Q4 2020 Ready Capital Corp Earnings Call
Greetings welcome to ready Capital Corporation fourth quarter, and full year of 2020 earnings conference call for.
At this time all participants are in a listen only mode.
And the answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
At this time I will now turn the conference over to Andrew Ahlborn, Chief Financial Officer, Mr. Albert You May now begin.
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 to differ materially from what we expect.
Therefore, you should exercise caution in interpreting and relying on them.
We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.
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 financial results prepared in accordance with GAAP.
A reconciliation of these measures to the most directly comparable GAAP measure is available in our fourth quarter 'twenty 'twenty earnings release, and our supplemental information.
By now everyone should have the access to our fourth quarter 2020 earnings release and the supplemental information both can be found in the investors section of the ready capital website.
In addition to Tom and myself. We are also joined by Adam <unk>, our head of credit on today's call.
Before turning it over to Tom I would like to point out the beginning this quarter, we have changed our non-GAAP earnings measure from core earnings to distributable earnings.
This change aligns us with their mortgage REIT peers and with recent SEC guidance. There has been no change in the methodology for calculating our non-GAAP earnings measure.
I will now turn it over to Chief Executive Officer, Tom capacity.
Thanks, Andrew Good morning, and thank you for joining our fourth quarter earnings call.
'twenty 'twenty marked the great Covid recession was shocked our commercial real estate debt market.
Ready capital delivered record results in a recession due to our diversified business model featuring for key aspects for.
<unk> earnings are resilient distributable earnings comprising stable net interest margin from our for point of $2 billion portfolio of small balance commercial or SBC loans and are $11 $7 billion servicing portfolio supplemented with income from highly profitable government sponsored gain on sale operations, which have all weather access to the capital market.
Yes.
Second investment strategy, our dual strategy of direct lending and acquisitions enables us to allocate capital efficiently across the economic cycle.
Third credit the relative credit strength of our SBC niche versus our large balance peers overlaid with the deep asset management infrastructure is evident in our superior credit metrics at year end versus our peer group.
Fourth our conservative approach to leverage compared to peers, who suffered COVID-19 book value of write downs of 25% to 50% due to forced asset sales are modest book value decline was limited to seasonal reserves and MSR mark to market. The clients at the height of the pandemic margin calls on our margin modest exposure to mark to market liability.
These were met with available liquidity.
Let me highlight the significant 2020 of accomplishments.
For the year distributable earnings and ROE were $1 82 per share and 12, 3%, surpassing our 10% target with a robust one for ex dividend coverage.
Despite the pandemic shut down for over half of the year, we originated and acquired $910 million of SBC loans to be held on balance sheet.
Our government sponsored small business administration of our S. P. A residential and Freddie Mac gain on sale of businesses. We originated $4 9 billion up 83 per cent year over year with additional originations of $2 7 billion of payment protection plan loan or P. P. P.
We ranked number two among non bank SBA lenders and climbed to number five in the Freddie Mac small balance loan League table.
Despite the difficult capital markets, we securitized over 609 million of loans renewed six credit facilities and manage the average recourse leverage the two point Onex. Finally, we continue to find accretive ways to expand at the scale our business with the signing of the $350 million and worth merger.
The foundation of our business is our for for $2 billion portfolio of first lien SBC loans. Unlike our peers with average loan balances over 100 million our portfolio is derisked with over 5400 loans, averaging only $800000.
This granularity provides numerous benefits first low single asset risk with our largest loan only one per cent of gross exposure.
Our S. P C focus avoid high beta COVID-19 sectors, such as big box retail large central business District office and hospitality.
Third the.
The portfolio is more correlated to residential housing than large balance commercial real estate, which benefits from the current strong housing fundamentals.
Additionally, our strong credit culture, which emphasizes the experienced sponsors superior markets and low risk collateral types has held 60 day plus delinquencies at 2.7% versus 6% in the large balance of C. M. B S market.
For the portfolio weighted average coupon of five four per cent of duration of seven years. This is the core of our stable of dividend.
The the net interest margin for our loan portfolio is supplemented by a growing servicing fee revenue at year end, we serviced over $11.7 billion of loans across our residential of SBA and Freddie Mac pilot platform with a weighted average servicing fee of 34 basis points across these three products.
That was compared to the model on commercial REIT ready capital is truly unique in that it also owns three government sponsored lending platforms, providing a supplemental gain on sale revenue stream.
