Thanks, everybody. Welcome, everybody. Thanks for coming. I'm Matt Howlett. I'm an Analyst at B. Riley. I wanna welcome Ready Capital. We have the management here, Tom Capasse. And what I wanna do is start off with just a written introduction for those that aren't familiar with Ready. I've covered this stock for several years, and what I've noticed from the onset was the differentiation of the company. It's a REIT, and it's one of the largest, but it's different than what traditionally you see out there from the commercial mortgage REIT sector. So Tom, why don't you start off with just a little introduction, then we can get into some Q&A?
Yeah, really, really briefly, Ready Capital is the fourth largest commercial real estate REIT in a peer group of, I guess, around 24 or 20-20 REITs. We achieved that, the capitalization over a decade through about 9 M&A transactions, which, you know, it differentiated us in the sector. So our business today is really really simple. It's two things. One is the capital-heavy bridge lending for multifamily, where we focus on the lower middle market. You know, our average balance is around $15 million. So it's really in between the mom and pop and the big sponsors, really generational families that do real estate development in local markets with a focus on multifamily. And our, our...
Well, those loans are underwritten for takeout in the agency market, multifamily. We have a license for Freddie Small, and we have strategic partnerships which enable us to undertake refi in the once stabilized in both Fannie and Freddie markets. The other side of what we do is, and let me say, just step back, that's about 90% of our invested capital, which is about $2.67 billion, including the pref. That generates in a normalized environment, around 8.5%-9% ROE.
The other side of what we do, which is, which is, 10% of the capital, is our government gain on sale businesses, which is led by the SBA 7(a) business, where we're the fourth largest SBA lender in the country and the largest non-bank. And that enables us to tackle the owner-occupied market for commercial real estate lending. And there, we tend to also focus on the real estate-related side of the SBA business, which we, I think, we might touch on in some of the follow-on questions. So that's a quick introduction to Ready Cap.
Great.
Oh, I'm sorry, one other thing. It's externally managed by Waterfall Asset Management, which is one of the larger structured credit managers globally. It's about $13 billion-$14 billion of net assets, of which Ready is about, you know, $2.7 billion of that. Sorry about that.
Great. Well, we're gonna take your questions, but I'll start off. Let's just jump into what you're seeing in the market. You mentioned in the Q&A on the first quarter call, you're seeing three diverging trends. The first was sort of some late cycle stress in multifamily, followed by the recycling of capital from some of the deals you've done, and then offset by this trade that you did where you put on, moved a lot of loans, whole for sale, mainly office, and you decided to forgo the NPV and sort of redeploy that capital. Just go over what you're seeing, some of those diverging trends and where this all leads.
Yeah, there's a lot packaged in there, but I think the two main... maybe to play back your question is, what's going on in the multifamily space, which is the large part of-- that's 85% of our book, and then how are we, from some recent M&A transactions, how are we repositioning our capital? Is that fair enough?
Absolutely.
So multifamily, just to touch on that, we split our portfolio, our about $10 billion of gross assets into our acquired portfolio, which is M&A driven, which was the Broadmark transaction, a public REIT that we acquired in 2023, and the Mosaic, a private REIT transaction we did in 2022. So that's about the originated portfolio, which is 85% multifamily, is currently around 7.9% delinquent. And a lot of that has to do with the fact that our CRE CLO structures, which are used to finance that book, are very investor-friendly.
We have a OC target of trigger of 1.5%, the industry is 5%, and the deals are static, meaning we can't buy loans out of the trust or swap good for bad loans. And the third thing is, we have a large bank servicer that's more familiar with more traditional stabilized CMBS. So to make a long story short, that's inflated our delinquency levels versus the industry because we haven't been able to modify loans the way other lenders that have the flexibility have been able to do.
So we're of the 7.9% that's currently delinquent, roughly $500 million of that or over 75%, has been designated, it's about a half, two dozen loans that have been designated with Key for refinancing and modification over the next three months, or we're moving servicing to another special servicer that is more aligned with our approach to the more fluid structure of modifying a bridge loan versus a stabilized office loan, for example. So I think we have a path forward to... We believe we have achieved peak delinquencies, and we have a path forward to significantly reduce that delinquency bucket. Now, just to circle back to why we're seeing the delinquencies?
And what's really interesting is, we're definitely seeing a structural shift in, in multifamily performance, and we, we believe we are achieving a market bottom in, in select markets. And I, and I'll bifurcate that into two particular valuation impacts. Number one is negative absorption. So deliveries, you may have seen in the Journal today, deliveries peaked at, a $500,000 -- I'm sorry, $500,000 in, 2022, 2023, to some extent, 2021. Those deliveries are now coming online in select markets. So if you draw a heat map of the United States, you could see, certain markets where the, deliveries divided by inventory is over 5%, which is versus the norm of around 1%-2%. So those markets, we're seeing a dramatic decline in single-- high single-digit declines in rents: Austin, Atlanta, some other markets.
