Ready Capital Corp Q1 FY2024 Earnings Call

Greetings, and welcome to Ready Capital's First Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to 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 first quarter 2024 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, everyone, and thank you for joining the call today. The persistence of higher rates and inflationary pressures continue to weigh in the commercial real estate sector. At this point in the CRE credit cycle, Ready Capital's near-term return on equity profile is impacted by three diverging trends. First, reduced return on equity from credit impairment in the originated portfolio due to late cycle stress in the multifamily sector. Second, increased return on equity from ongoing liquidation of the M&A portfolio, reduced operating expenses, and growth in our small business segment. The M&A portfolio comprises assets from the '22 Mosaic and '23 Broadmark acquisitions. And third, more aggressive liquidation of targeted non-performing loans in our portfolio. In the quarter, we transferred $655 million of loans into held for sale, taking $146 million valuation allowance against those loans. We've determined that the right path forward for this population, including all office loans without a short-term resolution, is to reposition the capital into market-yielding and cash-flowing investments. The net present value of repositioning this capital is greater than holding these assets through recovery and absorbing carry costs through the process. The book value per share declined by 4.5% but will be recaptured through reinvestment and share repurchases. In this regard, for analytical purposes, we have bifurcated our $9.4 billion gross portfolio into the originated 87% of the total and M&A portfolios, which is 13%. Before we delve into credit metrics, it's important to reiterate that tail risk in our portfolio is mitigated by three factors. First, our concentration in multifamily and mixed-use at 78% of our portfolio. Although overall market multifamily delinquencies increased in the first quarter, longer-term valuations are supported by demand with the average median of home payment of $3,000 exceeding rent by 50%. The current distress in multifamily, particularly transitional loans is a trifecta of higher rates, declining rent growth from oversupply in certain markets, and inflationary increases in operating expenses. Compared to the peer group as it relates to rent growth, our 2020 and 2022 vintages benefited from our proprietary GEO tier model, which ranks markets from one to five, one being the best with projected negative absorption a major factor. Recent data shows significant dispersion in rent metrics with a supply influx in overbuilt markets causing mid-single digit rent declines. As of March 31, 91% of our originated portfolio is in markets ranked three or better. Overall, multifamily industry prices are down 16% from the '22 peak with an additional 5% forecast for the 2024 bottom. Given our going-in loan-to-value ratio of 62%, these changes result in a portfolio mark-to-market below 100% versus office where a 50% decline has created over 100% loan-to-value ratios. We do not believe the increased delinquency in our multifamily portfolio is indicative of further principal loss. The financial effect will be short-term earnings pressure for the interim period between defaults and modification, forbearance, or refinance. Unlike other CRE sectors subject to the vagaries of the regional bank and CMBS markets, multifamily benefits from the government put with $150 billion of annual GSE allocation providing a pathway for takeout of bridge loans requiring additional time to execute a business plan. Across the $1.3 billion of our loans that reached initial maturity over the last 12 months, 42% paid off with 90% of the remaining loans qualifying for extension. Second, our concentration in lower to middle market loans. Our $9.4 billion total portfolio includes approximately 1,800 loans with an average balance of $4.4 million, avoiding single asset concentration risk. In the broader multifamily sector, the disparity on refinance risk is wide where 95% of loans under $25 million paid off at maturity compared to 55% of loans over $25 million. We've seen this in our originated portfolio where 16% of loans over $25 million are 60 days delinquent compared to 7% of loans under $25 million. And last, limited office exposure. As of March 31, our office portfolio consisted of 167 assets totaling $456 million, only 4.4% of our total portfolio. Further, only 11 of those loans had a balance of over $10 million and were concentrated in central business districts. 31% of the office loans are delinquent. We believe that recovery of the current stress in the office sector is long dated and the net present value of repositioning this capital is greater than holding these assets through recovery and absorbing carry costs. As such, 72% or $140 million of our delinquent office loans are included in the population transferred to held for sale. Post this transfer and liquidation, our office exposure will decrease to 3.3% of the population. Next, an update on the credit metrics in the originated portfolio. Please refer to Slide 11 in the deck where we present 60-day-plus delinquencies, non-accrual, and 4 to 5 risk-rated percentages. Overall 60-day delinquencies increased to 9.9% resulting in a rise in non-accrual loans to 7.2%. However, the 4 to 5 risk-rated loans, a leading indicator of future 60-day-plus, exhibited positive migrations, improving 29% to 9.6%. 