Q2 2023 Ready Capital Corporation Earnings Call
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Okay.
Greetings, ladies and gentlemen, and welcome to the ready capital second quarter of 2020 suite earnings call.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance. During this conference. Please press Star and then zero on your telephone keypad.
As a reminder, this conference is being recorded it.
It is now on location to introduce your host Chief Financial Officer.
Andrew <unk>. Please go ahead Sir.
Thank you operator, and good morning to those of you on the call.
Some of our comments today will be forward looking statements within the meaning of the federal Securities laws.
Such statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect.
Therefore, you should exercise caution in interpreting and relying on them.
We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.
During the call we will discuss our non-GAAP measures, which we believe can be useful in evaluating the company's operating performance.
These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.
A reconciliation of these measures to the most directly comparable GAAP measure is available in our second quarter 2023 earnings release, and our supplemental information, which can be found in the investors section of the ready capital website.
In addition to Todd and myself on today's call. We are also joined by Adam <unk> ready Capital's Chief Credit Officer.
I will now turn it over to Chief Executive Officer.
Awesome.
Thanks, Andrew Good morning, everyone and thank you for joining the call today.
The second quarter results reflect the ongoing expansion of the ready capital franchise, the positive relative credit metrics of our multifamily centric portfolio and the strength of earnings along with a more conservative balance sheet.
The closing of the broad Mark Realty capital acquisition marks another significant milestone for the company at closing the transaction increased our capital base by 44% to $2 7 billion listing ready capital to the fourth largest commercial mortgage REIT.
Liquidity of $270 million and reduced leverage by 1.6 X.
On a go forward basis, the transaction is expected to generate $400 million in basketball liquidity over the next 18 months and reduced our operating expense ratio by 30%.
This quarter to accelerate the earnings accretion of the transaction, we reduced $10 million of annual existing broad market expenses, Mark less liquid Oreo to anticipated liquidation values and integrated all shared services into the existing RC framework.
During the quarter, while stress CRA market conditions led to industry wide contraction in gross portfolios ready capital's increased 6% to $10 1 billion, reflecting a $127 million of loan originations as well as in addition.
Of 773 million abroad, Mark loans.
Our core product bridge origination was constrained at $123 million, reflecting the cyclical at 25% to 50% year over year.
The specific declines in commercial real estate transaction volume.
That said vintage retain yield of 17% and 63% loan to values strengthen future net interest margin.
While we expect tight CRE debt market conditions to persist into 2024, we note ready capital's competitive advantage and distressed asset management capabilities.
This allows us in a market downturn to offset lower originations with portfolio acquisitions or our current pivot in our direct lending to solution capital products, such as node on node financing or preferred equity with a focus on multifamily.
Offsetting capital intensive lower bridge originations were strong volumes in our CRE gain on sale channels, Freddie Mac, SPL, which totaled $34 million and Redstone, our Freddie Mac tax exempt lender originated $351 million in the quarter, bringing the total to $611 million originated year to date. This wasn't nearly two <unk>.
Year over year increase.
The current $1 $4 billion pipeline across all CRE products is the highest since the fourth quarter of 2021 with $1 2 billion committed from borrowers.
Our credit metrics this quarter continued to outperform the commercial mortgage REIT peer group.
Three observations in this regard.
First while consolidated 60 day delinquency percentage increased 50 basis points to four 6%. This was entirely attributable to additional mpls associated with the closing of the broad market transaction.
Second while the 60 day delinquency rate on the acquired portfolio of primarily mosaic and broad Mark is 13%. The 60 day percentage for our originated portfolio actually decreased 10 basis points.
Our industry low two 6% with conservative ltvs and debt yields of 68% and 9% respectively.
Last given the 61 million current contingent equity reserve on the Mosaiq portfolio and 4% <unk> reserves on the broad Mark portfolio, we do not anticipate losses above these reserves.
That'd be on the reserving on the acquired portfolio the credit strength of the originated portfolio can be attributed to the following factors.
First the portfolio, 77% concentration in workforce multifamily assets.
Portability crisis in single family housing due to the doubling in mortgage rates in the 40% post Covid increase in home prices continues to tilt the buy versus rent metrics in favor of rent, particularly for the middle class demographic we target.
Second is prudent underwriting we underwrote most bridge loans to zero to 3% rent growth avoiding aggressive pro forma rents with the majority of inception to date realized rent growth outpacing our underwriting.
