Greetings, and welcome to Ready Capital Corporation’s Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Andrew Ahlborn, Chief Financial Officer. Thank you. You may begin.

Thank you, operator, and good morning, and thanks to those of you on the call for joining us this morning. Some of our comments today will be forward-looking statements within the meaning of the Federal Securities Laws. Such statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Therefore, you should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. During the call, we will discuss our non-GAAP measures, which we believe can be useful in evaluating the company’s operating performance. These measures should not be considered in isolation or as a substitute for 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 2021 earnings release and our supplemental information, which can be found in the Investor Relations section of the Ready Capital website. I will now turn it over to Chief Executive Officer, Tom Capasse.

Thanks, Andrew. Good morning, everyone, and thanks for joining the call today. The fourth quarter's results capped another banner year for Ready Capital in earnings, originations and growth. We continue to build one of the most diversified CRE multi-strategy credit origination and securitization platforms in the industry through continued expansion in product offerings and as a leader in the CREIT space and strategic acquisitions. Our lending platform is supported by a rock-solid balance sheet, which has improved both from a cost of financing and liquidity standpoint. Now in the fourth quarter, we originated a record $2.2 billion of small balance commercial or SBC loans, which was not only a quarterly record, but also exceeded total annual production in both 2020 and 2019. For the year, total SBC loan originations and acquisitions were $4.9 billion, representing 2.5x growth over 2020. In our small business lending business, fourth quarter originations of SBA 7(a) loans equaled $136 million, capping a record $481 million in total 2021 production, more than double 2020. Combined with our residential merchant cash advance, real estate equity and multifamily affordable housing channels, total 2021 transaction volume reached a remarkable $10.2 billion. I would like to highlight some of the factors which contributed to our growth. First is our differentiated product offering, which provides sponsors with financing across the full life cycle of an SBC property from construction to stabilization. This model allows us to pivot as markets move. It also allows us to capture a larger portion of the economics as properties move to stabilization and develop broader relationships with our sponsors and brokers. For the quarter, in our lead product, transitional lending, we originated $1.5 billion, comprising 91% multifamily priced to a 12% retained yield. And with an average as-is LTV of 76%. This was supplemented with $98 million of fixed-rate and CMBS loans and $29 million in acquisitions. Our prime focus in 2022 will be growing our fixed rate and CMBS programs. Second is the ownership of government-sponsored lending businesses, which provide recession-proof gain-on-sale income that have barriers to entry and high ROEs. We closed the year as the sixth largest SBA lender and we'll continue to gain market share with the rollout of new programs, including SBA Express small loan for which we originated $5 million in the quarter and USDA for which we obtained a license. In our Freddie Mac business, we closed $169 million in the quarter and climbed to the fifth largest SBL lender. Our Red Stone Freddie Mac affordable housing tax exempt lender originated $444 million in the quarter, significantly outpacing the volume we underwrote when we acquired the business in the second quarter. Third is disciplined growth of our equity capital base. In 2021, our equity capital increased 54% to $1.3 billion, comprising $240 million in M&A and $167 million in common and preferred equity issuance. Compared to the traditional mREIT equity growth strategies or secondary issuance, we continue to support growth in our SBC market share through accretive M&A including the fourth quarter signing of the $550 million merger with Mosaic real estate credit. Fourth is human capital. In 2021, we added 83 full-time employees with a focus on front-end sales, production and credit, including a national sales manager and head of strategic partnerships. These senior hires cement our strategy of realigning the business with a focus on front-end production and efficient credit processes to improve loan pull-through and processing rates. Finally, our securitization franchise is evident in tight credit spreads versus the bellwether names in the CMBS market. Since inception, we have issued nearly $9 billion of transactions across 31 issues, including a record $2.4 billion in 2021. In the fourth quarter, we closed our largest CLO to date, ranking as the fifth largest CLO issuer in 2021. As an established issuer, we have access to match-funded non-recourse financing, helping drive our dividend yield premium to our CREIT peer group. Our 2022 budgeted issuance exceeds 2021, kicking off with our ACRE, CLO, a $1.2 billion offering in the upcoming weeks. A hallmark of Ready Capital has been a culture of credit discipline and our market share gains have been achieved by process and data-driven improvements in product and sector focus without aggressive credit underwriting. This credit discipline is evident in a 60-day plus delinquency rate in our SBC and SBA portfolios of only 1.2%. Further, high-risk assets rated four or five on our one to five risk rating scale declined 22 basis points to 5.4% of our SBC portfolio and remained consistent at 7.5% of our SBA portfolio. Now Ready Capital is uniquely positioned regarding the impact of rising rates and widening credit spreads on mREIT dividend yield and book value. First, 78% of our portfolio was floating rate at year-end. Additionally, 70% of the CRE floating rate portfolio comprises 2021 vintage with LIBOR floors averaging 19 basis points. So while we benefited from a weighted average floor of 215 at the beginning of the pandemic, as rates move lower, the current average of 50 basis points will place pressure on short-term margins but positions us well with more substantial upward movements in rates. Second is our asset liability structure. At year-end, only 5% of our debt comprised QSIPs pledged under short-term repo. Additionally, at year-end, 58% of the portfolio is match-funded through securitization with only 30% of our current warehouse inventory comprising fixed-rate loans, which are fully hedged. Lastly, we made significant headway last year in securing fixed-rate corporate borrowings, adding $575 million of additional secured debt, unsecured debt and preferred equity. In total, as proven in the COVID recession, Ready Capital's business model is highly resilient to rising macro risks from tightening monetary policy. Higher capital costs from spread widening on senior securitized debt tranches would likely be offset by earnings accretion from rising rates and widening asset yields in a less competitive SBC sector. I also want to provide a quick update on the Mosaic transaction. As we highlighted on our last call, the merger with Mosaic furthers Ready Capital's competitive advantage via a seamless expansion in our product mix from heavy transitional bridge to construction lending and is accretive to earnings. Pending shareholder approval, we expect the transaction to close in the third week in March. Finally, in terms of outlook, we're off to a strong start in 2022. Through the third week of February, we have originated $663 million of SBC loans and $33 million of SBA loans and have a current money-up pipeline of $1.3 billion across all products. We expect near-term earnings to be elevated as the tailwinds from PPP are recognized over the next two quarters before a reversion to our 10% to 11% target ROE via the continued growth in our loan servicing portfolio as well as expansion of our gain on sale businesses.

