Q4 2023 Broadmark Realty Capital Inc Earnings Call

Operator: Greetings and welcome to the Ready Capital fourth quarter 2023 earnings call. At this time, all participants are in a listen-only mode.

Greetings and welcome to the ready Capital's fourth quarter 'twenty Q3 earnings call.

At this time all participants are in a listen only mode.

Operator: A brief question and answer session will follow the formal presentation. If anyone should require operational assistance during the conference, please press star, name zero, and the telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andrew Obon.

A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press Star then zero on your telephone keypad.

As a reminder, this conference is being recorded.

Now my pleasure to introduce your host Andrew. Thank you you may begin.

Andrew Obon: 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 Law. 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.

Thank you operator, and good morning to those of you on the call.

Our comments today will be forward looking statements within the meaning of the federal Securities law.

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 that.

Andrew Obon: We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial conditions. During the call, we will discuss our non-gap 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 fourth quarter 2023 earnings release and our supplemental information, which can be found in the investors section of the Ready Capital website. In addition to Tom and myself on today's call, we are also joined by Adam Dowsler, Ready Capital's Chief Credit Officer. I will now turn it over to Chief Executive Officer Tom Capasso. Thanks, Andrew. Good morning, and thank you for joining us on the call today.

Fermi you two or 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 the most directly comparable GAAP measure is available in our fourth quarter 2023 earnings release, and our supplemental information, which can be found in the investors section of the ready capital website.

In addition to Tom and myself on today's call.

Also joined by Adam Zoster, ready Capital's Chief Credit Officer.

Now I'll turn it over to Chief Executive Officer, Tom capacity.

Thanks, Andrew Good morning, and thank you for joining the call today, despite broader headwinds ready capital enters 2024, with a resilient business model and a proven ability to navigate challenging periods, because we looked at 'twenty 'twenty four and beyond the key drivers that we will focus on to return to more historic level of earnings are less about current market conditions and the results.

Tom Capasso: Despite broader headwinds, Ready Capital enters 2024 with a resilient business model and a proven ability to navigate challenging periods. As we look to 2024 and beyond, the key drivers that we will focus on to return to a more historic level of earnings are less about current market conditions and the resulting credit pressures but rather about our strategic capital redeployment from recent long-term value accretive M&A. While our prior acquisitions have led to short-term earnings impacts over recent quarters, and we are cognizant it will take time to work through the persisting pressures, we believe executing our plan will generate meaningful long-term accretion. To begin, a quick recap of 2023's full year distributable return on average stockholders' equity was 8.6%.

Credit pressures, but rather about our strategic capital redeployment from recent long term value accretive M&A.

While our prior acquisitions have led to short term earnings impacts over recent quarters and we are cognizant. It will take time to work through the persisting pressures, we believe executing our plan will generate meaningful long term accretion.

We begin a quick recap of 2023 full year distributable return on average stockholders' equity was eight 6%.

Tom Capasso: The shortfall versus our 10% target was primarily due to a 250 basis point drag in ROE from M&A and a 25 basis point drag from the underperformance of our residential mortgage banking business. Our expectation is that the sale of underperforming assets, re-levering equity from M&A, and exiting our residential mortgage banking business will begin to provide material net interest margin accretion through reinvestment of the current levered ROE On the investment side, we've remained active in both our lower middle market CRE and small business lending segments. On the CRE side, despite a year-over-year 68% decline in CRE industry transaction volume, we originated $1.7 billion across all products, primarily comprising $1.3 billion of Freddie, small balance, and multifamily affordable products and $333 million of bridge production.

The shortfall versus our 10% target was primarily due to a 250 basis point drag on Roe.

From M&A.

A 25 basis point drag from the underperformance of our residential mortgage banking business.

Our expectation is that the sale of underperforming assets re levering equity from M&A.

Exhibiting our residential business will begin to provide material net interest margin accretion through reinvestment at the current levered Roe exceeding 14%.

On the investment side, we remained active in both of our lower middle market CRE in small business lending segments.

On the series side, despite a year over year, 68% decline.

CRE industry transaction volume, we originated $1 7 billion across all products, primarily comprising $1 3 billion of Freddie small balance multifamily affordable products and 333 million of bridge production.

Tom Capasso: On the small business lending side, we originated $494 million with contributions from both our legacy SBA business, focused on large loans, and our FinTech I business, focused on small loans. This dual large-small loan strategy uniquely positions our small business lending segment to achieve its target of $1 billion in annual production in the next two to three years. With only a 5% equity allocation but an 18% full-year distributable earnings contribution, the small business segment remains a material and, we believe, underappreciated aspect of our earnings profile.

On the small business lending side, we originated $494 million with contributions from both our legacy S. P. A business focused on large loans.

In our Fintech business focused on small loans.

Still large small loan strategy uniquely positions, our small business lending segment to achieve its target of 1 billion.

And annual production in the next two to three years.

With only a 5% equity allocation, but an 18% full year distributable earnings contribution the small business segment remains a material and we believe underappreciated aspect of our earnings profile.

Tom Capasso: As we enter the back end of the CRE market cycle, our two primary areas of focus are credit and earnings growth. On the credit side, while not immune to the CRE macroenvironment, we are differentiated from the broader sector in terms of our concentration in lower middle market multifamily, more conservative vintage underwriting, and avoidance of both overbuilt markets and high-risk CRE sectors such as office. As of December 31st, 60-day plus delinquencies in our originated and acquired CRE portfolios were 7.2% and 22.3%, respectively. My comments will focus on our originated portfolio, which represents 73% of total loans. The acquired portfolios, Concentrated in Mosaics, which closed in the first quarter of 2022, and Broadmark, which closed in the third quarter of 2023, featured combined purchase discounts for non-performing assets of 28%.

As we enter the back end of this series market cycle. Our two primary areas of focus are credit and earnings growth.

On the credit side, while not immune to the theory of macro environment.

We are differentiated from the broader sector in terms of our concentration in lower middle market multifamily.

More conservative vintage underwriting.

And so both overbuilt markets and high risk CRE sectors, such as office.

As of December 31st 60 day, plus delinquencies in our originated and acquired CRE portfolios were seven 2% and 22, 3% respectively.

My comments will focus on our originated portfolio, which represents 73% of total loans.

The acquired portfolio concentrated in mosaic, which closed in the first quarter of 'twenty, two and broad Mark which closed in the third quarter of 23 features combined purchase discounts for nonperforming assets of 28%.

Tom Capasso: We have liquidated 29% of the total acquired portfolio at prices above the combined purchase discounts. The main drivers of our 60-day delinquency are first, multifamily, which is 78% of the loan portfolio. At quarter end, multifamily 60-day plus delinquency was 6.6%, as certain properties experienced NOI reductions driven by flat rent growth and increases in operating and interest costs. 71% of the new delinquencies in the quarter were attributable to one large sponsor across four loans. As of February 25th, 60-day plus delinquencies have been reduced to 5.5% through payoffs or modifications, which in most cases require an equity infusion from the loan sponsor. Second, Office, which is only 5% of the CRE portfolio but accounts for 21% of total delinquencies. Eight loans are delinquent with an average balance of $15 million, and notably, only two have a balance greater than $20 million.

We've liquidated 29% of the total acquired portfolio at prices above the combined purchase discounts.

The main drivers of our 60 day delinquency, our first multifamily, which is 78% of the loan portfolio.

At quarter end multifamily 60 day, plus delinquency was 6.6% of certain properties experienced NOI reductions driven by flat rent growth and increases in operating and interest costs.

71% of the new delinquencies in the quarter were attributable to one large sponsor across four loans.

As of February 25th 60 day, plus delinquencies had been reduced to 5.5% through payoffs or modifications, which in most cases require an equity infusion from the loan sponsor.

Okay.

The office, which is only 5% of the CRE portfolio, but accounts for 21% of total delinquencies.

Eight loans are delinquent with an average balance of $15 million and notably only to have a balanced greater than 20 million. The largest loan is 44 million.

Our office portfolio is granular across a 165 assets with an average balance of $3 million, but 70% of the delinquencies are collateralized by larger CBD properties located in Chicago, Denver, and New York.

Tom Capasso: The largest loan is $44 million. Our office portfolio is granular across 165 assets, with an average balance of $3 million. But 70% of the delinquencies are collateralized by larger CBD properties located in Chicago, Denver, and New York. Looking forward, in the current Hire for Longer rate outlook, we are focused on refinancing our current maturity ladder, of which 45% or $2.8 billion in multifamily loans reached initial maturity in 2024, and 31% and $1.9 billion in the first half of 2025. Historically, our core bridge strategy has been to underwrite to take out our Freddie SBL license and 25 strategic partnerships, which provide access to all GSE multifamily channels. For example, in 2023, 64% of our bridge loans paid off at maturity, primarily via agency takeout, and 12% met the criteria for contractual extension.

Looking forward in the current higher for longer rate outlook. We are focused on refinancing our current maturity ladder of which 45% or 2.8 billion of multifamily loans reached an initial maturity in 2024, and 31% and $1 9 billion in the first half of 'twenty 'twenty five.

Historically, our corporate strategy is to underwrite to take out our Freddie S. P. L license and twenty-five strategic partnerships, which provide access to all GSE multifamily channels.

For example in 2023, 64% of our bridge loans paid off at maturity, primarily via agency take out.

And 12% met the criteria for contractual extension.

Well, the 11% of the multifamily portfolio currently rated four or five.

Our asset management teams are executing modifications and extensions were supported by the business plans and we are prioritizing on balance sheet liquidity for related capital solutions.

Billy with a mark to market L. T V of less than 100% on this population, we do not expect any material erosion to book value from additional seasonal reserves and modifications of 4% of the total originated portfolio remained comparatively love.

Tom Capasso: For the 11% of the multifamily portfolio currently rated 4 or 5, our asset management teams are executing modifications and extensions where supported by the business plans, and we are prioritizing on-balance sheet liquidity for related capital solutions. Notably, with a mark-to-market LTV of less than 100% on this population, we do not expect any material erosion of book value from additional CECL reserves and modifications. Of 4% of the total originated portfolio, it remains comparatively low.

Now a few observations on our CRE CLO.

Like most in our peer group, we have historically used CLO financing is one of our secured financing options.

Over the last eight years, we've issued 7 billion with $5 billion outstanding ranking number four with top quartile AAA spreads largely a result of one of the most conservative and investor friendly CLO structures.

Specifically, our Overcollateralization test is set at 1% versus the 3% average for the peer group and our deals are static. Unlike managed deals we are limited in our ability to swap collateral prevented from repurchasing collateral until after the 60 day delinquency is reached and reliant upon the spa.

Service here to manage decisions on asset resolution.

This has three impacts versus the peer group.

