Earnings Call Transcript - RC Q2 2021

Operator, Operator

Good morning and welcome to Ready Capital Corporation's Second Quarter 2021 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. Andrew Ahlborn, Chief Financial Officer. Please go ahead, sir.

Andrew Ahlborn, CFO

Thank you, operator, and good morning, and thanks to those of you on the call for joining us this morning. Some of our comments today will be forward-looking statements within the meaning of the federal securities laws. Such statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Therefore, you should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. During the call, we will discuss our non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our second quarter 2021 earnings release and our supplemental information. By now, everyone should have access to our second quarter 2021 earnings release and the supplemental information. Both can be found in the Investors section of the Ready Capital website. In addition to Tom and myself, we are also joined by Adam Zausmer, our Head of Credit Officer, and John Moser, President of SBA lending, on today's call. I will now turn it over to Chief Executive Officer, Tom Capasse.

Tom Capasse, CEO

Thanks, Andrew. Good morning, and thanks for joining our second quarter earnings call. Before jumping into commentary, I would like to welcome John Moser, President of Ready Capital's Small Business Administration or SBA lending business, to today's call. Over subsequent quarters, we will introduce various leaders within the organization, who will share their thoughts and expertise on their operating segment given the current performance of our SBA business. A better place to start with John. Ready Capital's differentiated investment strategy continues to produce quality earnings across all operating segments, normalized post-COVID. The quarterly results reflect the post-COVID resurgence in loan demand within our existing lending channels and the expansion into new and complementary markets. Deployment of sale proceeds from substantially all Anworth assets and lower funding costs from accretive capital market transactions have also contributed to this success. The linear economic recovery supports sustainable loan demand in our commercial real estate (CRE), small balance commercial (SBC), and Small Business Markets well into 2022. Credit metrics also remained stable post the expiration of COVID support measures. Building off a record first quarter, our SBC lending segment grew 17% quarter-over-quarter, originating a record $1.1 billion with increased volume across all loan products. This volume increase is indicative of Ready Capital's differentiated product offering as a leading non-bank capital provider for SBC property owners. Lifecycle financing spans from heavy transitional to stabilized agency and conventional products. Additionally, we remain focused on lower-data CRE sectors, evident in our second quarter production remaining concentrated in cash-flowing and multifamily assets, which accounted for 87% of volume. All four SBC segments provided strong contributions. First, transitional loan origination posted a record $807 million across 47 loans, significantly benefiting from post-COVID demand by strong sponsors looking to either acquire or reposition previously underperforming assets. Relevant metrics on the quarter's originations include an average loan size of $15 million, a spread of LIBOR plus 3.75, and a LIBOR floor of 25 basis points. Given current CLO execution, we expect retained yields to be in the mid-teens. The current money-up pipeline for traditional loans is $355 million. Our fixed-rate lending activities rebounded for the first time since COVID, across both our structured fixed-rate loan and CMBS product. In total, we originated $53 million of fixed-rate products but have a growing pipeline that is currently at $170 million money-up. Before the end of the year, we're contemplating a $250 to $300 million CMBS transaction, which will generate additional gain on sale income. Relevant metrics include a weighted average coupon of 5% and an LTV of 64%, third in our Freddie Mac small balance loan program. Demand for multifamily housing drove record originations to $240 million in the quarter. Increased demand was bolstered by attractive rates, which are at 3% in top-tier markets with Freddie being especially aggressive on our SBL product as it qualifies for the 50% FHA affordability mandate. Based on our current expectations, we expect our annual Freddie Mac production to be 20% higher than 2020, as evidenced by our $118 million money-up pipeline. Finally, on the acquisition side, we're starting to see opportunities and have a current pipeline of $1.3 billion and $192 million in closing. These acquisitions accelerate the redeployment of the Anworth capital and have levered yields in the mid-teens, making them immediately accretive to ROE. With that, I'll turn it over to John to discuss our SBA business.