Each of these businesses owned by the REIT in the taxable REIT subsidiary have unique barriers to entry come in current market values significantly in excess of carrying value and have access to liquidity and stress capital markets. This was evident in 2020 with record earnings across each business.
Our most significant and differentiate of platform as our SBA seven day lending subsidiary of one of only 14 non bank small business lending companies licensed by the SBA.
Wired in 2014 from C. I T. This business has originated 820 million since inception, including 83 million of 65 million of the third and fourth quarters of 2020, respectively.
We continue to grow market share in 'twenty 'twenty rising from 14th the ninth largest seven day lender and the second non bank lender throughout.
Throughout the pandemic bilateral support in D. C for the SBA is evident in three stimulus programs two rounds of the paycheck protection program or PPP principal and interest support on seven day loans and the increase in government guarantee from 75 to 90 per cent.
Integration of our Miami based Fintech unsecured lender with the SBA business provided the P. P. P leadership and rollout of seven day small loan program.
P. P. P originations totaled $2 7 billion in 2020 and totaled in excess of $1 billion in 2020 one as of last Friday, the increase to a 90% guarantee for September 30th will add the 2021 seven day volume with current secondary market premiums averaging 12 per cent further over the last six months, we have added seven business.
Element officers expanded our capabilities in small on lending and form new affinity relationships.
We also continue to expand our Freddie Mac, SPL and broader GSE lending operations originating $545 million in 2020.
Demand for this product continues to grow due to low rates relative to banks and stable fundamentals and the SBC property market as rent growth in collections have held up through the pandemic.
Additionally, we entered into two agency correspondent agreements in 2020, which allows us to offer a full suite of GSE products. We expect volume for these new programs to experienced modest growth as we build out the necessary infrastructure to achieve scale.
It was a historic year in residential mortgage originations and GM F. S experienced record volume and profitability in 2020 of G. M. F has originated for point 2 billion at margins, averaging 285 basis points up 100 per cent and two X versus 2019, respectively.
Additionally, we increased the mortgage servicing portfolio of balance of 17% to $9 5 billion, while lowering the weighted average coupon 9% of 368 basis points.
The trend in elevated performance has continued in the new year with over 750 50 million originated year to date.
And 2021 and we looked at target distributable earnings at or above pre COVID-19 levels through a number of means for.
First the restart of our SBC lending and acquisition activities, which began at the end of the third quarter and reached normalized levels in the first quarter.
Through the end of February we have originated and acquired $600 million, which is one of the half ex of the volume over the comparable period in 2020 <unk>.
Importantly, as typically occurs on the recessionary upcycle, we have tightened credit metrics, focusing on stronger sponsors and lower risk sectors, including multifamily and industrial.
Second we will continue to expand the earnings contribution of our SBA seven eighths of state of subsidiary from a combination of increased seven day volume in conjunction with capitalization on the six month window for the better for the benefit from this 90 per cent seven day guarantee and higher profits in the second round of the PPP program.
For the end of February we originated 26 million of seven day loans. The modest starts of the year is primarily driven by our decision to wait an update updated seven day guidance on the 90 per cent guarantee from the SBA, which became effective February 1st we believe the plan of expanding our BDO and affinity network targeting industry.
Verticals and developing a robust small of an infrastructure will result in increased volume going forward.
Meanwhile, we funded over 1 billion of PPP loans through last Friday with prospects for growth enhanced by the house small business Committee. The committee yesterday passing of resolution extending P. P. P through may 31st.
Lastly, we expect to continue to scale, our business to benefit from operating leverage created over the previous years.
This begins with the closing of the Ainsworth merger.
Of the merger is expected to grow the stockholders equity to $1 1 billion, providing incremental liquidity of $380 million increase float in our shares by 30% of reduced day, one of the operating expense ratio by approximately 200 basis points.
Unlike past mergers the liquid nature of the <unk> balance sheet provides more flexibility in turning over the portfolio into our core strategies, we expect to do this and the prudent man are best suited for creating value for our shareholders.
I'll now turn it over to Andrew to discuss financial results.
Thank you Tom and good morning, everyone.
We closed out a record 2020 with their third consecutive quarter of significantly above target returns with GAAP earnings per share of 49 cents.
Distributable earnings per share of 51 cents.
Our distributable earnings for the quarter equate to a 13, 3% return on average equity.
Distributable earnings for the year were 101.4 million for a 12, 3% return on average equity.
