Greetings, and welcome to Ready Capital Corporation third quarter 2021 earnings conference call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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, 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 on 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 third quarter 2021 earnings release and our supplemental information, which can be found in the investor relations section of the Ready Capital website. In addition to Tom and myself, we are also joined by Adam Zausmer, our Chief Credit Officer, and David Cohen, Co-Head of Bridge Lending on today's call. I will now turn it over to Chief Executive Officer, Tom Capasse.
Good morning, and welcome to those of you on the call today. In keeping with our practice of having members of the executive team, join Andrew and me on calls to display the depth of our team, I'd like to welcome David Cohen to today's call. David, a key leader in our organization, is co-founder of Ready Capital's Bridge Lending business, which has grown to be one of the premier sources of capital for owners of lower middle market properties in transition. Providing loans on transitional, value add, and event-driven commercial and multifamily real estate, David leads his core lending strategy, which accounts for nearly one-half of our capital allocation. Now turning to results, we reported distributable earnings per share of $0.64, 23% growth from the prior quarter.
This marks the sixth consecutive quarter where both return on equity and dividend coverage are in excess of our 10% and 105% targets. Both metrics are among the highest in our peer group, reflecting continued contributions across our multiple diverse business lines. At a high level, results continue to reflect post-COVID recovery and net interest margin in our core small balance commercial or SBC lending business, with stable contribution from our government-sponsored gain on sales segments. The post-COVID recovery in the SBC property market is lagging the large balance commercial real estate market, reflected in 36% and 11% year-over-year increases in SBC property sales to over $150 billion in prices through July. This trend is driving loan demand across our diverse product offerings.
We originated $1 billion of SBA loans in the quarter, holding consistent with record originations in the prior quarter. The volume was dispersed across our range of products which target all stages of an SBA property's life cycle from heavy transitional to stabilized agency loans. In our Freddie Mac Small Balance Loan program, we originated $136 million and expect annual volume to exceed $700 million in Freddie Mac and Bridge to Freddie volume by year-end. Despite quarterly volume declines due to changes in Freddie's affordability criteria and rate increases in the third quarter, demand for multifamily housing remains elevated. Freddie's recent rate reduction to as low as 2.6% in top markets is expected to drive increased volume through the end of the year.
In the quarter, activity in our conventional fixed rate segments picked up for the first time since the start of the pandemic. These products target stabilized or stabilizing properties with our fixed rate product, providing flexibility in term, repayment options, and property types. Originations in the quarter for the segment exceeded $105 million. Fixed rate originations of $71 million had an average rate of 4.1% and are expected to generate a low teen levered yield over their nine-year duration. CMBS originations of $34 million will be contributed to the company's first standalone CMBS offering and will generate gain on sale revenue. Our Bridge Lending business, which targets both heavy transitional to light transitional projects, was the star performer with over $730 million originated in the third quarter. I'm gonna turn it over to David to provide additional insight.
Thanks, Tom. Since the onset of COVID in 2020, and after the initial shock of the assumed negative implications on the commercial real estate lending market, there has been a forward-looking momentum in the market as lenders reentered the lending arena. The Ready Capital Bridge Lending platform quickly adapted to the changed market by focusing on certain preferred asset types and markets. We remain disciplined on credit. This is evident in evaluating approximately 1,500 new deals in the third quarter and closing on 3.5% for $730 million. To accomplish our continued growth and market share capture, we focus on several key areas. First, our closed transaction volume was driven in particular by our ability to provide sponsors and brokers with certainty of execution through our unique upfront due diligence review process.
In this market of uncertainty, execution certainty is paramount to being designated as the lender of choice. To accomplish these objectives, the bridge lending platform enhanced its infrastructure in the third quarter with the hiring of an additional four employees to support transaction execution in the areas of production and credit. Second, we continue to focus on the financing demand for value-add multifamily and industrial properties. Multifamily properties accounted for 87% of the third quarter volume and 88% of volume funded year-to-date. Our focus on multifamily assets is based on the company's proprietary geo-tier scoring model, which factors in local macroeconomic migration and demographic and absorption trends, as well as the predisposition towards the better classes of assets with qualified and experienced sponsors and operators that have the proven ability to execute a well-defined business plan.
In addition to our geo-tier model overlay, we are also focused on the property-level credit analysis, which includes evaluating the achievable pro forma rent levels for the value add improvements from the loan proceeds, vacancy, concessions, and bad debt, along with property and loan basis. Additionally, we underwrite traditional credit metrics such as stabilized loan to value and debt yield. This strong and detailed underwriting focus provides us with the confidence in the loan that upon stabilization, there is a clear path for an exit through a sale or refinancing into a fixed rate or agency loan. Another favorable sector focus for us benefiting from ongoing COVID dislocation is industrial. With the continuous increase of e-commerce sales, the industrial segment continues to show strength as supply chain demand is driving the need for industrial assets.