46% of our top 10 delinquencies, totaling $137 million, are included in our held for sale bucket and have been marked to expected liquidation values. Liquidity is being prioritized for capital solutions including refinancing 4, 5 rated loans and protecting our CLOs. As of April 30, we had total liquidity of approximately $170 million. Year-to-date, we have either refinanced or repurchased $114 million of delinquent loans out of the CLOs, with another $190 million in process. For example, in March, we refinanced a $68 million loan on a Class A multifamily property located in an Austin, Texas submarket, which went delinquent due to high operating costs and lower rents from oversupply. The 18-month extension provides a path to reach projected occupancy of 94% from 90% today, and 5% annual rent increases to $16.91 a month, both highly probable given the strength of the submarket and flattening absorption. The as-is loan-to-value on the new loan is 88%, funds and interest reserves to cover the 18-month term were priced at SOFR plus 5.85% resulting in a retained yield of 18%. In terms of projected liquidity through year-end, accelerated asset sales will provide an additional $200 million for capital solutions. As of the April 25 remittance date, five of our CRE CLOs were in breach of either interest coverage or over-collateralization tests. To date, we've approved $161 million of loan modifications with another $732 million in process and under review. We expect the cumulative effect of repurchases, refinance, and modifications to provide a path for compliance. One important factor to reiterate underlying Ready Capital's peer group comparison. We use a third-party special servicer which requires additional lag time and less flexibility to execute modifications. As such, our modification ratio is lower and delinquencies inflated versus the peer group. For example, according to a Deutsche Bank CRE CLO report on April remittances, the top three commercial mortgage REITs based on GAAP equity had averaged 71% modifications and under 1% 60-day delinquencies versus 5% and 11% for Ready Capital, the fourth largest. We continue to work with our existing special servicer to rectify this issue, and if unsuccessful, we'll implement alternatives such as another servicer or obtaining our own special servicer rating. Furthermore, in our M&A portfolio, overall credit improved. 60-day-plus delinquent rates declined 9%, resulting in a 5.6% improvement in the non-accrual percentage. Meanwhile, a 16.5% decline in 4 to 5 risk rating loans suggests future improvements. Now turning to earnings. As outlined in our fourth quarter earnings call, we continue to undertake five initiatives to improve return on equity: First, reallocation of low-yield assets from the M&A portfolio into 15%-plus levered return on equity current yields such as the 18% Austin refinance previously discussed. As of quarter-end, the M&A portfolio had a levered return on equity of 7.2%. As it relates to Broadmark specifically, which comprises 51% of the M&A portfolio, we liquidated an additional $50 million of assets or 5% of the original portfolio at our basis. Second is leverage. Current total leverage at quarter-end was 3.4 times, below our target of four times. Target leverage will be achieved from both accessing the corporate debt markets and leveraging new investments at better advanced rates and terms. In April, we closed a $150 million 5-year private term loan priced at SOFR plus 5.50%. Third, the exit of residential mortgage banking. We continue to target the end of the second quarter to conclude our efforts to divest our residential mortgage business. To that end, we are under contract to sell 40% of the MSRs, with the remaining 60% currently marketed for sale with an expected July settlement. Distributable return on equity in the business has lagged at 6.8%. Fourth, the growth of small business lending. Our stated long-term target for the platform is $1 billion in annual originations, with $194 million in the first quarter, $47 million over the prior quarterly record. To support this growth, we appointed Gary Taylor as CEO of Small Business Lending to continue the dual strategy of large and small loan 7(a) originations through continued integration of our fintech, iBusiness, with the added benefit of cost efficiencies in loan origination and servicing. Additionally, we're excited to announce this week we signed a definitive purchase agreement to acquire the Madison One Company, the nation's second-largest USDA originator. The transaction is expected to generate over $300 million of USDA volume annually, expanding our government-guaranteed small business offerings while increasing the company's gain on sale earnings. And last is operating expenses. Given market conditions and expected activity levels, we reduced staffing by 11% in April, resulting in annual savings of $8 million. Those reductions in addition to $3 million in other fixed operating costs result in a 46 basis point improvement to current return on equity. The total 200 basis point to 300 basis point return on equity accretion from these five initiatives provides a significant offset to the return on equity drag from an increased non-accrual percentage as the multifamily credit cycle matures. With that, I'll turn it over to Andrew.