Tom Capasso: A few observations on our spherical CLOs. Like most in our peer group, we have historically used CLO financing as one of our secured financing options. Over the last eight years, we've issued $7 billion, with $5 billion outstanding, ranking number four with top quartile AAA spreads, largely as a result of one of the most conservative and investor-friendly CLO structures. Specifically, our overcollateralization test is set at 1% versus the 3% average for the peer group, and our deals are static. Unlike managed deals, we are limited in our ability to swap collateral, prevented from repurchasing collateral until after 60-day delinquency is reached, and reliant upon the special servicer to manage decisions on asset resolutions. This has three impacts versus the peer group. The first is that series fillows will trip tests sooner. For example, our FL5, 9, 10, and 12 deals have already tripped their IC or OC tests.

First is that CRE CLO book trip test sooner for example, our F. L. Five 910, and 12 deals have trip, there I see or Oc tests.

Credit quality metrics will be skewed versus managed deals where the issuer can preemptively swap in performing loans before loan is delinquent and finally, our past asset resolution via repurchase or modification as longer due to both the 60 day trigger and need to obtain special servicer approval on our asset management decisions.

As of the February 25th Remittance date, there were 12 loans 60 days plus delinquent inside of our Clo's.

Of those we expect 15% to pay off 57% to qualify for a modification.

And 27% to enter foreclosure.

Modifications will require new equity contributions provide a bridge for properties to stabilize and reach agency take up.

I expected principal losses on these loans have been accounted for in our currency So reserve.

We expect as of the March remittance state that.

F L. Five nine and 12 will be above their I C. N O C thresholds.

Tom Capasso: Secondly, credit quality metrics will be skewed versus managed deals where the issuer can preemptively swap in performing loans before a loan is delinquent. And finally, our past asset resolution via repurchase or modification is longer due to both the 60-day trigger and the need to obtain special service or approval on our asset management decisions. As of the February 25th remittance date, there were 12 loans 60-day plus delinquent inside of our CLOs. Of those, we expect 15% to pay off, 57% to qualify for modification, and 27% to enter foreclosure. Modifications will require new equity contributions to provide a bridge for properties to stabilize and reach agency takeout. However, expected principal losses on these loans have been accounted for in our current FESA reserve. We expect, as of March for Minton State, that... FL 5, 9, and 12 will be above their IC and OC thresholds.

On the earnings side I want to lay out the bridge for increasing distributable ROE V 250 basis points over the next two years from the seven 5% in the fourth quarter to our 10% trailing seven year average first is reallocation of equity raised in the broad mark merger into our core strategies.

Since the third quarter 2023 merger close.

3% of the portfolio has liquidated of which the remaining 788 million at quarter end is yielding approximately 2.1% producing a current drag on ROE of 170 basis points.

Currently we have actionable liquidations for 36% of the remaining portfolio with a budget to monetize the balance over the next four quarters.

The anticipated contribution margin to our ROE.

From full reinvestment of those equity into our current investment pipeline is 250 basis points.

Second leverage current leverage of three points reacts and recourse leverage.

0.8 acts are at historical lows below our target leverage of four to four and a half X.

We expect to raise incremental debt capital over the upcoming months with the resulting increase in leverage contributing 125 basis points to our ROE.

Tom Capasso: On the earnings side, I want to lay out the bridge for increasing distributable ROE by 250 basis points over the next two years from 7.5% in the fourth quarter to our 10% trailing seven-year average. First, the reallocation of equity raised in the Broadmark merger into our core strategies. Since the third quarter 2023 merger closed, 23% of the portfolio has liquidated, of which the remaining $788 million at quarter end is yielding approximately 2.1%, producing a current drag on ROE of 170 basis points. Currently, we have actionable liquidations for 36% of the remaining portfolio with a budget to monetize the balance over the next four quarters. The anticipated contribution margin to ROE from full reinvestment of this equity into our current investment pipeline is 250 basis points. Second, leverage.

Third the exit our residential mortgage banking, which based on current planning is targeted for full liquidation by the end of the second quarter.

Due to current mortgage rates distributable or are we in this segment was laggard at 1.8% and we expect reinvest moves as capital to increase our are we 25 basis points.

With growth of small business lending E.

S. P. A seven day program continues to be the highest or are we segment, where given its capital light nature growth in production does not require significant capital resources.

With our stated long term seven eight origination target of doubling our current production to $1 billion every 100 million increase in volume adds an incremental 15 basis points to our ROE.

Last cost structure.

As part of the merger, we realized synergies on the Opex side COVID-19 million abroad Mark expenses.

Tom Capasso: Current leverage of 3.3x and recourse leverage of 0.8x are at historical lows below our target leverage of 4 to 4.5x. We expect to raise incremental debt capital over the upcoming months with the resulting increase in leverage contributing 125 basis points to ROE. Third, the exit of residential mortgage banking, which, based on current planning, is targeted for full liquidation by the end of the second quarter.

Given market conditions, we expect to continue to rightsize, the cost structure and staffing levels with a target 40 basis points ROA contribution.

Probability weighting each of these actions with a total 455 basis points increase in ROE V alongside focused credit management over the next 12 to 18 months of the series cycle. We believe will provide significant upside to the company's current earnings profile we.

We appreciate the continued support and understanding the work ahead of us and firmly believe that the platform is built to both withstand current market pressure and grow earnings as we move forward with that I'll turn it over to Andrew.

Tom Capasso: Due to current mortgage rates, distributable ROE in this segment was laggard at 1.8%, and we expect reinvestment of this capital to increase ROE by 25 basis points. Fourth, growth of small business lending. The SBA 7A program continues to be the highest ROE segment where, given its capital-like nature, growth in production does not require significant capital resources.

Thanks, Tom and good morning.

Quarterly GAAP earnings and distributable earnings per share were 12, and 26 cents respectively.

Distributable earnings of $48 5 million equates to a 75% distributable return on average stockholders equity.

2023 full year of GAAP earnings and your struggle earnings per share or $2 25.

$1 18, respectively, equating to an eight 6% distributable return on average stockholders equity.

Tom Capasso: For those stated long-term 7A origination targets of doubling our current production to 1 billion, every 100 million increase in volume adds an incremental 15 basis points to ROE. Last, Cost Structure. As part of the merger, we realized synergies on the OPEC side, cutting $19 million of Broadmark expenses.

On the balance sheet and income statement residential mortgage banking has been accounted for as a discontinued operation with assets and liabilities consolidated into held for sale line items.

Net income included in discontinued operation.

The main driver of the variance between our quarterly GAAP and distributable earnings were $3 2 million of the $6 $7 million increase to our seasonal reserve.

Andrew Obon: Given market conditions, we expect to continue to right-size the cost structure and staffing levels with a target 40 basis points ROE contribution. We believe probability weighting each of these actions, with a total 455 basis points increase in ROE, alongside focused credit management over the next 12 to 18 months of the CRE cycle, will provide significant upside to the company's current earnings profile. We appreciate the continued support, understand the work ahead of us, and firmly believe that the platform is built to both withstand current market pressure and grow earnings as we move forward. With that, I'll turn it over to Andrew. Thanks, Tom, and good morning. Quarterly gap earnings and distributable earnings per share were $0.12 and $0.26, respectively.

A $27 million markdown of our residential msr's.

A one time five and a half million dollar termination fee related to the refinance.

AG lending facility.

And a $3 $7 million unrealized loss.

The increase in our <unk> reserve was due to a $15 $8 million increase in specific reserves.

Set by a release of reserves on our performing loan portfolio.

The 75% distributable return on equity continues to be pressured by the effects of a decline in our retained yield of the portfolio.

As well as lower leverage.

In the fourth quarter or the Levered portfolio yield was 11.5% gallon.

Down 9% from the same period last year.

The change is due to a 11% allocation into broad mark out that.

Margin compression on the backlog and increase our E O from M&A.

We expect levered yields to increase at the back book moves into our securitization vehicles.

And the broad Mark assets are repositioned to enter market yields.

Net interest income declined $6 4 million quarter over quarter. The change was primarily due to a five and a half million dollars onetime charge upon the refinance mosaic lending facility the migration of $258 million of loan to non accrual.

Andrew Obon: Distributable earnings of $48.5 million equates to a 7.5% distributable return on average stockholders' equity. In 2023, full-year gap earnings and distributable earnings per share were $2.25 and $1.18, respectively, equating to an 8.6% distributable return on average stockholders' equity. On the balance sheet and income statement, residential mortgage banking has been accounted for as a discontinued operation, with assets and liabilities consolidated into held-for-sale line items and net income included in discontinued operations. The main driver of the variance between our quarterly GAAP and distributable earnings was $3.2 million of the $6.7 million increase to our CECL reserve, a $20.7 million markdown on our residential MSRs, a one-time five and a half million dollar termination fee related to the refinance of a mosaic lending facility, and a 3.7 million dollar unrealized loss.

And $2.6 million of interest expense related to the financing of nonperforming broad mark assets.

Realized gains were up quarter over quarter due to increased SBA seven day production.

And sales with average premiums of eight 9% and.

$288 million of production in our Freddie Mac businesses.

Servicing income increased $1 million quarter over quarter due to the recovery of previously booked impairment of our SBA and Freddie Mac servicing assets.

Other income increased $14 2 million due to the recognition of ERC income to.

To date, we have processed $62 9 million of <unk> contracts.

Recognizing net income of $42 8 million.

We expect this program to continue into 2024.

At a slower pace.

The improvement in operating expenses was due to a reduction in staffing and related compensation expense.

Lower servicing expenses as a result of lower advanced reimbursement.

And lower transaction volume.

On the balance sheet liquidity remains healthy with $139 million in total cash.

And over $1 5 billion in unencumbered assets.

Andrew Obon: The increase in our CECL reserve was due to a $15.8 million increase in specific reserves offset by a release of reserves on our performing loan portfolio. The 7.5% distributable return on equity continues to be pressured by the effects of a decline in the retained yield of the portfolio as well as lower leverage. In the fourth quarter, the levered portfolio yield was 11.5%, down 9% from the same period last year.

Recourse leverage in the business declined 2.8 times and mark to market debt equaled 17% of total debt.

The company's debt maturity ladder remained conservative with no material debt maturities until 2025, and the majority of maturing past 2020.

On the leverage front, we continue to explore multiple avenues of raising corporate debt.

For new issues have improved since the beginning of the fourth quarter and we are confident in our ability to access the markets in the upcoming months.

Incremental capital raise will be deployed into our origination and acquisition channels.

Andrew Obon: The change is due to an 11% allocation into Broadmark Assets, margin compression on the back book, and increased REO from M&A. We expect leveraged yields to increase as the back book moves into our securitization vehicles, and the Broadmark assets are repositioned into market yield. Net interest income declined $6.4 million quarter over quarter.

Which are witnessing opportunities in excess of current capital levels.

Book value per share was $14 on plan.

The change is due to a <unk> 10 per share mark out of the residential msr's.

A <unk> 10 per share reduction in bargain purchase gain.

And <unk>.

Of nonrecurring items discussed previously.

