Ready Capital Corp Q2 FY2024 Earnings Call

Greetings, and welcome to Ready Capital's Second Quarter 2024 Earnings Conference 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, Chief Financial Officer. 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 to be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our second quarter 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.

Thank you, Andrew. Good morning, everyone, and thank you for joining the call today. While we experienced a challenging quarter marked by what we believe will be bottoming multifamily credit fundamentals, we successfully executed several initiatives discussed on our last earnings call. These included active asset management, reallocation of low-yield assets, adding accretive leverage, the ongoing exit of the residential mortgage banking, and growing our small business lending platform, which together, better positioned the company for earnings growth as we move into 2025. As we've done in prior quarters, we present credit metrics for both the originated CRE and M&A loan portfolios. To begin, all credit metrics across our $7.9 billion originated CRE loan book improved quarter-over-quarter. First, 60-day-plus billing paces improved, 270 basis points to 5.2% as of June 30. Notably, office continues to dramatically underperform our core sector multifamily. Office constitutes only 4% of the portfolio but represents 16% of the delinquencies with 60-day-plus delinquencies of 26% compared to multifamily at 6%. Second, a 460 basis point improvement of risk score four and five rated loans to 5%; and third, non-accrual loans declined 120 basis points to 4.6%. Additionally, 91% of accruing loans pay current. The remaining 9%, which feature a PIK component, have an average current mark-to-market LTV of 86%. The quarterly improvement in credit metrics was a result of two active asset management strategies on our part. Through June 30th, we have modified 25 loans, totaling $801 million in our originated CRE bridge portfolio with 82% completed in the second quarter. The modification is focused on projects with healthy fundamentals requiring additional time to stabilize and secure permanent financing. Modifications had the following average metrics: an in-place debt yield of 5%, term extension of 12 months, 25% included spread reduction of 170 basis points, and 50% of sponsors contributed fresh equity. Second, we focused on the sale of underperforming assets where the net present value of liquidation exceeded in-house asset management strategies in both the originated and M&A portfolios. As discussed last quarter, we transferred $720 million of loans into held for sale comprising 47% originated and 53% M&A. Upon transfer, we've recorded a $138 million valuation allowance net of tax benefits. Through today, $576 million of the portfolio is either under contract to be sold or has closed. These sales are expected to generate incremental annual earnings of $0.24 per share from a reduction in interest and carry cost as well as the income generated from reinvestment. Closed loans were reflected in quarter end credit metrics with potential further improvement from loans closing post-quarter end with the earnings accretion benefit beginning in the fourth quarter. Origination activity in our CR loan business totaled $256 million in a quarter comprising 61% in our transitional and 39% Freddie Mac, with the latter experiencing an uptick to $122 million in July. We continue to reposition our M&A portfolio which consists of assets acquired in the Mosaic and Broadmark mergers to reallocate the capital into our core businesses. As of June 30, the loan portfolio totaled $1.1 billion across 81 assets with improving credit performance. 60-day-plus delinquencies improved 910 basis points to 15%. The portfolio has a subpar leveraged yield of 10.8 but post-completion of our loan sales, we expect this portfolio to total $775 million and leveraged yield to increase to 11.6%. Now, one additional observation on our overall CRE portfolio. In the quarter, continued negative migration in office loan credit negatively impacted peers with significant office concentration. Our recent asset management activities have further de-risked our portfolio. A quarter end office exposure, net of specific reserves, was reduced to 4% of loan exposure with plan liquidations reducing to a target of 3% by year end. Of the 3% remaining, the average loan balance is only $2.8 million and 85% are performing. Meanwhile, 82% of our portfolio was concentrated in mid-market multifamily where the nationwide affordability gap drives rental demand, stress primarily relates to negative leverage, and the recent rate rally is a green shoot. Now, turning to our small business lending segment, origination of SBA 7(a) loans exceeded target growing 80% year over year to $217 million and puts us on pace to achieve our $1 billion target run rate by the fourth quarter. The quarterly volume was split 37% from our legacy large loan business up to $5 million and 63% from our FinTech iBusiness, which specializes in loans under $500,000. In addition to organic growth, the company has a successful history of acquiring independent standalone operating companies that are complementary tuck-ins to core lending strategies such as iBusiness in 2019 and Redstone, our Freddie Affordable segment in 2021. This contrasts with our Anworth 2020 and Broadmark 2023 acquisitions, which were primarily accretive capital raises. We closed on two strategic acquisitions in the quarter for cash, which support origination growth in our small business lending segment through expanded product offerings and increased market share. First, the acquisition of the Madison One Company, one of the largest national USDA lenders. The USDA program provides 80% government guarantees on commercial and real estate loans in rural areas and complements our core 7(a) offering with similar economics. These include gain of sale revenue from the sales of the guaranteed portion, our retained servicing strip, and the net interest carry on the retained portion. Forward 12-month originations are expected to be $300 million, which adds $0.10 to annual EPS once fully ramped. Second, the acquisition of the Funding Circle US platform by iBusiness, which is expected to increase 7(a) small loan production by leveraging Funding Circle's leading front-end technology and established origination channels. Additionally, Funding Circle's core business loan product allows us to monetize leads from SBA 7(a) turndowns. Integration and rightsizing of the platform are expected to be complete by year-end with projected 2024 earnings drag of $0.04 per share and profitability achieved in 2025 with EPS accretion of $0.05 per share as we move through next year. Looking forward, we believe organic growth in these platforms will, over time, enable us to comfortably exceed our $1 billion target and achieve number three USA market share. The high ROE capital-light element of our small business lending segment is clear and we believe, underappreciated differentiator among our peer group as it provides earnings contribution in a countercyclical manner compared to CRE. Now, turning to earnings. As outlined over the last two calls, we continue to execute on four initiatives to improve EPS by year-end. First, the reallocation of low-yield assets into 15% levered ROE current yields. As discussed earlier, our sales efforts are expected to generate incremental annual earnings of $0.24 per share upon full reinvestment. Second, leverage, current total leverage at quarter end was 3.5x, below our long-term target of 4x. We continue to pursue adding accretive leverage, including the collapse and resecuritization of under-levered CLOs and the rotation into secured and corporate debt when accessible. The annualized EPS contribution from a half turn of leverage at current spreads is $0.08 per share. Third, the exit of residential mortgage banking. In the quarter, we completed a sale of 40% of the MSRs at a $3 million premium to our basis, with the remaining 60% coming to market shortly with expected settlement in early fourth quarter. The platform sale is expected to close also in the fourth quarter. Total proceeds from the sale of the MSRs platform are expected to be approximately $50 million with annual EPS accretion upon reinvestment of approximately $0.04 per share. And fourth, as described earlier, growth of the small business lending platform, which upon stabilization of our recent acquisitions and projected growth, we expect to add an incremental annualized $0.20 per share contribution. The potential annual cumulative earnings impact of these efforts is $0.56 per share. We believe that even probability weighted the success of each, the actions will lead us to returning to achieve our 10% annual return target. We're confident about the future earnings potential of the platform. At the same time, we're acutely aware of recent challenges, including not reaching our 10% target. Our recent strategic efforts have focused on initiatives that prioritize long-term earnings power rather than delivering immediate benefits. The impact of commercial real estate recession has been felt, and we believe that the tides are turning in the CRE cycle with green shoots in the form of rate declines and in multifamily peaking deliveries and improving transaction volume. With that, I'll turn it over to Andrew.