With industrial specifically, some key factors we evaluate are the property's location and corridor accessibility and whether suited for local and/or national tenancy and last mile distribution to the end user, as well as understanding the property's functional capabilities or obsolescence. This has been an incredible year for our bridge lending platform as we continue to build relationships and build upon our strong reputation as a prominent small and middle market balance-sheet bridge lender. We will continue our path of consistent growth and increase market share by working with best-in-class and experienced brokers and sponsors and providing a well-structured loan with the certainty our customers have come to expect. Let me turn the call back to Tom.
Thanks, David. To supplement our SBC direct lending, we also acquired $168 million in the quarter. The acquisitions included 49 loans with an average LTV of 58% and rates of 4.4%. The assets will be contributed to the company's 11th legacy loan securitization and are expected to generate a 15% return over a four-year duration. The current acquisition pipeline remains robust at $350 million. I want to highlight the growth in our CRE lending business and acquisitions business in 2021. Our expectation is that the 2021 volume across all products will exceed $4 billion, two times our normalized pre-pandemic originations in 2019.
Although the market backdrop has been constructive to this growth, we believe our investment in expanding our capabilities, the increased recognition of the Ready Capital brand, and the flexibility, certainty, and reliability we provide to our customers has been a significant factor in this growth. In our small business lending segment, which focuses on the Small Business Administration's or SBA 7(a) loan program, post-COVID recovery and small business loan demand continues to drive origination volumes. During the quarter, SBA 7(a) volumes reached $138 million, which along with the SBA's 90% guarantee and secondary market premiums averaging 12%, resulted in significant gain on sale margins.
The sustained demand from small businesses reemerging from COVID, the opportunistic staff and technology investments made into the business over the last four quarters, and product expansions such as the SBA 7(a) Small Loan program will continue to drive growth in this segment. Our expectation is that annual volume in 2021 will surpass $425 million, almost two times the average run rate from 2018 through 2020. I would also like to highlight that we completed the SBA's fiscal year, which ended September 30th, as the sixth largest lender nationwide. Now turning to our residential mortgage business, originations remain consistent at $1 billion, but as expected, average margin declined 15 basis points and averaged 92 basis points. Additionally, quarter-over-quarter, rate lock commitments fell 17% to $455 million, while the channel mix remains steady with purchase volume at 55%.
On the mortgage servicing right front, a high retention rate of 32% aided the growth of our MSRs to over $10.7 billion principal balance with a low pool weighted average coupon of 3.4%. We expect volumes to decline 20% in the fourth quarter due to seasonality and potential rate increases. Overall commercial portfolio growth was healthy, with SBC and SBA loans posting a 13% gain to $6.1 billion. Ready Capital's portfolio is not only differentiated from the peer group, but provides a superior risk-adjusted return. The portfolio is one of the lowest risk in the peer group, highly diversified across 4,500 loans, with the largest asset accounting for only 2% of the portfolio and a conservative average loan-to-value of 64%.
SBC credit performance in the portfolio continues to improve, with only 1.7% of loans 60-day-plus delinquent and only 10 basis points in forbearance. SBA performance also continues to improve, with 50 basis points of loans 60-day delinquent and 80 basis points in deferment. Remarkably, we have yet to realize a loss on a new origination. On the corporate development side, we remain focused on further building scale as a market leader in private debt solutions for our core middle market commercial real estate client base across the property life cycle. The merger with Mosaic Real Estate Investors is the next phase of our growth plan and a natural fit for our existing business. Mosaic, founded in 2015, is a leading non-bank lender, having originated over $2.5 billion of loans across construction lending, preferred equity, light value add, multifamily, and pre-construction development financing.
The $470 million transaction includes the acquisition of the existing Mosaic portfolio with an initial purchase price equal to 82.5% of the portfolio value and a $98 million future earn-out dependent on the achievement of certain milestones. Additionally, all origination and asset management staff will be merged into our existing SBA lending operations. This transaction furthers Ready Capital's competitive advantage via seamless expansion in our product mix from heavy transitional bridge to construction lending. Few non-banks offer a lower middle market sponsor full lifecycle financing solutions from construction to agency takeout, but now we do. Aside from the product expansion, the transaction is expected to be accretive to earnings due to the 12% portfolio yield and unlevered balance sheet. Pending shareholder approval, we expect the transaction to close by the end of the first quarter of 2022.
More information on the transaction can be found in the transaction presentation on the Ready Capital Investor Relations website. In terms of the outlook, the business continued to benefit from our diverse channels as well as the increasing scale and reach of our lending activities. The combination of growing net interest margin and servicing revenue, the increased scale of our gain on sale businesses, and the remaining benefit from our PPP efforts will continue to produce attractive returns for investors over the foreseeable future in strong support of our best in peer group dividend. With that, I'll turn it over to Andrew.