Andrew Obon: The change was primarily due to a $5.5 million one-time charge upon the refinanced Mosaic lending facility, the migration of $258 million of loans to non-accrual, and $2.6 million of interest expense related to the financing of non-performing Broadmark assets. Realized gains were up quarter over quarter due to increased SBA 7A production and sales with average premiums of 8.9 percent and $288 million of production in our Freddie Mac businesses. Servicing income increased $1,000,000.25 due to the recovery of previously booked impairment of our SBA and Freddie Mac servicing assets. Other income increased $14.2 million due to the recognition of ERC income.

While we understand it will take time given current market condition.

We remain agile creative and opportunistic to deliver differentiated credit solution.

For a lower to middle market customers.

We execute on our strategy, we expect the power of our earnings to cover the dividend consistently and returns to migrate to historical levels.

With that we will open the line for questions.

Okay.

Thank you we will now be conducting a question and answer session.

If you would like a Christian Please press star and then one on the telephone keypad.

<unk> Chan will indicate your line is in the question queue.

You May press Star and then two if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to be comprehensive you focusing still cute.

The first question, we have is from Christopher <unk>.

Andrew Obon: To date, we have processed $62.9 million of ERC contracts, recognizing net income of $42.8 million. We expect this program to continue into 2024, albeit at a slower pace. The improvement in operating expenses was due to a reduction in staffing and related compensation expenses, slightly lower servicing expenses as a result of lower advanced reimbursement, and lower transaction volume.

Please go ahead.

Hey, Thanks, good morning.

Just talk a little bit about what recent credit trends could mean for potential losses delinquencies have increased but what kind of losses do you believe that could lead to just based on what her in a debt service coverage ratios are and Ltvs in the book and then how you might plan to work out some of the lower performing loans.

Andrew you want to touch on the loss reserves and Adam maybe touch on the the credit component.

Andrew Obon: On the balance sheet, liquidity remains healthy with $139 million in total cash and over $1.5 billion in unencumbered assets. Recourse leverage in the business declined to 0.8 times, and mark-to-market debt equals 17% of total debt. The company's debt maturity ladder remains conservative, with no material debt maturities until 2025 and the majority maturing past 2026. On the leverage front, we continue to explore multiple avenues of raising corporate debt.

Hey, good morning, Kristen and the losses are we look at the book in two ways.

We determined diesel there is a general overlay, which accounts for roughly 50% of the reserve and then the asset management team is.

Adding on specific reserves for.

Those loans contained in a higher risk category. So we think the the current diesel reserves account for your expected losses on on those those assets in our higher risk buckets.

Based on sort.

The detailed work the asset management team's current mark to market LTV is etc.

And then hey, it's Adam Yeah on the credit front.

Andrew Obon: Markets for new issues have improved since the beginning of the fourth quarter, and we are confident in our ability to access the markets in the upcoming months. Incremental capital raised will be deployed into our origination and acquisition channels, which are witnessing opportunities in excess of current capital levels. Book value per share was $14.10.

Certainly seeing delinquencies as you highlighted increase.

Quarter over quarter.

So we do feel that our basis is still healthy and the majority of our portfolio.

We feel that if you look at the bridge delinquencies, where there was a spike youre certainly seeing.

We think that the realized losses will be more at the equity level versus the debt level. So as Andrew highlighted we think that our reserves are certainly adequately sized DSD yard distress ltvs are generally.

Andrew Obon: The change is due to a nine cents per share markdown on the residential MSRs, a four cents per share reduction in bargain purchase gain, and six cents of non-recurring items discussed previously. While we understand it will take time given current market conditions, we remain agile, creative, and opportunistic to deliver differentiated credit solutions for our lower to middle market customers. As we execute on our strategy, we expect the power of our earnings to cover the dividend consistently and returns to migrate to historical levels. With that, we will open the line to questions. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press the star and then 2 if you would like to remove your question from the queue.

Below 100% on the majority of the portfolio and really don't anticipate material losses.

But some loans will certainly require some modifications or restructuring.

Certainly some some time to resolve and kind of.

Yes, yes.

I have some time available for the market to rebound.

Okay.

Great. Thank you appreciate the color, there and Andrew and Adam and then just one on the disposition of the Red and the mortgage segment segment can you just detail why now and then are you able to provide any color on your confidence of that disposition being completed by June 30, which was in the presentation and I assume that would likely involve a sale and likely gain.

Just following the loss on discontinued operations this quarter.

Market observation and Andrew you can comment on the process, but right now that the majority of the equity in that business is in the MSR.

Of which two thirds are agency, we believe that right now MSR valuations have peaked.

Crispin Love: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start key. The first question we have is from Crispin Love of Piper Sandler. Please go ahead. Thanks. Thanks. Good morning.

And just from a.

Timing perspective in terms of valuation that's a that's one driver, but Andrew do you want to touch on the process.

Timing.

Yeah. So certainly we have a high degree of confidence of.

The transaction closing before the end of the second quarter.

Andrew Obon: Can you just talk a little bit about what recent credit trends could mean for potential losses? Still, even if these have increased, but what kind of losses do you believe that could lead to just based on what current debt service coverage ratios are and LTVs in the book, and then how you might plan to work out some of the lower-performing ones? Andrew, you want to touch on the loss reserves, and Adam, you can maybe touch on the credit component. Hey, good morning, Christopher.

Part of the criteria of moving a segment into held for sale and discontinued operations is having that complements although that the components of the process will be as Tom mentioned, obviously, a sale of the MSR, which.

Comprised the majority of the equity as well as you know.

Function of the assets and the liabilities of the company.

And the consideration what will most likely take the form.

Something upfront payment and then an earn out.

Of sorts so.

I think at this point in time based on where we are in the process. We do believe this will close before the end of the second quarter.

Andrew Obon: Yeah, on the loss reserve, you know, we look at the book in two ways. When we determine CECL, there is a general overlay, which accounts for, you know, roughly 50% of the reserve. And then the asset management team is adding specific reserves for, you know, those loans contained in our higher risk categories. So we think the current CECL reserves account for the expected losses on those assets in our higher risk buckets, you know, based on the details work, the asset management teams, current market LTVs, etc. And then, hey, it's Adam.

Thank you I appreciate you taking the questions.

That's right.

The next question we have is from Stephen laws of Raymond James. Please go ahead.

Hi, good morning.

I appreciate all the details in your prepared remarks, Tom and I've got my notes down correctly I think you said in the Clo's defaulted loans.

About 57%, so roughly 60% do you expect to modify it.

But I believe you said you need the.

Special Servicer approval can you talk a little bit of more about that process and.

How you work with that special service what are those mods, primarily look like is it is a capital in for more time or are there. Other moving parts are now each one can be unique but any general trends across those loans.

Adam Dowsler: You know, on the credit front, certainly seeing delinquencies, as you highlighted, increase quarter over quarter. However, we do feel that, you know, our basis is still healthy in the majority of our portfolio. You know, we feel that, you know, if you look at, you know, the bridge delinquencies where there was a spike, you're certainly seeing, we think that the realized losses will be more at the equity level versus the debt level. So, you know, as Andrew highlighted, we think that our reserves are certainly adequately sized.

Yes, Adam can you comment on that.

Yeah sure so in terms of the.

The process on the Mod so borrowers.

Yeah.

I have submitted relief requests for modifications and demos. Those then are under review by the special servicer.

In the ordinary course request for a modification by the borrower the special Servicer would review.

Proven and cure the delinquency, which certainly our approval has been directing certificate holder in several cases, the modification is a contractual bridge to a short term pay off. So an example, being like a sponsor is refinancing the debt or selling the real estate and the modifications can then be executed.

Crispin Love: You know, DSCRs stress LTVs are generally, you know, below 100% on the majority of the portfolio and really don't anticipate material losses, you know, but some loans will certainly require some modifications or restructuring and certainly some time to resolve. So, have some time available for the market to respond. Great, thank you. I appreciate the color there, Andrew and Adam.

In terms of what they look like certainly the preference is to have the sponsor bringing.

Fresh.

Equity injection to the modification.

Given given that more time is certainly.

Needed in this market, we feel that about anywhere from 12 to 18 months.

He is the right amount of time to modify these loans.

Andrew Obon: And then just one on the disposition of the resume mortgage segment. Can you detail why now? And then, are you able to provide any color on your confidence of the disposition being completed by June 30th, as was in the presentation? And I assume that would likely involve a sale and a likely gain just following the loss on discontinued operations this quarter. Just one market observation, and you can comment on the process, but right now, the majority of the equity in that business is in the MSRs, of which two-thirds are agency. We believe that, right now, MSR valuations have peaked. And just from a timing perspective in terms of valuation, that's one driver. But Andrew, do you want to touch on the process?

Given that the timing that's needed for the market to rebound. Additionally, you know, there's there's cash management.

Controls that are put in place on these modifications and in some cases, we're requiring.

Third third party professional management to come in.

On behalf of the <unk>.

Sponsors and kind of.

Helped maintain the asset utilized capex.

Really.

It will provide the necessary maintenance of the asset.

And Andrew thinking about interest income can you can you talk about the quality of interest income how much is cash interest received how much was or crude or maybe some type of pick income if theres any can you give us any color on an interest income quality.

Yes.

The majority of the interest income is cash paying there is a small segment.

Andrew Obon: I'm, Yeah, so certainly we have a high degree of confidence in the transaction closing before the end of the second quarter. You know, part of the criteria of moving a segment into help for sale and discontinued operations is having that that confidence level that, you know, the components of the process will be, as Tom mentioned, obviously, a sale of the MSR. Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show.

Of loans.

That are accruing based on.

Expected recovery on the loan.

Not paying but it is a.

Very small portion of the book.

Great and then finally, if I may I'm, you know returning capital to shareholders.

You closed I believe with with the comment on the dividend that you think earnings can can cover. This you know how do you think about the.

The glide path of earnings coverage for the dividend as we move through the year and you execute these challenges these.

Efforts to expand ROE.

And any consideration around stock repurchases given the current valuation. Thank you.

Stephen Laws: I appreciate you taking the question. The next question we have is from Stephen Laws of Raymond James. Please go ahead. Hi, good morning.

Maybe unpack that two ways, Andrew maybe just comment on the you know there's five measures we delineate it.

Stephen Laws: I appreciate all the details in your prepared remarks, Tom. And if I got my notes down correctly, I think you said in the CLOs with defaulted loans, about 57%, so roughly 60% you expect to modify. I believe you said you need the special service for approval. Can you talk a little bit more about that process and how you work with that special service? What are those modifications?

Obviously some of them are immediate like Opex in.

Some are longer term like the re levering of the broad Mark equity So maybe comment on that and then the the prioritization.

<unk> of cash of on repurchase versus capital solutions for the existing portfolio.

Yeah as Tom mentioned in his remarks, we believe that the totality of all of the options ahead of us it needs.

Roughly over a 400 basis point increase in earnings from their current level that will certainly be incremental over the next.