This mitigates refinancing risk as an offset to the 100 to 150 basis point movement in cap rates and debt service coverage ratios.
Third the maturity ladder, only 3% and 18% of our multifamily bridge assets mature over the next three and 12 months, respectively with the majority of maturities occurring later in 'twenty four and into 2025.
Last limited exposure to the office sector gross portfolio office is only 5%.
Approximately 20% of the commercial mortgage REIT peer group average and accounts for the majority of our delinquencies with a 6% seasonal reserve. We believe our office exposure is fully protected for continued office market stress.
Now an update on our small business lending segment, a high ROE business, we view as an underappreciated differentiator in the commercial mortgage REIT peer group to review ready capital as one of 2014 non bank lenders under the small business administration seven eight program.
Total 700 volume averaged $25 to 30 billion annually with the program split between large loans 500, K to $5 million and small under 500 K.
We segment the business in two separate operations seven eight lending through small and large loans channels and our fintech business.
And the lending segment in the quarter, we originated 121 million and seven eight loans, comprising 84% large and 26% small loans up 31% quarter over quarter increase with premiums averaging nine 1%.
Ready capital remains the largest non bank and fourth largest overall seven eight lender with a three year goal to double volume to 1 billion approximately a 3% market share.
Forward 12 months seven a industry volume projection is 10% growth.
Small business is turned to seven day lending as banks curtail conventional lending.
The binding administrations stated SBA policy goal is to increase small loan volume, primarily minority and women owned small businesses, which are approved using scoring models.
Our business is related technology has driven increases in our small loan volumes since implementation in mid 'twenty, two and is contributing to our efforts to reach our $1 billion origination target.
Our Fintech segment I business has launched its proprietary software called lender AI for business lending clients and is also driving third party revenue from providing lending as a service primarily to banks. The lender AI technology is derived from our business's success in developing its own software.
And algorithms for unsecured business lending and SBA loan processing, including seven a M to $5 billion plus in PPP origination.
<unk> proposition of the <unk> business software lies in providing reduce customer acquisition costs via a vertically integrated loan origination system. This allows higher pull through rates with an online portal and fully digital customer and lender experience, which simplifies our highly regulated seven day underwriting process.
<unk> business platform on boarded 100, new clients to the lending software with five additional clients added to the lending as a service platform, we've invested over $18 million to date in our business and expect the platform to breakeven in 2024.
In terms of seven eight credit.
The rise in prime to eight 5% is pressured our small business borrowers with 60 day delinquencies in the 700 portfolio increasing to two 2% well below the 6% G. F C peaks.
The earnings and book value impact of defaults. In this segment are limited due to the small equity allocation less than 5% equity in the high ROE of the business, which can sustain higher defaults and losses.
Looking forward the company is well positioned to increase earnings and expand investment activity.
First the return profile of new originations and the opportunity on the acquisition side has not been more attractive since the after the G. F C routine.
Retain yields on new originations are consistently in excess of 15% and acquisition opportunities and intelligence are two to three points in excess of that.
The relative credit strength of the portfolio with projected losses fully covered by current seasonal reserves.
Third liquidity is at a record level.
With 228 million of cash and $2 1 billion of unencumbered assets. Additionally, we expect $250 million of incremental liquidity in the upcoming quarters from portfolio turnover financing efforts and selected asset sales.
Finally, our conservative debt profile with total and recourse leverage of three and a half and 1.0 ex <unk>.
Further only 17% of leverage and subject to mark to market and only 4% represents repo.
Total available warehouse line availability exceeds lending capacity by $4 billion.
A number of lenders is at a record 22 with that I'll turn it over to Andrew.
Thanks, Tom quarterly GAAP and distributable earnings per common share were $1 87, and 36, respectively.
Distributable earnings of $51 3 million equates to a nine 3% return on average stockholders equity.
GAAP net income was significantly impacted by $229 9 million bargain purchase gain associated with the broad mark merger.
Bargain purchase gain is calculated as the difference between the fair value of the net assets acquired and the market price of the total compensation to broad mark shareholders on the closing date of the merger.
Interest income increased $15 3 million.
$132 9 million due to both the effects of rising rates on our floating rate portfolio as well as a $7 $8 million contribution from broad market assets added at the end of May.
<unk> average coupon in the quarter increased 56 basis points to eight 8%.