Thanks, Tom. Quarterly GAAP and distributable earnings per common share were a $0.44 loss and $0.29, respectively. Distributable earnings of $54 million equate to an 8.6% return on average stockholders' equity. Earnings were impacted by the following factors: First, revenue from net interest income, servicing income, and gain on sale declined 1.6% quarter-over-quarter. The $4 million decrease in net interest income was driven by the addition of $347 million of non-accrual loans and the addition of $97 million of leverage for which proceeds have yet to be invested. This was partially offset by a $3.7 million increase in realized gains due to a 25% increase in gain on sale revenue, driven by a record quarter in SBA 7(a) production. The levered yield in the portfolio remained flat quarter-over-quarter at 11.5%, as negative migration was offset by the continued reduction in equity allocated to our previous M&A deals. Second, operating costs improved 2% to $71 million. Absent the effects of REO impairment and ERC loss reserves, which equaled $18.8 million and are included in other operating expenses, total operating costs declined 14% to $52.1 million. The improvement was primarily due to a reduction in employment costs associated with staffing reductions and lower professional fees associated with employee retention credit, or ERC, production. These improvements were partially offset by an additional $3.4 million of servicing advances made in the quarter. Third, $120 million combined provision for loan loss and valuation allowance. 56% of the increase relates to specific assets, primarily across office properties, each slated for liquidation in the coming months. At quarter-end, the total provision and valuation allowance equaled 2% of the unpaid principal loan balance. Last, a $27 million reduction in ERC income was offset by a $30.2 million income tax benefit. ERC production in the quarter totaled $2.5 million and is not expected to increase further going forward. The income tax benefit was the result of restructuring that allowed us to benefit from previously recognized losses. On the balance sheet, book value per share was $13.43 compared to $14.10 at December 31. The change was primarily due to the valuation allowance on loans held for sale. This was offset by a $0.07 increase from share repurchases, which totaled 2.1 million shares at an average price of $8.88. In the capital markets, we renewed four warehouse facilities totaling over $1 billion in capacity, each used to support our CRE business. 75% of those renewals were at either net even or improved economics with the other bringing under market terms to market. On a go-forward, we expect continued pressure on earnings to persist with the benefits of the initiatives Tom outlined earlier reflected in earnings towards the end of 2024. With that, we will open the line for questions.

Our first question comes from Steve Delaney with JMP Securities.

Tom and Andrew, you guys have been busy it sounds like. Just a fine point, Andrew, the reserve on the $650 million held for sale, does that work out to about $0.85 per share hit to book value? Andrew?

Hey, Steve. I was on mute, but yes, that's about right. It was related to a 4.4% decline in the book value. So, doing the math, it's a little less than the 80s and the mid-60s, yes.

And Tom, the held for sale, the $650 million reminds me a little bit of what we used to call, what was it, good bank, bad bank back in RTC days, I guess, or back in the S&L crisis before that. How comprehensive, I mean, in terms of identifying across different segments of the portfolio, is this primarily one group, whether it's bridge loans or is it pretty comprehensive a little bit of everything? And what's your confidence level that you've circled 80%, 90% of the problems you're likely to have? Thank you.