Stephen Laws: What does it primarily look like? Is it capital in for more time, or are there other moving parts? I know each one can be unique, but any general trends across those lines? Adam, can you weigh in on that?

A four to six quarters as Tom mentioned things like Opex savings, which we anticipate will add 40 basis points.

We'll be more immediate.

Adam Dowsler: Yes, sure. So, you know, in terms of the... process for the mod.

The effect.

The leverage will be.

Somewhat dependent upon.

Adam Dowsler: So, you know, borrowers have submitted relief requests for modification of their loans. Those are then under review by the special servicer. In the ordinary course, you know, a request for a modification by the borrower would be reviewed, approved, andcured the delinquency, with certainly our approval as the directing certificate holder.

The times in which we choose to access the market and the redeployment of that capital and then the effect of the.

Portfolio turnover will sort of be felt every quarter I think you know Adam can elaborate on.

The planned for and the timing of Walmart liquidations, but that'll certainly lead into earnings. So I think you will see.

Sort of a glide path over the next four to six quarters in terms of.

Adam Dowsler: You know, in several cases, the modification is a contractual bridge to a short-term payoff. So an example of being like a sponsor is refinancing the debt or selling the real estate, and the modifications, you know, can then be executed. You know, in terms of what they look like, certainly the preference is to have the sponsor bring, you know, a fresh equity injection to the modification. Given that more time is certainly needed in this market, we feel that anywhere from 12 to 18 months is the right amount of time to modify these loans, given the timing that's needed for the market to rebound.

Capital allocation, including the share repurchase program.

We have today $80 million and capacity on our current program for share repurchases I do believe we will be.

The active in the repurchase program, while also balancing.

The need to add.

Net interest margin into the income statement in a market where yields are you know, it's very attractive and putting long term earnings.

And to the income statement is important so I think we will balance both of those given where the stock was trading certainly.

Adam Dowsler: Additionally, there are cash management controls that are put in place on these modifications, and in some cases, we're requiring third-party professional management to come in on behalf of the sponsors to help maintain the asset and utilize CapEx to really provide the necessary maintenance of the asset. Thanks.

The return profile on share repurchases quite powerful so I do anticipate we'll be active in the upcoming months.

We set new levels.

And then share repurchase strategy.

Yes.

That's what I just commented on.

Got it.

Yes.

The next question we have comes from Douglas Harter of UBS. Please go ahead.

Thanks.

Andrew Obon: And Andrew, thinking about interest income, can you talk about the quality of interest income? How much cash interest is received? How much was accrued, or maybe some type of PIC income, if there's any.

I'm wondering if you could talk about your expected.

Of putting new capital to work you know how you see the opportunity set.

Developing both in order to redeploy capital, but also to increase leverage.

Yes.

Maybe a comment on that.

Andrew Obon: Can you give us any color on interest income quality? Yeah, the majority of the interest income is cash paying. There is a small segment of loans that are accruing based on expected recovery on the loan, but it is a very small portion.

The current investment opportunity pipeline in our ways and.

Andrew maybe comment again on the Pat them on the liquidation of the broad Mark.

As well as the forward liquidity, but the.

The current <unk>.

Current market in terms of.

We kind of look at it in three.

Stephen Laws: And then finally, if I may, you know, returning capital shareholders, you closed with a comment on the dividend that you think earnings will cover. How do you think about the glide path of earnings coverage for the dividend as we move through the year and you execute these efforts to expand ROE and any consideration around stock repurchases given the current valuation? Let me unpack that two ways, Andrew, maybe just comment on the, you know, there are five measures we delineated.

Three areas.

So our silos one is our core bridge lending.

Where for lower middle market, you're getting retain yields on it.

Really strong vintage underwriting in the area of 35% to 55% that's up maybe.

Call. It 300 400 basis points since before the rate rise that siloed, one silo to which is which is cyclical is the capital.

Capital solutions, where we provide.

Andrew Obon: Obviously, some of them are immediate, like UPEX, and some are longer term, like the refinancing of the Broadmark equity. So maybe comment on that and then the prioritization of cash for repurchase versus capital solutions for the existing portfolio. Yeah, as Tom mentioned in his remarks, we believe that the totality of all the options ahead of us leads to roughly over a 400 basis point increase in earnings from their current level, although that'll certainly be incremental over the next four to six quarters.

Capital to opportunistic equity entering mostly the multifamily space men will provide senior mezz etcetera and in the context of a restructuring that's probably more in the.

Call It the 15 and a half to 18 and a half.

And and that's our that's the other area. The third area is the acquisitions.

And there we're seeing we're starting to see and this is from the external manager a growing pipeline of sales by banks, which are not I guess not unexpected those are more in the upper teens low twenties.

Andrew Obon: As Tom mentioned, things like operational savings, which we anticipate will add 40 basis points, will be more immediate. The effect of leverage will be somewhat dependent upon the times at which we choose to access the market and the redeployment of that capital. And then the effects of the portfolio turnover will sort of be felt every quarter. I think, you know, Adam can elaborate on the plan for and the timing of Broadmark's liquidations, but that'll certainly bleed into earnings. So I think you will see, you know, sort of a glide path over the next four to six quarters.

With our retained yield so in short youre seeing blended returns available to us.

Well into the.

Mid to upper teens, which is about a four or 500 basis point increase versus where we were prior to the the turn in the in the in the rates.

So that's the opportunity set 300, maybe just comment again on that liquidity forward liquidity and deployment.

Andrew Obon: In terms of, you know, capital allocation, including the share repurchase program, we have today 80 million in capacity on our current program for share repurchases. I do believe we will, you know, be active in the repurchase program while also balancing the need to add, you know, net interest margin to the income statement in a market where yields are, you know, very attractive, and putting long-term earnings into the income statement is important. So I think we will balance both of those, given where the stock is trading. Certainly, you know, the return on the pro bono share repurchase is quite powerful. So I do anticipate we'll be active in the upcoming year, at least at these levels. And then share, share repurchase strategy. Yeah, no, that's sort of time.

And certainly outside.

The portfolio run off.

Typically in broad Mark there are a handful of larger liquidity items, we expect to come through the balance sheet in the upcoming weeks and months here, obviously than the sale of the residential mortgage banking platform is expected to bring in.

And that base is approximately $100 million.

Are in the process.

Financing some of our retained physicians from our CLO debt is expected to bring in $130 million and then I do believe we have line of sight with some corporate issuances. So outside of portfolio runoff. We expect there in the upcoming weeks months or to be roughly $300 million of additional liquidity coming in.

You know Adam you, maybe just provide some commentary on the timing of the.

The broad Mark Liquidations and expected proceeds just to get a complete picture.

Andrew Obon: That's what I just commented on, you know. The next question we have is from Douglas Harder of UBS. Please go ahead.

Yes, so we expect to have about 50% of the broad mark assets paid off within our basis by year end 2024, I think it is a conservative estimate.

Douglas Harder: Thanks. I'm wondering if you could talk about the expected pace of putting new capital to work, and how you see the opportunity set developing both in order to redeploy capital but also to increase leverage. Yeah, I'll just make a comment on the current investment opportunity pipeline and ROEs. Andrew, maybe comment again on the, or Adam, on the liquidation of the Broadmark, as well as the forward liquidity. But the, you know, the current market in terms of, we kind of look at it in three areas, or silos. One is our core bridge lending, where for lower middle markets, you're getting retained yields on really strong vintage underwriting in the area of 13.5 to 15.5%. That's up, maybe call it 300, 400 basis points before the rate rise. That's silo number one.

This excludes current loans, where several we expect will pay off during this period and then secondly, there is more opportunity to liquidate other assets in the portfolio that arent currently flagged for a payoff.

Just.

Kind of the velocity of these payoffs.

Kind of give you the historical perspective since the merger closed so about 50 loans paid off for about 250 million. It's about 23% of the portfolio. We have pending pay offs of about 30 assets and those are the ones that I mentioned would pay off by the end of the year. That's about another call it about $250 million. So that's it.

Another 28% of the portfolio.

So all in all we should be out of about $500 million by year end the the liquidity.

Tom Capasso: Silo two, which is cyclical, is the capital solutions where we provide capital to opportunistic equity entering mostly the multifamily space. And we'll provide senior, MES, et cetera, in the context of a restructuring. That's probably more in the... call at the 15 12 to 18 12, and that's the other area.

From a <unk> perspective would be about $250 million of U P. B, obviously some of that is levered today.

And then yes, certainly a slew of other.

Payoffs that were expecting in the Baltimore portfolio that we're currently working through via loan sales.

<unk> that are giving indications that they're working on refinances and sale of assets.

Tom Capasso: The third area is acquisitions. And there we're seeing, we're starting to see, and this is from the external manager, a growing pipeline of sales by banks, which are not, I guess, not unexpected. Those are more in the upper teens, low 20s, with Rutaniel.

So just in summary thing thank you.

Frankly versus the peer group to some extent is apart from the <unk>.

The focus that the concentration in lower middle market multifamily, which has less credit volatility we do have because of the delevering from broad market. We have this path to a step function in growing liquidity towards the back end of this year, which will.

Andrew Obon: So, in short, you're seeing blended returns available to us well into the mid to upper teens, which is about a 400 or 500 basis point increase versus where we were prior to the turn in the rates. So that's the Opportunity Set. So, Andrew, maybe just comment again on that forward liquidity and deployment. Certainly, outside of the portfolio runoff, specifically in Broadmark, there are a handful of larger liquidity items we expect to come through the balance sheet in the upcoming weeks and months. Obviously, the sale of the residential mortgage banking platform is expected to bring in, on a net basis, approximately $100 million.

Result in deployment at these spreads which you know we don't believe this is a 2020 flashing pandemic flash in the Pan.

Snapback.

We see the NIM accretion being very significant over you know the.

Especially the back half of 'twenty this year into 25.

Okay.

Great. Thank you.

Thanks, Doug.

Yeah.

The next question, we have from Jade Rahmani of <unk>. Please go ahead.

Thank you very much just on the credit side with broad Mark and mosaic you said, 28% purchase discount do you believe that that's sufficient to absorb losses and therefore from those two portfolios. They would have no further deterioration on book value.

Andrew Obon: We are in the process of financing some of our retained positions from our CLOs, which is expected to bring in $130 million. And then I do believe we have a line of sight into some corporate issuances. So outside of portfolio runoff, we expect there to be roughly $300 million of additional liquidity coming in over the upcoming weeks and months. Adam, you may just provide some commentary on the timing of the Broadmark liquidation and expected proceeds. Yeah, so we expect to have about 50% of the Broadmark assets paid off within our basis by year-end 2024. I think this is a conservative estimate.

Andrew you want to comment.

Yes, it's mainly or break it down into two components.

On the mosaic side deal was structured with a contingent equity right.

That was at <unk>.

It was approximately $90 million, we do not expect to.

Feedback from Tianjin equity right.

The broad market side as we mentioned in the remarks the discount.

Applied to.

The Npls, we still continue to believe is enough to cover.

