Q3 2021 Ready Capital Corp Earnings Call
Greetings and welcome to ready Capital Corporation third quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
A reminder, this conference is being recorded it is now my pleasure to introduce your host Andrew Ahlborn Chief Financial Officer. Thank you you may begin thank.
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 on 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 third quarter 2021 earnings release, and our supplemental information, which can be found in the Investor Relations section of the ready capital website.
In addition to Tom and myself.
Also joined by Adam's asthma, our Chief Credit Officer, and David Cohen Co President of bridge lending on todays call.
Now I'll turn it over to Chief Executive Officer, Tom capacity.
Good morning, and welcome to those of you on the call today, and keeping with our practice of having members of the executive team join Andrew and me on calls and display the depth of our team I'd like to welcome David Collins todays call David a key leader in our organization is co founder of ready Capital's bridge lending business, which has grown to be one of the premier sources of cash.
Capital for owners of lower middle market properties in transition.
Riding loans on transitional value add and event driven commercial and multifamily real estate, David leases core lending strategy, which accounts for nearly one half of our capital allocation.
Now turning to results, we reported distributable earnings per share of <unk> 64, 23% growth from the prior quarter.
This marks the sixth consecutive quarter, where both return on equity and dividend coverage are in excess of our 10% and 105% targets.
Metrics are among the highest in our peer group, reflecting continued contributions across our multiple diverse business lines at a high level results continue to reflect post COVID-19 recovery in net interest margin in our core small balance commercial or SBC lending business was stable contribution from our government sponsored gain on sale.
Segments.
The post Covid recovery in the SBC property market is lagging the large balance commercial real estate market reflected in 36% and 11% year over year increases in SBC property sales over 150 billion and prices through July.
This trend is driving loan demand across our diverse product offerings, we originated $1 billion of SBC loans in the quarter holding consistent with record originations in the prior quarter.
The volume was dispersed across a range of products, which target all stages of an SBC properties lifecycle from have any transitional to stabilize agency loans.
In our Freddie Mac small balance loan program, we originated 136 million and expect annual volume to exceed $700 million in Freddie Mac Enbridge day Friday volume by year end.
<unk> quarterly volume declines due to changes in friday's affordability criteria and rate increases in the third quarter demand for multifamily housing remains elevated.
<unk> recent rate reduction to as low as two 6% in top markets is expected to drive increased volume through the end of the year.
In the quarter activity in our conventional fixed rate segments picked up for the first time since the start of the pandemic. These products target stabilized our stabilizing properties with our fixed rate product, providing flexibility in term repayment options and property types.
Originations in the quarter, but the segment exceeded $105 million.
Fixed rate originations of $71 million at an average rate of four 1% and are expected to generate a low teen levered yield over their nine year duration.
C N V as originations of $34 million will be contributed to the company's first Standalone C. M. B S offering and will generate gain on sale revenue.
Our bridge lending business, which targets both have any transitional to light transitional projects was the star performer with over $730 million originated in the third quarter I'm going to turn it over to David to provide additional insight.
Thanks, Tom since the onset of Covid in 2020, and after the initial shock of the assumed negative implications on the commercial real estate lending market. There has been a forward booking momentum in the market as lenders reenter the lending arena.
They're ready capital bridge lending platform quickly adapted to the changed market by focusing on certain preferred asset types and markets.
We remain disciplined on credit.
Is evident in evaluating approximately 1500, new deals in the third quarter and closing on three 5% or $730 million two.
To accomplish our continued growth and market share capture we focus on several key areas.
First our closed transaction volume was driven in particular by al.
Our ability to provide sponsors and brokers with certainty of execution through our unique upfront due diligence review process.
In this market of uncertainty execution certainty is paramount to be designated as the lender of choice.
To accomplish these objectives the bridge lending platform enhancements and infrastructure in the third quarter with the hiring of an additional four employees to support transaction execution in the areas of production and credit.
Second we continue to focus on the financing demand for value add multifamily and industrial properties multifamily properties accounted for 87%.
The third quarter volume and 88%.
You can find a year to date, our focus on multifamily assets is based on the company's proprietary geo tier scoring model, which factors in.
Vocal macroeconomic migration of demographic and absorption trends as well as the predisposition towards that better classes of assets with qualified and experienced sponsors and operators that have the proven ability to execute a well defined business plan.
In addition to our G O to your model overlay. We are also focused on the property level credit analysis, which includes evaluating the achievable pro forma rent levels for the value add improvements from the bone proceeds vacancy concessions and bad debt.
Along with property along basis. Additionally, we underwrite traditional credit metrics, such as stabilized willing to value and get you there.
This strong and detailed underwriting focus provides us with the confidence in the bone that upon stabilization. There was a clear path for an exit doing sale or refinancing into a fixed rate for agency loans.