Thanks, Tom. Quarterly GAAP and distributable earnings per common share were a loss of $0.21 and income of $0.07, respectively. Distributable earnings less realized losses on asset sales was $0.19 per common share, equating to a 5.8% return on average stockholders' equity. Earnings were impacted by the following factors: First, revenue from net interest income, servicing income, and gain on sale increased $6.2 million or 9% quarter-over-quarter to $73.7 million. The change was driven by $2.4 million of growth in net interest income due to $229 million of net loans returning to accrual status and a $3.8 million increase in gain on sale revenue due to incrementally higher loan sales of $35 million at premiums averaging 11%. The levered yield in the portfolio increased to 16.3% due to the liquidation of $140.1 million of under yielding assets and a higher percentage of accrual loans. Second, a net increase in the combined provision for loan loss and valuation allowance of $57.5 million. The movement was the result of both marketing loans that are under contract to sell to final execution prices and the markdown of additional loans expected to be sold. For loans under contract or sold, which total $579 million in unpaid principal balance, the quarterly impact, net of tax, was a loss of $44 million or $0.26 per share. These sales are expected to reduce interest expense and carry costs by $21 million and generate $121 million in incremental liquidity. For the remaining loans, there was an incremental benefit of $6.8 million, net of the effects of tax. In addition to the provision and allowance activity, we liquidated $42 million of REO at a quarterly net loss of $4.1 million. For the remaining REO, we took a $9.1 million charge-off. The cumulative effect of all REO activity in the quarter was a loss of $0.03 per share net of tax. The cumulative year-to-date effect of all loss provision and allowance activity related to the disposition of REO and nonperforming loans is a book value decline of 7.5%. And third, operating costs improved 15% to $65.8 million. Included in our operating expenses are REO charge-offs of $9.1 million. Absent the effect of REO charge-offs, the normalized operating expense ratio was 6.7% as a result of cost-cutting initiatives completed earlier in the year. We expect operating costs in our core business to continue to improve throughout the remainder of the year. These improvements will be offset by the effects of the Funding Circle acquisition, which is anticipated to add an additional $8 million or $0.05 per share in operating costs over the next two quarters. On the balance sheet, book value per share was down 3.5% to $12.97 per share. The change was primarily due to mark-to-market or realized losses on loans and REO liquidation and an $18.3 million reduction to the bargain purchase gain associated with the Broadmark transaction. Our expectation is that the book value per share is reflective of the clearing levels to execute our portfolio repositioning efforts. In the quarter, we repurchased 2.3 million shares at an average price of $8.61. Liquidity remains healthy with $226 million of unrestricted cash and an additional $40 million in committed but undrawn borrowings. With that, we will open the line for questions.