John Moser, President, SBA Lending

Thanks, Tom. In the post-COVID environment, small business demand for capital and the human capital and technology investments we have made in our SBA business paid dividends in the second quarter. Originations in the quarter were $146 million, a record for our business and a 190% growth from last quarter's volume. Volume was driven by increased demand from reopening small businesses, as conventional credit supply lags. The Senior Loan Officer survey showed a lagging cyclical easing of credit guidelines. Based on our year-to-date 7A authorizations, we now rank as the number one non-bank and number seven overall in the SBA lending industry nationwide. In addition to record volumes, secondary market premiums for the guaranteed loans remained attractive, providing a premium of 13.15% net for the quarter. Elevated premiums were driven by high demand for guaranteed floating rate SBA pools, returns from other floating rate guaranteed investments, and historic low prepayment speeds. We are taking several measures to capture 7A market share including the following: First, in terms of human capital, we continue to hire top SBA talent and have added 34 staff in the last three quarters. Moreover, with PPP drawing more banks into SBA lending, we feel it prudent to hire entry-level college students to train and take advantage of the expertise in the industry to build the future leaders in our organization. Second, regarding marketing, in the first quarter, we hired a senior-level marketing executive to develop custom programs specifically targeting various segments of the SBA 7A market—both broadly-based and small business verticals, such as our FedEx program. Additionally, we hired an affinity executive to continue building strategic alliances with larger referral partners to generate new relationships and build the pipeline. To date, we have originated $30 million through our affinity channels with expectations to grow affinity volume to $100 million in 2021. And third, in terms of technology, we have made enhancements to our front-end origination system designed to enhance client experience and build efficiencies in the process. Further, we continue to partner with our FinTech Knight Capital, following up the successful PPP portal with the rollout of the 7A small balance loan program. This program supplements our large loan 7A volume by targeting loans under $350,000 with expedited underwriting using credit score. Through the second quarter, we have originated $3 million in small loans, with a target annual volume of $30 million for 2021 and a target annual run rate of $100 million. I want to note that, as an organization, we are proud of our efforts in PPP through COVID. We concluded round two of the program by originating $2.2 billion in loans, which supported 72,000 businesses nationwide. Our focus on mom-and-pop businesses throughout the program aligns perfectly with our belief that small businesses are the backbone of our economy. The results of PPP have broad industry participation in SBA lending and future small business demand, particularly as it relates to Internet-enabled credit access. The disruption caused by the pandemic has proven that SBA lending will be a necessary solution to help Main Street businesses secure capital to expand and grow. Because Ready Capital is so quick to meet the needs directly coming out of the recent pandemic with PPP, we are well-positioned to maintain a lead generation list of over 100,000 PPP borrowers and numerous potential affinity partners to grow our 7A volume. We look forward to continuing relationships with these borrowers and will continue to expand our capabilities to help small businesses finance their ambitions. With that, I will turn it back to Tom.

Tom Capasse, CEO

Thanks, John. In our residential mortgage business, originations remain elevated at $1.1 billion, but as expected, cyclical margin compression resulted in quarterly margins declining 85 basis points, averaging 107 basis points. During the quarter, purchase volume reverted to historical run rates of 56% of total production. GMFS's focus on purchase origination channels will blunt the decline in refi volume, and the FHFA's recent removal of the 50 basis point adverse market fee will prolong the refi boom. Additionally, a high retention rate of 28% aided the growth of our servicing asset to over $10 billion in balance with a low pool WACC of 3.5%. We expect volumes to remain around $1 billion for the third quarter, with reductions in the fourth quarter due to seasonality and potential rate increases. Now, in terms of the portfolio of loans held for investment, it grew by $680 million to $5.2 billion and remains highly diversified across 4,500 loans with an average loan balance of only $1.2 million. Unlike our peers, we have little single asset concentration risk, with the largest loan representing under 2% of the gross portfolio. Performance in the portfolio, including our Freddie Mac loans, remained stable with 60-day plus delinquencies under 2.5% and credit metrics continuing to be attractive with an average LTV of 66%. Now turning to our corporate development, in terms of bolt-on acquisitions and new products, we're making great strides in these efforts. We announced last week the acquisition of Redstone Company to expand our multifamily agency origination business. We welcome the Redstone team to the Ready Capital family as a natural addition to our existing agency channels. Redstone is a Freddie Mac licensed multifamily servicer with over $4.2 billion of originations since its formation in 2002. Its primary focus is providing construction and permanent financing for the preservation and construction of affordable housing nationwide through the use of tax-exempt bonds. The business generates recurring revenue primarily through origination and servicing fees. We believe that under the Ready Capital umbrella, Redstone is positioned to not only maintain its market leadership but also to expand its position in the space. Redstone will further Ready Capital's focus on affordable housing. In terms of new products in our acquisitions segment, we continue to leverage the global investment sourcing of our external manager waterfall. New sector initiatives include a $100 million allocation to a waterfall lower-middle market CRE Equity Fund on which Ready Capital shares in the GP promote; $75 million in housing lot loans in the US; $50 million flow commitment for housing construction loans in the UK; and a $25 million flow commitment for retail manufactured housing loans to park operators. These new sector allocations serve as beta sites for potential future program rollouts to continue to diversify our core SBC investment strategy. Regarding the stability and outlook of earnings as we move ahead, we continue to grow core earnings with a combination of net interest margin from post-COVID capital redeployment in our SBC and CRE segments, supplemented by continued earnings strength in our government-sponsored gain-on-sale businesses. In addition to earnings from these two core segments, increased acquisition activity and recognition of PPP income will propel attractive returns over the next few quarters. We believe these collective tailwinds will more than offset a reduction in residential mortgage banking revenue as the industry normalizes. Our business model continues to demonstrate the competitive advantage of our embedded operating companies as well as the diversity of our entry points into small balance commercial lending. With that, I'll turn it over to Andrew to discuss our financials.