So we have limited exposure there because we used our GeoTier Model, which ranks the markets in the U.S. into 400 MSAs ranked 1-5, and we generally avoided those markets. But what we're seeing is a lot of the projects are being re-marked to that new normal in terms of rent declines. And that will be temporary because of the long-term demand-supply imbalance with respect to housing in the United States, which favors buying over, I'm sorry, renting over buying.
So that's one thing we're seeing, is a lot of the appraisers are now coming in when new money, of which a lot of which, you know, the last I saw on Preqin data, there's been about probably $100 billion-$200 billion of real estate equity capital being raised for distressed multifamily opportunities. The second thing we're seeing in terms of appraisals and valuations is a repricing of the DSCR, the debt service coverage ratio, in a modification to re-reflect increases in OpEx, which are about 40%, and a big driver there is insurance, believe it or not. The second part is obviously rates, and where most of it's being repriced to where the forward curve is today.
So a lot of what's going on in these restructurings, and to some extent, the bank market, where they do have bridge financing, is a rapid recalibration of supply and demand, where supply is hitting the market, gonna have a short-term impact. It'll happen over a 6-12-month period, then the market will, demand will... The market will bottom, and you'll have demand kick in again. 'Cause starts, I think, today they published, starts the last month were down to almost 300,000 units versus the 500,000. So the market is quickly curing and hitting bottom, in particular, in markets where there was oversupply. And so we see a lot of opportunity to do solutions capital around the influx of equity capital in those markets.
So that's a lot of what's driving a lot of our delinquencies. You know, you may have heard the dirty syndicator word. We have some exposure to that, not as much as other lenders. So those loans, which were larger loans, they went into distress right around the third quarter of last year, third or fourth quarter.
So most of the, in our portfolio, most of the significant 4 or 5 ranked loans have been flushed through, and now it's a matter of working through a modification with our servicer to get that, you know, 8% on that modified portfolio down to a more normalized level and reinstate the non-accruals to get the dividend back up to our target 10 over the next 3-4 quarters. So that, Matt, that's the asset quality side, and I think to unpack the other side of your question, which is the Broadmark acquisition, so... Or the acquired portfolio. So today, the acquired portfolio is about 13% of our equity capital. And so what we did was...
Then, by the way, the Broadmark acquisition delevered our balance sheet by from 5x to almost 3x, which gives us a lot of debt capacity in the back half of this year. But we did have a delayed liquidation because of the distress in the, you know, in the market overall. They were more hard money, single family and small balance bridge. So what we've done, currently, we announced last quarter a liquidation of around $655 million of our Broadmark portfolio, which, for which we took about a $150 million reserve, and we hired Newmark for the large loans, which in that portfolio are $5 million, and the small loans, Mission Capital. We have roughly 300 NDAs.
You wouldn't believe the amount of opportunity capital that's out there targeting these assets. So we're confident we're gonna achieve execution near the mark. So that portfolio, we've liquidated 35% of the Broadmark through the first quarter. 50% of this portfolio is Broadmark, and so by the end of the third quarter, we'll have liquidated 70% of the Broadmark portfolio, and we'll retain 30%, which is our high-yielding core assets yielding north of 15% ROE.
I guess that the other point to make with this is that the combination of this asset sale, which will provide about net equity capital of $250 million, along with a closing last week of an innovative repo facility on our CRE CLOs for $100 million. The divestiture of our residential mortgage banking business, based in Louisiana, which will provide another $75 million, and some odds and ends will provide organic liquidity of around $500 million between now and the end of the year, and that excludes any potential debt issuance.
So, we're able to redeploy that capital into various new originations and capital solutions, buying loans out of the CRE CLOs, and that will provide us with a pathway to normalize our earnings back to the 10% ROE that we've earned over the last trailing seven years. So that,
That's a lot.
It's a lot there to unpack there.
I wanna open it up to the audience. I'll just take it just one question. What are you seeing in terms of on the new origination front? Are you starting to see, you know, demand pick up? Where's pricing? I know it's been slow. Are you seeing more transaction volume? Is that getting going on the, on the front? Then the second question is, what are you seeing from banks? Some of the banks, obviously, are holding this paper. Have they marked it down yet? Are they selling? I know you have those two channels. How can we, you know, sort of look at the interplay, Ready buying, originating in either of those channels going forward?