Thank you. We will now be conducting a question-and-answer session. The first question we have is from Crispin Love of Piper Sandler. Please go ahead.

Thank you and good morning everyone. Can you just give a little bit more detail on the loan sales that occurred in the quarter? If I'm thinking about it right, you made roughly $450 million of sales, took the $20 million of realized losses on those. First, just how that compared to initial expectations? Were there multiple buyers there? Curious kind of like non-bank asset managers? And then how would you feel on the progress I think it should be probably about additional $100 million or so that to be sold, that's not committed and then timing there? Thank you.

Yes, Andrew, Adam, you want to comment?

Yes, Adam, why don't you take the first quarter on the buyers and then I can walk through the financial effects of that.

Yes, sure. I mean from a buyer's perspective on the loan sales that we put out for bid, we got back roughly 15 individual buyers for the pools that we have in the market. They're mainly regional investors and some local groups, specifically where we were liquidating land assets through the Broadmark transaction. These investors at the local level certainly help push up pricing. And we got much more favorable sales prices by kind of the local folks that knew these markets well, as opposed to selling as an outright pool.

Regarding the financial effects, on a year-to-date basis, we have approximately $20 million from closed loans and about $550 million from loans that are set to close in the third quarter. The cumulative earnings per share impact for the year is $0.70, after tax, while the impact for the quarter stands at $0.26. This provides the difference from our position in March. Currently, there is just under $130 million remaining, primarily consisting of 70% of loans that are over 60 days delinquent, with half of that total being office loans. These have been marked down more than the levels at which trades have cleared, around a 70% level. The rest of the portfolio has been marked down to about $0.50, depending on the collateral. For instance, office loans are marked down to roughly 25%, while multi-family loans are slightly higher. This outlines the financial impact, and we anticipate further progress in managing this pool as we move through the year.