Another favorable sector focus for us benefiting from ongoing Covid dislocation is industrial with the continuous increase of E. Commerce sales. The industrial segment continues to show strength as supply chain demands is driving the need for industrial assets with industrial specifically some key.
Factors, we evaluate are the property's location and corridor accessibility and whether suited for local.
<unk> national tendency and last mile distribution to the end user as well as understanding the properties functional capabilities or obsolescence.
This has been an incredible year for our bridge lending platform as we continue to build relationships and build upon our strong reputation I think prominent small and middle market balance bridge mind, we will continue our path of consistent growth and increased market share by working with best in class and experienced brokers and sponsors.
And providing a well structured loan with the certainty our customers have come to expect let.
Let me turn the call back to Tom.
Thanks, David to supplement our SBC direct lending, we also acquired $168 million in the quarter. The acquisitions included 49 loans with an average ltvs are 58% and rates of four 4%.
The assets will be contributed to the company's 11 legacy loan securitization and are expected to generate a 15% return over a four year duration. The current acquisition pipeline remains robust at $350 million.
I want to highlight the growth in our CRE lending business and acquisitions business in 2021, our expectation is that the 2021 volume across all products will exceed $4 billion two times, our normalized pre pandemic originations in 2019.
Although the market backdrop has been constructive to this growth we believe our investment in expanding our capabilities increased recognition of the ready capital brand.
The ability to certainty and reliability, we provide to our customers has been a significant factor in this growth.
In our small business lending segment, which focuses on the small business administration or SBA seven loan program post Covid recovery and small business loan demand continues to drive origination volumes during the quarter SBA seven eight volumes reached $138 million, which along with the SBA, 90% guarantee and secondary market premiums.
Averaging 12% resulted in a significant gain on sale margins the sustained demand from small businesses re emerging from Covid, the opportunistic staff and technology investments made into the business over the last four quarters and product expansion such as the seven eight small loan program will continue to drive growth in this segment.
Our expectation is that annual volume in 2020, one we will surpass $425 million.
Almost two times the average run rate from 2018 through 2020 I would also like to highlight that we completed the sba's fiscal year, which ended September 30th as the sixth largest lender nationwide.
Now turning to our residential mortgage business originations remain consistent at a $1 billion, but as expected average margin declined 15 basis points and averaged 92 basis points. Additionally quarter over quarter rate lock commitments fell 17% to $455 million, while the channel mix remains steady with purchase volume.
At 55%.
On the mortgage servicing right in front of high retention rate of 32% aided the growth of our MSR is to over $10 7 billion dollar of principal balance with a low pool weighted average coupon of three 4%, we expect volume to decline, 20% in the fourth quarter due to seasonality and potential rate increases.
Overall commercial portfolio growth was healthy with SBC and SBA loans, posting a 13% gain to $6 1 billion.
Ready capital's portfolio is not only differentiated from the peer group, but provides a superior risk adjusted return.
Portfolio is one of the lowest risk and the peer group probably diversified across 4500 loans with the largest asset accounting for only 2% of the portfolio and a conservative average loan to value of 64%.
SBC credit performance in the portfolio continues to improve with only one 7% of loans 60 days, plus delinquent and only 10 basis points in forbearance.
S. P. A performance also continues to improve with 50 basis points of loans 60 days delinquent and 80 basis points in deferment.
Remarkably we have yet to realize a loss on a new origination.
On the corporate development side, we remain focused on further building scale as a market leader in private debt solutions for our core middle market commercial real estate client base across the property lifecycle.
The merger with mosaic real estate investors is the next phase of our growth plan and a natural fit for our existing business.
<unk> founded in 2015 is a leading non bank lender, having originated over $2 5 billion of loans across construction lending preferred equity light value add multifamily and Preconstruction development financing.
$470 million transaction includes the acquisition of the existing Mosaiq portfolio with an initial purchase price equal to 82, 5% of the portfolio value and a $98 million of future earn out dependent on the achievement of certain milestones. Additionally, all origination and asset management staff will be merged into our existing <unk>.
<unk> lending operations. This transaction further ready capital's competitive advantage via seamless expansion and our product mix from heavy transitional bridge to construction lending.
Few non banks offer a lower middle market sponsor full lifecycle financing solutions from construction to agency takeout, but now we do.
Aside from the product expansion the transaction is expected to be accretive to earnings due to the 12% portfolio yield an unlevered balance sheet pending shareholder approval, we expect the transaction to close by the end of the first quarter of 2022.
More information on the transaction can be found in the transaction presentation on the ready capital Investor Relations website.
In terms of the outlook the business continues to benefit from our diverse channels as well as the increasing scale and reach of our lending activities. The combination of growing net interest margin servicing revenue the increased scale of our gain on sale of businesses and the remaining benefit from our PPP efforts will continue to produce attractive returns for investors over the foreseeable few.