Yes, that makes sense. I'll pass it over to Adam, who can provide Steve with more details about how we selected the population. In this quarter, we've analyzed the gross portfolio by dividing it into the originated portfolio, which features a small number of acquisitions made over the years, and the M&A portfolio. We chose from both of these segments to perform a net present value analysis where we capture the discount compared to the book value through significant reinvestment opportunities, which range from 15 to low 20 percent depending on whether it's direct lending or acquisitions, along with share repurchases. That's the broader strategy. Adam, could you offer some specific insights regarding the population selection?

Yes. Steve, in terms of the selection of the portfolio, certainly office, as Tom highlighted, our office exposure relative to our peers is still fairly low. But I think as we evaluate the net present value of really repositioning our capital, we think that adds greater than holding these office assets through recovery and absorbing legal costs to foreclose and carry costs to operate the property. So, certainly office is a big component of that. Secondly, I'd say on the Broadmark side, I think the continued high mortgage rates and construction cost have certainly continued to impact our residential land and development portfolio from that merger, especially in secondary and tertiary markets. So, it's really the non-core assets and really assets that would ultimately have large carry costs.

And not part of your core ongoing lending programs is what I'm gathering.

That's exactly right, yes.

Yes. As we mentioned in the fourth quarter, this had the biggest impact in terms of ROE accretion by selling lower-yielding assets with long durations, which is essentially what this portfolio consists of. After this, our office will be down to just over 3%. That's how we selected the population.

Our next question comes from Jade Rahmani with KBW.

What do you think distributable earnings would have been excluding the tax benefit? And what's a reasonable range do you think going forward? I estimated in our note $0.14, but wanted to get your comment on that.

Yes. The tax benefit related to the restructuring is approximately $20 million, which translates to about $0.12. The structure of our business allows us to continually optimize the tax impact of our operating companies. While we experienced a significant tax benefit this quarter, I anticipate that figure to fluctuate as our businesses change. Moving forward, several factors will affect core earnings. Notably, the timeline for converting non-accrual loans back to accrual status will have a significant impact. Currently, we are losing about $60 million in revenue from our non-accrual assets, which translates to roughly $0.35 in annual core earnings. Additionally, transitioning our held-for-sale assets, which currently have negative yields, into market-yielding investments will result in an expected EPS increase of approximately $0.12 to $0.15. There are various factors at play, and as we resolve these issues and replace some of the lower-yielding assets and one-time items like ERC income and tax benefits, we anticipate a more consistent revenue stream that approaches our 10% target.

So just to put that together, distributable earnings was $0.29. There was around $0.12 of tax benefit related restructuring. So that gets to $0.17. And then, there's $0.35 per year or $0.09 per quarter of income from non-accruals.

Lost income.

Yes. So that $0.12 remaining is what DE can be like until you redeploy capital?

No, sorry. Just to be clear, the non-accrual assets are earning zero today, right? So, the impact of those in the portfolio is nothing. As those come back into accrual status through the work that we're doing with the special servicer, the financial impact on a go-forward basis will be positive.

Were those non-accruals on non-accrual through the quarter?

The majority of them except for the additional ones I mentioned in the comments were there for the quarter.

Okay. And then, the next question would just be the loans held for sale, do you know what the delinquency rate in that pool is?

So, out of that, the total pool that moved there, 70% of that is in some state of delinquency.

I guess the constitution of that is the majority of that the acquired loans from Broadmark and Mosaic, or is it originated loans?

It is a little less than an even split. So, 40% of that is coming from our M&A bucket and 60% is coming from the loans that we originated. So, it's really basically an even split.

And lastly, regarding the GMFS transaction, do you have a signed sale agreement? Can you provide a range for the expected consideration?

It will be divided into three components. The first two involve the sale of the MSRs, categorized into retail and non-retail, with approximately 40% coming from non-retail and 60% from retail. We have agreements in place to sell the non-retail portion, which is valued at low- to mid-5 multiples, aligning with our year-end mark. The retail component is preparing to enter the market, and I expect its execution will also be in line with our valuation. The final component is the sale of the platform, which isn't under contract yet, but we anticipate it will be structured as book value plus an earnout or book value plus a small premium with earnout. We expect everything to be finalized within the next three to four months.