Andrew Ahlborn, CFO

Thank you, Tom, and good morning, everybody. GAAP earnings and distributable earnings per share were $0.38 and $0.52, respectively, for the quarter. Distributable earnings of $41.4 million represent a 68% growth from the prior quarter. For the fifth consecutive quarter, distributable earnings have both exceeded our target 10% return and covered our dividend. The earnings profile is reflective of the reemergence of our multifaceted business in the post-COVID economic climate, the growth in our loan and servicing portfolios, the recognition of PPP earnings, and the redeployment of capital from the Anworth merger. Additionally, the revenue profile of the company continues to normalize with a 52% contribution from stable interest income and servicing revenue in the quarter. Net income attributable to PPP totaled $9.8 million or $0.14 per share. The additional earnings from PPP were partially offset by 15% of the balance sheet allocated to assets from legacy mergers with lower yields in our core assets, as well as increased investment in marketing, technology, and human capital. The assets from legacy acquisitions are in the process of being repositioned, and the reinvestment of the capital is expected to be accretive to the current earnings profile. Net interest income before the provision for loan losses increased 111% to $47.6 million in the quarter. The increase was driven by a 25% increase in the loan portfolio, where the weighted average coupon remained stable at 5.1%. The inclusion of $17.6 million in PPP net interest and the reduction in average funding cost of 30 basis points to 3.3% contributed to this growth. Additionally, increased production in our SBA, Freddie Mac, and residential businesses resulted in a servicing asset that grew to over $12.9 billion in service loans, resulting in a 23% increase in servicing revenue to $13.4 million. Gain on sale revenue grew 121% to $23.7 million due to increased production in both the SBA and Freddie Mac SBL operations. In the quarter, we sold $102 million of SBA loans compared to $36 million in the first quarter at average premiums of 13%. Likewise, Freddie Mac SBL sales rose by 8.5% to $181 million with premiums averaging 169 basis points. Revenue from residential mortgage banking was up 41% to $10.7 million. As anticipated, these changes were due to an 85 basis point decline in average margin, which normalized to 93 basis points at the end of the quarter. We expect production and margin levels to remain similar in the third quarter. In the quarter, net additions to the MSR were offset by a $4.7 million valuation decline due to movement in CPR assumptions. We believe the MSR holds significant embedded value due to the lower WACC and increased balance. Additional income statement items of note include a $4.2 million increase in income from joint ventures as our CRE equity investments move through the execution of business plans and a $6.1 million increase in operating expenses due to increased employee compensation accruals, increased marketing and technology efforts, and a $3.7 million expense related to PPP production. On the balance sheet, key items included efforts to reposition the Anworth assets, growth in our loan and servicing portfolios, several capital markets transactions, and the inclusion of increased PPP assets. To start, we successfully liquidated $374 million of agency RMBS securities in the quarter, generating approximately $25 million in liquidity for reinvestment in our core businesses. At quarter-end, the remaining Anworth assets included $168 million of RMBS securities, $84 million of residential loans, and $26 million of REO, all of which are expected to be liquidated over the next two quarters. These assets were supported by $171 million of debt and $106 million of equity at quarter-end. PPP assets grew to $2.3 billion and are financed through the PPP loan fund. The assets are held net of a $95 million discount, which represents unrecognized fees that will be accreted into income over the next few quarters. We also expect to receive 65 basis points on the gross value of the PPP loans, which is the difference between the 100 basis point rate on the loan and the 35 basis point cost of funds on the PPP loan fund. In addition, we booked reserves of $3.7 million on PPP assets to account for the remaining uncertainty in the program. On the right side of the balance sheet, we continue to focus on maintaining appropriate recourse leverage ratios and reducing our cost of funds. To start, we completed our 10th securitization of acquired loans. The deal securitized $233 million of assets with an advance rate of 80% and a weighted average cost of funds of 160 basis points. Next, we closed new $500 million warehouse facilities that support our origination and acquisition activities across all CRE products. Finally, we successfully refinanced the Anworth preferred securities with a new $115 million offering at 6.5%, reducing costs by 162 basis points. Additionally, we expect to price our 6th CRE CLO this week with an advance rate in the mid-'80s and weighted average spreads of sold bonds, 10 basis points inside our previous execution. Looking forward, we are pursuing ways to refinance parts of the capital stack to lower costs and extend duration. With that, I'll turn it back to Tom.