Thanks, Tom, and good morning. GAAP earnings and distributable earnings per share were $0.61 and $0.64, respectively, for the quarter. Distributable earnings of $49.4 million represents a 19% growth from the prior quarter and a 17.3% return on average stockholders' equity. Distributable earnings without PPP totaled $0.45 per share, a 20% increase from the prior quarter. The continued strength in earnings were driven by the growth in the portfolio due to increased lending volumes, the attractive economic climate for our gain on sale segments, and the realization of deferred revenue associated with PPP. Stable and recurring revenue from net interest income and servicing increased 22% quarter-over-quarter to $47.3 million.
The growth in net interest income was driven by a 13% increase in the portfolio, which as of quarter end, had a weighted average coupon of 4.9% and average margins of 240 basis points. Additionally, we recognized a $4.5 million increase in quarter-over-quarter accretable payoffs, which were partially offset by a $2.5 million reduction in interest income on mortgage-backed securities due to the continued liquidation of the existing Anworth portfolio. The servicing portfolio increased to $15.8 billion, with a weighted average servicing fee consistent at 29 basis points. Gain on sale revenue from our SBA 7(a) and Freddie Mac SBL operations remained notable at $19.7 million.
SBA production in the quarter continued to be at a 90% guarantee, and given the strength of the secondary markets, $117 million of sales resulted in net profits of $14.2 million. As we discussed last quarter, we are currently selling a portion of production at below-market premiums, which eliminates day one recognition of earnings but increases the retained yield over the loan's duration. Freddie Mac sales totaled $110 million in the quarter, generating $1.8 million in revenue, with margins remaining consistent at 160 basis points. As expected, net revenue from residential mortgage banking activities declined 15.6% to $12.9 million, despite consistent quarter-over-quarter production due to the normalization of margins to 92 basis points.
Additional income statement items of note include a $1.2 million increase in other income related to origination fees, which were offset by increases in compensation expense related to continued growth in staffing and bonus accruals, professional fee accruals, and fees due to Ready Capital's manager. Included in this quarter's earnings were $2 million in net income contribution from RedStone, which was acquired by Ready Capital on July 31. Pre-tax PPP related income totaled $17.7 million, which includes $18.7 million of interest income, offset by $1.2 million of interest expense and $200,000 of other income. On a tax-affected basis, PPP increased net income available to stockholders by $13.3 million. As of September 30th, we had $82.9 million of deferred revenue remaining, as well as $8.9 million of reserves pending resolution of their forgiveness process.
PPP assets declined $400 million due to the forgiveness of roughly 18% of the portfolio through September 30th, and we expect the majority of the deferred revenue to be accreted into earnings over the next three to four quarters. On the balance sheet, we continue to focus on the growth of the portfolio, the capitalization of the business, and funding the growth of the franchise. To start, book value per share increased to $15.06, and we expect further growth of book value due both to mark-to-market on the MSR asset as well as the retention of earnings inside our taxable REIT subsidiaries. On the asset side of the balance sheet, the loan portfolio increased to $5.9 billion as a result of $1.1 billion in originations and acquisitions, net of $500 million in payoffs.
73% of the portfolio is floating rate, with 70% of the remaining fixed rate loans match funded. This growth was complemented with a $25.8 million increase in the servicing assets due to net additions, including those acquired with RedStone, as well as mark-to-market improvements. To fund the growth of the portfolio, we liquidated $140 million of the remaining Anworth RMBS positions in the quarter. The increase in unconsolidated joint ventures was due to the inclusion of $35.6 million of assets related to the business combination with RedStone. As of September 30th, total leverage inclusive of the Paycheck Protection Program liquidity fund was 5.9 times, with recourse leverage at 2.2 times.
We recently closed a $350 million, 4.5% senior secured note offering to refinance our existing notes as well as to fund the robust pipeline. This deal continues the trend of reducing the company's cost of capital as we scale. Today, the weighted average cost of corporate leverage is 5.3% compared to 7% on December 31st, 2020. Additionally, the successful repositioning of the preferred stock inherited in the Anworth transaction is reflected in the new Ready Capital Series E on the September 30 balance sheet. In the quarter, we also completed the company's sixth and largest to date CRE CLO.
The transaction securitized $653 million of originated bridge loans at an advance rate of 83% and a weighted average cost of 133 basis points, with the most senior bond having a +95% spread. We plan to be in the market with our seventh CRECLO in the fourth quarter. With that, we will open up the line for questions.
Thank you. Ladies and gentlemen, at this time, we will be conducting a question- and- answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Tim Hayes with BTIG. Please proceed with your question.
