Greetings, and welcome to the Ready Capital Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andrew Ahlborn. Thank you, you may begin.

Thank you, operator, and good morning to those of you on the call. Some of our comments today will be forward-looking statements within the meaning of the Federal Securities Laws. Such statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Therefore, you should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. During the call, we will discuss our non-GAAP measures, which we believe can be useful in evaluating the company’s operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our 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 Zausmer, Ready Capital’s Chief Credit Officer. I will now turn it over to Chief Executive Officer, Tom Capasse.

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. 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. Full-year distributable return on average stockholders' equity was 8.6%. 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, relevering equity from M&A, and exiting our residential business will begin to provide material net interest margin accretion through reinvestment of the current levered ROEs exceeding 14%. On the investment side, we have 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 multi-family affordable products and $333 million of bridge production. 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 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 material and we believe underappreciated aspect of our earnings profile. 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 macro environment, we are differentiated from the broader sector in terms of our concentration in lower middle market multi-family, 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 portfolio concentrated in Mosaic, 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%. 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, multi-family which is 78% of the loan portfolio. At quarter end, multi-family 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 is 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, 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 higher-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 is 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. 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 to book value from additional CECL reserves and modifications of 4% of the total originated portfolio remain comparatively low. Now, a few observations on our CRE 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 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 resolution. This has three impacts versus the peer group. First is said CRE CLOs trip test sooner. For example, our FL5, 9, 10, 12 deals have tripped their IC or OC tests. 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 path to asset resolution via repurchase or modification is 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-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. Expected principal losses on these loans have been accounted for in our current CECL reserve. We expect as of the March remittance date 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 250 basis points over the next two years, from the 7.5% in the fourth quarter to our 10% trailing seven-year average. First is reallocation of equity raised in the Broadmark merger into our core strategies. Since the third quarter 2023 merger close, 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: current leverage of 3.3x and recourse leverage of 0.8x are at historical lows below our target leverage of 4x 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. 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 7(a) program continues to be the highest ROE segment where given its capitalized nature, growth in production does not require significant capital resources. But those stated long-term 7(a) origination target 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 realize synergies on the OPEX side, cutting $19 million of Broadmark expenses. Given market conditions, we expect to continue to right-size the cost structure and staffing levels with a target 40 basis points ROE contribution. 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 series cycle, we believe 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 GAAP earnings and distributable earnings per share were $0.12 and $0.26, respectively. Distributable earnings of $48.5 million equates to a 7.5% distributable return on average stockholder’s equity. 2023 full year GAAP earnings and distributable earnings per share were $2.25 and $1.18, respectively equating to an 8.6% distributable return on average stockholder’s 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 were $3.2 million of the $6.7 million increase to our CECL reserve, a $20.7 million markdown of our residential MSR, a one-time $5.5 million termination fee related to the refinance of a Mosaic lending facility, and a $3.7 million unrealized loss. 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. 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 levered yields to increase as the back book moves into our securitization vehicles and the Broadmark assets are repositioned into market yields. Net interest income declined by $6.4 million quarter-over-quarter. The change was primarily due to a $5.5 million one-time charge upon the refinance of the 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 7(a) production and sales with average premiums of 8.9% and $288 million of production in our Freddie Mac businesses. Servicing income increased by $1 million quarter-over-quarter due to the recovery of previously booked impairment of our SBA and Freddie Mac servicing assets. Other income increased by 14.2 million due to the recognition of ERC income. 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 expense, slightly lower servicing expenses as a result of lower advance 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. Recourse leveraging 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. 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 month. Incremental capital raised will be deployed into our origination acquisition channels, which are witnessing opportunities in excess of current capital levels. Book value per share was $14.10. The changes due to a $0.09 per share markdown of the residential MSR, a $0.04 per share reduction in bargain purchase gain, and $0.06 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 for questions.

Thank you. The first question we have is from Crispin Love of Piper Sandler. Please go ahead.

Thanks. Good morning. Can you 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 just based on 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 loans?

Andy, do you want to touch on the loss reserves and Adam, maybe touch on the credit component.

Hey, good morning, Crispin. Yeah, on the loss reserve, we look at the book in two ways when we determine CECL. There is a general overlay, which accounts for roughly 50% of the reserve and then the asset management team adds on specific reserves for those loans contained in a higher risk category. So we think the current CECL reserves account for the expected losses on those assets in our higher risk buckets. Based on sort of the details where the asset management teams, current mortgage market LTVs, etc.