I expected principal losses, I think what you'll see over the next few quarters as movement.

Yeah.

I will call them immaterial movements around the bargain purchase gain.

In both directions.

Adam Dowsler: You know, this excludes current loans where, you know, several we expect will pay off during this period. And then, you know, secondly, there's, you know, more opportunity to liquidate other assets in the portfolio that aren't currently flagged for a payoff. You know, just, you know, the velocity of these payoffs.

Sort of values get finalized, but yes, we do believe the.

The purchase discounts and both of those mergers.

We will prevent future principal losses.

And then on the multifamily side in the bridge portfolio.

You mentioned, 70% of the delinquencies due to one borrower.

Do you believe that we're at peak delinquencies or do you expect it.

Adam Dowsler: I'll just kind of give the historical perspective since the merger closed. So, about 50 loans have been paid off for about $250 million. That's about 23% of the portfolio. We have pending payoffs of about 30 assets. And those are the ones that I mentioned would pay off by the end of the year. That's about another, call it about $250 million.

To be lumpy and there will be further deterioration I mean, I personally don't see why we would now be at peak delinquencies, considering the staggering our maturities and the 2021 2022 vintage originations I think that they probably will still be some deterioration do you agree with that.

I think we do agree with that from a broad market perspective in particular large balance our upper middle market I'm, sorry upper block.

Adam Dowsler: So that's another 28% of the portfolio. So all in all, you know, we should be out of about $500 million by year-end. The liquidity, you know, from a UPB perspective would be about $250 million. Obviously, some of that is levered today.

The larger sponsors in the in the Sunbelt markets for example, where there's there's significant negative absorption that has to be a period of negative absorption as new supply hits over the next.

Adam Dowsler: And then, you know, certainly, you know, a slew of other payoffs that we're expecting in the Broadmark portfolio that we're currently working through via loan sales, you know, sponsors that are giving indications that they're working on refinances and the sale of assets. So just in sum, I think what differentiates us versus the peer group to some extent is, apart from the focus, the concentration in lower middle market multifamily, which has less credit volatility, we do have, because of the de-levering from Broadmark, this path to... step function in growing liquidity towards the back end of this year, which will result in deployment at these spreads, which we don't believe this is a 2020 pandemic flash in So we see NIM accretion being very significant in the back half of this year and into 2025. Great, thank you. The next question we have is from Jay Clementi of KBW. Please go ahead.

Year year, and a half, but our portfolio is very differentiated.

And when we look at this in terms of roll rates are negative migration. So Adam maybe Mike could you comment on how youre looking at the.

Our bridge portfolio versus you know in terms of its lower middle market focus and what you're seeing with those sponsors.

Yeah.

Specific to our multifamily bridge portfolio.

You mentioned that the largest asset.

Defaulted.

So in sum I mean, our our two largest sponsors have actually already defaulted and we are working through asset solutions modifications bridge to bridge financings et cetera through.

Through the special Servicers.

Andrew you know loans that we hold today, the majority of our small and middle market sponsors, we feel have greater liquidity and funding.

The temporary covered cover the interest shortfalls.

We think that Q1 may see a spike as we execute.

Jay Clementi: Thank you very much. Just on the credit side with Broadmark and Mosaic, you said 28% purchase discount. Do you believe that that's sufficient to absorb losses and, therefore, from those two portfolios, they would have no further deterioration on book value? Anyone want to comment?

Some of the modifications and bridge to bridge strategy on our existing Glenn delinquency, but we expect really negative migration to peak late in Q1 or Q2.

Which is really due to the granular granularity of our remaining portfolio.

Andrew Obon: Yes, maybe we'll break it down into two components. On the Mosaic side, the idea was structured with a contention equity rate. We, that was at BOSE, approximately $90 million.

Okay.

Yeah.

And geographically how would you describe the concentration is it largely sunbelt.

Well just about.

I'd just add as I said Adam.

Andrew Obon: We do not expect to... exceed Dockum Tinge in equity. On the Broadmark side, as we mentioned in the remarks, the discount applied to the NPLs, we still continue to believe is enough to cover expected principal losses. I think what you will see over the next two quarters is movement, you know, I would call it immaterial movements around the bargain-purchase scheme in both directions as values get finalized. But yes, we do believe the purchase discounts in both of those mergers will prevent future principal losses, and then on the multifamily side in the bridge portfolio. You mentioned 70% of the delinquency is due to one borrower.

Yeah, you can comment on it but if you recall jade one of the.

Kind of one of our credit by bolt is our Geo tier model, which uses regression analysis from <unk> on lower middle market.

Most of the multifamily so we.

We basically.

And that model, we look at forward negative absorption is one of the big drivers as a result of that markets like Austin, San Francisco et cetera, and in particular with some of the.

In the heat map of the Sunbelt, where there's a lot of supply coming we've avoided that but given that overlay Adam what what have you seen in terms of the our concentrations in those markets.

Jay Clementi: Do you believe that we're at peak delinquencies, or do you expect, you know, it to be lumpy, and there will be further deterioration? I mean, personally, I don't see why we would now be at peak delinquencies considering the staggering of maturities and the 2021-2022 vintage originations. I think that there probably will still be some deterioration.

Yeah.

Markets, such as the Carolinas and Texas.

No.

Where we have heavy concentration.

These markets have positive net migration and strong demos.

And you know as you know our focus is really on workforce housing and we still expect that there is tremendous demand for these units.

Specifically for good quality affordable housing and given the.

Tom Capasso: Do you agree with that? I think we'd agree with that from a broad market perspective, in particular, large balance or upper middle market, I'm sorry, the larger sponsors in the Sunbelt markets, for example, where there's significant negative absorption that has to be a period of negative absorption as new supply hits over the next year, year and a half. But our portfolio is very differentiated, and we look at this in terms of roll rates and negative migration.

You know really given the.

The positive net migration, we feel that where our assets are located will remain strong strong markets.

Our top our top msas in our in our bridge portfolio.

Dallas, Dallas, Texas, being being the largest which represents about 25% of the overall portfolio.

Atlanta comes in second at about 15% and then the Phoenix markets about 13%.

Adam Dowsler: So Adam, maybe you could comment on how you're looking at our bridge portfolio versus, you know, in terms of its lower middle market focus and what you're seeing with those. Yeah, you know. Specific to our multifamily bridge portfolio, you mentioned that the largest asset had defaulted. So, in sum, our two largest sponsors have actually already defaulted.

Charlotte Houston and Chicago.

Kind of round out the remaining.

We're a big exposures.

Thank you on the office.

Can you talk to the character of the collateral because theres huge differentiation in the market between skyscrapers in CBD versus suburban office parks versus owner occupied where say a law firm owns the building and they sublease two floors. So how would you characterize the.

Adam Dowsler: And we are working through asset solutions, modifications, bridge-to-bridge finances, et cetera, through the special servicers and through loans that we hold today. The majority of our small and mid-market sponsors, we feel, have greater liquidity and funding to temporarily cover the interest shortfalls. We think that Q1 may see a spike as we execute some of the modifications and bridge-to-bridge strategy on our existing delinquency, but we expect really negative migration to peak late and call it Q1 or Q2, which is really due to the granularity of our remaining portfolio, www. Broadmark.com, And geographically, how would you describe the concentration? Is it largely in the sunbelt?

Office.

Because I'm surprised that there is no delinquencies in small loans sub $15 million type loans.

Yes, so you know offices.

Tom highlighted in his opening remarks, right. So it's about 5% of the total portfolio.

Our average balance on our office portfolio is about $3 million, it's about 160.

Individual assets.

The small balance nature of these office assets.

Jay Clementi: Bye. I just have to just add, Adam; you can comment on it. But if you recall, Jade, one of our... Kind of one of our credit bibles is our GeoTier model, which uses regression analysis from GFC on lower middle market, mostly multifamily. So we basically, in that model, we look at forward negative absorption as one of the big drivers. As a result of that, markets like Austin, San Francisco, etc., and, in particular, the heat map of the Sun Belt, where there's a lot of supply coming, we've avoided that. But given that overlay, Adam, what have you seen in terms of our concentrations in those markets? Yeah, you know, markets such as the Carolinas in Texas, you know, where, you know, where we have heavy concentrations, these markets have Positive Net Migration and Strong Demos.

You know a lot of it is focused on stable like medical office type type properties.

And really just just smaller smaller assets, which again.

It's a lot easier.

So lease up you know.

A lot of this is on short term leases, but given given the amount of space that needs to be leased up in the small and the small projects.

Yes.

Ability of our sponsors to do that is and isn't as challenging as you highlight with these larger these larger office buildings in CBD and that's really where the majority of our office delinquencies are are located which is in the CBD specifically in.

Chicago New York.

Were those delinquencies are.

Also Los Angeles.

<unk>.

So I think again, you know just given that granularity.

We feel that we're certainly insulated from a lot of the headlines around around the office sector.

Adam Dowsler: And, you know, as you know, our focus is really on workforce housing, and we still expect that there's tremendous demand for these units, specifically for, you know, good quality affordable housing. And, you know, given the, really, given the positive net migration, we feel that where our assets are located will remain strong markets. Our top MFAs in our bridge portfolio, Dallas, Texas being the largest, which represents about 25% of the overall portfolio, Atlanta comes in second at about 15%, and then the Phoenix market is about 13%. You know, Charlotte, Houston, and Chicago kind of round out the remaining part of where our bigger group is.

And it's also it's also from a from a liquidation asset management perspective also more efficient to work through.

And liquidate these these smaller assets.

Yes, just at a high level at 70% of our 5% office is.

That is the large balance in that.

We account for 70% of delinquency. So it's a handful of small CBD properties.

A handful of cities that we have to originate but for which we have we believe they're very strong seasonal reserves. So I think the if you will the tail risk in our book versus the sector is very very limited to CBD office.

Okay.

Thank you for taking the questions.

Okay.

Okay.

The next question, we have is from Steve Delaney of JMP.

JMP. Please go ahead.

Adam Dowsler: Thank you. On the office... Can you talk about the character of the collateral because there's huge differentiation in the market between skyscrapers and CBD versus suburban office parks versus owner-occupied, you know, where say a law firm owns the building and they sublease two floors. So how would you characterize the office?

Morning, everyone and thanks for taking the question Andrew if I could start with you you mentioned leverage some opportunities looking forward.

Should we assume that would be a new CLO and under your your existing shelf and could we see that as soon as <unk> or <unk> of this year. Thanks.

Jay Clementi: Because I'm surprised that there's, you know, delinquencies and, you know, small loans, you know, sub 15 million type loans. Yeah, so office, as Tom highlighted in his opening remarks, right, so it's about 5% of the total portfolio. Our average balance on our office portfolio is about $3 million. It's about 160 individual assets. The small balance nature of these office assets, a lot of it is focused on stable medical office-type properties and really just smaller assets, which, again, it's a lot easier to lease up. A lot of this is on short-term leases, but given the amount of space that needs to be leased up in these small projects, the ability of our sponsors to do that isn't as challenging as you highlight with these larger office buildings and CBDs, and that's really where the majority of our office delinquencies are located, which is in the CBDs, specifically in Chicago, New York, where those delinquencies are, and also Los Angeles.