Thanks, Tom. Quarterly GAAP earnings and distributable earnings per share were $0.69 and $0.67 respectively. Distributable earnings of $52.5 million equates to a 17.8% return on average stockholders’ equity. 2021 full GAAP earnings and distributable earnings per share are $2.17 and $2.29 respectively. Covering our dividend of $1.66 and equating to a 15.4% return on average stockholders’ equity. Distributable earnings related to net income from PPP was $15.5 million or $0.21 per share for the quarter. The quarterly earnings profile absent the effects of PPP is reflective of the growth in our balance sheet, the continued contribution from our gain on sale businesses, and the normalization of residential mortgage banking revenue. Net-interest income increased to $39.4 million due to loan fundings of $1.2 billion outpacing loan payoffs of $339 million. As of quarter end, the $7.1 billion held for investment portfolio had a weighted average coupon of 4.8% and average margins of 275 basis points. The stability of our revenue was further bolstered by servicing revenue of $10.1 million. In the quarter, 68% of non-PPP revenue was produced by the stabilized investments on the balance sheet. Realized gains decreased 15% due to a $4.3 million quarter-over-quarter reduction in income generated from the sale of certain mortgage-backed securities positions. Total gain on sale revenue from SBA, Freddie Mac SPL and Red Stone operations remained consistent at $19.2 million. Gains from the sale of SBA 7(a) loans declined $3.4 million, primarily due to an 11% reduction in loan sale activity as well as the decision to sell 20% of the activity for a higher future IO strip. Gains from Freddie Mac sales remain consistent at $1.5 million, and increased activity at Red Stone resulted in $5.9 million of additional sale income. As expected, net revenue from residential mortgage banking activity declined 37% to $8.1 million, due to both lower quarter-over-quarter production and margins, which declined to 75 basis points in the quarter. Unrealized appreciation of the MSR, which we do not include in distributable earnings, totals $6.1 million and we anticipate will continue to be a source of book value appreciation in the upcoming quarters. Operating expenses were $9.8 million lower quarter-over-quarter, primarily due to a reduction in variable compensation in our mortgage banking segment and a quarter-over-quarter reduction in professional fees. As I stated previously, net income related to PPP totaled $15.5 million in the quarter after considering the effects of tax and fees payable to the external manager. This income, which continues to add to our outperformance, is likely to remain a significant contributor to earnings over the next few quarters. As of year-end, we had $60.7 million of deferred revenue remaining to be accreted into earnings and $12.8 million of reserves against those fees. As of last week, 31.4% of the original portfolio remained. On the liquidity front, we took several measures in the quarter to fund the increasing opportunity set. This included raising $490 million of incremental corporate capital including $350 million of 4.5% senior secured five-year notes, $110 million of 5.5% senior unsecured seven-year notes and $30 million in equity via our ATM. As of December 31, total leverage absent that PPPL facility was 5.2 times and recourse leverage was 2.7 times. The recourse leverage, which is higher than historical norms, is primarily driven by both the high lending volumes in the quarter and our securitization cycle. Recourse leverage ratios are expected to revert to our historical norm of two times due to the upcoming CRE CLO, the additional equity from our secondary offering in January, and the closing of the Mosaic merger. With that, we will open the line for questions.