Sure and strong support of our best in peer group dividend with that I'll turn it over to Andrew.
Thanks, Tom and good morning.
GAAP earnings and distributable earnings per share were <unk>, 61, and 64, respectively for the quarter.
Distributable earnings of $49 4 million represents a 19% growth from the prior quarter and a 17, 3% return on average stockholders equity.
Distributable earnings without P. P. P totaled 45 per share a 20% increase from the prior quarter.
The continued strength and earnings were driven by the growth in the portfolio due to increased lending volumes.
Practice economic climate for gain on sale segments, and the realization of deferred revenue associated with P. P. P.
Stable and reoccurring revenue from net interest income and servicing increased 22% quarter over quarter to $47 3 million and.
The growth in net interest income was driven by 13% increase in the portfolio, which as of quarter end had a weighted average coupon of four 9% and average margins of 240 basis points.
Additionally, we recognized a $4.5 million increase in quarter over quarter, Accretable payoffs, which were partially offset by a $2 $5 million reduction in interest income on mortgage backed securities due to the continued liquidation of the existing <unk> portfolio.
The servicing portfolio increased to $15 8 billion with a weighted average servicing fee consistent at 29 basis points.
You know until revenue from our SBA seven day, and Freddie Mac SDL operations remain notable at $19 7 million.
SBA production in the quarter continued to be at a 90% guarantee and given the strength of the secondary markets $117 million.
This resulted in net profit of $14 $2 million.
As we discussed last quarter. We are currently selling a portion of production at below market premiums, which eliminates day, one recognition of earnings but increases the retained yield over the loan's duration.
Freddie Mac sales totaled $110 million in the corner generating $1 8 million in revenue with margins remaining consistent at 160 basis points.
As expected net revenue from residential mortgage banking activities declined 15, 6% to $12 9 million, despite consistent quarter over quarter production due to the normalization of margins in 92 basis points.
Additional income statement items of note include a $1.2 million increase in other income related to origination fees, which were offset by increases in compensation expense related to continued growth in staffing and bonus accruals.
Professional fee accruals and fees due to ready capital's manager.
Included in this quarter's earnings were $2 million and net income contribution from Redstone, which was acquired by ready capital on July 31.
Pre tax P. P. P related income totaled $17 7 million, which includes $18 7 million of interest income offset by $1 2 million of interest expense and 200000 of other income on a tax affected basis PPP increased net income available to stockholders by 13.
$3 million.
As of September 30th we had $82 9 million of deferred revenue remaining as well as $8 $9 million of reserves pending resolution of their forgiveness process.
<unk> assets declined 400 million due to the forgiveness of roughly 18% of the portfolio through September 30, and we expect the majority of the deferred revenue to be accreted into earnings.
Over the next three to four quarters.
On the balance sheet, we continue to focus on the growth of the portfolio the capitalization of the business and funding the growth of the franchise.
You start book value per share increased to $15 six and we expect further growth to book value you bought the mark to market on the MSR asset as well as the retention of earnings inside our taxable REIT subsidiaries.
On the asset side of the balance sheet the loan portfolio increased to $5 9 billion as a result of $1 1 billion in originations and acquisitions net of 500 million in pay offs.
73% of the portfolio is floating rate with 70% of the remaining fixed rate loans match funded.
This growth was complemented with a $25 $8 million increase in the servicing asset due to net additions, including those acquired with Redstone as well as mark to market improvements.
To fund the growth of the portfolio, we liquidated $140 million of the remaining Edwards RMB etch positions in the quarter.
The increase in unconsolidated joint ventures was due to the inclusion of $35 6 million of assets related to the business combination with Redstone.
As of September 30th total leverage inclusive of the Paycheck protection program liquidity fun was five nine times with recourse leverage at two two times.
We recently closed a $315 million, 4.5% senior secured notes offering to refinance our existing notes as well as to fund our robust pipeline.
This deal continues the trend of reducing the companys cost of capital as we scale.
Today, the weighted average cost of corporate leverage is five 3% compared to 7% on December 31 2020.
Additionally, the successful repositioning of the preferred stock inherited in the Android transaction is reflected in the new ready Capital's series E on the September 30th balance sheet.
In the quarter, we also completed the company's six and largest to date CRE CLO.
The transaction securitized 653 million of originated bridge loans, and an advance rate of 83% and a weighted average cost of 133 basis points with the most senior bond having at plus 95 spread.
We plan to be in the market with our seven CRE CLO in the fourth quarter.
With that we will open up the line for questions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
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Our first question comes from the line of Tim Hayes with BTG. Please proceed with your question.
Hey, good morning, guys.