Great. Thank you, Andrew and Adam. I appreciate the color there. And then just on the core earnings trajectory going into the back half of the year. I know you gave a lot of detail in the prepared remarks. But just curious on how you would expect core earnings to trend to the back half of the year, what the main drivers are and then narrowing the gap between earnings and the dividend to get closer to that 10% ROE target. Do you think that 10% target is probably not attainable sometime in 2025? I'm just curious on your thoughts there as we get from if we take the 2Q, call it kind of core earnings less than real-life loss of 19 cents, and how that builds going forward?

Yeah. I mean, we provided last quarter and this quarter a bridge with respect to the four initiatives we're undertaking, the lead one being reallocation of low-yielding assets and elimination or reduction of non-accruals. But, Adam, I'm sorry, Andrew, maybe just comment on in terms of the timing and accretion.

Yeah. So when you look at the quarter and the $0.19, I'd say that is a fairly deflated starting point to begin with. So in the quarter, there were a couple of one-time items that are included in core, like reserves, repair and denial on the SBA, some bad debt expense related to ERC, the continued wind-down of the purchase future receivables box. So the cumulative effect of all those one-time items was roughly $0.02 to $0.03. So I'd say the starting point is more in the low 20s when you look at core earnings. The bridge to dividend coverage really focuses on the items that were in Tom's prepared remarks, starting with this portfolio cleanup exercise that we've undertaken. That is expected just from a reduction in carry cost and interest alone to generate $0.03 per share on a quarterly basis. The reinvestment of proceeds, which are expected to be a little north of $120 million at market yields today, produces another $0.02 to $0.03 per quarter, depending on the yield. And then when you look at the investments we've made this quarter, mainly into operating platforms rather than our core loan book, specifically with Madison One, that business should generate anywhere between $15 to $17 million in annual net income, given that it has an existing servicing asset, et cetera. That should produce another $0.02 to $0.03 per share. And then just continued organic growth of our existing SBA business and just repositioning of the normal cadence of the portfolio. So I do think there's a clear path to getting back to that 9.5%, 10%, 10.5% return level, which would cover the dividend. In terms of the timing, a lot of these items will occur over the next couple of months. So some are more immediate. For example, the reduction in carry cost will happen as soon as trades settle. The reinvestment will take throughout the remainder of the year. Madison One is going to take a month or two to get their pipeline up to speed and get back online. So I do think the full financial effects of these items will not be felt until we move into 2025. When you look at the remainder of 2024, we'll certainly feel some of the benefits of these activities, but we'll also have other items weighing on earnings. For example, the Funding Circle is going to have a negative drag on earnings for the next two quarters before it turns profitable. But I do believe as we move into 2025, there's a path to getting back to the return levels we expect.

Okay. That all sounds good. Thank you, Andrew. Thank you, Tom. Appreciate you taking my questions.

No problem. Appreciate your time.

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

Thanks, and good morning. I was hoping you could talk about what is your appetite and what would be the opportunity to continue to kind of roll up other originators in the SBA channel?

Yes, it's interesting. There are very few M&A opportunities because there are only 14 or 15 non-bank licenses. There was considerable discussion in Congress regarding the lending circle license, which we terminated in coordination with the SBA. This termination might allow for reallocation. The key point is that most participants are banks, with around 1,800 out of the 5,000 banks in the US involved. Therefore, M&A activity is limited. We are focusing more on acquisitions during this pullback by banks, which allows us to bring in teams of specialists, such as a recent team we onboarded from the West. We are witnessing an increase in this strategy as a way to grow the large loan segment, specifically those above $500,000. On the smaller end, we are exploring fintech opportunities similar to what Funding Circle offers, which includes unsecured loans to small businesses. However, in the core SBA sector, with limited licenses available, most growth will come from acquiring specialized origination teams.