Thank you very much. At this time, we will be conducting our question-and-answer session. We have a first question from the line of Crispin Love with Piper Sandler. Please go ahead.

Thanks and good morning, Tom and Andrew. Multifamily financing and originations definitely crushed it in 2021, driven by our results and for the full year. And then just also with the $1.5 billion we saw in the fourth quarter. Can you speak to some of the key drivers of the demand that you've been seeing in the bridge space? And then what kind of expectations do you have to be able to keep up that activity in 2022? Or would you expect any type of slowdown here given the recent elevated levels and might not be as strong as the 1.5%, but just what kind of expectations going forward in the bridge space?

Yes. I'll make a broad market observation. And then, Adam, maybe you can comment on some of the specifics in terms of tactically how we're focusing on multifamily. But generally speaking, if you look at multifamily broadly, a lot of the growth post-pandemic has been in suburban areas, not necessarily in the central business district. So we've capitalized on that largely because we focus on obviously smaller price points. The second factor is our linkage with our Freddie Mac SBL license, where we again obtained fifth largest lender status in 2021. So those are two of the broader overlays. But Adam, maybe you can comment more specifically in terms of what the growth in that sector and what you see going forward?

Yes, sure. I think certainly, there's a housing crisis in the United States, specifically on the affordable side. Our relationships in the market with some of the top multifamily investors nationwide. There's certainly a lot of activity given the strength of that sector and really propelling acquisition financing demand. Given the fact that there's really a void for high-quality, affordable multifamily units, our bridge platform steps in and really provides the capital expenditures necessary to help rehab some of these properties and provide nice homes for folks more on the lower income side across the country. Our specific focus in growing this bridge business, we're certainly pursuing lighter transitional stories where the assets are close to stabilization and require fairly minimal capital expenditures. But given the strength this year, I think also what's propelled it is our certainty of execution that we deliver in the marketplace, whether it's our direct clients, repeat clients, mortgage banker relationships across the country, Ready Capital is really known as a firm that delivers specifically in this space. We've really become experts in the multifamily sector. So I think generally speaking, I think our originations in 2022 should specifically in the multifamily side should closely resemble the production we did in 2021.