First question around the mosaic acquisition can you just give us a little bit more color around the profile of these loans.
How does the collateral compare to what you might lend on from a transitional standpoint.
Can you talk about kind of the credit profile and how these loans performed through the pandemic and kind of since the company started since 2015 any any material realized losses in that business.
Talk about or.
Also I just wanted to touch on the maturity schedule, what that might look like over the next couple of years. Thanks.
Thanks, Tim I'm, sorry, Hey, handoff to Adam.
As a preference Adam we did the Adam and his team conducted extensive due diligence, there's roughly whereas it Andrew Adam roughly 35 38 loans over the last six months.
Maybe you can kind of do.
Bit of a deep dive in terms of you know.
Good.
The broad profile credit profile of the portfolio.
Yeah, sure Hey, Hey, this is Adam thanks.
Thanks for the question Tim So the overall credit profile of this portfolio is strong.
We have a healthy basis in the loan portfolio got moderate weighted average ads as ltvs based on fresh valuations that we ordered to our due diligence process.
The portfolio is good property type and geographic diversity.
Approximately 95% of assets are in what we call Geo tiers, 123, which is the largest and most liquid assets excuse me the most liquid markets across the country.
Approximately 25% of the portfolio is backed by multifamily properties, which obviously, but that was it.
Lower lower volatile asset class.
We're very.
Shouldn't bullish on.
Majority of the construction projects are well into construction phase with with guaranteed maximum price contracts.
This mitigates rising construction costs that the market's experiencing due to materials and labor shortages and also supply chain issues.
In terms of a breakdown of the portfolio construction represents about 60% of the assets.
I'd say from a from a geographic perspective.
40% of the assets are on the West coast.
Markets that we we like Los Angeles et cetera.
From a credit performance perspective.
The performance of the pandemic has been positive.
With over 90% of the portfolio fully performing today two assets are in default and there are three Oreo assets two of the oreos were due to the pandemic and there was one legacy Oreo.
Three to four assets have experienced delays due to the pandemic.
Material supply shortage, and our cost overruns, but we're comfortable with the assets due to the projects being backed by reputable well capitalized developers and sponsors who during the pandemic contributed additional equity is needed and had executed completion interest in carry guarantees at closing of the deals there.
There were six deals that received extensions since the onset of the pandemic.
And want to highlight that six deals.
Had been repaid at par since the beginning of our due diligence process.
You know, which is which is extremely favorable.
That's great color I appreciate that.
And then just.
The maturity schedule. There are these what's what are the duration on these loans do you expect them to.
To be facing some repayments in the near term.
Yeah, I'll I'll leave it there and then maybe one or two follow ups.
Yes sure.
Typical typical tenor of these loans is three excuse me is three years to four years.
And these have.
Various extension options.
And then also.
I'd say the weighted average is about two years remaining on the majority of these and then in terms of.
Refinances and and and.
And pay offs.
There's certainly a number that are that are in process, where we're working closely excuse me where mosaic is working closely.
With the.
The sponsors on their refinancings and asset sales.
Okay got it and then.
The the collateral here I mean are these natural candidates for you guys to then offer some type of heavier transitional loan once it completes construction to get CEO or you know.
Is it a different type of collateral than you're normally targeting.
No. It's very it's very similar given the bridge program that David walk through I mean, there's certainly a significant amount.
Of opportunities for us to do bridge financing on some of these assets specifically where there is.
With where the projects are in the horizontal phase and.
The entitlements are complete the pre development phase is complete and they are looking to go vertical so David and his team they're going to be building out a construction prop product at ready capital, where we can offer.
These clients bridge and then additionally on the more stabilized assets that are within the portfolio.
Certainly would be a very good fit for our <unk> and fixed rate platforms.
So certainly a lot of opportunities there and then also.
Multimodal investments in multifamily properties focused mostly in the southeast where we can.
Work with our partners on the agency side to offer.
Large balance agency Fannie or.
Freddie conventional.
Got it got it okay. So it sounds like a nice.
Kind of leading pipeline for other parts of the business too.
And then you just talked to you mentioned earnings accretion from the deal any can you size that for us in the near long or near Slush intermediate term, what you kind of expect the earnings contribution from this portfolio to be one upon closing and maybe where you see growing.
It tends to say Andrew I think you got to look at it or we're looking at it in two ways.
The accretion is going to come from the fact that the the portfolio on an unlevered basis is earning.
Above our target returns so roughly around 12%.
On the return here so that'll be the first part the second part will be just.
You know the operating leverage that comes with integrating that business into.
Our existing infrastructure, so we certainly expect.
Accretion from from that as well and then just the reinvestment of the additional $470 million of capital whether through through leverage or just the natural cash flow portfolio into our existing.
<unk> products and so when you look at the return profile of the company today given P. P. P is pushing it north of 15%.