Great. And I guess once you kind of hit the $1 billion run rate and integrate the two acquisitions, how do you think about what is kind of the long-term growth or intermediate to long-term growth you can continue to deliver on that product?

The SBA 7(a) market is around $25 billion to $30 billion, depending on the credit cycle, and USDA might contribute another $1 billion or $2 billion. Currently, we have a run rate of $1 billion. Live Oak is the largest competitor, operating at about $3 billion. Our aim is to reach approximately $1.5 billion to $2 billion in the next 12 to 24 months, with a significant portion of that coming from our leadership in the small loan segment, which has a higher proportion of minority-owned businesses supported by the SBA. This will be a key driver of growth. In terms of an intermediate target, achieving $1.5 billion to $2 billion seems feasible through our unique dual approach involving large, traditional loan officers in specific industries and regions, as well as leveraging fintech growth. For instance, Funding Circle has seen about $4 billion in existing originations in the U.S. over recent years, with many borrowers having a history of unsecured loans for small businesses. The SBA allows for longer amortization, around 26%.

Correct.

Yes, 26%. We will immediately refinance those borrowers, which will be beneficial for them, and we can generate strong gain on sale income because these loans sell at higher premiums in the secondary market due to limited refinancing risk. To answer your question, Doug, it may be a bit lengthy, but that’s our perspective on that business. Additionally, I feel we do not receive sufficient recognition, considering it is somewhat unique compared to peers, for the potential earnings growth from this business, which operates counter to the trends in commercial real estate.

Great. Appreciate the answer.

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

Hi, good morning. Tom, I appreciate all the comments on the earnings ramp, both your prepared remarks and the answer to Crispin's question, kind of, follow-up on that, as you think about the different drivers of the earnings ramp, where is the biggest risk in executing that strategy? Is it returns on new investments? Is it credit issues in the existing portfolio? Can you talk about the execution risk around getting back to a 10%-plus return?

I believe that when you examine the peer groups, the earnings for the current quarter do not reflect reinvestment risk, even amidst the rate increases. The key issue is the negative migration affecting the existing multifamily sector. I'll let Adam elaborate on that. We are primarily focused on the lower middle market, which doesn’t include the overheated markets experiencing peak deliveries. When I review our credit dashboard, many of these borrowers face negative leverage as the primary challenge. The caps have expired, and we are seeing negative leverage compared to the current cash flows, which are expected to decline due to heavy transitions. These borrowers need support to navigate difficulties while executing their business plans, which are being impacted more by negative leverage than by aggressive rent increases or cap rate compression at exit. We believe that multifamily, particularly in the lower middle market, has likely hit a bottom in this quarter or the next, although certain markets with peak deliveries, like Atlanta, may take longer to recover. The fundamentals remain strong; prior to COVID, rent was only 6% above mortgage payments, and even now, despite the rate increases, there is still a sizable difference of about 58%. The demand is present, particularly in the affordable segment. Therefore, the significant risk remains the negative migration within our multifamily portfolio, which we consider to be low risk due to these conditions.

Yeah, I appreciate the comments on that, Tom. Just kind of curious where you viewed the risk getting back there, but it seems like you've got it laid out pretty well. I wanted to talk about, I guess, to follow up on that, right, credit, the 60-day EQ and the CRE portfolio down to low 6s from around 10, where do you expect that to stabilize? Is it going to be a little volatile near term? Do you expect it to continue trending down? And kind of what's the normalized level for the type of assets and borrowers you have in your portfolio?

It's Adam. We believe that the first half of 2024 will be the most challenging part of the cycle. Delinquency levels are likely to remain volatile for the next 12 to 18 months, fluctuating as some new assets face issues while others get resolved. The efforts we've made on the liquidation side should reduce our exposures, particularly regarding some of the larger office assets. This will be a net positive. Currently, our peak delinquency is around 10%, but today it's at 6.3%. We don't expect the CRE portfolio to exceed the Q1 levels and we're focusing on the multifamily sector, which makes up over 70% of our portfolio. We anticipate this sector to recover well as interest rates and economic fundamentals improve. We've also made significant progress with cooperative borrowers who needed more time to implement their business plans. Overall, I believe the worst is behind us on the multifamily side, and we've made substantial strides in managing the M&A portfolios. Therefore, I think we've already reached our peak.