Interest expense increased $12 1 million to $172 5 million as average funding costs rose to 657 basis points in the quarter.
The levered yields in the portfolio declined to 10, 2% due to both the inclusion of additional nonperforming assets from broad market as well as increased cash balances inside our CRE CLO due to higher prepayments.
We expect levered yields to grow from here as those items are reinvested into current market yields.
The provision for loan losses totaled $919 4 million with $4 $6 million related to the broad market business combination.
Seasonal increases were primarily driven by changes to traps macro assumption in.
In particular, the CRB price index.
The total provision only 680000 related to additional expected losses on nonperforming assets within our CRE portfolio.
Realized gains increased $12 3 million to $23 9 million due to increased SBA and Freddie Mac production.
In the SBA seven business average premiums remained consistent at nine 1% with $97 9 million of sales producing $8 5 million of income.
Originations in our Freddie Mac affordable business increased 39% quarter over quarter dish.
This production contributed $6 million of gains.
Additionally, the conversion of our LIBOR based interest rate swaps to sulfur based interest rate swaps resulted in a $2 $4 million gain.
Conversion did not affect the fixed pay lag or the duration of our hedges.
Unrealized gains equaled $7 4 million and $8 $8 million increase in the residential MSR value was offset by $1 4 million of unrealized losses across other loan and bond position.
Only the losses have been included in distributable earnings.
Lower income from unconsolidated joint ventures continued into Q2 and totaled 33000, and this is due to a $5 million mark to market loss inside of the Jv's.
And continues to be the result of cap rate movement.
Operating expenses increased $2 6 million in the quarter due to a $2 8 million of vascular advances that were expense and the inclusion of $2 million of operating expenses from the <unk> platform.
We expect the operating expense ratio in the business to improve as we rollout synergies from the transaction.
On the balance sheet book value per share declined three 6% to $14 50 to set.
The change is attributable to 3% dilution from the broad Mark merger.
And 6% dilution from seasonal reserves.
This dilution was offset by share repurchase activity in the quarter, where we repurchased one 7 million shares at an average price of $10 82 sets.
The dilution from the <unk> merger was slightly higher than modeled due to more aggressive marks on the Oreo portfolio and certain employee termination costs that are included in the business combination accounting.
As expected leverage decreased one six turns to three five times.
On the capital markets front, we remained active first we closed our <unk> CRE CLO is $649 million deal with seniors pricing its sofa plus 255.
Second we added two additional warehouse lines to support the business.
First a $300 million facility to finance <unk> existing residential portfolio right. So for a plus 300 at a 70% advance.
The second a $125 million facility to finance lateral retained on balance sheet post the call of two of our earliest CRE CLO.
Post quarter, we completed our third securitization of SBA seven eggs on guaranteed love.
The $190 million deals closed a 69% advanced rate with pricing a sofa plus $3 25.
We continue to explore a variety of avenues in the corporate market given current leverage levels.
In the short term the initial deleveraging and increased mpls associated with the closing of broad Mark will create temporary earnings drag, but subsequent liquidity generated from re leveraging and asset sales deployed in target rate CRE debt markets with reinvestment Aro music heating 15%.
We will be long term accretive.
We are positioned to maintain a dividend consistent with our stated 10% target return on equity while protecting book value and believe the earnings power of the company to be higher as we move past the broad market integration.
With that we will open the line for questions.
Thank you Sir ladies unchanged.
And I'll be conducting the question and answer session.
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Our first question comes from Crispin Love with Piper Sandler.
Thanks, Good morning, everyone just following the bank crisis or.
Many crisis several months ago, they were definitely use that loan acquisition opportunities would pick up.
Later in 2023 or early 2024, and Tom you mentioned that a little bit earlier as well, but can you just speak to him and expound on the.
The loan acquisition opportunities out there, what you've seen already and if you're surprised if you haven't seen more recently or and just kind of do you expect them to pick up over the next several months and quarters and is a key inhibitor recently more been on the bid asking pricing on these deals.
Yes, Chris that's a good point, but I would say that.
Our view is that it.
It's definitely less than we thought it would be and what we're seeing in terms of the reason for that is really price discovery because there's this weird bid ask.
Weird in the sense that you know the.
The economic assumptions regarding an assumption.
Cap rate increases and price declines are very different between the buyers and the sellers.