And then hey, it's Adam. Yes, regarding credit, we are certainly observing an increase in delinquencies quarter-over-quarter, but we believe that our foundation remains strong in the majority of our portfolio. When examining bridge delinquencies, where there was a noticeable spike, we expect that the realized losses will be more at the equity level rather than the debt level. As Andrew mentioned, we believe that our reserves are appropriately sized. The SCR is under stress, and LTVs are generally below 100% for most of the portfolio. We do not anticipate significant losses, although some loans will likely need modifications or restructuring, and we will need time for the market to recover.

Thank you, I appreciate the insights, Andrew and Adam. I have a question regarding the sale of the residential mortgage segments. Can you explain why this is happening now and share your confidence about completing the sale by June 30th, as mentioned in the presentation? I assume this might involve a sale and potential gain after this quarter's losses on discontinued operations.

Just one market observation and Andrew you can comment on the process but right now 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. And just from a timing perspective, in terms of valuation, 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 in the transaction closing before the end of the second quarter. You know, part of the criteria of moving a segment into held for sale and discontinued operations is having that confidence level that the components of the process will be, as Tom mentioned, obviously, a sale of the MSR which comprise the majority of the equity, as well as the assumption of the assets and the liabilities of the company, and the consideration that will most likely take the form of some 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.

Thank you. Appreciate you taking my questions.

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

Hi, good morning. Appreciate all the details in your prepared remarks Tom, and if I have got my notes down correctly I think you said the CLOs have defaulted loans about 57%, so roughly 60% you expect to modify can you talk a little bit more about that process and how you work with that special service? What are those mods primarily look like, is it capital N for more time, or are there other moving parts, each one can be unique, but any general trends across those loans?

Yeah, Adam, can you comment on that?

Yeah, sure. So, in terms of the process on the mod, so borrowers had submitted relief requests for modification in their loans. Those then are under review by the special servicer. In the ordinary course, the request for a modification by the borrower, the special servicer would review, approve and cure the delinquency, with certainly our approval as the directing certificate holder. In several cases, the modification is a contractual bridge to a short-term payoff. So an example being like a sponsor is refinancing the debt or selling the real estate, and the modifications can then be executed. In terms of what they look like, certainly, the preference is to have the sponsor bring a fresh equity injection to the modification, given that more time is certainly needed in this market. We feel that about 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. 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 and kind of help maintain the asset utilized CAPEX to really provide the necessary maintenance of the asset.

Thanks and Andrew, thinking about interest income can you talk about the quality of interest income, how much is cash interest received, how much was approved, or maybe some type of tech income, if there's any, can you give us any color on interest income quality?

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 not paying, and it is a very small portion of the book.

Great. Finally, regarding returning capital to shareholders, you mentioned that earnings can cover the dividend. How do you view the earnings coverage for the dividend as we progress through the year and work on expanding ROE? Also, what are your thoughts on stock repurchases given the current valuation? Thank you.

Let me explain that further. There are five measures we identified, some of which are immediate like operating expenses, while others are long-term, such as the re-levering of the Broadmark equities. Please share your thoughts on that and how we prioritize cash for stock repurchases 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 leads to roughly over a 400 basis point increase in earnings from their current level. That'll certainly be incremental over the next four or six quarters. As Tom mentioned, things like OPEX savings, which we anticipate will add 40 basis points will be more immediate. The effects of leverage will be somewhat dependent upon the times in which we choose to access the market and the redeployment of capital. And then the effects of the portfolio turnover will sort of be felt every quarter. I think, Adam can elaborate on the plan for and the timing of Broadmark liquidations, but that'll certainly bleed into earnings. So I think you will see a glide path over the next four to six quarters. In terms of 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 be 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 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, the return on our share repurchases is quite powerful. So, I do anticipate we will be active in the upcoming months, at least at these levels.

And then share repurchase strategy?

Next question we have is from Douglas Harter of UBS. Please go ahead.

Thanks. I'm wondering if you could talk about the expected pace of putting new capital to work, how you see the opportunity set developing both in order to redeploy capital, but also to increase leverage?