And the other thing to add to that is there will be a bit of handoff to additional commercial real estate sectors, for example, industrial as well as ultimately hospitality and retail, again, not malls, but these kinds of strip malls and smaller properties that we focus on.

Great, thank you. Just one follow-up on that. Adam, I just want to make sure I heard you correctly. Can you confirm that originations in the bridge space in 2022 should be similar to 2021?

Oh, I'm sorry. Yes. Similar to 2021.

Okay, perfect. That makes sense. Thank you. And then just one second question for me on ROEs. And Tom, you hit on this a little bit in your prepared remarks. So this is the second quarter of seeing ROEs in the mid-teens range. It seems like with PPP and some of the growth that you're seeing in the loan originations, in the next quarter or two, you might expect similar levels in that mid-teens range? Or just asking a different way, when do you expect ROE to kind of drift back to the 10% plus range that you've talked about in the past?

I would say the late third, fourth quarter of 2022. I don't know if you want to comment on that.

Yeah, Chris, we still have roughly $60 million in revenue from PPP flowing through the earnings. Our expectation is that the majority of that will flow in the first and second quarters, with probably some limited carryover into the third. So I think Tom is right that the reversion is towards the back half of the year.

Great, thank you. Thank you for the question and answers.

Thank you. We have the next question from the line of Steve DeLaney with JMP Securities. Please go ahead.

Good morning, Tom and Andrew, congratulations on a really great year. Just curious because of the strong close to the year in terms of distributable income, do you anticipate that you'll be carrying any undistributed REIT taxable income forward into 2022?

So Steve, good morning. Based on the fact that the PPP income was earned at our TRS entities and we limited distributions from that TRS up to the REIT, I do expect there will be a carryover.

Okay, thank you. And thanks, Slide 6 is very helpful. Especially the way it lays out your PPP and I appreciate your comments about the dollar amounts that are left. You say that the PPP revenue is net of direct expenses. Does that also mean taxes, or is there a component of a 2% to 3% tax impact on ROE? Does some of that reflect taxes on the PPP revenues?

So the tax impact is included in the provision for income tax line item. When we described the income or totality of PPP income in the prepared remarks, that was net of tax.

Got it? So when we look at that, obviously, we're seeing numbers range by quarter or let's just say at 6% on that PPP revenue line, the true impact on your 16%, 17% ROE would probably be touch less than that because of the taxes that would be coming off of that. I'm trying to get it like PPP is gone.

Correct.

Okay, that's what I needed to try, I just verified.

Yeah. There's one other thing in there. The other line item that's impacted by that is the investment advisory fees, which are also shown gross on that slide. If you look at the EPS impact, it's roughly $0.22 for the quarter.

Got it? Okay. Thanks. And Tom, you mentioned fixed-rate multifamily. Just curious, as you move forward with that, do you plan to, on that product, create your own sort of private label shell where you'd be issuing your own? Or would you be operating in more of a conduit fashion with other established CMBS issuers?

We would probably, at this point, act on our own, given our current pipeline; however, we're not averse to participating with other CMBS issuers. Obviously, our loans are smaller and so we have more of a specific identity. We have our own capital markets brand, if you will, because of that we have four shelves outstanding currently, including the CMBS. But yeah, we're open to just in terms of optimizing inventory turn and execution, we would consider participating with another shell.

Well, you've been at some point all the multifamily bridge lending that's been done over the last year to allow borrowers looking for fixed or new owners of that property looking for fixed. So great job on positioning yourself strategically for that opportunity. I appreciate your comments this morning.

Thanks, Steve.

Thank you. We have the next question from the line of Jade Rahmani with KBW. Please go ahead.