What's the range of proceeds just adding all that together?

Yes, we expect the net proceeds after financing to be somewhere between $70 million and $80 million.

Our next question is from Douglas Harter with UBS.

This is Cory Johnson on for Doug. I think, historically, you've generally issued about two to three CLOs per year. I don't believe you issued any year-to-date despite the CMBS market opening up. Could you maybe explain a little bit of like why that is the case?

Andrew, do you want to touch on that? I mean, obviously, the origination volume is down currently, but maybe just discuss on the overall CRE CLO strategy.

So, I think the drop-off is just, as Tom mentioned, bridge originations have been lower in the platform this year. As I look at our backlog and our future pipeline, I think there is a chance we bring a CLO to market as we move towards the end of the year, potentially in the first quarter of next year. It will continue to be a core part of how we finance the business. I think the structure it takes, whether it's a static or managed deal, whether we outsource special servicing or we commemorate a special servicer, all things we're working through in advance of that CLO. But it certainly will continue to be a core part of our financing strategy.

Our next question comes from Stephen Laws with Raymond James.

I wanted to touch base on the follow-up on your comments in the prepared remarks about CLO and servicer. What is the process or timeline as far as changing your servicer or moving that internal? And your CLOs are static. I know you talked about that and the impact that has a lot on the last call, but how would changing your servicer change your ability to either buy out loans before they default or replace them or modify them more quickly?

Adam, you want to comment on that?

I'll provide some insights on that. Regarding the replacement of the servicer, since we are the directing certificate holder, we can easily facilitate that by finding an alternative rated servicer for the CLO. This would enable us to act swiftly. Additionally, we have considerable flexibility in modifications, leveraging our highly experienced team that effectively manages these assets. The main challenge we’ve been facing is that the third-party servicer is taking too long to process the resolutions efficiently. We are actively pushing them to act with more urgency to tackle a backlog of pending resolutions. Assuming we can get the special servicer to move faster, we have around six modifications pending, totaling over $500 million, which we expect to resolve successfully this quarter. As for becoming a rated special servicer, that process typically takes about six to nine months. We have a strong team, solid guidelines, and decent technology, but it will still take that amount of time. We’re maintaining regular discussions with our third-party special servicer while also exploring other options to enhance our flexibility as we address the current challenges.

To build on Adam's comments, we implemented an action plan with the current servicer just this week. We also have a partnership with another special servicer who has extensive experience in transitional loans. This is certainly an option we are actively pursuing.

And then as a follow-up to the previous question regarding future CLOs and issuance, do you really think about that as new origination volume or any deals going to be collapsed with collateral rolled in? And as you think about those structures, will you look to do managed deals? Do you feel like you get better pricing with the static nature that you have with the existing? How do you think about how you will structure those future CLOs?

Well, historically, we at Ready Capital, if you look at the universe, it's probably around a dozen or more issuers. The market peaked at about $30 million a year in '21 and '22. We are the fourth largest issuer since our inception. Our deals definitely have the most investor-friendly structures. For instance, our over-collateralization test is set at 2%, while the industry standard is 5%. That's how we structure the deal.

1% actually. 1% in the industry.

I'm sorry, yes, even worse, or you could say even more conservative or investor-friendly. This has allowed us to offer pricing on the triples that is best-in-class compared to our peers. In the current market, we are likely leaning towards refinancing our existing portfolio and adopting a more managed structure. Through the external manager that oversees our securitizations, we are one of the largest issuers across a wide range of ABS sectors. At this stage in the credit cycle, we will likely prioritize more flexibility in exchange for slightly higher spreads on the triples.

I was just saying, yes, Tom, in terms of the pool, it would really be a combination of legacy assets, some collapses, and new issuance. To Tom's point, we are certainly evaluating the managed structure or a hybrid structure that provides greater flexibility.

Our next question comes from Crispin Love with Piper Sandler.

Just looking at the delinquency rates on the lower middle market slide of the presentation, first, do those rates include the loans held for sale? And if so, what would those delinquency rates look like absent the $655 million of loans held for sale on a portfolio basis? And any other color that you think would be helpful?