I'll comment on the current investment opportunity pipeline and returns on equity, and Andrew can elaborate on the liquidation of Broadmark and our forward liquidity. We're looking at the market in three main areas. The first is core bridge lending, where we're seeing retained yields on strong underwriting in the lower middle market ranging from 13.5% to 15.5%. This is an increase of about 300 to 400 basis points since before the rate hike. The second area, which is more cyclical, involves capital solutions. Here, we provide capital to opportunistic equity, primarily in the multifamily sector, and we also offer senior mezzanine financing in restructuring contexts, with returns likely falling between 15.5% and 18.5%. The third area pertains to acquisitions. We're observing a growing pipeline of sales from banks, which, while expected, are yielding returns in the upper teens to low 20s. Overall, we're seeing blended returns available to us well into the mid to upper teens, representing a 400 to 500 basis point increase from prior to the rate changes. That's the opportunity landscape. Andrew, could you speak on liquidity and our future 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 here. Obviously, the sale of the residential mortgage banking platform is expected to bring in on a net basis, approximately $100 million. We are in the process of financing some of our retained positions from our CLOs that's expected to bring in $130 million. And then I do believe we have line of sight into some corporate issuances. So, outside of portfolio runoff we expect there in the upcoming weeks and months there to be roughly $300 million of additional liquidity coming in. Adam, you may just provide some commentary on the timing of the Broadmark liquidations and expected proceeds just to get a complete picture.

Yeah, so we expect to have about 50% of the Broadmark assets paid off within our bases by year end 2024. I think this is a conservative estimate. This excludes current loans where several we expect will pay off during this period. And then secondly, there's more opportunity to liquidate other assets in the portfolio that aren't currently flagged for a payoff. Just kind of the velocity of these payoffs, just kind of given the historical perspective since the merger close, so about 50 loans paid off for about 250 million to about 23% of the portfolio. We have pending payoffs of about 30 assets, and those the ones that I mentioned would pay off by the end of the year. That's about another call it about 250 million. So all in all, we should be out of about 500 million by year-end. The liquidity, from a UPBs perspective would be about 250 million of UPB. Obviously, some of that is levered today. And then, certainly a slew of other payoffs that we are expecting in the more and more portfolio that we're currently working through by loan sales, sponsors that are giving indications that they’re working on refinances and sale of assets.

This is Tom speaking. I believe what sets us apart from our peers is our focus on the lower middle market multifamily sector, which experiences less credit volatility. Additionally, due to the deleveraging from Broadmark, we have a path to significantly increased liquidity as we approach the end of this year. This will allow for deployment at wider spreads, and we don’t see this as a short-term situation like what happened in 2020. We anticipate substantial net interest margin growth, particularly in the latter half of this year and into 2025.

Great, thank you.

The next question we have is from Jade Rahmani of KBW. Please go ahead.

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?

Andy, do you want to comment?

Yes, maybe we will break it down into two components. On the Mosaic side, our deal was structured with a contingent equity, right. That was at approximately $90 million. We do not expect to exceed that contingent equity revenue. On the Broadmark side, as you mentioned you noticed the discount applied to the NPL, we still continue to believe is enough to cover expected principal losses. I think what you will see over the next few quarters is movement, I would call them immaterial movements around the bargain purchase gain in both directions, as sort of 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 that 70% of the delinquencies are due to one borrower. Do you believe that we're at peak delinquencies or do you expect it to be lumpy and there will be further deterioration? I personally don't see why we would now be at peak delinquencies considering the staggering of maturities and the 2021-2022 vintage originations, I think there probably will still be some deterioration, do you agree with that?

I believe we share the same view regarding the overall market, especially concerning larger balances or the upper middle market, particularly in the Sunbelt regions where we are experiencing significant negative absorption. This negative absorption is expected to continue as new supply enters the market over the next year to year and a half. However, our portfolio remains distinct. We analyze this situation in terms of roll rates and negative migration. Adam, can you provide insight on how our bridge portfolio, which focuses on the lower middle market, is performing and what trends you are observing with those sponsors?

Yeah, specific to our multifamily bridge portfolio you mentioned that the largest asset had defaulted. So, in sum, I mean, our two largest sponsors have actually already defaulted. And we are working through asset solutions modifications, bridge to bridge finances, etc. through the special servicers, and through loans that we hold today. The majority of our small middle-market sponsors, we feel had greater liquidity and funding to temporary 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, in call it Q1 or Q2, which is really due to the granularity of our remaining portfolio.

And geographically how would you describe the concentration, is it largely Sunbelt?