Thanks very much. I was wondering if you can give an update on the Red Stone platform. The types of opportunities that that business is seeing? Maybe some color around the average deal size, work characterizes the affordable housing focus and if there's any aims to pursue a Fannie Mae dust license or perhaps joint ventures with others looking for a product in the affordable housing space? I know that's a big focus of both the GSEs and some other lenders this year.

Yes. Adam, I'll let you kind of take the ball on this one, but just as a backdrop, affordable is a very big part of our ESG focus as a firm. Obviously, on the SBA side, that adds to that. But generally speaking, we're squarely in the fairway of the GSE scorecard in terms of affordability because the SBL product qualifies and now we have a tax-exempt lender. So maybe, Adam, just comment on two things briefly: one is the overall business strategy, just to refresh on that in terms of the tax-exempt aspect and how Red Stone operates. And secondly, what was the volume in 2021 versus what we budgeted at the acquisition and what you see the prospects for originations in 2022.

Yes, sure. The Red Stone platform, which we acquired in August, had a tremendous year. Certainly, government support around low-income housing tax credit space. That platform works with municipalities and their investor base. Again, tremendous year. From a volume perspective, somewhere north of $750 million of loans in 2021, which was slightly above the projections that we had when we acquired them. I believe since the acquisition of that platform, they've originated somewhere north of $500 million. I think, again, given the lack of quality affordable housing that we discussed earlier, that platform certainly has a bright future going into 2022, a lot of momentum, an extremely strong pipeline. We expect that they will exceed volumes from the previous year, from 2021. In terms of other agency licenses, as you know, we have a pretty small balance license and then the Red Stone folks participate in the TEBS program at Freddie. But yes, certainly, as opportunities come up from a JV perspective, et cetera, working with our strategic partners as exits for the significant amount of multifamily that we've originated in 2021 on the bridge side. Certainly, JVing, working with lenders that have these agency products is going to be very beneficial for our clients as we move forward and those assets stabilize.

Thank you very much. A question for Tom, just on the current lending environment. You've been around through a couple of lengthy periods of cycles as well as the genesis of the CMBS market. Just looking for your perspective on today's environment, first of all, what's driven the surge in nonbank lending? And I think in the fourth quarter, there was some increased loan loss risk rankings in the bank space that could cause the banks to modestly pull back, wondering if you're seeing that. And just on credit, what's your perspective on the quality of originations being done today versus prior cycles?

Yes. Just, I guess, two ways to answer that. One is broadly the large balance, the overall market and then there's our subsector, the SBC, small balance market. I would say, generally, right now in the CMBS versus bank, you're definitely seeing an increase in market share by the conduits. I think CMBS as a percentage of total originations in 2021 was around 15%, upper teens maybe. We expect that actually to increase to maybe that 25% zone. A lot of that is driven by two things: one is the competitiveness of CMBS to portfolio lending in a rising rate environment, and secondly, there's definitely been a pullback in banks, not dramatic, but incrementally in terms of credit, particularly on the bridge side away from CMBS. Those are just two broad market comments. And then as far as the credit component, at least in our niche, which is typically below $50 million, we're definitely not seeing a significant decline in credit metrics in terms of debt yield, debt service coverage ratio and as-is LTVs or on the stabilized loan, the actual appraised values. So this vintage will probably kind of be more on par with what you saw in the early 2000s. We have a relatively benign environment on credit, which we expect to continue into 2022 with more of an increase in nonbank penetration of originations.

Thank you. Appreciate the commentary.

Yes, thanks, Jade.

Thank you. We have the next question from the line of Tim Hayes with BTIG. Please go ahead.

Hey, good morning, guys. I know some questions have been asked around kind of ROEs. But if we could just get an update from you on the target ROE as we get into the back half of the year and PPP income subsides. And then just your comfort level with where the dividend is with respect to that?

Andrew, do you want to take that?