Those numbers do include the delinquency rates from the held for sale loan. So, it's inclusive of the entire portfolio. When you look at the held for sale delinquency rates, as I said before, they're much higher. So, roughly 70% of that population is in some state of delinquency. So, on a comparative basis, once those are sold, we expect the delinquency rate to come down quite a bit.

And then just following up on Jade's question earlier, just how do you expect the movement of loans held for sale to impact near-term net interest income and distributable earnings? And I guess just relatedly, what are your near-term projections for core return on equity? Andrew, it sounded like you said that you expected to trend closer to the 10% target, but just curious over the next couple of quarters.

So in the short term, on a net interest income standpoint, I think this population of loans will continue to have very minimal effect given that the majority of them are not accruing today. As we move out of them, and we are working to do so over the next three months and that capital gets repositioned either into new originations at market yields or refinancing of existing loans at market yields, it should add an incremental $0.12 to $0.15 of go-forward EPS, right? So, the combination of that repositioning and the modification work that's being done in the CLOs, which we expect to have, let's call it, a $0.09 per quarter impact on EPS, pushes as we move to the back of this year core earnings back towards that 10% target. I think in the interim period though while we work through those, the financial effect will be fairly de minimis.

And then just one last question. When do you think the loans held for sale will be sold? And are you already in discussions with buyers for these loans? And just any detail on what kind of buyers are looking at them, whether it's asset managers or mortgage REITs or mortgage finance companies, just anything there would be awesome.

I'm sorry, Adam, could you provide your insights on the overall strategy with specific brokers? I want to mention that in terms of potential buyers, it's definitely not other mortgage REITs; rather, it's more private credit funds that have accumulated substantial capital focused on the distressed commercial real estate sector, along with smaller investors interested in Broadmark assets. Adam, perhaps you can elaborate on that.

We have a very large portfolio, and this particular subset of loans is quite detailed, consisting mainly of non-performing loans and real estate owned. Many of the assets are already with brokers or have purchase and sale agreements in place. Regarding the real estate owned segment, most of those assets are being handled by individual brokers in the market. On the loan side, we plan to conduct a bulk sale across a few different pools. The potential buyers are likely to be regional entities interested in acquiring these non-performing loans and developing new business strategies for the assets. Additionally, there will be debt funds examining these assets, particularly for larger office projects where they can collaborate with operating partners for development.

Our next question comes from Matt Howlett with B. Riley Securities.

Just first question from a high level. I mean, Tom, where are we in the commercial real estate cycle? I'm assuming a lot of these delinquencies were '21 low cap rate vintages. Can you give us an indication whether you think the worst is over here?

Yes, there are eight food groups in Moody's analytics, and there are eight answers to that question. However, the one that is relevant for Ready is multifamily, which constitutes 80% of our exposure. To answer briefly, we believe there are rotational bottoms in submarkets tied to supply hitting the market. Multifamily starts have increased since 2020, reaching up to 50% or 60% early this year, but they are now down year-over-year to 35%. As a result, there are price declines and corresponding rent declines in certain submarkets where supply is abundant. To determine the bottoms in different markets, we assess the amount of supply and the time needed to absorb that excess supply before the market stabilizes. Overall, multifamily prices have decreased by 16%, and we anticipate an additional 5% decline. Broadly, we expect the bottom to occur in the latter half of 2024, with significant variations across markets. We utilize a GEO tier model for years to analyze markets, with one major input being negative absorber supply and negative absorption. We have managed to avoid significant issues in places like Austin, Texas. Ultimately, we believe that multifamily valuations are supported by the substantial difference in costs between buying and renting. The average monthly payment in the United States is now nearly $3,000 for a median-priced home, while average rent is just under $2,000, marking a 50-year high. This situation will bolster demand for apartments in relation to single-family homes and establish a floor for multifamily valuations. This confidence stems from our legacy book, which has a low loan-to-value ratio in the low 60s. Despite these declines, we foresee a government takeout through Fannie Mae and Freddie Mac, and they simply need time to implement their business plans. In contrast to the office sector, which we believe is facing a five-year secular decline, multifamily remains solid.