Hey, good morning, guys. First question around the Mosaic acquisition. Can you just give us a little bit more color around the profile of these loans? You know, how does the collateral compare to what you might lend on from a transitional standpoint? Can you talk about kind of the credit profile and how these loans performed through the pandemic and kind of since the company started since 2015? Any, you know, material realized losses in that business to talk about or, also, I just want to touch on the maturity schedule, what that might look like over the next couple of years. Thanks.
Thanks, Tim.
Sorry . Hey
I'm going to hand off to Adam. Just as a preface, Adam and his team conducted extensive due diligence. There's roughly, what is it, Andrew, Adam, roughly 35, 38 loans over the last six months. Adam, maybe you can kind of do a bit of a deep dive in terms of, you know, the broad profile, credit profile of the portfolio.
Yeah, sure. Hey, hey, this is Adam. Thanks for the question, Tim. You know, the overall credit profile of this portfolio is strong. You know, we have a healthy basis in the loan portfolio, got moderate weighted average as-is LTVs based on fresh valuations that we ordered through our due diligence process. You know, the portfolio has good property type and geographic diversity. Approximately 95% of assets are in what we call geo-tiers one through three, which are the largest and most liquid assets, excuse me, most liquid markets across the country. Approximately 25% of the portfolio is backed by multifamily properties, which obviously, you know, is a lower volatile asset class that, you know, we're very bullish on.
You know, majority of the construction projects are, you know, well into construction phase with guaranteed maximum price contracts. This mitigates rising construction costs that the market's experiencing due to materials and labor shortages, and then also supply chain issues. In terms of a breakdown of the portfolio, you know, construction represents about 60% of the assets. I'd say, you know, from a geographic perspective, about 40% of the assets are on the West Coast, markets that we, you know, we like Los Angeles, et cetera. From a credit performance perspective, you know, the performance through the pandemic has been positive, with over 90% of the portfolio fully performing today. Two assets are in default, and there are three REO assets.
Two of the REOs were due to the pandemic, and there was one legacy REO. Three to four assets have experienced a delay due to the pandemic, which is, you know, material supply shortages and/or cost overruns. We're comfortable with the assets due to the projects being backed by reputable, well-capitalized developers and sponsors, who during the pandemic contributed additional equity as needed and had executed completion interest and carry guarantees at closing of the deals. There's six deals that received extensions since the onset of the pandemic. And wanna highlight that six deals, you know, have been repaid at par since the beginning of our due diligence process, which is extremely favorable.
That's great color. I appreciate that. Just the maturity schedule there. What are the duration on these loans? Do you expect to be facing some repayments in the near term? Yeah. I'll leave it there and then I have maybe one or two follow-ups.
Yeah, sure. The you know, typical tenor of these loans is three to four years. And these have you know, various extension options. Then also you know, I'd say the weighted average is about two years remaining on the majority of these. Then in terms of.
Okay.
You know, refinances and payoffs, you know, there's certainly a number that are in process where we're working closely, excuse me, where Mosaic is working closely with the sponsors on their refinance and asset sales.
Okay. Got it. You know, the collateral here, I mean, are these natural candidates for you guys to then offer some type of heavier transitional loan, once it completes construction and gets CO, or, you know, is it different type of collateral than you're normally targeting?
No, it's very similar. You know, given the bridge program that David walked through, I mean, there's certainly a significant amount of opportunities for us to do bridge financing on some of these assets. You know, specifically where the projects are in the horizontal phase. And, you know, the entitlements are complete. The pre-development phase is complete, and they're looking to go vertical. So David and his team, they're gonna be building out a construction product at Ready Capital, where we can offer you know, these clients bridge. And then additionally, you know, on the more stabilized assets that are within the portfolio, you know, there certainly would be a very good fit for our CMBS and fixed rate platforms. So certainly a lot of opportunities there.
And then also, you know, we have multiple investments in multifamily properties, focused mostly in the Southeast, where we can.
Mm-hmm.
You know, work with some of our partners on the agency side to offer you know, some of the large balance agency, you know, Fannie or Freddie conventional.
Got it. Okay. It sounds like yeah, a nice kinda lending pipeline for other parts of the business too, and then.
Yeah.
You just talked or mentioned earnings accretion from the deal. You know, can you size that for us in the near long or near/intermediate term, what you kinda expect the earnings contribution from this portfolio to be, upon closing and maybe where you see it growing?
Hey, Tim, this is Andrew. I think you gotta look at it or we're looking at it in two ways. The accretion is gonna come from the fact that the portfolio on an unlevered basis is earning, you know, above our target returns. So it's roughly around 12% unlevered return here. That'll be the first part. The second part will be just, you know, the operating leverage that comes with integrating that business into our existing infrastructure. We certainly expect accretion from that as well. And just the reinvestment of the additional, you know, $470 million of capital, whether through leverage or just the natural cash flow of portfolio into our existing products.