Tom Capasse, CEO

Thanks, Andrew. Ready Capital's differentiated strategy and diversified model continue to deliver superior returns for our investors. The ongoing efforts to increase our scale, capture market share, and expand our entry points into the small balance commercial sector will serve our shareholders well into the future. With that, we'll open the line for questions.

Operator, Operator

Our first question is from Crispen Love with Piper Sandler. Please go ahead.

Crispen Love, Analyst

Thanks, good morning. The acquisition pipeline looks to have roughly doubled sequentially and is definitely the highest that I've seen it. Can you speak to some of the loan acquisition opportunities you're seeing in the market and what's driving that significantly higher pipeline?

Tom Capasse, CEO

Yes, there are really two factors to consider. The majority of it comes from the fact that as forbearance, eviction, and other COVID measures are starting to roll off, we are beginning to see a lot of banks address the problems directly within their portfolios. Most of what we're seeing is scratched and dented, not GFC-type excess leverage. So, we're definitely seeing a number of especially regional and community banks looking to offload CRE risk while targeting a ratio of under 250% of Tier 1 capital. So that's the bulk of it. In addition, as we mentioned, we are also diversifying our portfolio into new asset classes like UK housing construction and CRE equity, so that accounts for the balance of it.

Crispen Love, Analyst

Okay, great. That's helpful. Just one on PPP on the balance sheet. I think it’s still about $2.2 billion of PPP loans. How many quarters do you estimate it will take for those loans to run off the balance sheet? And then just a reminder, what's the additional PPP income that you expect to realize over the next several quarters?

Tom Capasse, CEO

Hey, Crispen. Our best guess is that that balance will run off over two to four quarters. If you look at our round one production, it took about a year for the majority of those loans to be forgiven. Additionally, as for the income profile, there is still $95 million of unrecognized fee income that will flow through interest income over that time period. In addition to the carry of the asset, which is 65 basis points. The recognition, in terms of quarter-over-quarter, will be a little choppy, as it will be based on the velocity of forgiveness, but we do expect that to play out over the next two to four quarters.

Crispen Love, Analyst

Okay, great. That's it for me. Thanks for taking my questions.

Operator, Operator

Our next question is from Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Christopher Nolan, Analyst

Hey, guys. Tom, is the $0.42 dividend the new base dividend going forward?

Tom Capasse, CEO

Andrew, do you want to touch on that?

Andrew Ahlborn, CFO

I think the Board will continue to evaluate the increased earnings from our core businesses absent PPP, in addition to the recognition of PPP income, in setting that dividend. I don't want to speak for them, but I would expect, based on the current profile, that the $0.42 dividend is stable in the near term.

Christopher Nolan, Analyst

Okay. And given that implied return is expected to be 11%, should that be the new baseline we should look at rather than the 10% target?

Andrew Ahlborn, CFO

Yes, certainly over the next few quarters with PPP, I would say 11% as a base. When you add in $95 million plus of income, in addition to our core business, that is certainly trending toward that $0.40 range. I would say that 11% is probably the baseline for the time being. As PPP runs off, I think you'll see is that runway really provides the path to the growth in our core businesses that we've been talking about.

Christopher Nolan, Analyst

Great, that's it from me. Thank you, guys.

Operator, Operator

Our next question is from Tim Hayes with BTIG. Please go ahead.