As Tom mentioned earlier, our business is structured to provide stable earnings from our loan and servicing portfolios with upside from our gain on sale of operating segments.
The current quarter's earnings profile continues to highlight these benefits.
Net interest income before loss provisions increased 36 per cent quarter over quarter to $23 5 million.
This increase was driven by the redeployment of 160 million of net capital on 367 million of originations and acquisitions into the loan portfolio as well as the realization of discounts on payoffs.
Our total seasonal reserve remained at Q3 levels, although there were shifts in the composition of that balance in.
In the quarter, we released $2 3 million of reserves on loans with clean pay history over the last 12 months the.
This release was offset by just general reserves of point 4 million on delinquent loans and $1 9 million of reserves on newly originated loans.
The reserves on delinquent loans have been included in our calculation of distributable earnings.
Net mortgage banking revenue continued to provide strong earnings despite a $11 7 million dollar decline in quarter over quarter revenue.
In the quarter residential volume remained relatively flat at $1.2 billion, but average margins declined 25 basis points to 275 basis points.
Net realized gains from our SBA and Freddie Mac S. The L businesses increased 41% to $11 3 million.
This increase was driven by the 84 per cent quarter over quarter increase in SBA guarantee sales and a 25 per cent increase in Freddie Mac production.
S. P. A C L premiums continue to be high and average 12% in the quarter.
The recent update to a 90 per cent guarantee we expect the return profile of your SBA business to improve considerably.
Earnings contributions from our servicing portfolio increased 1.3 million to $11 4 million Inc.
The increase is due to the addition of $557 million into the servicing assets during the quarter.
Our balance sheet is reflective of both the reemergence of our core lending strategies and the continued focus on maintaining adequate liquidity and leverage levels.
In the quarter, our core loan portfolio increased of $4 2 billion, marking a return to a portfolio of growth after two consecutive quarters of portfolio declines.
Performance in the portfolio remains stable with 60, plus day delinquencies remain below 2.7 per cent.
Forbearance remains low of 2% in the CRE portfolio and deferments in the SBA portfolio remained low at six 8%.
We believe the diversity of this portfolio will continue to deliver superior performance for large bound CRE assets.
We remain focused on liquidity and mark to market debt we.
We currently have $172 million in cash and liquidity and the average recourse leverage in the fourth quarter was two one times.
Included in our total recourse debt of $1 8 billion at year end was 370 million to support our agency lending activities and $450 million of corporate debt.
Recently, we price the 200 million senior unsecured note offering of five year note how does the coupon of five and three quarters 45 basis points inside of our previous best execution.
Additionally, we plan to come to market with the 625 million other.
Although at the end of the first quarter and are in the final stages of negotiating two new warehouse facilities to fund our investment pipeline.
Our future efforts will focus on lowering cost of funds.
And reducing reliance of mark to market leverage.
As we have previously done for.
The supplemental earnings deck, which includes summary information on the company's earnings profile, various operating segments and key financial metrics.
Of note is our company update on slide three the.
Strike to the earnings profile of outside sex.
And the investment activities on slide seven.
We've also included a summary of the Android transaction on slide 20.
I will now turn it over to Tom for closing remarks.
Thanks Andrea.
In the four years since we went public via our merger with Zeiss financial much has been accomplished.
With the pending close of the and worth merger, we will have doubled the equity base of the company originated or acquired over 20 billion of assets completed 17, Securitizations and developed a leading platform in the small balance commercial market.
Over this period, our model has delivered 45% total return for our shareholders, which compares favorably to the 26% return from Ishares mortgage real estate capped etfs.
We are committed to providing superior returns and looking ahead to 2021 and beyond and we will continue to benefit from steady revenue stream from the loan and servicing portfolios and alpha from the opportunities embedded in our government sponsored sponsored lending segments.
So with that operator, I'll now open it up for questions.
Thank you well now be conducting the question answer session.
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One moment, please while we poll for questions.
Thank you and our first question coming from the line of Christian Love with Piper Sandler. Please proceed with your questions.
Thanks, Good morning.
Tom and Andrew a gain of sale gain on sale margins were under some pressure in the quarter I think in the presentation. You comment there around 275 Bips I was wondering can you speak to how margins are trending in the first quarter and what you would expect in the near to medium term with respect the margins.
And that of Utah.
You talked about the from residential mortgage banking segment correct.