And so, you know, when you look at the return profile of the company today, given PPP is, you know, pushing it north of 15%, that's a hard hurdle to overcome. As that runs off over the next two to three quarters, the profile of this equity is certainly in excess of the sort of the net run rate of the existing business.
Right, right. Makes sense. Okay. Appreciate that, Andrew. Just last question from me around the acquisitions this quarter. Looks like, you know, a portfolio of low LTV, high-yielding loans. Can you just give us a little bit of color on where this acquisition came from, what kind of loans these are, and if you think you can even improve? The advance rate looks pretty low. I'm assuming that's the financing on the loans there. I mean, are you able to kinda put those on your lines and get better, y ou know, better leverage there and boost that ROE a bit? Any color on that would be helpful.
Andrew, you wanna touch on that?
Yeah, sure.
Sorry, Andrew. Hey.
Yeah. Hey, Tom. Yeah, sure. You know, on the recent acquisitions, you know, small balance loans, spread about a nice, you know, geographic profile, nice diversity. You know, sourced through a regional bank. You know, as you can see, you know, certainly, you know, extremely low LTVs, clean pay histories historically. You know, nice amortization given the seasoning in these assets. Again, you know, just from a diversity profile, excuse me, from a diversity profile, you know, fits very well with what we've been doing. Those assets are performing extremely well.
Got it. Thanks for the color, guys. I appreciate you taking my questions this morning.
Thanks, Tim.
Our next question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.
Hi, good morning. One quick follow-up.
Morning.
To Tim's question. You mentioned the 12% on levered yields. How much leverage is, you know, you think is appropriate for this type of construction loan, and kind of how do we think about the type of financing you'll use?
Yeah.
Andrew, you wanna take that?
We certainly think to the extent we, you know, apply asset level financing to the portfolio, probably gonna have advanced rates slightly lower than where our existing products are. We do think the balance sheet provides, you know, optionality in whether we apply asset-specific financing or we do something like a term loan given the sorta unencumbered nature of the balance sheet. You know, we'll work through those options depending on the markets between now and close. We do think it provides us with that flexibility.
Yeah. One thing I would add to that, Andrew, is that one of the unique aspects of construction loans is the existence of a fairly liquid syndication market, either pari passu or A/B notes. That's another way we're gonna look at leverage on this portfolio. We're looking to manage the overall exposure in terms of net equity, that kinda 10%-20%. On a pro forma basis, this will be about, what, Andrew, 16% net of reserves. That's kinda how we're thinking about the, you know, managing the net equity exposure as well as the overall, you know, amount of recourse leverage.
Great. Switching to the Resi Mortgage Banking business, can you talk about, you know, you've done a great job at maintaining volumes even as you've seen your mix shift more towards purchase the last six months? Can you talk about the outlook, both on volumes and what you're seeing in margins across the channel? Any opportunities or headwinds created by the likely increase in conforming limits here, in the near future?
You know, GMFS has continued to outperform and will in terms of their versus their peer group as measured by STRATMOR and other data we track. To answer your question, I think our guidance is for a decline of roughly 20% in the next quarter. As far as margins, I think we've normalized to 92 basis points this past quarter. I think, Andrew, you can chime in, but our expectation is a normalized range now of mid-90s to a little above, well, call it 100 to 125 in terms of a bandwidth. I think you're seeing the expected normalization occurring.
But I will point out that if you look at some of the larger public comps, they've outperformed in terms of both volume and margins and also the stability. Remember, the strategy with our residential mortgage banking segment is to retain MSRs as a hedge for production declines, which has worked out very well in terms of normalized ROE. They benefit from a much lower volatility in their lower convexity risk in their MSR book due to the nature of the underlying geographic area, Louisiana, et cetera, and the lower WAC in the portfolio as well.
Great. Lastly, Andrew, one follow-up. You mentioned $83 million of PPP income remaining roll into earnings in the next three to four quarters. Is there any lumpiness to that? Is it gonna be sort of straight line recognition? How do we think about putting that into our models?
Yeah. I do think there's gonna be some volatility in how that rolls through earnings. If you look at the speed at which the first round of PPP was forgiven, there were certainly spikes in that processing between months six and 10, of which we're sort of, you know, we're rolling into. I do expect there's gonna be some, you know, increased activity over the upcoming months with the tail, you know, coming behind it. Unfortunately, you know, not straight line. Do think there's gonna be some increased activity over the fourth and first quarters. Then, probably the effects will be less pronounced as we move from there.
Great. Appreciate the comments this morning.
Our next question comes from the line of Crispin Love with Piper Sandler. Please proceed with your question.