You know that's that's a hard hurdle.
But as that runs off over the next two to three quarters that the profile of <unk>.
This equity certainly in excess of the sort of the net run rate of the existing business.
Right right makes.
Oh.
Okay I appreciate that Andrew and then just last question for me.
Around the acquisitions this quarter it looks like a.
<unk> portfolio of low LTV high yielding loans can you just give us a little bit of color on.
Where this acquisition came from what kind of loans. These are.
If you think you can even improve on the advance rate looks pretty low.
Assuming that the financing on the loans. There I mean are you able to kind of put those on your lines and get better.
Better leverage there and boosted our O N.
Any color on that would be helpful.
Andrew you want to yeah sure alright.
Alright, thank you.
Yeah, Hey, Tom Yeah sure.
On the recent acquisitions.
Very consistent with the type of asset acquisitions that we've done historically.
Small balance loans spread about a nice.
Geographic profile nice diversity.
Sourced through a regional bank and <unk>.
You can see certainly extremely low.
Low ltvs clean pay histories historically.
Nice amortization given given the seasoning in these assets.
Again, just from a from a diversity.
Excuse me from a diversity profile fits fits very well with the with what we've been doing and those assets are performing extremely well.
Got it thanks for the color guys I appreciate taking my questions. This morning.
Thanks, Jeff.
Our next question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.
Hi, good morning.
Quick follow up more of a attempts quite she mentioned that 12% unlevered yields how much leverage is.
You think is appropriate for this type of construction loan and kind of how do we think about the type of financing or use.
Yeah, we certainly.
We certainly think to the extent, we apply asset level financing to the portfolio, probably gonna have advanced rate is slightly lower than where our existing products are but we do think the balance sheet provides.
Optionality and whether we apply asset asset specific financing or we do.
We do something like a term loan given the.
Unencumbered nature of the balance sheet so.
No we'll work through those those options just depending on the markets between now and close.
But we do think it provides us with that flexibility.
Yeah, one thing I would just add to that Andrew is that one of the unique aspects of construction loans is.
The existence of a.
Fairly liquid syndication market.
Either <unk> passu or a b notes so that's another.
The other way, we're going to look at leverage on this this portfolio.
We're looking to manage the overall exposure in terms of net equity that kind of 10% to 20%.
So from a basis this would be around what Andrew is 16% net of reserves. So that's kind of how we're thinking about the.
Managing the net equity exposure as well as the overall.
You know amount of recourse leverage.
Great switching to the resi mortgage banking business can you talk about.
Done a great job at maintaining volumes, even though she's senior your mix shift more towards purchase the last six months can you talk about the outlook.
Both on volumes and what you're seeing in margins across the channel.
And then any opportunities or headwinds created by the the likely increase in conforming limits here.
In the near future.
Yeah.
They're the G. MFS has continued to outperform in and well.
And in the in terms of there versus their peer group as measured by <unk> more than other data we track but to answer your question I think our guidance is for a decline of roughly 20%.
In the next quarter.
Quarter.
But as far as margins I think we've normalized to way. It was 92 basis points. This past quarter I think Andrew you can chime in but our expectation is a normalized range now of.
So mid Ninety's to a little less.
Call. It one to one one to one one in a quarter in terms of a bandwidth. So I think youre seeing the expected normalization is occurring but I would point out that if you look at some of the larger public comps they've they've outperformed in terms of.
Both volume and.
Margins and also the stability remember the strategy with our with.
With our residential mortgage banking segment is to utilize retain MSR as a hedge.
For the production declines, which has worked out very well in terms of normalized Roe.
And there we also they they benefit from a much lower volatility in their lower convexity brisk in their MSR book due to this.
The nature of the underlying.
Geographic area, Louisiana, Louisiana, et cetera, and the lower.
The lower WAC in the portfolio as well.
Great and then.
Lastly, Andrew one follow up you mentioned $83 million of P. P. P income remaining.
Roll into earnings for the next three to four quarters is there any lumpiness to that is it going to be sort of straight line recognition, how do we think about putting that into our models.
Yeah, I do think there's going to be some volatility and how that rolls through earnings if you look at.
The speed at which the first round of P. P. P was forgiven there were certainly.
Spikes in that processing between month, six and 10 of which were sort of you know we're rolling into so I do expect theres going be some.
Increased activity over the upcoming months with the tail.
You know coming behind it so unfortunately.
You know not straight line do you think there's going to be some increased activity over the fourth and first quarters and then.
Probably the effects will be less pronounced as we move from there.
Great I appreciate the comments this morning.
Our next question comes from the line of Christian Love with Piper Sandler. Please proceed with your question.
Thanks, and good morning, everyone.
First on the Mosaiq transaction I'm just looking for.