Exactly yeah, yeah. So I think of Andrew maybe you could comment on the actual the beauty of quarter to date, but generally speaking.
With the the 50 60 basis point upward move in the in the 10 year, we expect the you know.
The stating the obvious refined the decline you know up to 75 per cent. This year in the industry that'll be more that'll be partly offset though versus prior cycles by you know what significant purchase demand. So I think we expect origination volume to decline.
Up to a 30% to 40% versus the elevated 'twenty 'twenty levels as far as margins.
Given that decline you're continuing to see the typical cycle with refi burnout and more availability of staff.
So you'll see a lot more competition on rates.
And as a result of that we expect margins to normalize.
To more of that you know 75 to 150 basis point level, you've seen historically by the third quarter of this year, but that said our our of G. M. F. S. It tends to be in its own ecosystem in it it tends to lag both in terms of Prepays and and some of them. The the more competitive price elastic market set of Android and now what.
With that kind of macro backdrop, what are you seeing in the trends in the quarter.
Yeah, I mean, thus far of margins have come.
Come down probably 25 basis points, where they were at year end.
So certainly some compression there I think you know when we look at the effects of rates on G fast and it's important to note. The you know the MSR is lost close to $40 million in value over the last.
Eight quarters and during that time, we've added close to 2 billion into that that portfolio. So I certainly think there's going to be now as rates move some recovery in the value of that asset as well.
I don't think that that's an important differentiating factor of Cushing, but some mortgage bankers sell M. S. Ours don't retain it we we retain MSR as a hedge against production and.
When you have a whipsaw of like this in the 10 year, you would expect that to be reflected as Andrew saying in the and this quarter and subsequent quarters in an improved valuation for the MSR book.
Okay, great. Thank you that's all helpful.
One more for me so how should we be thinking about the P. P. P fees I guess first what's remaining from round one that needs to be recognized and then what would you expect for a round two for net seems does kind of in the ballpark of around 15 million makes sense and then kind of what.
For what timeframe timeframe would you expect those to be.
I realized the I'll, let Andrew comment on the net income just the Andrew one backdrop the the.
The couple of days ago, the the house small business commodity extended the voted to extend the 60 days so that could give us a longer of the Senate has to approve it but the that'll give us a longer.
Another two months of a potential revenues associated with the program and the round two I'm sorry, Andrew good.
Yeah, so because of a in terms of route one production, there's 10 million left to be recognized.
I expect all of that to be recognized in the current year.
Profitability on round, two is going to be at least on a percentage basis significantly higher than where we were in round one.
And so you know my expectation is that round two.
Revenue is going to be either at or one of half X, where we were in round one.
There'll be some differences in how we treat that income.
Because we are carrying those loans on balance sheet through the through financing with the P. P. P. L F.
So the the fees earned there will be of yield adjustment of alone.
You know recognized over the average life, which is probably under two years. In addition to that you're going to get the the spread from carrying that portfolio I'm.
So do you think P. P P round two.
Have a fairly significant impact on the earnings of the company over the next.
Call it six to eight quarters.
Okay, and just to clarify so you were talking about the one in of halftime heat you mean, one of the half times on a kind of a like for like in originations right not all of them because I think your debt.
The area like we were expecting to do something like $40 million in round, one and fees line.
You don't know and I'm talking on a dollar level of it.
No on a dollar basis. So if we did 40 in round one I certainly think round to profitability, it's kind of exceed that.
Perfect. Thank you very helpful.
Our next question is from the line of from Tim Hayes with B T. O G. Please see the question.
Hey, good morning, guys. Congrats on a nice wrap to a challenging year first question for me I know you kind of touched on the impact of higher rates on G fast there and you're in your disclosure you talked about.
Obviously, the impact from higher short term rates on them and you know it seems like that would actually higher one month LIBOR, but would benefit you there, but just thinking about the higher long term rate impact.
Ted you mentioned G fast, but maybe if you could talk about the impact on the broader S. B C ecosystem and what that could mean for kind of transaction activity and and for you know for your pipeline and I know the magnitude of linearity of of move makes a big difference, but any comments around that would be helpful.
Yeah, that's a good question Hum.
The the largest segment of origination where most of the capital is dedicated is the small balance bridge.
And.
And we are kind of pivoting a little bit more of the multifamily industrial and of for obvious reasons.
But the what's interesting about as compared to the residential credit space.