Thanks. Good morning, everyone. First on the Mosaic transaction, I'm just looking for a couple of metrics. Is it fair that I guess, as it stands right now, that earnings should be a run rate around $50 million-$55 million? I'm just curious of what Mosaic should be on a run rate for revenues, and are those revenues primarily or vast majority net interest income or if there's anything else there?
Yeah, I can talk about the current earnings profile. You know, as you look at the numbers this quarter, the normalized business in the absence of PPP is certainly running higher than our expectations on return on equity as well as the dividend. When you layer on, you know, $82 million and change of earnings to be recognized over the upcoming quarters, we certainly think that's gonna push earnings to levels we're seeing, you know, this quarter, for at least the next, you know, call it two quarters.
In terms of the earnings contribution post closing, the way I would look at it is that the equity allocated into the Mosaic strategy is gonna earn roughly an 11% bottom line return, you know, with the majority of that revenue, in fact, coming on the interest income line item. You know, given there's no real leverage flowing through the financials today, the offset to that is gonna be in the form of just some of the normalized OPEX.
Okay, great. Thanks. That's helpful. Then, just broader on the Ready Capital business. Can you speak to the trajectory and the sustainability of core earnings? You've definitely posted a really solid quarter, this quarter at $0.64. I'm just curious, a little bit about what you think the trajectory could be and what some of the puts and takes will be? I know Resi like will soften a little bit, as you noted with the 20% drop in originations. SBC originations have remained very strong. Do you expect that momentum to continue? Just kinda how should that flow through and impact the overall core earnings of the business?
Yeah, it's a good question. You know, when we look at our 2022 business plans, what you're seeing is the, if you will, transfer from the large gain on sale revenues resulting from the pandemic stimulus packages, notably PPP, to the relevering of the SBC origination and acquisitions book, such that you're gonna see kind of a more of a prorated mix between. You know, right now, the equity allocation, if you look on the deck, I forget which page it is, but it shows that we're now at about 90%, 90/10 SBC equity allocation and 10% on the gain on sale businesses.
What you're gonna see in subsequent quarters is a normalization of the NIM related to that core SBC capital-heavy business. That's being supported by record originations, right? We did $4 billion. We will likely do $4 billion this year, 2x the normalized 2019. As we see that continuing, especially in David's bridge business. That and the other thing to point out there is that with the capital markets execution on our, in particular, our CRE CLOs, which only trade about 5 basis points higher on the AAAs than the benchmark ones like Blackstone, et cetera, our ROEs are better than what they were pre-pandemic. Call it maybe by 100 basis points or so on those businesses.
That will continue to support kind of a high single-digit ROE. And then the gain on sale businesses continue to grow post-pandemic, in particular the SBA with the rollout of the. You know, we hired a number of added 20 staff to that business and also are rolling out new products like this SBA 7(a) small loan program. So we expect continued market share gains in that segment. We're adding incremental businesses like RedStone, which are capital light and also are a benefit from government-sponsored programs, in that case the Freddie Mac tax-exempt program. That'll be offset a little bit by, as we talked about, by the normalization of the residential mortgage banking.
Kind of a long way to answer your question, but, you know, we are very bullish on the prospects of on the origination front going into 2022, which will support continued growth in the core NIM high, which supports a high single digit ROE, supplemented by the one or two points attributable to the gain on sale businesses.
Okay. Thanks. Thanks for all the color there. If I could just sneak one more in. During prepared remarks, you talked about the 90% guarantee on SBA. Do you expect that 90% guarantee to hold going forward? Or do you think it could be moved back to 75%? If that were to happen, any big impacts to the business?
Well, it's a good question. It's actually in the reconciliation bill right now to continue the 90%. The 90%, remember, was borrowed from the Obama incentives from the GFC, and then obviously implemented as part of the CARES Act. It is in the current reconciliation bill. You know, the way that works. We're pretty active in our trade, non-bank trade association, NAGGL, and we're getting guidance from them that, you know, it's a bit of a coin flip as to whether that stays in. From our standpoint, our base case scenario on earnings assumes a normalization back to the 75%. If we get the 90%, that would be upside in the SBC gain on sale contribution. I'm sorry, SBA gain on sale contribution.
Great. Thank you for taking my questions, and congrats on a great quarter.
Thanks.
Thanks, Crispin.
Our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question.
Yes, thanks for taking the questions. Tom, I'm curious what you make of the current lending environment. A lot of the mortgage REITs have seen a surge in production. A lot of the CRE brokers are citing debt funds as the most competitive, and many have a CLO exit. Also secondarily, how comfortable are you with the increase in average loan size that the Mosaic portfolio will introduce to the Ready Capital business?