Tim Hayes, Analyst

Hey, good morning guys, congrats on a nice quarter. My first question is just on capital transactions. You highlighted the sixth CRE CLO in the market with potentially some CMBS transactions fixed rates in that transaction at year-end. You also have $180 million of 7.5% senior notes coming due early next year. I'm just curious about two parts here: when you think you'll look to address those notes and how you might do so and if you feel the need to hold on to some excess liquidity to address or just to hold on until those notes are addressed. And is there any other transactions that you might be entertaining?

Andrew Ahlborn, CFO

Yes, in terms of the senior secured debt, we are exploring all options to take advantage of what is an attractive market for issuers. What that looks like, I think we're still exploring, but it could be using securitizations we have utilized in the past, such as baby bonds, and possibly a refinance of the senior secured debt but also looking at newer avenues for us like a term loan or more. So that is something I would expect us to tackle sooner rather than later. In terms of broader capital markets activities, as I said, we are pricing the 5th CRE CLO this week. Before year-end, I do expect we'll do a seventh CRE CLO, plus the CMBS deal Tom described and potentially also doing acquisition deals depending on the pipeline. So I think we'll be busy over the remaining four months or so of the year.

Tim Hayes, Analyst

Yes, it sounds like it. Okay, that's helpful. You mentioned on the last call talking about the opportunity in Europe and doing more lending there. Can you just talk about the resources you have there, the offices, and if you have boots on the ground there originating loans already? I'm just trying to get a feel for the kind of infrastructure and resources you have to source small balance commercial loans in Europe right now and what that opportunity looks like for you?

Andrew Ahlborn, CFO

The external manager has about 30 staff in offices located in London, Dublin, and Spain. There are over $1 billion of net assets and probably a couple of billion of gross assets in loans and structured credit. This team is well-positioned to source numerous flow programs with bridge and small balance lenders in those markets. Most recently, we committed to housing construction loans in the UK. Previously, we had a deal in Ireland, and we currently have a flow program in a company called Origin. We are going to seek to continue to expand those relationships, but we do have boots on the ground, including asset managers and originators that source and document these transactions, and they are fully hedged in the spot market.

Tim Hayes, Analyst

Okay. So how does the gross ROE on these flow program loans compare to what you're originating here?

Andrew Ahlborn, CFO

ROE base is about 150 basis points higher. ROE after swap costs is not a lot less competitive. There is a lot of money in Europe chasing NPLs since the GFC, but not a lot of money is providing liquidity for the sponsors to buy properties out of that work out. So we see a niche there and are looking to continue to capitalize on that.

Tim Hayes, Analyst

Got it. That's helpful. Lastly, on the Redstone acquisition, can you maybe give us more of a feel for how meaningful this is for you? I understand you want to go more affordable. That's probably the right move given the new administration's agenda, but how meaningful is this from an equity and earnings standpoint? Does it significantly accelerate your originations in the agency multifamily space?

Andrew Ahlborn, CFO

Yes, maybe there's two answers to that question. Adam, could you briefly discuss the business strategy in terms of how it fits with our existing Freddie Mac and the uptick?

Adam Zausmer, Head of Credit Officer

Yes, sure. Hi, this is Adam Zausmer. I mean so Redstone is certainly a very strong originator. They've been around since 2002. They are a market leader in this segment. We have spent substantial time with their team, and they are highly experienced in the space. As Freddie Mac licensed servicers, their focus aligns well with our product line, and we have some strong JV partners. From a collateral perspective at Ready Capital, multifamily is definitely a space that we're extremely focused on, given the evolving environment. There is significant tenant demand for affordable housing across the United States, and properties at risk often have lengthy waitlists and a nominal impact from events such as a pandemic, as the majority of the rent is subsidized. This presents a low-risk product for Ready Capital that enhances diversification from a credit perspective and income stream. This team is going to continue to operate as it is with a strong pipeline and significant government support for facilitating affordable housing projects. It syncs up extremely well with our investment strategy.

Andrew Ahlborn, CFO

In terms of the balance sheet, we have roughly $70 million in equity on hand with some earn-out components over time. Regarding pre-tax net income expectations, we're looking at approximately $10 million in ’22 with growth projected from there.

Tim Hayes, Analyst

Okay, I appreciate the comments there, Adam and Andrew. I'm going to leave it there. Thanks again, guys.

Operator, Operator

Our next question is from Stephen Laws with Raymond James. Please go ahead.