Obviously, the the there's the correlation between NOI and.
And rates in a rising rate environment, it's a bull market and you'll see it in this case the recovery in the sectors of CRE that we're focused so as a result purchase demand in commercial real estate will will come off the bottom and as a result of that we are seeing a big rig regardless of the increase in the 10 year, let's see.
The hundred let's say, but let's say, we're at two and a half of year end, which is a lot of street forecast, we don't see we see purchase volume in the CRE space that we focus on kind of that mid market.
Level, where debt, which drives the need for bridge financing. So we think that actually will b b a neutral impact.
Terms of of rates. The only won one area. It may have an incremental is the Freddie Mac small balance of the GSE space.
So that could impact refi volume, there, but nowhere nowhere as near the the the Delta that you have in the residential space. So I'd say on balance it's a rising rates for us are a net positive because of the fact that our you.
Our.
Bridge book is a floating rate based off of LIBOR.
Mhm, Okay. That's that's helpful in framing that I appreciate it. This this might be a dumb question here, but I think the wording you guys use in your earnings release about I guess for I forget if it was for Q1 key origination activity, but was that you acquired or you know what.
Originated a certain amount of small and medium sized commercial loans is that language is different than what you've used in the past in terms of the medium size loans are you doing some bigger loans here or was it still kind of business as usual for you guys.
Well the yeah.
The interpreter.
Yeah. So you know the majority of our lending activity in the first quarter has been in the bridge business for each segment and we haven't seen some uptick in loan sizes. They are you know historically those ones of the average below $10 million, but we are doing some larger loans in excess of $10 million of that.
Really the reasoning for putting in that language.
It actually the just to be more specific we're doing some.
I'm size loans, you know kind of in that.
Three of the $25 million, but we're doing it across a number of properties with one sponsor where we cross collateralize the.
It's still you know of.
Squarely in the debt kind of the mid market.
Mid market property the property value you know again as compared to the the the muscles of the larger see rates, which are focused on you know 100 million plus.
Single property deals.
Right I guess I guess my question around that though is are you butting up against more of the middle of traditional middle market players as you get a little bit bigger and does that impact kind of the yield youre able or coupon you're able to achieve there or is there just increased competition as you kind of go higher in size.
Adam do you want to take it up you know from your vantage point of the credit side, you're obviously.
Driving the the the approval of these loans, but how would you view the current trends.
Yeah, I think in terms of the larger loans.
You know certainly sticking with kind of the highest performing.
Asset classes through through Covid, so specifically on the multifamily industrial and self storage side.
And those tend to be slightly lower rates than we have gotten historically.
And that's certainly a competitive sector, but I think you know the debt that the type of transactions that that we are doing really enables us to improve our cash flow and bridge bridge portfolio, which really enhances the overall portfolio.
It keeps us out of good risk profile.
Yeah, I'd just add to that if you look at so we're moving to COVID-19 less cover the affected sectors with tighter spreads. However, the comeback in the CRE CLO market has more than offset any tightening on the the.
The lending margin such that the ROE.
The incremental Roe's, Andrew are running what are kind of in the <unk> zone.
Yeah of closer to 20.
Okay. So yeah, so they're there they're about three to 400 basis points higher than they were of pre COVID-19 due to the.
The up going up.
In credit quality from the standpoint of the again the the sector is least affected by Covid.
Got it no. That's the that's helpful. Because that's what I was trying to get out of if you know we should be anticipating some type of yield degradation as you yeah as competition picks up for the the types of assets Youre going after in the bridge business, but it sounds like that's more than offset by the financing side of things.
And and and and.
Right, but just on your.
Sorry, sorry, Tom but just on the you know on your warehouse lines of credit facilities. You know are you seeing kind of better leverage and a lower cost there as well as the banks of to compete with that market. Just wondering if there's some tailwind in there as well.
And of what you're seeing in terms of the of the facilities.
Yeah, I don't I don't think we're seeing I'm, assuming the lower.
Lower costs of where we've experienced historically, although as we mentioned in our remarks, we are seeing opportunities to bring in other lending partners. You know right now we're in the midst of negotiating.
No two new warehouse line. So we think we'll be.
Accretive going forward once of 500 million dollar facility Jude.
Fond of our core origination activities.
And in terms of out of are fairly consistent with our existing warehouse lines and then we are in the midst of finalizing a non mark to market facility to two I'm fond of acquisitions business. So we are seeing.