First on loan demand, that's obviously being significantly driven by transaction volume. Remember, you mentioned the other mortgage REITs. They're in a rarefied space, right? They're at large balance. Their average balances on transitional loans might be in the hundreds of millions, and ours is, you know, roughly in the, call it the $12 million-$15 million. So we squarely focus in the lower middle market. There, you're seeing kind of a lag recovery in terms of transaction volume. Through July, it was up, I forget what it was, 17% to $150 billion. That's driving a lot of the growth in David's business. David, maybe you can just comment on that.
I'll comment on them and Adam comment on the Mosaic exposure. Dave, just maybe you could comment on what you're seeing in terms of your core business, in terms of competition from debt funds and demand from your client base.
Yeah. I think it's very competitive right now. You know, as I mentioned in the presentation before that, you know, the certainty of execution is paramount right now. I think that a lot of our clients are looking for us through this upfront process we have to review deals to go from beginning to end without much change. Now, the volume is definitely being driven across the board, all states. You know, there's a lot of you know, movement and migration to the Sun Belt or wherever it may be. The demand in particular for multifamily has been, you know, very ferocious. It's been very. There's been a lot of volume in that market.
I think that, you know, since we focus on asset types, the multifamily and industrial in particular, that's where we're seeing the most value add opportunities right now. And then followed by, you know, I would say self-storage and minimal on the hospitality, retail and then, you know, some office. But the demand is across the board and, you know, it's gonna continue so long as there's a good work from home platform that, you know, our tenants are looking to work from. Yeah, I think it will continue going forward. The volume is the highest I've seen it in a while.
Yeah. Just last point on that, then Adam maybe touch on the Mosaic in a moment. Dave, I think another point you make in our management meetings is the competition in your strata of the market, the lower middle market is not as great in terms of new entrants and, you know, pricing and credit aggressive, you know, being aggressive on credit in the large balance space, correct?
That's 100% correct, Tom. You know, once you get up to the over $50 million or even over $100 million of a loan size, the whole sphere changes in terms of the competitive nature. But there are very few lenders in the $5 million-$20 million. Since we focus in that area, in the middle market, small balance, it's definitely given us an advantage to one, have diversity and also to be able to structure and close on those transactions.
Yeah. It's helpful. In terms of the second part of the question, Adam, maybe just touch on the current Mosaic transaction, how you and your team are gonna manage the existing exposure, and then the go forward in terms of, you know, we're bringing on. They have a very strong team in Mosaic. Mosaic was formed by a visionary and a pioneer in the CMBS market, Ethan Penner. They, you know, that team is gonna be based in California and will be integrated and continue to originate the construction loans. Maybe just Adam, very briefly touch on the existing exposure and then the go forward.
Yeah. Jade, I think you touched on you know, the comfort around the larger loan sizes. You know, I think in regards to loan sizes, you know, I like to say that you know, the smaller deals you know, the underwriting on those are you know, often more complex than the actual larger transactions, right? The risks are the same, et cetera, but you typically have with a smaller loan you know, less sophisticated sponsor, et cetera. I think you know, with the Mosaic portfolio, these larger loan sizes you know, the sponsors and developers are and developers are often you know, more institutional than the small amounts borrowers, like I mentioned, more experienced, well capitalized. Should they run into issues they can you know, easily tap into you know, their equity partners if needed.
That certainly gives us some comfort on the loan sizes. In David's bridge business, you know, you've seen over the years that, you know, within our own portfolio, the existing portfolio, that our average loan sizes have been increases. I think that also helps with economies of scale in terms of underwriting and expenses related to the business. You know, to Tom's second point about, you know, the team that we're bringing on. You know, during the due diligence process, we spent a lot of time out in these markets with the Mosaic asset managers, with their leaders, et cetera, touring the markets, touring the assets, you know, doing deep dives at the asset level.
What we came around with is that, you know, these are, you know, very experienced solid asset managers that have strong relationships, not just from a sponsor and client perspective, but from a third-party perspective, from local partners in the market that can assist with, you know, just local intel that you need on these type of assets. You know, working with those has been fantastic and, you know, we're gonna be bringing them on to the Ready Capital team. You know, that also gives us significant comfort that, you know, they're gonna be helping us manage these assets going forward.
Thank you. Just on Mosaic manager, you mentioned Ethan Penner. I'm wondering what his role will be with respect to Ready Capital. I think the language says that the Mosaic manager will continue to provide investment management services to certain, you know, prospective and existing clients, which I assume is of their own clients. Just curious about the role that they'll have with respect to Ready Capital.
Yeah. Mosaic will be retained essentially in a specialist asset manager role, you know, to manage the, a number of the assets in terms of disposition strategies, advance, you know, how we, you know, syndication, et cetera. That there's an alignment there in terms of their existing LPs because there is the contingent, equity, right mechanism, the $98 million, which, will accrete 90% to the existing Mosaic shareholders. That, we think this arrangement creates a strong alignment of interest both for Ready Capital, as well as the, Mosaic, LPs.
