah, they could be a cash flow sweep and we're applying yeah, you know that.
So what we're applying the funds to did that serves to make like the monthly payment.
Right.
<unk>.
[noise] Hello.
Yeah, Hey, Hey, Jade sorry, there aren't there are no cash triggers and argue.
Okay. Thank you for that I'm, just lastly on the dividend I'm not sure. If you could comment high level expectations or just policy meanings and if you could specifically say weather.
You believe the management and board preference should be toward a suspending the dividend for conservatism sake or to pay.
Dividends through stock.
The pay stock dividends.
Personally I think suspending the dividend would be preferable then stock dividend, but wanted to share with you are thinking.
Got it or why don't you. This was obviously of the very very important aboard topics and writing, but kind of walk through a.
Jades Jay's question regarding the dividend.
Yes, so jade in terms of a dividend amount I think a lot of that is gonna be dependent on the performance of the business you know rightsizing the dividend too.
Yeah.
Taxable income as well as core performance is probably the pop.
Going forward, what I can say is.
We do not plan on issuing.
Stock dividends going forward.
Now I can't predict every.
No event in the future so that that may change, but as it is not our intension, nor do we plan on issuing stock dividends in subsequent quarters would that being said no given.
Our desire to maintain liquidity and even increase liquidity.
I think we'll reevaluate or the board will reevaluate.
Given that amount as we get closer to quarter end.
To see how the business has performed and to reset expectations of how the business will perform the future. So no. Although he can't number on it today, what I can tell you is I do not anticipate stock dividends being part of it.
Thank you very much for taking the questions.
Fix it.
The next question comes from Stephen Laws with Raymond James. Please go ahead.
Hi, good morning.
Following up on that one is in triple b questions as far as fundings that you've seen our these loans that were a round, one overflow or or how much of the fundings were actually new applications post round one.
Yeah. So thanks for the question are around two activities have been.
More muted than our round one efforts.
So although that is subject to change given that the velocity of round two.
You know foreign has been much much lower than round one.
At this time.
The amount of round two applications, we have taken the in is much much lower than around a lot activity.
Great and then you know I think those in the prepared remarks, you said 3 billion improved 2.1 billion funded which I assume is getting us to that roughly 205 million at 5% on the gross revenue.
Contribution should we expect the remaining 95 million or an incremental 45 million of potential gross revenue.
And this quarter or how much of the remaining 900 million approved you expect to fund.
Yeah, we expect to fund or a large percentage of that there will be some fallout.
From the population, but we suspect we will.
On the majority of that population over the upcoming days.
Great and then and then lastly, I think on that topic that I have.
So we know that means you're entitled to at least at the gross level. When do you actually received those fees and they at your balance sheet as cash.
Yeah, it's probably going to be 45 to 60 days, though.
There are some forms that need to be filed with the FDA theres other arrangements we've made.
With our Counterparties in this transaction that affect the timing of that but I think 45 to 60 days is divestments.
And I guess the follow up to that just to.
Sure you don't they don't receive their cloud of the fees until you do correct, you don't have to advance or front any of that.
Correct.
Great Okay fantastic shifting to.
Let me hit on advanced just real quick or do you have a breakdown of of your advance obligations across the gses and any non agency or or maybe a.
A better preferred way would be how much of your interest and principal advances are on a scheduled versus actual basis.
Well, the and so I don't think we put out a good enough type.
I was going to say just to we haven't put out any and spis specific a quantitative analysis around each of the Fannie Freddie Ginnie, but.
Ginny you have to advance 80%.
Have a pea and I and the there is availability of a facility for for that.
And then for Fannie and Freddie.
There's they caught curtailed the advance obligation on P. and I too from 12 to four months. So you know we feel if you size it up let's say it doubles from the current seven.
They have Oh Gee MFS has availability under the current warehouse lines, you know as well as a the Ginnie Mae facility. If a if it was required a so we feel comfortable in terms of the adequacy of of liquidity for that on a peak advanced basis.
And Andrew if you'd add to that.
<unk>.
No nothing for me talk [laughter].
Okay, Great and lastly, just wanted to touch on the financing facilities. Appreciate the disclosure on page 16 of your supplement.
You know a number of Ah maturities here you know in three to three to 12 months. I believe you know are these have extensions your option or can you can you talk about how those discussions on on renewing those facilities are going up or given the changes in the business are there different facilities that you need to put in place to support the string.
And the business lines, you're saying today and some of these other facilities, maybe you're no longer necessary. So.
Any any comments around a conditional color on page 16 would be great.
Yeah. So it's certainly depends facility by facility either certain facilities, where it's at our expansion are our option.
Theres other facilities, where it's not.
No what I will say is that our talks to date with our.
Existing lenders have been more highly constructive in support of we continue to.
You know, believing that that they are you know in the business of SBC, unless we see asset class long term.
We have not.
Got indication that.
No continued dog talks would not be.
I'm positive would that being said.
Our goal over time is too.