You know opportunities to expand the partners who went to us.
Yeah, and Andrew just to add and I'd say that you know these the larger the larger loans, you know kind of the middle market larger loans that we're doing the warehouse partners that we have are certainly.
Very interested in these type of asset classes that we're lending and now given kind of the credit strength of these assets. So certainly seeing some better advance rates from them in and then lower lower financing costs.
And that in turn drives the ROE on the incremental ROE and therefore, the NIM attribution.
Two again about three to 400 basis points higher than where we were of pre COVID-19.
Lower lower debt cost and higher advance rate due to the shift in property mix to more of a lower risk sectors and cash flowing properties.
Yeah.
Got it that's really helpful guys I appreciate it I'm going to hop back in the queue for now, but thanks again for taking my questions. This morning.
Good day.
Thank you our.
The next question is from the line of Steve Delaney with JMP Securities. Please proceed with your line.
Good morning, Tom and Andrew and congratulations on a truly great year under the circumstances.
You mentioned in your you for.
Freddie Mac small balance that you had added some correspondent programs could you comment on that a little bit I'm, just curious if you're developing partnerships with community banks for independent mortgage brokers to true source loans that are broader than your own network. Thanks.
Yeah actually out of monitor you managed to take that one.
Yeah short for the the agency product that we have is the Freddie Mac S. B L. A license. So that's the the smaller balance of agency loan for to the extent that our production folks have opportunities that are larger in size, you know kind of fit the profile of our you know either of Freddie Fannie.
Any type of.
Type of financing.
We're partnering with with various lenders that have those licenses.
Where we send them opportunities and then you know the license that they don't have is particularly on the smaller bound side, where we're all specialty is.
And they send those opportunities. So that's it's kind of of back and forth partnership.
And you know we kind of.
The feed each other got it for me okay.
Okay. So you're you're you're accessing the das program or the K program simply by working with with those licensees to show them wounds and hopefully there's some reciprocity there maybe almost small balance side is that where the parent that's.
That's exactly right okay, great. Thank you.
Oh, Yeah, no I'm, sorry, I was I was just going to add and then and then one of our bridge side. It also works well, where we bounce of opportunities.
All of our agency partners on the larger balance side, it's just kind of check out just to make sure that the peak out sizes to what to an agency financing.
The financing. So then when our loans kind of stabilize come to maturity. We then again partner with those agencies.
Alright, we partnered with the windows that that half of those products in the they really become a take out for our for our.
<unk> for 'twenty.
Okay, No that's very helpful and.
We will keep an eye on debt, obviously, great business and a limited number of licenses out there. So definitely important part of what you have looked.
Look we all know 2020 was the best year ever for resi mortgage I think what some people are missing and we you know a lot of a lot of ipos and a lot of volatility in the stocks Air view is well well 'twenty 'twenty. One is is going to come down from 2020, it's probably still could be the second best year ever.
You know for the resi mortgage business and just to.
Make sure I was clear on your guidance I think I heard you say look for volume to be down 30% to 40% year to day and of normalization down from the high two hundreds to maybe the low <unk>.
100, plus or whatever by the fourth quarter of next year did I did I get that reasonably accurate.
Yes.
Okay. Good I will take all of that into account. Okay. Thanks in the to pick up on where Tim was Tim Hayes of little bit earlier, I think you answered this and my question about the the pending I think Andrew mentioned, you've got a CLO financing targeted coming up and you've got over 600 million of recently originated.
It sounds like the return profile between the combination of pricing on the loans and we've seen CLO.
The pricing in terms of execution speed as tight as ever it sounds like your expectation for.
For the next CLO debt the net return on equity you could exceed the the median or the average within your existing portfolio is that is that an accurate takeaway.
Yeah, I think that's right.
Okay, Alright, well thanks, Thank you all for the comments.
Yeah.
The next question is from the line of Stephen laws with Raymond James. Please proceed with your question.
Hi, good morning.
Tom first of all the the NH The act.
The acquisition of when that closes how do we think about capital reallocation.
Were you actively or how quickly sell down the MBS portfolio.
You know as you think about investment opportunities.
And the other business segments and as we think about you know kind of.
When that's fully done you know how how does that change the current business mix of given.
Given the the opportunity she like today.
Yes, I think it's the it's a very and Andrew chime in but.
Based on our current acquisition and origination forecast and the core SBC business it looks to be a linear one to two quarter reduction in the MBS portfolio.