Couple of metrics is it fair that.
I guess as it stands right now that earnings should be a run rate around $50 million to $55 million and I'm just curious of what.
What was that it should be on a on a for revenues and those revenues primarily our gas majority net interest income therefore, if there's anything else there.
Yeah, I can talk about the the current earnings profile.
As you look at the numbers this quarter that the normalized business in the absence of a P. P. P.
It's certainly running higher than our expectations on return on equity as well as the dividend when you layer on.
$82 million and change of earnings to be.
Recognized over the upcoming quarters, we certainly think that's going to push earnings.
To levels, we're seeing.
This quarter.
For at least the next you know call it two quarters.
And then in terms of the earnings contribution post.
Clothing, the way I would look at it is that the equity allocated into the mosaic strategy is going to earn roughly an 11%.
Bottom line return.
With the majority of that revenue in fact coming on the interest income line item.
You know given there's no real leverage flowing through the financials today and the offset to that is going to be in the form of just some of the normalized opex.
Okay, great. Thanks.
That's helpful.
And then.
Just broader on the.
Ready capital business can you speak to the trajectory and the sustainability of our core earnings he definitely posted a really solid quarter. This quarter at 64. So I'm just curious a little bit about what you think that trajectory it could be and what some of the puts and takes will be.
Red Lake will soften a little bit.
Noted with a 20% drop in originations, but but SBC originations have remained very strong. So do you expect that momentum to continue and just kind of how should that flow through and impact. The overall core earnings of the business.
Yeah, It's a good question.
When we look at our 2022 business plans.
What youre seeing is the.
Transfer if you will the transfer from the a.
A large gain on sale.
Our gain on sale revenues, resulting from the pandemic stimulus packages, notably PPP.
Due to the re levering of the at SBC.
SBC origination and acquisitions book.
Such that Youre going to see kind of a more of a prorated mix between right right now the equity allocation. If you look on the deck I forget which page it is but it shows that we're now at about 90% 90 10 SPC.
Equity allocation and 10% on the gain on sale businesses, So what what youre going to see in subsequent quarters is a normalization of the NIM a relate it to that core SBC capital heavy business and that's being supported by record originations right.
We did 4 billion that we will likely do 4 billion this year to ex the.
The normalized 2019, and so we see that.
Continuing especially in Dave's bridge business, so that and that and the other thing to point out there is that with the capital markets execution on our in particular, CRE, CLO, which only trade about five basis points higher on the AAA is then the the benchmark ones like Blackstone et cetera, our Roe or better than what they were pre pandemic call.
Maybe by 100 basis points or so on the on those businesses. So that that will continue to support kind of a high single digit Roe.
And then the gain on sale businesses continued to Uh huh.
To.
Post pandemic in particular, the SBA with the rollout of the you know we hired a number of added 20 staff to that business in.
Also are rolling out new products like this SBA seven eight small loan program. So we expect.
Continued market share gains in that segment and then we're adding incremental businesses like Redstone, which are capital light and also.
Our benefit from government sponsored.
Programs in that case, the Freddie Mac tax exempt program and that'll be offset a little bit by as we talked about by the normalization of the residents.
Residential mortgage banking.
So long way of answering your question, but we are very bullish.
Bullish on the prospects of on the origination front going into 2022, which will support continued growth in the core NIM high which supports a high single digit Roe.
Supplemented by are the one or two points.
Attributable to the gain on sale businesses.
Okay. Thanks, Tom Thanks for all the color there and if I could just sneak one more in.
During the prepared remarks, you talked about the 90% guarantee on SBA.
Do you think do you expect that 90% guaranteed to hold going forward or do you think it could be moved back to 75% if that were to happen in any big impacts to the business.
Well, it's a good question, it's actually in the reconciliation Bill right now to continue the the 90% to 90 remember was a was borrowed from the Obama incentives from the GSE and then obviously you implemented as part of the cares Act.
So but it is in the current.
The reconciliation bill, but that's it.
The way that works from we're pretty active in that are traded nonbank Trade Association Nagel and were getting guidance from them that are you know its a bit of a coin flip as to whether that stays and but from our standpoint, our base case scenario.
And earnings assumes.
Normalization back to the 75, but if we get the 90 that would be.
That would be upside.
In the SBC gain on sale of contribution.
That's our SBA gain on sale contribution.
Great. Thank you for taking my questions and congrats on a great quarter.
Thanks Joseph.
Our next question comes from the line of Jade Rahmani with K B W. Please. Please proceed with your question.
Yes, hi, thanks for taking the questions Tom I'm curious what you make of the current lending environment a lot of other mortgage Reits have seen a surge in production a lot of the theory brokers are citing that funds as the most competitive and many have a CLO exit and also secondarily how comfortable are you with the.