Great. And lastly, Tom, again, buybacks, how do you consider how you think about capital allocation to buybacks versus new investments, you're pretty active in Q2, fairly close to where the stock is now below 70% of quarter-end books. So I just wanted to get your thoughts on capital allocation between those options as you grow leverage.

Andrew, do you want to comment?

Yes. So we have approximately $42 million left in our program. Liquidity today remains very healthy at over $250 million. The sales we described earlier as well as GMS and some other initiatives that are going to bring in additional liquidity. So I certainly think the share repurchase program depending on where the stock is trading and other uses of capital, which include new investments as well as protecting the existing portfolio will be a tool we use to try to deliver value here. But I certainly think the liquidity position of the company allows us that opportunity.

Great. I do have one more, sorry. You mentioned the service and your CLOs in the last couple of calls and potentially changing that of bringing it in-house. Any update on that?

Adam, would you like to share your thoughts? You've had a quite positive experience this quarter with service, haven't you?

Yes, the majority of the improvement certainly on our bridge side is due to the collaboration with our third-party special servicer. Certainly, quicker speeds to resolve what was in the first half, really a heavy backlog of relief requests submitted by our clients. We have in process now an additional 10-plus mods totaling about $300 million that we expect to execute in short order here. And we really feel the third-party special servicer now has, like I mentioned, really a greater sense of urgency being more proactive to effectuate the pending resolutions. So, yes, I mean, things have certainly improved. I think they're on the same page with us in terms of executing these industry-standard mods. And again, giving our clients more time and more breathing room in a tough market to stabilize the assets and achieve permanent financing.

Great. Appreciate the comments this morning.

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

This is actually Jason Sabshon on for Jade. For my first question, it would be helpful to hear what was earnings excluding the tax gain? And how long do you expect the tax gains to continue for? And on that note, what do you estimate as the current economic run rate of distributable earnings?

Yes. So, the tax activity in the quarter is actually a little different than what occurred in the first quarter. So the tax activity in this quarter was directly related to the loan sale activity. So, tax benefits directly related to losses or valuation allowances or reserves on loans that are liquidating. So, I don't think you can look at the tax items this quarter in isolation, a little different than last quarter where the tax activity was specifically related to restructuring within the organization to monetize certain NOLs. So, this is a direct offset to those losses. And then as we described previously, we do believe that the activities that we laid out in our remarks and that I commented on, provide a path forward towards covering that $0.30 EBITDA. We think that path takes us into 2025. With that being said, the dividend is set at right around 9.5% on value today. So, given our target of 10%, we think this cycle works its way through, that the platform is to push beyond that. We don't think that occurs until we move into the back half of 2025 though.

Got it. Thank you. And just moving to delinquencies. How much of the decline in DQs was related to the loan portfolios that you sold? And separately, it would be helpful to hear more color on how delinquency rates within CLOs are calculated because we noticed some differences between the reported rates and the implied rates based on interest payments received in the remittance reports? Thank you.

Yes, I'll address the first part of your question and then let Adam respond to the second part. Regarding the delinquency rates in our portfolio, we only sold $20 million worth of assets through June 30, which is a small portion of the total we are under contract to sell. Therefore, the effect on the decrease in delinquencies for this quarter was minimal, around $15 million. The main drivers of this decline were modifications and an overall improvement in credit quality. Adam, you can cover the second part.