To add to this, Adam, you can provide your insights as well. If you remember, Jade, one of our foundational frameworks is our Geo tier model, which employs regression analysis from the Global Financial Crisis focused on the lower middle market, particularly multifamily housing. In this model, we consider forward negative absorption as a significant factor. Consequently, we have avoided markets like Austin and San Francisco, especially in the areas of the Sunbelt where there is a surge in supply. With that context, Adam, what have you observed regarding our concentrations in those markets?

We see that markets such as the Carolinas and Texas, where we have a strong presence, are experiencing positive net migration and favorable demographics. Our primary focus is on workforce housing, and we continue to anticipate significant demand for these units, particularly for quality affordable housing. Due to the positive net migration, we believe that the locations of our assets will continue to be strong markets. The largest market in our bridge portfolio is Dallas, Texas, accounting for about 25% of the overall portfolio, followed by Atlanta at around 15%, and the Phoenix market at approximately 13%. Charlotte, Houston, and Chicago make up the rest of our significant exposures.

Thank you. On the office, can you talk to the character of the collateral because there's huge differentiation in the market between skyscrapers and 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 office because I'm surprised that there's delinquencies in small loans, sub 15 million type loans?

Yeah, so offices 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 balanced nature of these office assets, a lot of it is focused on stable, like medical office type properties and really just smaller assets which again are 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 when you have these larger office buildings and CBDs. And that's really where the majority of our office delinquencies are located, which is in the CBD, specifically in Chicago, New York, where those delinquencies are, now also Los Angeles. So I think, 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 smaller assets.

At a high level, 70% of our 5% office is from a large balance that may account for 70% of delinquency. This primarily involves a few small CBD properties in a few cities that we need to originate, for which we believe we have very strong CECL reserves. Therefore, the tail risk in our portfolio compared to the sector is very limited to CBD office.

Thank you for taking the questions.

The next question we have is from Steve Delaney of JMP. Please go ahead.

Good 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 under your existing shell and could we see that as soon as 2Q or 3Q of this year? Thanks.

It's certainly important for us to continue using our shells as a core financing strategy. I do expect that we will issue in the CLO market this year, most likely in the third quarter. When considering increasing leverage across the business, that's one aspect, but adding additional corporate debt for reinvestment will also be a key part of that.

And usually try to target about a $300 million offering under your program?

Typically, our CLOs are between $750 million and $1 billion, so they're a little larger in size. Yeah, some of our other shells are smaller, such as our SBA shell or acquisition shell, etc. But our CLO offerings tend to be larger in size.

Yeah, just to add to that, since the inception of the market, we were the fourth largest overall issuer that has issued $7 billion, and $5 billion is outstanding so that we do larger new issue sizes. And just to say one point on that, our spreads on the AAA's historically are on top of the even the best names in 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 and the deals being static. So that does present versus the peer group a skewness in our delinquency metrics, and the time it takes for us to buy loans out of the trust or what have you. So just wanted to highlight that. And that does give us access to the market even in times when there's liquidities as constraints in the primary ABS market.

That's good information, thank you. Either one of you, or maybe Adam, I noted there are 12 loans that were 60 days delinquent, and you detailed how many payoffs, modifications, or foreclosures there were. I didn't get the total unpaid principal balance for those 12 loans and how much specific reserve may be assigned to them. Thank you.

Those 12 loans total approximately $500 million. There is no specific reserve against them beyond what is required by CECL. Additionally, we expect to pay off 15% of that in the next few quarters, 60% is currently undergoing pending modification as we strategically collaborate with the sponsors, and around 30 of them will likely enter a foreclosure process.

Yeah, and that 30 would then get fair value at the time it goes to REO, correct.

That's right.

Sure, I have a final question for you, Tom. I know you're busy with your company, but you've probably seen the short sellers targeting CLO issuers. They've affected Harbor and Blackstone as well. I noticed you didn't mention the 10-day late payment data from trustees as an early warning signal when discussing loan performance. You likely know which borrowers are making payments, but I'm curious about your thoughts on the value of that trustee data. You've talked about 30-day and 60-day delinquencies, but what do you think about the importance of that 10-day late payment information?

You're referencing the special servicers reports on the…

Yes, the payment data that USB and others put out, the CLO special services, correct.