The increase in average loan size that the mosaic portfolio will introduce to the ratty cat business.
First on loan demand.
And that's obviously being significantly driven by transaction volume and remember were you mentioned the other mortgage Reits there theyre on a rarefied space right. There at large balance their average balances on transitional loans might be in the hundreds of millions and ours is.
Roughly in the call it the fit $12 million to $15 million. So we squarely focused in the lower middle market and there.
Youre seeing kind of a lag recovery in terms of transaction volume through July it was up I forget what it was 17% to 150 billion. So that's driving a lot of the growth in David's been David maybe you can just comment on that I'll comment on them.
Adam comment on the mosaic.
Closure, but Dave just maybe maybe you could.
Comment on what Youre seeing in terms of your core business in terms of competition from debt funds and demand from your client base.
Yes, I think it's very competitive right now and as I mentioned in the.
Dissertation before that.
Certain CEO of execution is Paramount right now and I think that a lot of our clients are looking for us through this upfront process. We have to review deals to go from beginning to end without without much change now the volume is definitely being driven across the board all states.
There's a lot of.
Moving to migration to the sunbelt or wherever it may be but the demand in particular for multifamily has been.
Very very ferocious, it's been very theres been a water volume in that in that market I think that since we focus on an asset types the multifamily and industrial in particular, that's why we're seeing the most value add.
Opportunities right now and then followed by I would say self storage and minimal on the hospitality retail and then some office, but the demand is across the board and.
It's going to continue so long as there is.
Good work from home platform that.
Tenants are looking to work from and I think it will continue going forward, but the volume is.
Highest I've seen it in a while.
Yeah, and just last point on that and then maybe touch on the mosaic.
But David I think another point you make in our management meetings is the competition in your strata of the market lower middle market is not as great in terms of new entrants and.
Pricing and credit aggressive being a great aggressive on credit in a month in the large balance base correct.
100% correct, Tom and once you get up to the over.
Over $50 million or even over $100 million of a loan size.
The whole C or changes in terms of the competitive nature, but there are very few lenders in the 5% to 20.
And since we focus in that area in the middle market small balance its definitely given us an advantage to one half diversity.
And also to be able to structure and close on those transactions.
Okay. That's helpful.
In terms of the second part of that question, Adam maybe just touch on the current mosaic transaction. How are you and your team are going to manage the existing exposure and then the go forward in terms of you know, we're bringing on and they've been very strong.
Our team.
In mosaic mosaic was formed by a visionary and a pioneer in the sea MBS market, Ethan Pentair and they they so that team is going to be based in California, and we will continue to.
It will be integrated and continue to originate the construction.
Construction loans were maybe just Adam very briefly touch on the existing exposure and then the go forward.
Yeah, Jade I think thank you.
Touch on the.
The comfort around the larger loan sizes.
You know I think you know in regards to loan sizes I'd like to say that you know the the smaller deals.
The underwriting on those are often more complex than the actual larger transactions right the risk or the same et cetera, but you typically have with a smaller loan less sophisticated sponsor et cetera, but I think.
Mosaiq portfolio these larger loan sizes.
Sponsors and developers are in <unk>.
Developers are often more institutional than the small amounts borrowers like I mentioned more experienced well capitalized should they run into issues. They can easily tap into their equity partners if needed.
So that certainly gives us some comfort on the us on the loan sizes and then also in David's Bridge business.
<unk> seen over the years.
Within our own portfolio of existing portfolio that are large.
That our average loan sizes have had been increases I think that also helps with economies of scale in terms of underwriting.
And expenses related to the business.
To Tom's second point about the team that we're bringing on.
During the due diligence process.
We spent a lot of time out in these markets with the mosaic asset managers with their leaders et cetera.
Calling the market exploring the assets doing doing deep dives at the asset level and what we came around with.
Is that these are.
Very experienced solid asset managers that have stronger relationships not just from our sponsor and client perspective, but from a third party perspective from local partners in the market that that that that can assist with.
Just local Intel debt that you need on these type of asset so.
Working with those has been has been fantastic and we're going to be bringing them on.
To the ready capital team.
It also gives us significant significant comfort that.
They're going to be helping us manage these are these assets going forward.
Thank you and just on Mosaiq manager you mentioned Ethan Pentair I'm wondering what will his role be with respect to read of capital.
I think the language says.
That the mosaic manager will continue to provide investment management services to certain.
Prospective and existing clients, which I assume is up their own clients, but just curious about the role that they'll have with respect to capital.
Mosaiq will be retained as essentially in a specialist asset manager role.
To manage the the.
A number of the assets in terms of disposition strategies advance how we syndication.
Syndication et cetera, and.