Figure out ways in the absence of the new issuance market, which we hope will rebound.
You know shortly but in the absence of that exploring ways to move recourse debt to two non recourse and so we are continuing to explore what the that may look like.
So well that sort of the late and then right.
Great.
One last question on the residential mortgage origination business, maybe at the higher level.
You know how much of those approvals for automated you know or or even not fully automated how much as his recent development is going to impact the processing timeline and how that pipeline as a is approved when you consider things like potential employment gaps are taking unemployment under a under one of them.
These are the government programs or or some other help that you know maybe would have been an instant approval type rifai pre co bid is now something it's going to get kicked out in need of a one off approval any comments around impacts of that on processing goes the loan applications going forward.
Yeah, I think getting this yeah, so industry data, which Oh go ahead Sir.
That was gonna say no Thomson all your process.
Yeah in terms of processing times industrywide.
The.
We did get guidance in terms of in the last two weeks from the Gses on both how to process self verification of employment given the obvious increasing unemployment and secondly, the the somewhat related the the the forbearance now being not a uh huh.
The forbearance that accrual now being put on the back end of alone the deferred as opposed to being a payment shock in the at the end of the six month period. So I think that your answer your first question. It it's let's say application times, where maybe two weeks now it's doubled.
On that basis.
And as a result of that the yeah that that will extend the timelines or reduce the production amount by you know very small amounts.
But I will say that the are the most fascinating thing and almost three years in this industry is the profitability on the production side due to the fact that the demand far exceed the production capability of the mortgage banking industry and as a result, you're seeing that in the.
The secondary the profit margins on new production have are up two to five ex depending upon the month the weak in the a and the a and the and the product type.
That's great color. Thanks, very much for that Doug I. Appreciate your time this morning.
Well thanks.
Once again, if you have a question. Please press Star then one.
Next question comes from Crispin Love with Piper Sandler. Please go ahead.
Hi, Good morning, guys hope, you're doing well and staying safe.
So one question on.
Loan acquisitions. So you guys seem to be pretty bullish on loan acquisition opportunities do you think those opportunities will be 2020 events or are likely more pronounced in 2021 as kind of the market.
Got it moves through what where you're going through right. Now and then also are there any specific areas and loan acquisitions, where do you expect to see the most opportunities.
Yeah, I would just say it for to first answer question I would say, it's really more of a it will it. Unlike the last financial crisis, which was more driven by bank or you know as a 800 banks had a significant issues that required a loan sales.
This is more of a a a capital markets not non bank lending has taken a big slug of the SBC market. So I'd say that the opportunities that will probably emerge late third quarter through for one Q2 thousand 21.
And you'll see three channels, one will be the banks you know obviously a lot of the particular hospitality and what have you will be affected on their balance sheets see we're already starting to see pools aggregate for sale there at discount the second channel will be these non bank lenders on the transitional loan side at the peak I think we were tracking at roughly over 200 Ah Ah lenders.
Including the large commercial mortgage Reits and Yep, a significant chunk, maybe a third of those are in our.
Our wheel house in terms of loan size. So we're seeing a lot of or potential sales on the transitional loan size side at a discount.
And the third as SP, a a lot of SPM lenders that we think this recession will create a shakeout in.
Some lenders that were big that were relatively aggressive on underwriting we we were very conservative.
And in terms of our expected losses versus some of our competitors. So we we also see opportunities in the secondary market for SP, a portfolios as well so those those three channels, we expect to emerge probably starting in late Threeq you through Fourq two into one Q2 thousand 21.
Okay. Thanks, and then on the accounting treatment that PPP loans will all the net fees show up in net interest income or will they actually shopping noninterest income side of the income statement and then also how long do you expect the the loans to be on the balance sheet.
PPP loans.
Well, Chris when I think the majority of the economics will probably flow through the other bucket of the income statement.
And we do not suspect to carry.
Much of production on the balance sheet at all so very small portion will retain on the balance sheet. The majority of it will.
You sold off balance sheet.
Okay, Great and then can you just talk a little bit about the health of the small businesses in your and your portfolio up do you have any data I kind of how many have have close temporarily for right now or how many are kind of starting to reopen and then also it if any of that small.
And you have actually close permanently.
Adam you on that.
Okay.
Yeah. So.
You know any anywhere from 20, 25% 50 burst and.
Of the businesses are close right, obviously like the restaurants that are having.
Curbside pickup delivery remain open a majority of the old held remain open.
And I'd say, we think you know the paycheck protection program would you know certainly gonna help businesses and the FDA has also.
From a loss mitigation standpoint, they're all Americans that it's going to pay print principal interest and fees for six months.
And then it after that are you ready cap is actually going to give it a profit three months of deferments without us FDA approval and while the period I'm. If we go to the FDA, but I'd say you know, we're where we haven't heard of a businesses that have had had have shut down complete.
And will not come back.
But there's there's obviously a lot of uncertainty in terms of business is opening back up you know obviously, that's that's slowly happening as as as states are built implementing some of the reopening.