Yeah, it's certainly continuing to use our Shah.

Core financing strategy will will be important.

U S U.

In the CLO market this year.

Most likely a Q3 event.

I think when you look at increasing leverage across the business. It certainly that is one component, but adding on additional corporate debt.

For reinvestment.

Well, we'll be at.

Key part of that as well.

And you usually try to target about a 300 million dollar offering under your program.

Typically our CLO as are between 750, and a $1 billion. So theyre a little larger in size, yes, some of our other shelves.

No.

Our smaller such as our SBA shell for acquisitions off et cetera, but our CLO offerings tend to be larger in size.

Great. Thank you for that.

Just to add to that just just since the inception of the market where.

Tom Capasso: So I think, again, just given that granularity, we feel that we're certainly insulated from a lot of the headlines around the office sector. And it's also, from a liquidation asset management perspective, also more efficient to work through and liquidate these assets. Smaller Assets, Yeah, just at a high level, it's 70% of our 5% office, is that the large balance, and they account for 70% of delinquencies. So it's a handful of small CBD properties in a handful of cities that we have to originate, for which we have, we believe, very strong CECL reserves.

We're the fourth largest overall issuer issued $7 5 billion is outstanding so that we do larger newest sizes and just one it's even one point on that.

Our spreads on the AAA has historically are on top of even the best.

Best names and in the AR and the sector and a big part of that is our structures are the most investor friendly.

In terms of IC overcollateralization.

Triggers which are one versus the industry at three in the deals being static so that does happen.

Jay Clementi: So I think, if you will, the tail risk in our book versus the sector is very, very limited. Thank you for taking the question. Thank you. The next question we have is from Steve Delaney of Citizen JMP. Please go ahead. Good morning, everyone, and thanks for taking the question.

Yes, so that does present versus the peer group a skewness in our our delinquency metrics in the time, we take for us to to buy loans out of the trust or what have you. So I just wanted to highlight that and that that does give us access to the market even in <unk>.

Times when there's.

Steve DeLaney: Andrew, I could start with you. You mentioned leverage and some opportunities looking forward. Should we assume that would be a new CLO under your existing shelf, and could we see that as soon as 2Q or 3Q of this year? Thanks.

Yeah look liquidity constraints and the primary ABS market.

That's good color. Thank you.

And either one of you I guess or maybe Adam 12, I made a note 12 loans that were 60 days delinquent and then you laid out how many payoffs mods or or foreclosure I didn't get the tone of those 12 loans I didn't get the total U P b and how much a specific reserve may be.

Andrew Obon: Yeah, it's certainly continuing to use ourselves as a core financing strategy will be important. I do expect us to issue a statement in the CLL market this year, most likely a Q3 event. I think when you look at increasing leverage across the business, certainly, that is one component, but adding on additional corporate debt for reinvestment will be a key part of that as well. We usually try to target about a three hundred million dollar offering under your program. Typically, our CLOs are between 750 and a billion, so they're a little larger in size. Yeah, some of our other shelves, you know, are smaller, such as our SBA shelf or acquisition shelf, etc.

Those 12 loans. Thank you.

Yes, so those 12 loans is roughly.

$5 $500 million.

And there the.

Yeah.

There's no specific reserve against them beyond beyond the seasonal.

And I think the highlights are.

I think you have 15% of that we expect to pay off in the next few quarters.

Andrew Obon: But our CLO offerings tend to be larger. Yeah, just to add to that, just since the inception of the market, we're... We're the fourth largest overall issuer, having issued $7 billion, $5 billion is outstanding, so we do larger new issue sizes. And just one point on that: our spreads on the AAAs historically are on top of even the best names in the sector, and a big part of that is our structures are the most investor-friendly, in terms of overcollateralization triggers, which are at one versus the industry at three, and the deals being static. So that does present, versus the peer group, a skewness in our delinquency metrics and the time it So I just wanted to highlight that, and that does give us access to the market, even in times when there's, Yeah, like liquidity constraints in the primary ABS. That's a good color, thank you.

60% is under <unk>.

Pending pending modification, where we are strategically working with the sponsors.

And then about 30 of them will likely go through a foreclosure process.

And that 30 would then get fair value at the time it goes to RVO correct.

That's right, yes, okay, great and just one final thing Tom I guess I'll throw this out to you.

I know you're busy running your own company, but you probably have heard about the short sellers.

Out there on CLO issuers, they've obviously at Arbor, they pit Blackstone as well.

You never mentioned in terms of what you look at and how you look at the performance of the loans I Didnt hear you mentioned.

Steve DeLaney: And either one of you, I guess, or maybe Adam, 12, I made a note, 12 loans that were 60 days delinquent, and then you laid out how many payoffs, mods, or foreclosures. I didn't get the total of those 12 loans; I didn't get the total UPB and how much specific reserve there might be against those 12 loans. Thank you.

Trustee 10 day late payment data is being.

An early warning signal I guess, you know, which borrowers are making payments and which are not but.

Andrew Obon: Yeah, so those 12 loans are roughly... of $5,000,000. There's no specific reserve against them beyond CECL. And I think the highlights are, I think you have 15% of that we expect to pay off in the next few quarters, 60% is under pending modification where we're strategically working with the sponsors, and then about 30 of them will likely go through a foreclosure process. Yeah, and that 30 would then get fair value at the time it goes to REO, correct? That's right.

Just your thoughts about.

I know, it's a market question and not an RC specific but it nobody youre not mentioning that data you mentioned in your 30 day and 60 day D queues and I'm just curious what your thoughts are about any value in that trustee data.

Yeah.

Youre referencing these special Servicers reports on the yes.

Yes, the payment the payment date.

Yeah.

Steve DeLaney: Yep. Okay, great. And just one final thing.

USB and others put out with the CLO Special Servicers correct Cressey reporting yes, Andrew.

Tom Capasso: Tom, I guess I'll throw this out to you. I know you're busy running your own company, but you probably have heard about these short sellers out there on CLO issuers. They've obviously hit Arbor, and they've hit Blackstone as well. You never mentioned, in terms of what you look at and how you look at the performance of the loans, I didn't hear you mention trustee 10-day late payment data as being an early warning signal. I guess you know which borrowers are making payments and which are not, but just your thoughts about, I know it's a market question and not an RC-specific question, but you're not mentioning that data.

Because we we just view the and I know that's a differentiator about from a from our perspective is.

We do have we do work with a a S external special servicer, but are Adam and his team are.

Managing all of the actual disposition strategy asset management strategies, and we do have an early warning indicators that is embedded in our four to five model or I'm, sorry, a risk rating system. So maybe just comment on that in the context of the broader market.

[noise] linkage between looking at CRE, CLO reporting cressey reporting versus how we manage it.

Steve DeLaney: You mentioned your 30-day and 60-day DQs, and I'm just curious what your thoughts are about any value in that trustee data. You're referencing the special servicers, reports on the... Yes, the payment data that USB and others put out.

In terms of looking just looking at it as on balance sheet. Thanks.

Thanks, Tom.

Yeah.

Yeah, I mean, given given where D C HR deals.

We have a alright.

Steve DeLaney: The CLO Special Services, correct? Oh, the CRES-C reporting. Yeah, Ben, do you want to comment on that?

I'm, sorry, Adam Dcs to find that.

Yeah, the director certificate holder.

Okay.

We're the first loss holder on our on our on our Sealers.

Tom Capasso: I think, you know, because we just view the... and another differentiator from our perspective is that we do have, we do work with an external special servicer, but Adam and his team are managing all of the actual disposition asset management strategies, and we do have an early warning indicator that is embedded in our fortified model, my apologies, our risk rate system. So, Adam, maybe just comment on that in the context of the broader market linkage between looking at CRE-CLO reporting, CRES-C reporting, versus how we manage it in terms of just looking at it as a whole. Thanks, Tom. Yeah, I mean, given where DCH is in our deals, you know, we have a... Sorry, Andrew. I'm sorry, Adam.

So given our position right. So we have our asset management team that works closely with the special Servicers Theres a portfolio management team first off that is really acts as a liaison between the sponsor and the special Servicers in terms of the draw process updates on asset.

<unk> updates.

And.

So we're in we're in constant connection with the sponsors and the and the special Servicers two to work through solutions.

The special Servicer, certainly working closely with the sponsors and then theyre, making recommendations to us.

And I think.

Our our ROE that robust team with the overlay of the special Servicer I think provides us a unique strategic.

Advantage in.

In the market.

<unk>.

Adam Dowsler: Did DCH define that? Yeah, the direct certificate holder, which is, you know, we're the first loss holder on our CLOs. So given our position, right, we have our asset management team that works closely with the special servicers. You know, there's a portfolio management team, first off, that really acts as a liaison between the sponsor and the special servicers in terms of, you know, the draw process, updates on asset levels, and updates, and we're in constant communication with the sponsors and the special servicers to work through solutions.

That answer your question.

That's helpful. Thank you Adam and Tom.

Okay.

The next question, we have is from Christopher Nolan of Ladenburg Thalmann. Please go ahead.

Hey, guys.

Run stable excuse me multifamily is a do you have any rent stabilization apartment exposure in New York City.

We have about I think we have about $175 million of multifamily exposure in New York City. The vast majority of it is on unregulated. So so the answer is no there's very very little.

Okay, Great and Tom in past calls you indicated broad market is expected to be EPS accretive by fourth quarter of 2024 is that still hold.

Adam Dowsler: The special servicer is certainly working closely with the sponsors, and then they're making recommendations to us. And I think, you know, our robust team with the overlay of the special servicer, I think, provides us a unique strategic advantage in the market. Does that answer your question? That's helpful. Thank you, Adam and Tom.

Under the context of the.

But the bridge, we laid out maybe comment on that.

Yes, we do expect by the fourth quarter or the transaction certainly to be accretive to current EPS and we expect it to drive.

Earnings past, our current dividend levels.

And as we move into 2025, we expect the full impact of.

Christopher Nolan: Yeah. The next question we have is from Christopher Nolan of Ledenburg, Thalmen. Please go ahead.

The various items that Tom laid out including.

Tom Capasso: Hey guys, multi-family, do you have any rent stabilization, apartment exposure in your portfolio? We have about, I think we have about 175 million of multi-family exposure in New York City. The vast majority of it is unregulated. So the answer is no, there's very, very little. Great. And Tom, on past calls, you indicated Broadmark is expected to be EPS-accredited by fourth quarter 2024. Does that still hold?

Broad market sort of reach their totality. So we didn't need the ultimate earnings accretion based on where we are running.

In the few quarters, leading up to above are probably happens in the late stages of and mid stages of 25.