Yes. The way delinquencies are reported and the public information on the CLOs may appear different from our current numbers. When you review our bridge portfolio in the supplemental deck and examine the delinquency rates, you’ll see that it represents the total bridge portfolio, which includes not only what's in the CLOs but also our balance sheet. There is a distinction there. Additionally, it's important to consider the timing of when remittance reports are released and when the information is distributed, as this varies based on the research report consulted. Recently, we have noticed a wide range of delinquency rates across all issuers, depending on the specific report and its timing.

Hey guys. Andrew, is it fair to say that the allowance volumes are really a function of how much you're transferring to held for sale?

Yes. The majority of the reduction in CECL this quarter was directly related to that.

And given that's trending down and given the comments on the call saying that you think you saw the peak in terms of multifamily, should we expect the valuation allowance charges to go down in the second half?

I don't think we're in a position to start significantly reducing the CECL reserve yet. When looking across all our product types, we slightly increased the reserve for loans that are not held for sale across all our CRE products. The 7(a) allowance decreased slightly this quarter. However, I don't anticipate a reduction in CECL as we move forward due to some uncertainty in the next couple of quarters.

Great. Tom, based on your comments about the focus on workforce housing, I agree with what you said. However, one thing you're overlooking is that this segment of multifamily housing is quite susceptible to rent regulations like rent stabilization and rent control. Considering your nationwide portfolio, are you monitoring this situation? Any thoughts you can share on it?

Yes, I want to emphasize that we have very little, if any, exposure to rent regulation. What Andrew mentioned regarding workforce is not related to rent regulations, which typically apply to the lower tier of the market, around 80% of the median income. Our focus is on middle-income properties, specifically A minus and B plus in suburban areas with middle-income individuals, rather than Class A properties in Manhattan or central business districts. Therefore, very little, if any, of our portfolio is affected by rent regulation. I'm sorry, Adam, could you clarify that? What percentage of our total exposure comes from the properties we acquired from banks in the New York area?

Yes. Less than 1% of the portfolio has any rent-regulated or rent-controlled properties in the New York City metro area.

You are correct that we have no exposure to that risk, but it is certainly a concern. We observe this through the activities of our Ready Cap Affordable, which is from the old Redstone business that operates primarily in that market. While they are in the LTIC market with very few defaults, there is considerable volatility due to ongoing initiatives in various municipalities across the U.S.

Great. Final question. On Funding Circle, given that's a fintech company, and I presume it's sort of populated by guys who are very sharp on current trends in terms of online lending and so forth. Strategically, what does that imply in terms of how Ready Capital can utilize that platform for other things? Any thoughts on that?

Yes. So they definitely have a very complementary platform to our current front-end technology, the loan origination, the algorithms that the business uses. They have a longer track record with, again, their primary. They were owned by one of the larger U.K.-based entities, which is one of the larger providers of credit to small businesses on an unsecured basis, the so-called SMEs in the U.K. Actually, the external manager has a significant funding relationship with them, so we're very familiar with the quality of their originations. This business was deemed non-core, and they've sold it. So the first, there's kind of a two-fold approach to harvesting the value in the platform. One is to obviously just immediately cross-sell the $4 billion of borrowers that have current unsecured loans in north of 35%, and we can refinance in the mid-20s. So that's one. Two, reduce OpEx, where there's overlap between the two platforms. And again, they're both tech-oriented, so that is already underway, and very limited execution risk. And the third is, as you're indicating, the potential for bolt-on products, and the potential for bolt-on products, which the most obvious would be unsecured loans that don't meet the SBA guidelines, equipment leasing, et cetera. And so that's kind of Stage 3 of how we would generate the value from the platform. But again, the interesting thing about this whole small business is a very small percentage. It's very difficult to deploy capital given the inherent leverage in the government programs. So we will consider, looking at the flow programs on unsecured small business loans, which we see a sell in the secondary market or to the extent where we have capital and it's ROE accretive to hold on the balance sheet.

Great. Thank you for the comments.

No problem.

There are no further questions at this time. And I would like to turn the floor back over to Tom Capasse for any closing remarks.

Again, we appreciate the comments and the participation. I 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.