And just to give you a few numbers of mission capital noted.
I think they tracked 8 billion of sales offered in 5 billion traded in 'twenty two year to date. They've noted 5 billion of offers and only a $1 billion of transacted and thats due exactly to what the point that I think you're getting at which is this kind of bid ask.
That differential and so what we see happening, though is we are definitely predicting a pickup in the fourth quarter of this year because a lot of banks are doing now.
With the rise in rates they still have losses on their securities portfolios. So in terms of generating liquidity they are turning to the bank.
To the CRE loan portfolios, where the regulators are still pressuring them in terms of our concentration limits in relation to tier one capital.
But what they're doing is they're more focusing on.
Kind of.
Assets that are criticized.
That have a lease price discount and versus clean performing or let's say on the other end of the spectrum office or npls. So that's so that's so yes, that's kind of the the log jam in the bank market that being said what we're seeing is.
From our perspective in Adams outdoor could comment on this at a time, but we're pivoting a lot of our our direct lending to so called solutions capital in the multifamily market, where we provide preferred or a bridge bridge.
Bridge REIT bridge to bridge refinancing or note on note, where we are able to deploy capital in reached in a restructuring context.
For third parties that provide a about a two to two to three point increment in yield versus our straight up.
Our direct lending in the multifamily bridge sector, so and that's reflected in our current pipeline of about $1 four.
Thanks, Tom that's helpful. In your solutions lending comment might be kind of tie into my next question as well but.
Do you expect to have extensions for for many of your bridge multifamily loans once they mature for for all the kind of the growth in loans that were originated in 2020 in 2021, and just curious how you would expect many of those maturities to be handled over the next several quarters and it would be great. If you could just repeat the maturity schedule.
That you highlighted earlier in the call.
Yes, I'll, just repeat that and hand, it off to Adam to comment on our strategy with respect to bridge extensions, but in the next.
Six months, we only have three.
<unk>, 3% and over 12 months, where was it Andrew.
18%, 18% to 18% so a lot of our maturities are backloaded that being said Adam what are you guys seeing in terms of asset management and your approach to the extension.
And into a refinancing.
Yes sure.
I deals are structured with extension options.
Some may not qualify given given the market so.
Our typical extension step is 70% LTV, but given cap rates, we're seeing about 80% plus ltvs.
So we can certainly considered the 70% to 80% slices sub debt and priced as such.
If extension conditions arent met we think in many cases, it's going to for sales is there'll be some some equity to protect.
And then also on the.
Refinance front.
I think for a majority of the deals.
Our clients have the ability to execute cash in refinances, and we feel that the check decline would have to write isn't that material relative to the equity that the sponsors have been having these deals.
Sorry, just to could you define a so called cash and refinance what is that.
Yeah, so when the the natural take out for our multifamily bridge would be.
Our conventional agency product so to the extent that the debt yields not there that the agency's required or the eight or the LTV steps aren't met the sponsor would have to come out of pocket.
And basically contribute additional equity into the transaction to execute or a refinance of the agencies.
Thanks, I appreciate you taking all my questions Thats It for me.
Thanks, Jason.
Thank you. The next question comes from Stephen Laws of Raymond James.
Hi, good morning.
Andrew I wanted to follow up with some of your comments on the earnings drag and then.
New investment activity in synergies so as.
As we think about optimizing capital deployment, how much near term earnings drag do you anticipate versus the <unk> levels.
You know and as redeploying.
Redeploying this capital given that it seems like opportunities are attractive, but youre not seeing maybe as much as you thought in some spots. How quickly do you think are or how patiently do you want to wait to redeploy that capital over the back half of the year and early next year.
Yes, so when you look at.
What I'll call the 100, yielding parts of the portfolio.
From both broad Mark and to some extent mosaic it's probably.
Creating an earnings drag.
It's somewhere between 100 150 basis points to the Bottomline.
In terms of.
The turnover we have mark.
The broad market portfolio to levels, where we think we can move out of.
The under yielding an Oreo asset.
Fairly quickly over the next couple of quarters and then.
Certainly on the mosaic.
We have the contingent equity REIT, which gives us some flexibility to.
To move those assets about sustaining losses, so I do.
Spectrum prioritize moving those assets as we move throughout the rest of the year and into the early part of next year.
In terms of.
Capital deployment.
We are balancing.