Stephen Laws, Analyst

Hi, good morning. Andrew, I wanted to follow up on an earlier question regarding the PPP fee income. I believe there is $95 million expected as that balance sheet runs off over two to four quarters. Is there any deferred costs that we should net out from that? How do we think about how much of that drops to the bottom line?

Andrew Ahlborn, CFO

Yes. The majority of that will drop to the bottom line. The upfront costs to produce the PPP loans are embedded in that discount and have been captured already. With that being said, there will be some ancillary variable costs related to forgiveness processing over the period, but they should be minimal.

Stephen Laws, Analyst

So very high margins there. I appreciate that. I wanted to ask for a little more color on the residential banking margins. It looks like they were 107 basis points for the quarter, but leveled off at 93 basis points by quarter-end. In the prepared remarks, I believe you said you expect them to be largely flat, but can you provide some color around margins in retail versus wholesale, which ones have experienced the most pressure and what you have seen in July?

Tom Capasse, CEO

Andrew, do you want to touch on that?

Andrew Ahlborn, CFO

Yes, certainly. When you look at the trends over the last month regarding our wholesale and correspondent channels, the compression has been much more pronounced. At quarter-end, you're seeing margins in the retail channels around 130 basis points compared to something more like 50 basis points in those other channels. I would expect that to remain fairly similar going forward.

Stephen Laws, Analyst

Great. And along that line of business, do you think you're staffed appropriately? As you look out into a slowing refinance environment, how do you intend to manage expenses? Is everything really variable there, so it'll take care of itself?

Tom Capasse, CEO

Yes. GMFS has been doing this since 1999, and they rank in terms of cost per loan, in terms of OpEx, top quartile or among the lowest. The way they do it is through significant reliance on qualified outsourced underwriters and closers. Therefore, I believe we have a relatively higher variable cost structure than other lenders, with a higher purchase and retail percentage, which provides for a little bit more earnings stability across the rate cycle.

Stephen Laws, Analyst

I appreciate the comments there. Thanks for your time as well.

Operator, Operator

Our next question is from Matthew Howlett with B. Riley. Please go ahead.

Matthew Howlett, Analyst

Hey, good morning, guys. Thanks for taking my question. As the balance sheet is growing, and I know that net interest income is going to be moving up over the next few quarters, I want to focus on the margin. The gains on margins on multifamily were $169 million on Freddie and the SBA net sale premiums grew 13%, although normalized levels... are they running above historical averages? How do we think about the sustainability of those margins in the long term?

Tom Capasse, CEO

Yes, certainly in the 7A space, historically, they have run 10% to 11%. So, they are a little elevated now. The other thing I’ll add is that, as you look at the earnings profile going forward, we have started to sell some percentage of our 7A production at lower premiums in an effort to build a higher servicing strip. So when you look ahead, we have decided for a portion of the assets to sell closer to that historical norm of the 10% premium, which results in a higher servicing strip. Thus, there is no gain on sale income due to excess servicing there, and then in the Freddie Mac space, they have been running right around that 150 basis point mark for quite some time, so maybe a bit higher in the quarter, but pretty normalized.

Matthew Howlett, Analyst

So, what you're saying is you've given up some of the gains on the SBA this quarter from higher retention of the servicing strip?

Tom Capasse, CEO

Yes, starting in the third quarter.

Matthew Howlett, Analyst

Got it. Okay, good. Okay. And then with the PPP income coming and you outlined some of the acquisitions and investments you made in the company, technology... Can you sort of go over how you are going to allocate in terms of raising the dividend, buying back stock, or making these investments? What can you tell us in terms of how you think about excess earnings? How that will be allocated or returned to shareholders?

Tom Capasse, CEO

Andrew you want to touch on it?

Andrew Ahlborn, CFO

So as we said in the first quarter, the Board has outlined that recognition of PPP income will be considered as part of that normalized dividend. However, it’s essential to note that PPP income did standard our TRS entities. So, there is the ability to retain some of those earnings, in the form of book value appreciation over time. Depending on how taxable income looks at the end of the year, which is highly dependent on the distribution of those PPP revenue streams, there may be a need for a special dividend. I would say the Board is really considering net income as part of our stable dividend strategy going forward.