In lockstep with.
You know for.
Funding the origination investment net net investment in the SBC loans.
So there's a you know that the the and worth of merger plus the.
The ability to re lever that roughly 300 million plus of capital provides us with funding for our all of our base case originations and acquisition the forecast for 2021.
That said there are a number of the potential kind of bolt on acquisitions, we're looking at across the.
Our platform more broadly you know the.
Recall, the the Knight financial acquisition back in.
20, the fourth quarter of 2019, so yeah between the the to the.
The regular way acquisitions and originations in particular of the bridge space, where we're seeing a lot of post COVID-19 demand mvpds potential of smaller bolt on acquisitions. We are we think for be able to very quickly redeploy that capital in and of one to two quarter time period I don't know Andrew if you could comment on that.
You know I think that's right I think you will see some movement post close to get out of some of the more volatile items into bring.
You know their existing leverage more in line with where we have but outside of that I think we'll manage the runoff to meet the the investment pipeline.
Great appreciate the color on that debt Andrew to touch on the other operating expenses down quite a bit from the last four quarters.
Just can.
Can you give us an idea of a little bit more detail what's in that that line item. But also you know, it's just kind of $50 million of year annualized number of the right target or how do we think about this expense going forward.
Yeah, So the fourth quarter of the movement a lot of debt was due to adjustments in bonus compensation.
In the residential mortgage banking business.
So although a lot of that adjustment occurred in the fourth quarter.
The as a percentage of profitability, it's more in line with what on an annualized basis with what you can expect going forward.
So that does that reduction was offset by some increases in your end of accruals, but to answer. Your second question. Yeah. So I think the annual run rate here is more in line with what you can expect from the new year.
Great. Thanks, a lot.
Thank you.
Our next question is from the line of for Randy Binner with B Riley FBR. Please proceed with your questions.
Hey, Thanks, Good morning, I just have a few follow up questions you know across the world. We've covered so far so first on the rest of the origination figure.
You'd think I think you said down 75 per cent on refi.
Versus last year, and then overall down 30 40 per cent. So that the number of kind of continues to jump out at me and I just want to understand if that's the comment more towards your book or the.
<unk> origination market overall.
If the overall of that that was just I was just quoting an M b a [noise].
Data, Okay. So that did recently that said that and just to be clear that's not decline in the origination of arm to the shift in this quarter are they expect to be go from 70 ish 75 ish last same quarter last year down to only.
The 25 or so that the this this quarter just the that's it so that the percentage of industry originations.
Again, we view the the overall decline you know obviously, the purchase volume going down very significantly and offset by.
The the refi.
Refi volume going down significantly offset by a secular shortage of of homes and the increased therefore, an increase in purchase demand, but that net net will be 30 to 40 per cent in the industry I would argue that a G. Fast is in a market where there's still it's a again, it's a lot more.
If you look at the C. P ours, they're usually about one to two points slower.
On the MSR book and the.
The the Delta on refi is is it is a is a fraction of its probably 20%, 30% less than hot competitive markets like California. So yeah anyway. So that that we do expect that sort of decline in overall volume tied to a again, that's that's more tied to it.
Our view of the 10 year being about two at year end.
But you know so that that's the kind of if that's helpful. That's how we're thinking about it in the context of the broader market and but a lower percentage decline in for Jim F. S.
Okay understood that is helpful. And then on you mentioned the CLO coming up just kind of curious if you have a sense of how that might price.
Versus.
Whereas if it's possible the compared to where of similar book, where the price pre COVID-19.
I guess the high level question as you.
You know where where work do you think of CLO can price for your high quality book now versus pre COVID-19 higher or lower.
Andrew of Adam can can you maybe touch on what you guys of here and on the in the current market, but pre Covid I think we were at what Andrew maybe.
On the AAA seniors double I seen as we're at L. Plus a 110 125 is that right.
Yeah, that's right and then of Gapped out you know in.
In the dark days of the first.
First quarter of last year, the the the seniors gapped out to like 600 over.
For the the worst trades.
Today, I don't know Andrew or Adam I think we're.
We're basically at or near pre Covid types is that correct.
Yeah, So I think that's right yeah.
Okay. That's that's helpful.
Yeah no. That's good the just just curious I mean, the the market's gotten.
Quite a bit tighter and so that's just one data point for the last thing I had was you mentioned I think you know kind of some origination affinity relationships, but.