Oh, the CRESSI reporting. Andy, would you like to share your thoughts on that? From our perspective, what's distinguishing is that we collaborate with an external special servicer, but Adam and his team are overseeing all the actual asset management and disposition strategies. Additionally, we incorporate early warning indicators in our four to five risk-rated model. Perhaps you can discuss this in relation to the broader market, particularly how we compare CRE and CLO reporting to our management approach, especially regarding our on-balance sheet considerations.

Given our deals, we have the direct certificate holder as well as the first loss holder on our CLOs. Our asset management team collaborates closely with special servicers. There is a portfolio management team that serves as a liaison between the sponsor and the special servicer regarding the draw process and asset level updates. We maintain constant communication with both the sponsors and the special servicers to devise solutions. The special servicer is also working closely with the sponsors and providing recommendations to us. I believe our strong team, along with the support of the special servicer, offers us a unique strategic advantage in the market. That addresses your question.

That's helpful. Thank you, Adam and Tom.

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

Hey, guys. Rent stable, excuse me, multifamily, do you have any rent stabilization apartment exposure in New York City?

We have approximately $175 million of multifamily exposure in New York City, and the majority of it is unregulated. So the answer is no, there's very little.

Okay, great. And Tom in past calls you have indicated Broadmark is expected to be EPS accretive by fourth quarter 2024, does that still hold?

Andrew in the context of what the bridge related argument, maybe you can comment on that.

Yeah, we do expect by the fourth quarter the transaction certainly to be accretive to current EPS, 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 on the late stages of and mid stages of 2025.

Okay, so it's fair to say that the accretion to distributable ROEs 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 until 2025, correct?

I think that's a fair statement.

And so for 2024, we should see probably a distributable ROE somewhere below your 10% target, is that fair?

We believe that the total earnings of the company for the year will be sufficient to cover the dividend. Our expectation is that earnings will increase from the current level to support the existing $0.30 dividend in the latter half of the year. We anticipate growth in earnings from that point, aligning with our historical return target as we approach 2025.

Okay, that's it for me. Thank you very much.

The next question we have is from Sarah Barcomb of BTIG. 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. 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?

There are certainly a couple of impacts from triggering these tests. The first effect is that cash flow is redirected away from our efforts to reduce senior debt. In the financials, you'll notice that when loans go into non-accrual status, interest will compress, and you'll observe the consequences of reducing the securities. Due to our consolidation method, this impact won't be reflected in the bonds themselves. The total cash flow diverted during this time when the interest test has been triggered is approximately $8.5 million. Another financial impact during this period is that the funding accounts within these deals are being redirected away from repurchasing the loans we have funded on the balance sheet and are instead passing through the waterfall structure. Consequently, there is around $80 million in loans on the balance sheet that remain unlevered. This will also lead to some yield compression. Eventually, these loans will be repurchased back into the deals as they are right-sized, but for the time being, we do see what I would characterize as marginal yield compression. These are the primary effects.

Okay, thanks for the color there. 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, you want to comment.

Yeah, I think those were historically as loans have become REO that we have had in securitizations. 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 CLOs. So today it's not material, but as we kind of work through these assets, some things that we 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?

On the SBA front, we've been operating at just under $500 million over the past three years. Back in the second quarter of last year, we implemented a small loan and micro loan strategy. To recap, the SBA has three tiers: large loans range from $350,000 to $5 million, primarily real estate secured, while small and micro loans fall below that. Micro loans are generally under $50,000 and utilize a credit score methodology, which we've adapted through our FinTech advancements in Florida, a leading provider in the PPP program. We've modified that technology to originate small loans, projecting a run rate of about $30 million to $40 million over the coming months. This aligns with the Biden administration's initiative to promote loans to minority and women-owned businesses, particularly in that lower tier. In addition to the growth in large loans, we've been identifying opportunities to acquire loan offerings from banks exiting the SBA business. Our target is $500 million to $750 million for this year, with aspirations of reaching $1 billion in the next couple of years. This is quite accretive due to the premiums on these loans, typically above 10 points in the secondary market, while utilizing very limited capital. This aspect differentiates us within the peer group, which may not be fully recognized. Adam, would you like to share how you're positioning the business concerning the core bridge and other related construction products?

I believe the question pertains to our capital Freddie businesses in the multifamily sector. We are targeting around $1 billion for 2024. This capital light multifamily initiative is divided into our small balance loan program, where we are licensed through Freddie Mac, and our affordable multifamily business, which involves tax-exempt financing contributing to the $1 billion goal for 2024.