Thank you very much.
Thanks, Jade.
Thank you.
Our next question comes from the line of Steve DeLaney with JMP Securities. Please proceed with your question.
Thanks. Hey, good morning, everyone. Congratulations on the really strong results. Yeah, I think when I look at what you've done with your performance, the legacy businesses and the acquisitions that you've bolted on in the last six months, I think you've really taken investor focus off of the PPP and the timing of that, et cetera. You know, props for that. I think that's good for the stock. Starting off today, I think Tim nailed it on his first question. I think the question of the day is understanding the Mosaic portfolio in terms of property types and geo, and you certainly covered that. We also know that, you know, the team's gonna stay. How many people are you said they're based in California.
Just roughly how many people are coming over to manage that portfolio?
Adam, you wanna touch that?
Yeah, it's a.
Yeah, sure. On the asset management side, it's about eight individuals.
Uh-huh.
There's an origination team of two individuals. The combination of that, right, the origination folks that obviously originated these loans, underwrote them, et cetera, that's gonna be a huge benefit for us as you know, we move forward here. It's about 10 folks based in California.
Okay, great. In that group, obviously you've got the existing portfolio. Tom, as you look forward, is this something that you structure something as a separate TRS, or do you see this group as sort of a sub manager to Waterfall itself? I guess what I'm really asking, Tom, is do you see this other than acquiring a portfolio, do you see this having legs? If it does, kinda how does it fit into the overall structure of the company?
Yeah, no, that's a good question, Steve. This unequivocally is a great bolt-on fit for our existing product mix. Because think about it, if you're a sponsor, a lower middle market sponsor, you know, what we offer them now through Dave's business is a, you know, a so-called heavy transitional, right? Where they.
Right
Acquire it, there'd be a lot of CapEx, but it's not ground up construction. Now we go to ground up construction, which is typically the bailiwick of the banks. Very few non-banks in this space. You know, like Bank OZK, etc., they have much lower LTVs, you know, just given the nature of the high capital charges for construction loans with banks, they're more in the 50s-ish, 60 at most. As a non-bank, we can go a little bit up the LTV spectrum, not by a lot, but you know, kind of like a unitranche with a leverage loan. But for us, this clearly is a new existing product offering that, you know, will fit our existing sponsor base.
For example, just to give you one example, with the RedS tone, they do construction lending, right, for affordable with a takeout.
Right.
From Freddie. Well, now we can provide that even more, enhance their business by offering construction lending for affordable multifamily with a, you know, with a known takeout with the Freddie tax-exempt bond. You know, this clearly is a product fit. The individual, Alex Ovalle, who's coming on board, is very well respected in the industry. He was with Ethan back in the Nomura days 25+ years ago. I think, you know, we see a very, a seamless product fit for this construction lending vis-à-vis Dave's transitional lending business.
Great. That's great to hear. A quick follow-up on RedS tone, since you mentioned it. I've been trying to understand exactly how they fit into the mix, and whether do they focus more on, you know, low-income housing tax credit syndications or actually buying the MRBs and the GILs. Exactly, you know, what is? Can you kinda clarify exactly the products they have to support, you know, low-income affordable housing?
Adam, you wanna touch on that? I mean, just to be upfront, though, that they're not a syndicator.
Okay.
They basically utilize the Freddie Mac tax-exempt bond program. Adam, maybe you can just kinda touch on.
Got it.
Their core business.
Yeah. Yeah, sure, Steve. You know, their sole focus is really providing construction and permanent financing for, you know, the preservation and construction of affordable housing.
Yeah.
Primarily utilizing tax-exempt bonds. You know, just some things that they've done over the years. They've closed over $5 billion of multifamily affordable, 60,000 units. They got a $1.7 billion pipeline today of affordable projects. They have a Freddie Mac seller servicer license for the target of affordable housing. They've done, like, 19 tax-exempt bond securitizations to date through the Freddie Mac program. To Tom's point, I mean, yeah, their sole focus is really construction and permanent financing for affordable housing. Clearly, there's a significant demand from a tenant perspective to get into these affordable projects.
Got it. Yeah, a highly specialized and focused loan brokerage kind of platform. Obviously next year, starting next year, you know, yes, we got an increase in the caps to $78 billion, but 50% has to be affordable. Sounds like a really nice piece addition. Listen, thanks for the questions and for the comments this morning. Thank you.
Thanks, Steve.
Thanks, Steve.
Our next question comes from the line of Chris Nolan with Ladenburg Thalmann. Please proceed with your question.
Hi, my questions have been asked and answered. Thank you.
Thanks, Chris.
If there are no further questions in the queue, I'd like to hand the call back to management for closing remarks.
We again appreciate everybody's time. It was a good quarter, and we look forward to subsequent calls. Have a good day.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.