But I think you want to highlight no it's still kind of uncertainty out there and I think you know these government programs.
Can I have to wait wait and see how that plays out but we do expect that that each program is going to help help our clients significantly.
Adam but one question that what were the two specific programs. The SPD is rolling out one is the emergency direct lending program, which they implement themselves and we obviously were for our our borrowers to what was the second one of the piano deferrals.
Yeah, well, what onetime with the odd the economic injury disaster alone.
Obviously, the PPG and then just a regular way odd deferments programs, so big as as a as an SB one good ways off.
Permanent.
Okay. Thanks.
Thanks to the helpful color.
Sure.
Sensors.
The next question comes from Christopher Nolan Ladenburg Thalmann. Please go ahead.
Hey, guys mature loan loss, whatever form or you guys targeting a loan loss reserve ratio.
No. So certainly we're not targeting anything specific we will continue to.
No one evaluate loan loans on a specific basis, so the out him and his team are going through.
The portfolio on a continuous basis to identify sort of problem or watch list loans up warrant.
Specific reserves.
And then in addition to that.
We will continue to use.
The trip data in some of the.
Assumptions around the more macroeconomic climate to drive sort of just general Cecil reserve So although we're not.
We're not targeting a specific number I do suspect that as.
Things move around and as we get more certainty on the portfolio, whether it be on the downside or the upside.
The reserve number will will change.
No based on.
The current performance.
The loans that have been included in seasonal reserve as of March 31st.
As the economy reopens.
I suspect that reserve will revert back to a lower number but it's hard to tell just given.
You know the uncertainty in the in the general comment right now.
Okay. So the reserve.
Adam.
So go ahead please.
Yes, I know just going to stress that you know you know it would take a significant decline in collateral value that you losses on the portfolio you know just given that the weighted average.
Loan to value on on our collateral, 60%, but obviously certainly assessing ace case by case and.
The initial assessment that we did for Q1, obviously, there's going be be some follow up to that as you know as we get updates from our clients, but again, you know, we feel that they say portfolio as well well well protected.
Actually at these low leverage ratios disruption.
I guess a follow up question in terms of how well the loans are covered if everything is close including courts and so forth. How do you guys intend to recover anything.
If there's no you know judicial process and working at the moment.
Yeah, I think there's several so I think somebody that's that's really separate them.
The site.
Oh no Adam.
Adam Please.
Yeah, I think I think we're still we're still several months away. These four.
But the majority of hardship requests that are coming up you know there's going to be Oh, you know for the majority of it remote forbearances. So we're really looking at you know three must be won't will remain current the ones that are having having some of these issues with his business coders to do business closures.
We have you know start.
Significant amount of.
Non essential and its in retail centers. The hospitality assets. We have you have limited exposure hospitality, but obviously those assets out at fairly low occupancy right now the markets start to rebound states open up and we believe that is three months I'll call. It all in July.
My first.
August when you know to the extent that no sponsor is unable to make a payment post the forbearance period. That's when you know workouts could could start.
No we expect a limited amount given that we've got a lot of confidence and in business plan.
So you know in terms of courts courts opening you know again, I think thats something that we got to assess in three months from now, but you know currently from 60, plus delinquency standpoint, the portfolio, which still right around 1%.
So you know there's not not many workouts in our portfolio right now what we're going to have to run up against that limited limited issues that we've had no portfolio.
And port closures that we add who who historical loan acquisitions for instance.
Yeah, but of course that we've spoken to failed but the process continues.
Receivers play so you know the world hasn't stopped them from from or I believe standpoint, but again the highlight I think that's that's really something that would it be dealt with and it's pretty much potential.
Great and final question is what's her recourse leverage target or threshold I should say.
In terms of ratio yeah, So historically weve historically, we've we've.
Targeted two times.
You know the as I said earlier this quarter was little bit of an anomaly given you a material increases on gain on sale production.
[laughter] corresponding with a.
A significant reduction in stockholders' equity so overtime overtime our goal continues to.
Target that 2.0 times ratio.
No and the increases this quarter.
As the marks in the securities and the MSR and see so revert.
A more normal levels not all in part drive that ratio for the though.
Okay. So we should expect the recourse leverage ratio to drift downward rather than an upward.
Yeah. Its arch, it's our intent always manage the business to that.
The 2.0 times so were.
Actually taking steps to to try and.
Reduce that number and.
Surely you know given that we have a large inventory of.
New newly rigid originated bridge in fixed rate product that was pretty far along into securitization process.
Sure the new issuance markets opened up roughly $1.1 billion of assets the on.
You know warehouse will immediately be converted into nonrecourse debt.
Great. Okay. That's it for me guys. Thank you.
<unk>.
Thanks.
This concludes the question answer session.
During the call was back over the top as the past due for any closing remarks.
Good luck for thank you for everybody support during a challenging time and we look forward to next quarter's earning call.
This concludes todays conference call you may disconnect your lines.
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