There's an alignment there in terms of their existing El piece, because there is the are the contingent equity right mechanism in the $98 million, which will accrete, 90% to the existing mosaiq shareholders. So that so we think this arrangement creates a strong alignment of interests both for.
A ready cap as well as the mosaic.
Bozak L piece.
Thank you very much.
Thanks Jed.
Yes.
Our next question comes from the line of Steve Delaney with JMP Securities. Please proceed with your question.
Good morning, everyone. Congratulations on the really strong results Yeah, I think it's when look at what you've done with your performance of the legacy businesses and the acquisitions that you've bolted on in the last six months I think you've really taken investor focus off of the P. P P and the timing of that et cetera. So.
Props for that I think that's good for the stock.
Starting off I think Tim Tim nailed it on his first question I think the question of the day is understanding the port the mosaic portfolio in terms of property types and Geo and you certainly covered that.
We also know that the team is going to stay how many people are you said theyre based in California, just roughly how many people are coming over.
To manage that portfolio.
Adam you want touch.
Yeah sure I'm on the asset management side.
It's about eight individuals.
And then there is an origination team of two individuals. So the combination of that RIDEA origination folks that obviously originated as loans underwrote them et cetera, that's going to be a huge benefit for us as we move forward here. So it's about 10 folks station in California.
Great and that group.
Obviously, you've got the existing portfolio.
Tommy as you look forward is this something that you structure something as a separate Trs or do you or do you see this group is sort of a sub manager to waterfall itself. How does I guess, what I'm really asking Thomas do you see this other than acquiring a portfolio do you.
See this having legs and if it does kind of how does it fit into the overall structure of the company.
Yes, no. That's a good question Steve This unequivocally is a.
Great bolt on fit for our existing product mix I'm, just thinking about it if you are a sponsor or lower.
Lower middle market sponsor.
What we offer them now through data business is a so called heavy transitional right, where you could acquire it there'll be a lot of capex, but it's not ground up construction. So now we go to ground up construction, which is typically the valley wake up the banks are very to nonbanks in the space.
And so you know like bank of Ozark et cetera, they have much other ltvs by just given the nature of the high capital charges for our construction loans with banks. They are more in the fifties ish 60 minute most.
And as a non bank, we can go a little bit up the.
The LTV spectrum.
Not by a lot, but kind of like a unit tranche with leveraged loan, but ER, but for US. This clearly is a.
A new existing product offering that.
Is it will fit our existing sponsor base, but for example, just to give you. One example.
With the Redstone, they do construction lending right for affordable with a take out from Friday, well now we can provide that even more enhance their business by offering affordable construction, sorry, offering construction lending for affordable multifamily with a with a known take out with the with the Freddie taxes.
Bonds so yes.
This clearly is a product that in and the individual Alex a valley, who would come on it was coming on board is very well respected in the industry. He has been.
He was with Ethan back in the Nomura days.
Five plus years ago. So I think we see a very <unk>.
Seamless product fit for this fortunes this construction lending vis vis Dave's.
Transitional lending business.
Great. That's that's that's great to hear and then a quick follow up on Redstone. Since you mentioned it I've been trying to understand exactly how they fit into the mix and whether do they focus more on low income housing tax credit syndications or actually buying the MLR bees in the G.
LS exactly you know what is can you kind of clarify exactly the products they have to support low income affordable.
Housing Adam do you want to touch on that I mean, just to upfront, though that theyre not theyre not a they're not a syndicator okay. There.
They basically utilize the Friday.
Our tax exempt bond program, but Adam maybe you can just kind of touch on draw their core business.
Yeah, Yeah sure Steve.
So they're there they're sole focus is really providing construction and permanent financing for.
Preservation and construction of affordable housing.
Merrily utilizing tax exempt bonds. So just just some things that they've done over the years, so they've closed over $5 billion of multifamily affordable.
<unk> thousand units, they've got a $1 7 billion pipeline today of affordable projects. They have a Freddie Mac seller servicer license.
For the target of affordable housing.
They've done like 19 tax exempt bond securitizations to date through the Freddie Mac program.
So to Tom's point I mean, yes. They are their sole focus is really construction and permanent <unk>.
Financing for affordable housing and clearly there's a significant demand.
From a from a tenant from a tenant perspective to get into Egypt.
These projects got it so highly specialized highly specialized and focused loan brokerage kind of kind of platform.
And obviously next year starting next year.
We got an increase in the caps to 78 billion, but 50% has to be affordable. So.
It sounds like.
Nice piece addition, so listen thanks for the questions.
Our comments this morning, thank you.
Sure.
Our next question comes from the line of Chris Nolan with Ladenburg Thalmann. Please proceed with your question.
Hi, my questions have been asked and answered thank you.
Thanks, guys.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Okay again appreciate everybody's time.
Good quarter, and we look forward to.
Subsequent calls so have a good day.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.