The way you explain it makes complete sense now. I appreciate that additional color. And perhaps I should have started off with the first question. I should congratulate everybody with the share repurchases, particularly in April. And we can all do the math in terms of the net present value of buying back shares here, selling loans, and buying back shares at 100% upside potentially. What can you tell me in terms of the pace of repurchases? They are up in April versus the first quarter. Would you like to see that April base continue? Could we see Dutch tenders when you get big pools of capital? And just curious on share repurchase activities for everybody therefore for buying back shares.

Thanks. Andrew, do you want to comment?

Yes. So, we have $50 million remaining on our existing share repurchase program. I think we will continue to utilize the program while also balancing the need to use liquidity both in terms of protecting our CLOs as well as putting money to work in a very attractive environment. As you mentioned, the return profile on repurchasing shares is very attractive at these levels. And certainly, as proceeds come in from sales and payoffs, we'll evaluate whether the $50 million is a sufficient amount allocated to the repurchase when we get through it all. But I do expect that repurchases assuming liquidity levels remain healthy and margin risk in the portfolio remains really small. I do expect it to be a part of what we do going forward.

My opinion is that if you can invest capital in something that could potentially double in value, although you are currently receiving a 20% return on new investments, share repurchases at these discounts to net asset value seem to be the best use of capital, especially considering the other liquidity you are managing. I appreciate your efforts in this area, and it’s encouraging to see.

Yes. So, the term loan price is SOFR plus 5.50% on a not tax affected though. So, we will be able to tax back the interest cost of this issuance, which will bring it down into the 7%s. In terms of accessing other corporate markets, we certainly see deals get done and we explore them on a continuous basis. And I do think as we move forward and evaluate the liquidity needs of the company, we'll consider all options.

Our next question comes from Jade Rahmani with KBW.

Can you give any color on the other income line, which is around $15 million, and also the other operating expenses, which was about $30 million?

Yes. So, in the other income, the biggest driver is going to be the contingent equity rate, which was offset by losses that are also included in core. So, the net impact of that is zero. On the operating side, the biggest one in there is impairment on REO, which flowed through that line item. That was roughly $17 million in the quarter. There's also carry costs on REO like tax expenses, et cetera, that flow through there. But the main one was the REO impairment this quarter.

So, I guess on the $15 million of other income, I mean in the 10-K the description is that it includes a whole variety of stuff, your 10-Q is not out, but origination income, change in repair and denial reserve, employee retention credit consulting income. Are those line items expected to continue?

Origination income will persist, primarily comprised of fees from Redstone, which decreased by $2 million compared to the previous quarter. This will be a continued source of income. The repair and denial reserve pertains to the reserves established for the guaranteed segment of 7(a) loans in case of delinquencies that require us to reimburse the SBA for defaults. This reserve appears in our income statement due to a significant reserve created when we acquired the business from CIT. I anticipate this figure will decrease over time. The employee retention credit income in this area fell by $27 million quarter-over-quarter and currently stands at $2.5 million for Q1. I expect it to approach zero as we progress through the remainder of the year. Additionally, the contingent equity right, the last component within this category, will also diminish as we conclude the Mosaic transaction. Thus, the key contributors to other income, aside from unforeseen future items, will largely be our origination income.

Okay. That's great. And then, capital plans aside from a potential CLO, are you contemplating anything at this point?

We are not.

Okay. I thought there was a plan for some sort of unsecured debt or preferred, I guess the term loan was issued and maybe that's what you were previously referring to?

Yes. With the execution of the term loan, the proceeds from the sale of the held for sale loans, as well as just the natural liquidity projections in the business, we're pretty well positioned for the immediate term. Obviously, as we move to the back half of the year, we will balance the opportunity set on the investment side with the opportunity for raising additional debt at that point. But in the short term, the liquidity forecast for the company is quite healthy.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Tom Capasse for closing comments.

I appreciate everybody's time and look forward to the second quarter earnings call.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.