And I think those were well described but then in the opening script I thought I heard that you had some kind of fintech activity. There inside you know if we could just spend the second on that if I heard that right what is the.
What's the what is that technology.
Play that that you use because to me it sounded like the affinia relationship for pretty traditional but it but we would like to hear if there's you know of technology enabler there.
Yeah the the.
The the Fintech reference it relates to the.
Unsecured.
The night financial of the unsecured.
Small business lender that we acquired late late last year, and you know the they're part of us and ecosystem of the small lenders that utilize scoring methodologies, but importantly, the develop portals, which enable a.
A a small business borrower to go online and.
Uh huh.
The download documents and go through of scoring program and and and use of its use of much less manually intensive.
Origination front end of the loan origination system, and we're able to utilize the product.
The first with respect to the small loans, which the SBA allows you to use the scorecard on the scoring methodologies that obviously is custom fit to a Ah Ah Ah Ah.
Technology front end platform like what Knight has so we've adopted that to rollout a small loan program, which will use it for affinity and then we're going to do the same program with the large loans. The a seven day loans, which are more labor intensive, but we have delegated underwriting authority from the preferred lender from the SBA. So.
And that that can be white label to let's say of bank of credit Union or what have you. So those are that's that's how the that's sort of front end.
The system, both in terms of the online portal and the ability to score and download documents is of what we're talking about as opposed to the more traditional method, which is having you know.
A BD owes it to the debt.
Business development officers that will then take the referrals and then go through the more traditional loan underwriting process.
Understood. Thanks, so much.
Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please proceed with your questions.
Hey, guys for the Anh acquisition.
Because of the changes in the interest rate environment since the deal was announced.
Any changes in terms of the expectations for accretion to book value of our earnings for pretty capital.
Yeah. So you know A&H as book value from September 30 through December 31st increased slightly.
You saw some appreciation in January that was given up in February but we expect.
The accretion of dilution to be right.
Right around if not slightly improved from where we modeled that at September 30th.
Great and as a follow up question, Tom given your comments in terms of.
Oh excuse the Andrews comments in terms of the lower expense run rate what is the expectations in terms of our core ROE target for.
For 2021.
Yes, I think our view is that you know pre.
Pre COVID-19, we were <unk>.
Targeting a 10% return on book.
I would say that you know post COVID-19 given.
So the the incremental increase in the ROE on the core of bridge lending business coupled with the.
Some of the the gain on sale of businesses continuing to contribute I think the.
Residential mortgage banking is not kind of a repeat of 2021, but it'll be strong.
And clearly the the SBA with the.
P. P. P round two and the <unk> also increased the guarantee amount from 75 to 90 through October 1st that along with continued strength in the Freddie business those gain on sale that those two will offset of the sort of decline incrementally in the.
And the mortgage banking segment, so that we expect to have them.
Our ROE target in excess of that that 10 per cent that we were targeting pre COVID-19.
Great. Thank you.
Thank you.
Our next question is from the line of Tim Hayes B Tinchy. Please proceed with your question.
Hey, guys just one more follow up for me and I just wanted to put your last comments income.
Of the context of the dividend, which I know is a board decision but.
If you're gonna be bigger following the acquisition of <unk> and you're having a higher ROE target than you did before Covid, where your dividend was 40 cents and you're expecting you know all of these tailwind to the gain on sale of businesses ex GFS.
And the core bridge business to more than offset what's going on the G. In the past I'm just trying to understand at what point, we might be you know there seems to be very good dividend coverage here, so what point or what would it take for you guys to recommend an increase in the dividend at the the current level.
Or do you want to touch on that.
Yeah. So you know as we said on previous earnings calls the the goal is the first get back to the 40 cent dividend level I think we're well on our way to that.
You know again I can't speak.
It's a board decision, but in terms of when we get to that level.
Board is probably going to look at how the Edwards integration goes in combination with.
Certainly the expected revenue from P. P. P round, two of which as of Sept before it can be quite substantial.
So given those fact patterns.
For a return to normal I believe could happen quicker than might otherwise have been expected absent the PPP.
Thank you.
At the end of question and answer session now I'll turn the call over to Mister Thomas capacity for closing remarks.
Again, we appreciate everybody's time in the after after a tough 2020 and.
We feel we're strongly positioned for 2021 and I look forward to the next earnings call.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and we thank you for your participation.
Yeah.
Yeah.