Tom Capasse, CEO

Yes. And just to add to what Andrew is saying, one of the flexibilities of our business model and financial structure is that we have the ability to take excess capital and either, in this case, retain it and grow book value, or as Andrew said, look at increasing the dividend. It's unlikely since we're trading at book higher that we would buy back shares, as that would not be accretive.

Matthew Howlett, Analyst

Got you. And are you still looking at these types of Redstone bolt-on acquisitions? Any updates on the pipeline and the other programs you are looking at?

Tom Capasse, CEO

Yes, we're continuing to look at a number of opportunities, squarely in the whole SBC stress base. Some of it could be a migration into, for example, the housing market. It's pretty hot right now, and we think we have a long pathway to at least single-digit HPI in the US and select European markets. So we're looking at the commercial aspects of that, as evidenced by the lot loan transactions we've done in Texas and the housing construction in the UK.

Matthew Howlett, Analyst

Got it. That's interesting. Thanks a lot, guys.

Operator, Operator

Our next question is from Jade Rahmani with KBW. Please go ahead.

Unidentified Analyst, Analyst

Hi, this is Sarah for Jade. My first question is: do you view distributable EPS as sustainable at current levels, or should we expect a moderation in the back half of ‘21 and in '22?

Tom Capasse, CEO

I think as you look at the earnings profile in the current quarter, you see our core business is producing income levels at pre-COVID norms. That includes a significant reduction from our residential sector. When you take those levels and add the need to account for $95 million plus of PPP income over the two to four-quarter period, it gives us an idea of what that earnings profile looks like.

Unidentified Analyst, Analyst

Thank you. And my second question is, could you please provide an update on credit? What percentage of loans in the credit portfolio are non-accrual? How does that compare with last quarter, and what percentage are 60-day delinquencies?

Adam Zausmer, Head of Credit Officer

Hi, this is Adam. On the CRE portfolio performance, the 60-day delinquencies are at 2.8% versus about 1% pre-pandemic. We feel that 3% for 60-plus is a healthy target in this environment. We are certainly seeing stabilization trends across the portfolio, with 30-day delinquencies being less than 1% of the portfolio currently under forbearance. 85% of expired forbearances remain current. We continue to upgrade our risk scores, including loans that have improved performance for three consecutive months post-forbearance. The non-accruals today are at 3% compared to 2.8% last quarter. In comparison, the CRE portfolio's CMBS conduit shows 60-plus delinquency levels about twice that of Ready Capital, at around 5%. Our performance remains extremely healthy, and the portfolio has experienced zero losses through the pandemic.

Unidentified Analyst, Analyst

That's great. Thanks for taking my question.

Operator, Operator

Thank you. Our next question is from Chris Muller with JMP Securities. Please go ahead.

Chris Muller, Analyst

Hey guys, thanks for taking the question. Just a quick one from me. So on the transitional loans, can you talk about whether there was a deliberate shift from you guys over the last two quarters to originate higher volumes of that, or was it just a shift in the market that led to strong demand? Additionally, where do you expect that quarterly origination rate to normalize? It looks like the pipeline is dropping a little bit, but still remains relatively strong.

Tom Capasse, CEO

Yes. I'll refer to Adam, who is heavily involved on the production side. Regarding the overall market and demand for the Bridge product, there is indeed a COVID effect we're seeing, which we think has some legs into early 2022. Essentially, the sponsors that experience minor increases in vacancy due to COVID, such as multifamily or whatever, are electing to pursue Bridge instead of permanent financing to spend on deferred CapEx or planned CapEx to upgrade properties. There is that, plus we see higher transaction volume with weak sponsors selling to strong sponsors. With that, Adam, what would you comment on regarding the pipeline?

Adam Zausmer, Head of Credit Officer

Yes, we are still seeing tremendous activity from our Bridge platform. Our focus, from a credit perspective, is primarily on clean deals with a high degree of confidence in the business plans. Our sweet spot has been strong cash-flowing multifamily and industrial in attractive markets with limited credit risk. This strategy is mainly due to the stress environment that Tom mentioned, as we selectively execute larger transactions. Currently, about 90% plus of our portfolio is in multifamily, an asset class that we remain very confident about in this environment.

Chris Muller, Analyst

Great, thanks. And congrats on another strong quarter.

Operator, Operator

And speakers, we have no further questions at this time. I'll return the call back to you for your closing remarks.

Tom Capasse, CEO

We appreciate your time again for this quarter and look forward to the next quarter's call.

Operator, Operator

And that does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a great day, everyone.