The need to carry higher liquidity level, which today stands at all.
All time high.
And the investment pipeline I think we will continue that.
To start on that balance as we sort of see how this all unfolded the upcoming quarters.
Great.
Just as a follow up you know as I think about the growth in the back half of the year.
Where do you expect to see that primarily or like we saw in Q2 do you expect each of the segments to show some strength as we move through the year.
Yeah, I think as we go segment by segment in the small business lending segment. I think you will see volumes increase as we move throughout the year. The first quarter typically tends to be slower and volumes ramp up from there.
Due to the nature of the industry I also changing we are seeing.
Sort of exceptional quarter over quarter growth from our small loan segment. So I expect small business loans to increase as we go forward.
<unk>.
<unk> business is the pipelines are historically high.
Continued strength and growth.
Throughout the remainder of the year of that.
On the <unk>.
Capital intensive lending side of the business.
Volumes have been low over the last few quarters.
Given the current pipeline and the liquidity we have we do think volumes will grow and we can do that while balancing the need to.
Terry increased liquidity levels can that manage other parts of the balance sheet. So would you expect growth in those segments I would expect in our residential business.
<unk> to sort of stay where they've been the last couple of quarters.
Great I appreciate the comments this morning.
Thank you. The next question comes from Christopher Nolan of Ladenburg Thalmann.
Tom do you expect the broad Merck deal to be EPS accretive by second half of 'twenty four.
I mean, a lot of that has to do with the.
As Andrew indicated the velocity at which we liquidate the nonperforming loans.
As of quarter end.
That their NPL ratio was 22, which is down from the November of last year. It earlier and I think they were up around that 30% area, but Andrew do you want to comment on in terms of the earnings accretion.
Yes, I think that's the right target time period for the full effect of the merger.
Flow through.
The speed at which the.
Well I'll call, the lower yielding assets, our turnover as well as the re leveraging of the equity certainly will have an effect on the timing.
But I do think the second half of next year.
Certainly what we're targeting.
And then.
Sam.
So im sorry, what's that.
I'm going to say, we did in terms of the earnings accretion we did we were pretty.
Ahead of budget on the Opex savings, we reduced full is it aimed at $13 million.
This quarter of the.
$10 million a day.
10 million sorry.
Okay, and I guess loan loss provision you had $4 six from broad market 680000 from our performers what was the balance 14 million for.
It was really driven by our general allowance on that.
The performing portfolio.
Run.
Portfolio through.
Through traffic as many of our peers do.
They had some significant movements in there.
Sorry price index.
It was really the main driver of the additional reserves.
So were there any charge offs in the quarter.
Very immaterial under $1 billion okay.
Okay. That's it for me thank you.
Yeah.
Thank you ladies on Jameson I'm, just reminding you cannot answer question Youre welcome space and then one on the telephone keypad.
The next question comes from the changed Rahmani of K B W.
Thank you very much what's the dollar amount of broad Mark Npls, you said the ratio was 22%.
That's right Andrew.
So I'll break up.
Yes.
The total portfolio, which is roughly 775 roughly 150.
As NPL and then in addition to it the remainder of the portfolio is Oreo, which obviously is.
Nonperforming as well so I don't know the total 900 close to $300 million.
Okay. So the total is 900 million 150.
His npls and another roughly $1 50 as Oreo.
That's right.
Okay and on the legacy ready capital side Whats the dollar amount of Npls.
Well, Adam you're right.
I'm sorry go ahead and regimen for the bridge and fix the ratio is only.
Two 5% or 60 days plus so.
So Andrew what's the dollar amount.
Okay.
Yes, so all of that.
Yes, it's Rob.
A total of $10 billion.
The 2% of that.
The $200 million.
Okay.
Wanted to ask about the dividend comment since book value was $14 52, the target is roughly a 10% Roe.
That would imply $1 45, which is more like 36 cents a share.
Sure.
And also the comments about distributable EPS, having some near term earnings drag of 100 to 150 basis points. That's around four to five so that would also.
Somewhat consistent just wanted to see if those numbers square in the range of reasonableness and I do appreciate your all providing those comments.
Yeah.
Yeah I expect.
Gulfport dividend.
So just to be set within that target stated target range of 10% to 11% on book I think with an emphasis on establishing a level that is.
Consistently covered by distributable earnings.
So as you indicated the current dividend.