Great, thanks for all the detail there. Appreciate it.

The last question we have is from Matt Howlett of B. Riley Securities. Please go ahead.

Thank you for taking my question. Tom, you mentioned a potential yield in the high teens to low 20% range on the acquired channel with some banks. Are these yields unlevered? Could you walk me through some of the economics, such as where you are buying, what types of discounts you're seeing, and the kind of paper involved?

These are typically lower middle market stabilized loans that tend to receive criticism. They are not in default but are referred to as scratch and dent. From a bank regulatory viewpoint, they often face scrutiny, usually because the debt service coverage ratio nears or falls below the 1.0 threshold. This situation is beneficial for us since we incorporate them into our asset management strategies for acquired portfolios. Following the global financial crisis, we were one of the significant buyers of smaller balance loans, acquiring nearly $5 billion and resolving around 5,000 loans, establishing a solid track record. In summary, the scratch and dent portfolios generally trade in the low 90s to low 80s for unlevered yields. We are examining high single-digit to low double-digit returns, which sometimes come with staple financing. Additionally, we have more options for secured lending. Term lending has less mark-to-market impact from banks due to Basel III changes, which favor loan-on-loan real estate over direct loans. Therefore, with either staple financing from the seller or third-party bank financing, we can achieve leveraged internal rates of return in the high single to low double digits, potentially reaching the upper teens after adjusting for losses.

Yeah, and we have also done, since inception, we've done 11 standalone securitization of this strategy. So that's just another layer in terms of getting higher returns on that portfolio.

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

It's SCMT.

SCMT, sorry, SCMT shelf. So that's where we have historically utilized the purchase of these portfolios in the secondary market, which is a little bit a differentiator again, a differentiator from us in the peer group to buy these pools from banks or out of securitization trusts to then finance them in the ABS market. But again, right now, what's very unique versus the last credit cycle GFC is the availability of bank financing on a longer-term secured basis with limited mark-to-market.

Got you. On the bigger packages you see from the New York Community Bancorp, I mean, would you get together a waterfall and bid on those or is that something that Ready looks at?

The external manager has a significant trading desk and sources these deals. And so we definitely look as part of our acquisition silo. And the service is 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.

Thank you. Just one final question about the buyback. Do you think the $14 book is a solid value? Are you feeling a sense of urgency to act on the buyback, considering the expected improvement in ROE and dividend over time? How does it rank in your list of priorities? Thank you.

Andrew.

Certainly where the shares are trading, I think it will be a priority for us coming out of earnings. Again, there is a need to balance using the liquidity on the balance sheet today, for that purpose versus taking advantage of new investments that will provide sort of longer-term earnings power for the company. I will say, 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 Jade Rahmani of KBW. Please go ahead.

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

Yeah, so I think there are a variety of options. I think you may see a combination of private placements, potentially some of the retail channels that have been open across a couple of deals since Q4 will 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 cost for those issuances today is somewhere in the range of 9% to 10% of loan yield.

Wow. And so what's the use of proceeds, you are 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?

The liquidity we have will be allocated for various purposes you mentioned. Some will address issues within the portfolio, such as refinancing and repurchasing from CLOs. A significant portion will focus on reinvesting in our origination and acquisition channels. Additionally, part of this liquidity will contribute to the share repurchase program. We share your perspective that maintaining sufficient liquidity on the balance sheet to navigate uncertainties remains a priority. Balancing other capital uses like repurchases and new investments will be approached with this top priority in mind. We agree that maintaining higher liquidity and lower leverage throughout the cycle is crucial and will continue to guide our business management.

From a broader viewpoint, I want to emphasize what Andrew mentioned. We are anticipating a significant influx of liquidity towards the end of this year, and we are deliberately focusing on defensive strategies within asset management, such as strategic refinances. We believe that our lower middle market sponsors, particularly the larger ones, have already faced challenges and are now navigating through those. Many of our lower middle market sponsors with workforce housing are helping to alleviate some of the pressure on debt service coverage ratios. There is a pathway to transition to agency takeout, similar to other REITs that specialize in multifamily small balance financing. We strongly believe that considering the upcoming trends in rent growth over the next two years will lead to better capital utilization compared to immediate share repurchases in the next 18 months.

Thank you. And with that I would like to turn the floor back over to Tom Capasse for closing remarks.

Yeah, I 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.