Okay. So it's fair to say that the EPS excuse me.

Accretion to distributable ROE that you guys are outlining earlier, it's going to be back loaded in the second half of 2024, and we're really not going to see the full effect of it.

Andrew Obon: enter in the context of the bridge we laid out, maybe comment on that. Yeah, we do expect by the fourth quarter the transaction to be accretive to current EPS, and we expect it to drive your earnings past our current dividend levels. And as we move into 2025, we expect the full impact of the various items that Tom laid out, including Broadmark, to sort of reach their totality. So I think the ultimate earnings accretion based on where we are running in the few quarters leading up to Broadmark probably happens in the late stages and mid stages of 2020. OK, so it's fair to say that the EPS, excuse me, Creation to Distributable ROE that you guys were outlining earlier is going to be backloaded in the second half of 2024, and we're really not going to see the full effect of it in 2025. I think that's a fair statement.

25, correct.

I think that's a fair statement.

So for 2024, we should see probably a distributable ROE somewhere below your 10% target is that fair.

Yes, I think that's fair, we expect that the cumulative earnings of the company over the.

The full year two to cover the dividend So you know.

You will what we're expecting is a ramp up from where we're at today.

Towards the back half of the year that is that is covering the current 30% and then the growth.

Growth in earnings from that that level into our historical return targets to happen and as.

As we move into 2025, Okay. That's it for me. Thank you very much.

Yeah.

The next question Lee question, we have is from Sandra Barker of Beachy Archie. Please go ahead.

Hey, everyone. Thanks for taking the question. So you just gave some dividend coverage commentary. Thanks for that just quickly a follow up on the topic of CLO performance.

It sounds like we should see stronger IC and Oc coverage come March but.

Christopher Nolan: So for 2024, we should probably see a distributed ROE somewhere below your 10% target. Yeah, I think that's fair. We expect the cumulative earnings of the company over the full year to cover the dividend. What we are expecting is a ramp up from where we're at today to something towards the back half of the year that covers the current 30 cents. And then the growth and earnings from that level into our historical return target should happen as we move into 2020. That's it for me. The next question we have is from Sarah Bargham of DTIG. Please go ahead. Hey everyone.

So could we expect to see some further downside to D. E. On the residual income side. The interest income equation from Q4 levels can you give any guidance on the potential Q1 earnings impact there before those loans are resolved.

Yes. So certainly there is there's a there's a couple of impacts.

Tripping SaaS.

The first one as you mentioned is cash flow.

Gets diverted away from our reserve.

D level debt delever the seniors the way it'll work in the financials as you will see to the extent that loans.

Sarah Bargham: Thanks for taking the question. So, you just gave some dividend coverage commentary. Thanks for that.

Non accrual status Youll see interest compression, there and you'll see some.

Sarah Bargham: Just quickly, a follow-up on the topic of CLO performance. Sounds like we should see stronger IC and OC coverage come March, but could we expect to see some further downside to DE on the residual income side of the interest income equation from Q4 levels? Can you give any guidance on the potential Q1 earnings impact there before those loans are resolved? Yeah, so certainly there's there's a couple impacts of tripping these tests.

Thanks.

The Delevering of these securities.

So it won't because of how we consolidate it is not going to show up in the bonds themselves. The total cash flow.

Diverted them.

Over this period, where the tests have been trip has been roughly $8 $5 million.

Other financial impact.

Andrew Obon: The first one, as you mentioned, is cash flow gets diverted away from our residents to sort of de-levy the seniors. The way it'll work in the financials is you'll see to the extent loans hit non-accrual status, you'll see interest compression there, and you'll see the effects of the de-levering of these securities. So it won't, because of how we consolidate, it's not going to show up in the bonds themselves. The total cash flow sort of diverted over this period where the tests have been tripped has been roughly $8.5 million.

Yeah as you know during this period, where the class or track that.

The funding accounts that fit inside these deals.

Our diverted away from.

Repurchasing logs, we have funded on balance sheet and converted through the waterfall structure and so you have a <unk>.

Component of loans, roughly $80 million today that are sitting on balance sheet.

Andrew Obon: I think the other financial impact is, you know, during this period when the tests are tripped, the funding accounts that sit inside these deals are diverted away from re-purchasing loans we have funded on the balance sheet and diverted through the waterfall of the structure. And so you have loans, roughly $80 million today, that are sitting on the balance sheet unlevered, so you'll have some yield compression there. Those loans eventually will get repurchased into deals at the right size, but for that period of time, you do have what I'll call marginal yield compression. So those will be sort of the main events. Okay, thanks for the color there.

Unlevered, so you'll have some some yield compression there those loans eventually will get repurchase into the deals at the right size of it for that period of time, you have what are called <unk>.

Marginal yield compression so those will be the sort of the main effects.

Okay. Thanks for the color there and then I think you mentioned that 27%.

Delinquencies are likely to foreclose, well those remain and the CLO as real estate owned.

Adam you want to comment.

Yeah, I think those were.

Historically as loans have become Oreo that we have had in securitizations, we have purchased them out.

Sarah Bargham: And then I think you mentioned that 27% of the delinquencies are likely to foreclose. Will those remain in the CLOs as real estate owned? Adam, do you want to come in?

So that's certainly something we will we will consider.

As we work through these but but to date, there's been very limited oreos that we have within our within our clo's. So so today, it's not material, but you know as we kind of worked through these assets.

Adam Dowsler: Yeah, I think those, you know, we're, Historically, as loans, you know, have become REO that we have had in securitizations, and we have purchased them out, so that's certainly something we will consider as we work through these, but, to date, there's been very limited REOs that we have within our within our CLOs, so today, it's not material, but you know as we kind of And then just really quickly, sorry if I missed this at the beginning, but can you remind me if you gave us a target for your volumes in the Freddie Mac and SBA verticals this year?

Some some things.

That will certainly evaluate.

Okay, and then just really quickly.

Sorry, if I missed this at the beginning but can you remind me if you gave us a target for your volumes in the Freddie Mac and SBA verticals this year.

Gautam you want to kind of bucket on the SBA front.

We've been running at about five a little under 500 million over the last three years and we back around second quarter of last year, we are fintech implement a day.

Adam Dowsler: On the SBA front, we've been running at about a little under $500 million over the last three years. Back around the second quarter of last year, our FinTech implemented a Small Loan and Micro Loan Strategy. Just to recap, SBA has three tiers; 350 to 5 million is a large loan, mostly real estate secured, and below that there's small and micro, which are two different tiers; I think below 50,000 is micro.

A small loan and micro loan strategy just to recap SBA has five three tiers three $3 $50 million to $5 million is large loan mostly real estate secured.

And below that there is a.

Small and micro.

Two different tiers, I think below below 50000 of micro and those are that.

Tom Capasso: And those are loans that the SBA allows using a credit score methodology, which obviously is very similar to what we've been developing with our FinTech in Florida, which was one of the leading providers in the PPP program. So we've retrofitted that tech to a strategy whereby we're using that to originate small loans. I think we were running, Andrew, about 33 million the last, you know, call it 30, 40 million run rate looking at it over the next couple of months, and Ramping, that part of the initiative of the Biden administration to promote loans to minority women-owned businesses, of which that lower tier is a big chunk of that. So with that, the combination of the large loan, continued growth there, and we've been poaching a lot of, You know, we've been seeing opportunities to take on loan officers that are leaving work from banks that are exiting the SBA business, and Spintech that leads us to a target of $500 to $750 million for this year and $1 billion over the next couple of years, which is very accretive given the premiums that you have on So I think, again, that's something that is a differentiation in the peer group that's a little bit underappreciated.

These are loans that are the SBA allows a credit score methodology, which obviously is a very adaptive to what we've been developing with our Fintech in Florida, which was one of the leading providers in the PPP program. So we've retrofitted that tact two a M.

Our strategy whereby.

We're using that to originate small loans I think we were running Andrew what about $33 million less.

Call. It 30 40 million run rate looking out over the next couple of months and ramping so and then Thats part of the initiative of the by the administration to promote loans to a minority and women owned businesses of which the that tier that lower tier is a big chunk of that so so with that.

Combination of the large loan continued growth there and we've been poaching a lot of.

You know we've been so im seeing opportunities to take on loan officers that are exiting from banks that are exiting the SBA business.

And this fintech that debt.

Leads us to a target of 500 to 750 for this year $1 billion over the next couple of years.

Which is very accretive given the premiums that you have on these loans and.

Which you know are usually north of 10 points.

The secondary market and the fact that it uses utilizes various eliminate our capital. So I think again, that's something that is a differentiation in the peer group that's a little bit under appreciate it. So that's the SBA and Adam you want to just to comment on how you're positioning the business from the standpoint of the.

Adam Dowsler: So that's the SBA. Adam, you want to just comment on how you're positioning the business from the standpoint of the... you know, the core bridge and the other related construction and other products. Yeah, I think just to answer the question, I think the question was around the cap, you know, our capital, Freddie Freddie businesses on the multifamily side. I think, you know, the volumes they're expecting about, you know, we're targeting a billion dollars for 2024. And those capital light multifamily programs are split between our small balance loan program, where we have the license through Freddie Mac, and then separately our affordable multifamily business, Thanks for all the detail there. I appreciate it. Thanks, Sarah.

You know the the.

Core bridge and and the other related to construction and other products.

Yes, I think you just answered.

I think the question was around the cap our capital Ie Freddie Freddie business is on the multifamily side I think the volumes there were expecting about were targeting $1 billion for 2024.

And those capital light multifamily programs or spin or split between our small balance loan program, where we have the license through Freddie Mac, and then separately, our affordable multifamily business, which is the tax exempt business.

Which which makes up the bill.

The $1 billion target for 2024.

Great. Thanks for all the detail I appreciate it.

Sarah Bargham: The next question we have is from Matt Howlett of B Raleigh Securities. Please go ahead. Oh, hey, thanks for taking my question. Hey, Tom, you mentioned, I think you said, high teens to low 20%, potentially on the acquired channel with some of the banks. Are those unlevered?

Thanks Sarah.

The next question we have is from Medtronic <unk> Securities. Please go ahead.

Oh, Hey, thanks for taking my question.

Hey, Tom You mentioned I think you said high teens to low 20% yield on the.

Potentially on the acquired channel with some of the banks are those unlevered. That's the first question can you just walk me through some of the economics of those I mean, where you're where you're buying it what type of discounts.

Matthew Philip Howlett: That's the first question. Can you just walk me through some of the economics of those? I mean, where you are, what you're buying, what type of discounts, what type of paper it is? Yeah, these are lower middle market loans that usually end up being criticized. They're not in default.

It is.

Yes these are lower.

Lower middle market.

Usually stabilized.

Loans that.

Our usually.

And the criticized there.