Yes. So I think the 10% to 11% target post the effects of PPP is what we’re focused on. And in terms of coverage of the dividend, I think the earnings profile continues to support where the dividend is today, and the board will continue to evaluate moving that dividend based on future earnings projections. But certainly, over the next couple of quarters, the return profile is going to be higher than what our future targets are.

Got it. Thanks for that, Andrew. Can you clarify the originations or acquisitions this quarter in a category that I think was previously classified as land loans last quarter and now seems to be labeled as other? What types of loans were those? I apologize if this is related to something, but I don't believe any mergers or acquisitions closed in the fourth quarter, and I apologize if I missed something or if I’m misunderstanding.

No, not at all. Those are the origination volumes from Red Stone this quarter.

Okay. Got you. Red Stone. Makes sense. And then just you've given some comments previously on kind of your outlook for resi. And I was curious if you at this time are comfortable giving us any type of updated guidance for origination volumes this year or in the at least in the near term?

Andrew, do you want to comment in terms of our budget?

Yes. Tim, we're seeing volumes come down to sort of normalized levels. In January, we originated around $250 million. Our expectation is from the $4 billion mark, a 20% to 25% reduction in where we were at in 2021.

Okay. Got you. So sorry, just on an annual basis, thinking a 20% to 25% reduction year-over-year in '22?

Correct.

Okay. That’s it for me this morning. Appreciate the comments.

Thank you. We have the next question from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Hey, guys. Most of my questions have been asked. For Adam, though, given that you're seeing such strong demand, what sort of annual revenue growth are your multifamily clients seeing in their rents?

Yes. I mean generally, across the board, when we underwrite the pro forma upfront, I think across the board, we're seeing anywhere from 10% to 20%, depending on which market, certainly, the assets are in. But I think certainly, from the upfront underwriting, we are generally seeing that at least in 2021, these multifamily operators are exceeding where we underwrite it on a pro forma basis. But call it anywhere from 10% to 20% growth in rents.

So if you're operating one of these multifamily facilities for affordable housing, they're seeing between 10% and 20% increase in rents annually? Is that correct?

To clarify, Adam, the rents in our non-affordable sector have likely increased by approximately 10% to 15%. In contrast, rents in the affordable sector tend to be lower by their very nature, so we don't observe the same level of increase or decrease. Therefore, those rents have grown by more like high single digits.

Yes. And just for a clarification point, I mean, that was specifically in the year 2021, and those were really post-rent rents where we're seeing a 10% to 20% growth.

Okay. I have a follow-up question regarding the current housing supply crunch. It seems that consumers' financial situations are not as strong as they once were. At some point, this could lead to rent stabilization or potential rent control issues. Are you noticing any of these trends in your markets?

No. I mean nothing significant. I mean, obviously, depending on where the asset is located, we're certainly making sure that to the extent that these properties have some form of rent regulation, whether it's stabilized, controlled, etc., we're certainly looking at those on a much more conservative basis. But to the extent that there are market units, if it's market, it's market, right? I mean we're not really seeing pullback from municipalities that are taking market units and converting them to regulator.

Yes. In terms of the macro regulatory risk, there isn't a significant increase in the ratio of renters spending over 50% of their income on rent. This is a key indicator they monitor. The situation is supported by wage growth in that area, which, while not exceptional, is at least somewhat keeping pace with rent increases. For instance, if wages rise in the mid-single digits and rents increase by around 10%, the proportion of the total population allocating over 50% of their income to rent remains relatively stable.

Final question. For your affordable housing, what percentage of your units would have some sort of government stabilization like Section 8 or something like that?

Yes, north of 20%, somewhere between 20% and 30%.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd like to turn the call back to Tom Capasse for closing remarks. Over to you, sir.

Thank you. Thank you, everybody. And we, again a second year after a COVID recession and another record year, and we hope to continue to improve earnings through accretive acquisitions and growth in our organic growth in our core business and I appreciate your time and look forward to the next call.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.