It's roughly little over 11% on book value and certainly at the upper range of.
That stated target.
Determination of where the dividend ultimately settled.
Within that range will be dependent on the speed at which excess capital is reinvested.
The repositioning of the under yielding assets.
Just described.
The growth of the small business lending segment I think the board.
We will evaluate progress on all those fronts over the next few months here to determine where we land for Q3.
And going forward.
Thanks, that's very helpful.
Financial covenants are becoming an issue to watch.
Interest coverage ratio in particular, but also liquidity with the lower leverage of three five times, which is healthy where are you feeling about financial covenants and the company's overall capitalization clearly you seem to feel confident because the company bought back stock in the quarter.
Okay.
Yes, certainly we don't have any issues with our financial covenants today.
From a leverage cap.
<unk> liquidity, we have significant room, there I would say even with the notes brought over from broad market and we will be structured.
We are confident that we can meet those financial covenants as well.
Certainly carrying higher on liquidity lower leverage and the right type of leverage throughout this time period is important and will be.
A focus of ours alongside.
Capital deployment.
But no issues with covenants right.
And significant room.
Thank you for taking the questions.
Okay.
The next question comes from Matt <unk> of <unk> Securities.
Hey, Thanks for taking my question just on the subject of Essex capital I know, there's a lot of opportunities to originate and buy loans I wanted to ask.
In terms of share repurchases, what youre doing and congrats for that.
That and then the second with the banks, we're hearing a lot of the banks are looking to offload.
Brick and mortar origination platforms not just loans.
Guys are more of a specialty finance model than the REIT.
The diversified platform and would you be interested in acquiring.
Origination platform as well.
Yes.
3rd% Matt.
That's part of our DNA versus the peer group. The fact that we are a REIT that owns.
<unk> made good examples of that.
Fill in acquisitions.
On an origination platform was the Redstone Freddie Mac.
Tax exempt blenders, so yes, we definitely are.
Looking.
In particular at a number of specialty finance platforms, both on the commercial real estate and the SBA front one bank for example, with selling its 504 business and that we did.
It just didn't pencil out, but we are looking at.
USDA platforms, yeah, Yeah that's.
A sister to the SBA program and of course, we're looking always in the Hunt for agency.
Related licenses to add to bolt onto our Freddie Mac platform. So.
Yes.
Adam do you want to add add to that but but.
We are we are definitely in the.
Four platforms, not just here, but in Europe as well.
Yeah, Tom No I I echo that specifically on the on the agency side.
Just given the amount of multifamily bridge that we're executing in the market.
Certainly agencies, the natural takeout for these and to have.
A platform that can originate multiple agency products would be powerful for the franchise value. So yes, certainly certainly interested in the agency space.
Great and then just.
On your capital structure also with the broad market and to deleveraging in the equity I mean, what's the update on that.
On doing something.
Baby bonds preferred is that market still.
Is there an update there unless he he's going to have capacity at some point to enter I'd like to do that.
Yes, certainly the leverage profile.
Business.
It provides room for for raising additional corporate debt.
We've seen some encouraging issuances over the lot.
A couple of months here something that convert.
Market I think when we think about how we're positioned.
Position now we're focused on exploring both unsecured and secured debt I do think we have.
That's a unique structure, which allows us to sort of place secured corporate GAAP and taxable entity as much.
Minimizes.
The ultimate cost.
So it is something we continue to explore I think we are balancing.
The excess liquidity, we do have in the business certainly the asset level financing, we can pull out of.
The portfolio today over $2 billion of unencumbered assets with sort of the cost of entering the debt markets today, but certainly it's something we continuously without it.
And even on the preferreds that.
Extra room, there now correct.
Sure.
Great. Thanks for taking my questions.
Yeah.
Thank you next we have a follow up question from the changed from money off K B W.
Thank you very much.
Just wanted to ask a big picture question somewhat related to the loan portfolio sales question.
At the outset.
Generally from my Vantage point I would characterize second quarter earnings as continued deterioration in commercial real estate credit performance, but for the most part no big new shoes to drop.
It's been somewhat surprising I think that the major loan losses, we've seen have been.
Deals that had issues for some time and then I think on multifamily overall performance has been pretty resilient to those comments square with what you're seeing.
Do you think that this represents an improvement in the economic outlook and moderation in inflation and that's why we haven't seen a major.