Tom Capasso: They're what we call scratch and dent, but from a bank regulatory standpoint, they get criticized usually due to the sponsor because of DSCR approaching that kind of below-1.0 threshold. And that's great, you know, from our perspective, because we like to use it in our asset management strategies for acquired portfolios. You know, we were one of the larger buyers of these smaller balanced loans after the GFC. We bought nearly 5 billion, and we worked out 5,000 loans. So we have a track record. And so, in short, to answer your question, the Scratch and Dem Portfolios trade probably at the low 90s. Low 80s to unleveraged yields. Adam, we're looking at high single digit, low double.

They're not in default or what we call scratch and dent, but from a bank regulatory standpoint. They are they get criticized usually due to the sponsor because of D. D. C are.

Approaching that kind of blow one O threshold.

Great from our perspective, because we like we utilized.

Our asset management strategies for acquired portfolios.

We're one of the larger buyers of these smaller balance loans. After the Dfc, we bought nearly $5 billion and.

And we worked out 5000 loans. So we have a track record and so in short to answer your question, the scratch and Dent portfolios trade probably at low ninety's to.

[noise] low eighty's to Unlevered yields are Adam we're looking what high single low double.

They many times come with stapled financing, where we can we have more.

Interesting is we have more offers for credit on the secured lending basis term lending with limited mark to market from the banks given the the Basel III changes, which favor loan on loan real estate being a lot better than making direct loans, so anyway with that either the staple financing from the seller and or the.

Tom Capasso: Many times, they come with stapled financing, or we have more. What's interesting is we have more offers for credit on a secured lending basis, term lending, with limited mark-to-market from the banks given the... The Basel III changes, which favor loan-on-loan real estate being a lot better than making direct loans.

The third party financing from banks that gets us to Levered IRR on that high single low double to that kind of upper teens.

Tom Capasso: So, anyways, with that, either the stapled financing from the seller or the third-party financing from banks, that gets us to levered IRRs on that high single load double to that kind of upper teens area, loss-in-profit. Yeah, and we've also done, since inception, we've done 11 standalone securitizations of this strategy. So that's, that's just another layer in terms of getting higher, higher returns. Yeah, that's an important point. Good point, but we do have access.

Loss adjusted.

We've also done.

Since inception, we've done 11, standalone securitization of of this strategy.

So that's that's that's just another layer in terms of.

And getting getting higher and higher returns on that portfolio.

That's important point a good point, but we do have access it's our RCM T shelf is that right Adam.

It's S at CMT.

CMT, sorry, CMT shops.

That's where we have historically utilized purchase of these portfolios in the secondary market, which is a little bit of differentiate again, a differentiator from us in the peer group to buy these pools from banks or auto securitization trusts to then finance them in the ABS market, but again right now whats very unique versus the last.

Adam Dowsler: It's our RCM T-shelf, is that right, Adam? It's SCMT. Sorry.

Adam Dowsler: SCMT. So that's where we have historically utilized the purchase of these portfolios in the secondary market, which is a little bit, again, a differentiator from us in the peer group to buy these pools from banks or out-of-securitization trusts, to then... Finance on ABS. Gotcha. On the bigger packages you see from the New York Community Bank Corp., I mean... Would you get together a waterfall and bid on those, or is that something? looks at it.

Credit cycle GSE is the availability of bank financing on a longer term secured basis with limited mark to market.

Gotcha.

On the bigger packages you see from your community.

Community Bancorp.

Would you get to go to a waterfall and bid on those or is there something else when theyre ready it looks at.

Matthew Philip Howlett: Oh, yeah, no; we, the external manager, have a significant trading desk and sources these deals. And so we definitely look as part of our acquisition silo and the services provided by the external manager to bid jointly and allocate equity accordingly. Yeah, we've done that in a number of transactions over the last decade. Great thing.

Okay.

Yeah.

External manager has a significant trading desk and sources. These deals and so we definitely look as part of our acquisition silo.

And the services provided by the external manager to bid jointly and allocate equity accordingly.

We've done that in a number of.

Number of transactions over the last decade.

Great. Thanks.

Matthew Philip Howlett: Just final question, again, on the buyback, you know, I think you feel like the $14 book is pretty good with what I'm hearing you say. What would be, is there a sense of urgency, you know, given what will be an improvement in the ROE and probably the dividend over time? Do you feel like, you know, to act sooner with the buyback than later? And where does that stack up on the list of priorities?

Final question I'll get on the buyback you know what.

Thank you feel like that the $14 book is pretty good, but what I'm hearing you say I mean, what would be is there a sense of urgency given the it will be an improvement in the row.

The dividend over time, you feel like to ask sooner with the buyback and later.

Does that stack up in the list of priorities. Thanks, a lot.

From Andrew.

Yes, certainly certainly where the shares are trading.

I think it will be a priority for us coming out of earnings.

Again, there is a need.

Matthew Philip Howlett: Thanks a lot, from Yeah, certainly, certainly where the shares are trading. I think it will be a priority for us coming out of burning. Again, there is a need to balance using the liquidity on the balance sheet today for that purpose versus taking advantage of, you know, new investment that will provide sort of longer-term earnings power for the company. I will say, you know, given some of the liquidity events we laid out earlier in the call, I think, those items will provide a lot more flexibility to be more aggressive in the share repurchase program should shares hang around these levels. Great, thank you. The last question we have is a follow-up from Director Mani of ABW. Please go ahead.

The need to balance.

Using the liquidity on the balance sheet today for for that purpose versus taking advantage of.

New investment that will provide sort of longer term earnings power of the company I will say given some of the liquidity events, we laid out earlier in the call.

You know those.

Those items will provide a lot more flexibility to be more aggressive in the share repurchase program should you know shares.

Hang around these levels.

Great. Thank you.

The last question we have.

Hey, good money.

Director Mani: Thank you very much. Yeah, I find all the questions about shared buybacks pretty interesting at this point in the cycle where there are clearly very high delinquencies in the portfolio and a lot of credit uncertainty in the outlook. It seems to me, you know, a better use of capital would be defensive. So I just wanted to ask about corporate debt issuance. What kind of issuance is being contemplated? Do you have a range of sizes you're thinking about and what the cost might be?

Please go ahead.

Thank you very much.

Yes, I find all the questions about share buybacks pretty interesting at this point in the cycle, where there is clearly very high delinquencies in the portfolio and a lot of credit uncertainty in the outlook. It seems to me.

Better use of capital would be defensive.

So I just wanted to ask about the corporate debt issuance.

What kind of issuances being conflict contemplated do you have in a range of size, you're thinking about it and what the cost might be.

Andrew Obon: Yeah, so I think there are a variety of options. I think you may see, in terms of private placement, potentially some of the retail channels that have been open across a couple deals since Q4 as an option for us. In terms of sizing, I would expect them to be more measured, anywhere from $75 to $150 million.

Yes. So I think there are a variety of options I think you may see.

<unk>.

A combination of private placement and potentially some of the retail channels that have been opened across the couple of deals since the Q4 be an option for us.

In terms of sizing I would expect them to be more measured anywhere from $75 million to $150 million I think the the cost.

Andrew Obon: I think the cost for those issuances today is somewhere in the range of 9% to 10% along the way, www.broadmark.com. Wow, and so what's the use of proceeds? You're going to leverage that capital rather than pay off capital elsewhere? Is any of this used to cure deficiencies or to pay off secured debt, or secured leverage elsewhere?

For those issuances today is somewhere in the range of <unk>.

9% to 10% of our all in yield.

Wow, so what's the use of proceeds you're going to lever that capital rather than pay off capital elsewhere is any of this used to cure deficiencies or to pay off secured debt secured leverage elsewhere.

Andrew Obon: Certainly, the combination of all the liquidity will be used for a variety of the things you just mentioned. Some of it will be to manage some of the problem areas in the portfolio, whether that be refi, repurchasing from CLOs, et cetera. A large majority of that will be used for reinvestment in our origination channels and acquisitions, and then some of that liquidity will be used in the share repurchase program. We certainly agree with you that having an ample amount of liquidity on the balance sheet to manage is important. Uncertainty across this cycle continues to be the priority, and certainly balancing those other areas of capital uses, including the repurchase and new investments, will be done so with that top priority in mind. So we do agree with you that carrying increased liquidity amounts and lower leverage throughout the cycle is important and will continue to be the way we manage the business.

Yes, certainly.

You know the combination of all the liquidity will be used for a variety of the things you just mentioned some of it will be too.

Manage some of the the problem areas in the portfolio, whether that be refi repurchasing from CLO etcetera.

A large majority of that will be used for reinvestment in.

Our origination channels and acquisition channels.

And then.

Some of that liquidity will be used.

The share repurchase program, we certainly agree with you that having ample amount of liquidity on the balance sheet to manage.

Uncertainty across the.

The cycle continues to be the priority and certainly balancing those other.

Areas of capital uses including the repurchase and new investments will be done so with with that top priority in mind. So we do agree with you that caring.

<unk> increased liquidity amount.

Lower leverage throughout the cycle is important and I'll continue to lead the way we manage the business.

Andrew Obon: Yeah, just from a more macro perspective, to add on to what Andy was saying, Jade, we're looking at the wall of liquidity we have coming in on the back end of, you know, kind of phased in through this calendar year, where you're clearly prioritizing defensive use in asset management strategies like strategic refis because we strongly believe that our lower middle market sponsors, the big guys across the vintage have already experienced stress or in workup. But we have a lot of lower middle market sponsors with more workforce housing that are covering some of the stress in DSCR, and there's a bridge to agency takeout, just like some of our lower middle market sponsors. Some of the other REITs that are focused on the multifamily, small-balance base. And we believe, strongly believe, that if you look at the forward curve and rent growth over the next 24 months, that will provide a better use of capital than, let's say, immediate repurchases of shares over the next 18 months.

Just from a more macro perspective to add on to what I was saying that we were looking at the wall of liquidity, we have coming in in the back end of you know kind of phased in through this calendar year.

Clearly prioritizing defensive.

Abuse went in asset management strategies like strategic Refis, because we strongly believe that our lower middle market sponsors the big guys have a.

Across the.

The vintage ups have already experienced stress or in workout, but we we have a lot of lower middle market sponsors with more workforce housing that are covering some of the stress in D. C are and there's a bridge to our agency takeout just like some of our our.

Some of the other Reits that are focused in the multifamily and small balance space and we believe strongly believe that if you look at the forward curve and our rent.

Rent growth over the next 24 months that that will provide a better use of capital.

Then, let's say immediate repurchases of our shares over the over the next.

Tom Capasso: Thank you. And with that, I would like to turn the call back over to Tom Capace for his closing remarks. Again, we appreciate everybody's time today and look forward to the next quarter's earnings call. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your line, www. BroadmarkRealty.com BF-WATCH TV 2021, www. BroadmarkRealty.com,........................

18 months.

Yeah.

Thank you Andrew.

I would like to turn the floor back over to Tom capacity for closing remarks.

Again, we appreciate everybody's time today and look forward to the next quarter's earnings call.

Ladies and gentlemen that concludes today's conference. Thank you for joining US you may now disconnect your lines.

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