Major new loan losses, or do you think it's really just a timing factor as loans come up for maturity.
But Adam add to my comments, but I think Jade, we're definitely seeing in this quarter I don't I hate the term bottoming.
The deceleration in the rate of decline is the best way to frame. It in particular in office. Some of the Mark Submarkets are just collapsing completely others are stabilizing obviously, we're we're small balanced we only have 5% office. So CBD is not our pain.
But in the multifamily space there is theres a front page journal article today, Theres definitely some idiosyncratic issues with.
In particular, our luxury.
Love to multifamily.
And Ah surprised negative absorption due to new supply coming on line that that was some of the trends we saw again not affecting us because we're more workforce small balance, but yes, there's definitely been a de acceleration in the rate of decline.
In a lot of the markets that we track Adam you would add to that from a macro perspective, what you're seeing in particular on the multifamily front.
Yeah, No it's Tom I think that's right.
You know I think the multifamily market obviously experienced.
Some historical rent growths.
Transaction.
And the marketplace, we're certainly seeing things stabilize rents kind of leveling off.
But at the end of the day I mean, when we look across our workforce multifamily.
Portfolio.
The performance the rent growth in the Occupancies have certainly really outperformed our underwriting I think the stress in the market today remains the fact, just given where interest rates are and the stress that's really coming.
And you know call. It 2020 for 2025 in terms of the maturities that are going to hit the hit the marketplace.
Yes, I mean, having right.
It's pretty stable.
Yeah.
Experienced J the early nineties, and obviously Dfc you definitely don't see this free fall Eric acceleration of the the.
The fundamentals acceleration deterioration of fundamentals just again, just seems like a de acceleration and we'll see where it goes in terms of.
The economic outlook for 'twenty four.
So then I think you'd probably be somewhat constructive in terms of.
Capital deployment, maybe looking to get more aggressive.
Is that a fair statement and then on the multifamily side do you expect there to be sort of meaningful credit deterioration next year.
Okay.
Add to this but we're definitely loosening the screws in terms of our retained yields on direct lending to some of the top sponsors we're seeing opportunities in really clean construction because the banks have really pulled back on that asset class.
And we have that capability from the mosaic acquisition.
We are definitely in this so called solutions capital segment. That's that's.
Filling the box, where we're getting less bank.
Sales.
That may materialize, we think in the fourth quarter of this year.
But Adam in terms of again, that's reflected in our 1 billion four of.
Current pipeline committed pipeline highest since first quarter of 'twenty, one that amount or if you'd add to that in terms of the multifamily component.
Yes, I mean, just the multifamily outlook I'd say certainly a limited number of loans are in default today.
We've really had nominal realized credit losses since inception of the firm.
I'd say, despite various challenges in the market.
We certainly are not overly concerned about our large multifamily portfolio.
Office is certainly a primarily primary concern although.
It's a limited.
Limited percentage of our overall portfolio as Tom highlighted at 5% and then just going back to the multifamily portfolio. I mean, just really seen limited limited issues in the portfolio of late and we haven't taking material reserves, because we feel that our debt basis is still fine.
But you know as we approach.
2024 and 2025.
Certainly originated.
Pretty pretty heavy volume of multifamily bridge 2021 through 2022, so as those as those loans mature in the coming years.
There could be some some challenges depending where rates are but again, we think our our debt is well protected.
And if there's any if there are any challenges.
We think that would be equity could take it could take a hit here and there, but then again as I mentioned earlier spin.
Specifically on <unk>.
On the cash and Refis the.
Sponsors have significant equity in these deals and we think that they'll continue to to protect the asset.
Thank you and just lastly, the clarification on the near term.
Packed a broad mark the 100 to 150 basis points.
Headwind is that relative to the 36 cents of distributable EPS you all earned in the second quarter.
Yes, just a reference to the.
Distributable Roe for the quarter.
I mean, the 36 cents includes the 100 to 150 basis point headwind I assume not.
Yes, just one sorry.
Exactly just that a third of it.
Yes.
Oh, great that's really helpful. Thanks, so much.
Thanks, Jason.
Okay.
Thank you ladies and gentlemen, we have reached the end of the question and answer session I would now.
Mr. Tom capacity for closing remarks.
I appreciate everybody's time again today, we look forward to our next earnings call. Thanks, everyone.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for attending and even now disconnect your lines.
Okay.
Okay.
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Okay.
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