Yeah. So in the regular way, direct lending market, we're seeing transactional volume pick up, in particular with respect to the what we call Capital Solutions. So providing a unitranche deal to help refinance a, there's a lot of these private debt funds that got hung with inventories that we're trying to do CRE CLOs. So we'll go in and provide. We'll mark to market the project, revamp the business plan, and we'll do a unitranche deal, let's say, at a 70%, 80%, 80%, 70%, 75% LTV. So those, and then a number of sponsors are also buying multifamily that's distressed. And so those deals are going at SOFR plus 450 to a retained yield of roughly 16% under current CRE CLO pricing.
That same exact loan before 2022 was at SOFR plus, call it 250-300, to about 11.5%-12% retained yield. So, that's the core of the bridge lending. Construction is another area that we've migrated into. There we're looking at SOFR plus 700, with a roughly 22% retained yield. And then the capital solution stuff adds probably another 200 basis points, if it's- there's an element of distress in it. So those are the, that's the core opportunity set that we're looking to redeploy the $500 million of capital in the back half of this year. You know, the banks, it's funny, a lot of the banks, we haven't seen the volume of sales that we thought we would.
A lot of it is actually targeted towards office, like CIBC just did a quiet transaction, and Webster Bank and a few other banks we've seen, which we don't bid on. That's not our. We only have, after the asset sale we're talking about now, we'll only have about 3% office, so it's not our, not our cup of tea. That being said, what we are seeing is, interestingly enough, is with the Fed and the OCC approving these CRT credit risk transfer deals, we're actually looking at about 6 CRT transactions involving small balance commercial real estate and our core, our core business.
Okay, and these would be cash transactions or would be synthetic?
They're synthetic securitizations, either private or public. There's a number of companies that have been set up to actually facilitate these transactions.
Wow!
So, I mean, as opposed to cash sales, we're seeing a number of banks look at that structure now that the Fed and the OCC has blessed it, and we're undertaking to potentially invest some of our in our acquired book in those transactions in the back half of this year.
Just to be clear, the balance sheets can support. I mean, you're underleveraged, you're under a return of recourse leverage, and I think it's, what? 3 turns. I mean, the balance sheet can support much higher.
Yeah. So we're at 3.4x right now. Our target is 4.5x. So that translates into roughly $300 million of incremental recourse debt on top of the $500 million of-
$500 million.
C apital that we're getting through these various initiatives we talked about, in particular, the announced loan sale.
That's a lot of firepower. Are there questions from the audience? I want to ask on the, on the multi... You're 71% multifamily?
It's actually, including mixed-use, but more like 85%.
Wow! The GSE takeout, that's still there? Has that been, I mean, that's the majority of your exits. Is that- are they still there? Are they- anything changed with them? Are there- seems like they're growing, they're affordability focused.
Yeah, no, yeah, exactly, and that, that fits us.
Yeah.
'Cause a lot of what we do is affordable. Not the lower end of affordable, but more the middle market, if you will. So virtually, I'd say 80% of our multifamily book qualifies for Fannie, Freddie, and, you know, they still have the scorecard caps of 70%, which they're not gonna fill, I think, year to date. They're around 18%, 19%. I just looked at Freddie's data the other day. So, yeah, it's still there, and they haven't tightened underwriting guidelines. It's just a story of nominal rate, absolute rates. Right?
Right.
You need to get the project stabilized to a debt yield of more like 8 or 9 to qualify for a current Freddie-
Right.
Or Fannie loan. So I'd say. And that's why the extension, this is not extend and pretend, like some of the office stuff. Ours is extend, stabilize, and get to a debt yield, which will be accomplished via a combination of, NOI increase and a reduction in rates, if you believe the forward curve, which we do. The intersection of those two will enable refis to occur in significant waves in probably the summer of next year.
And just to paraphrase, your multifamily is not performing really any differently than the industry, just your servicer is a little bit behind with modifications and so forth. But ultimately, you expect good outcomes on—it's good quality, a good asset, and, you know, that's the way to think about it, just the servicer's a little bit behind on modifications. You have some stringent tests in your CLOs. That's just a product of how they were structured.
Yeah, we have. Again, we identified with our lead servicer $500 million of loans that are comprised over 75% of that delinquency bucket. The other 16% is office, of which we're selling. So to flush that pipeline, the three buckets are easy mods, which they're in the process of doing, and those are ones where the borrower can put in equity, we can extend the term. They're in decent markets where there's not a lot of heavy CapEx spend, and so that's bucket one. Bucket two is maybe mods that they, as a more of a traditional stabilized lender, are not as adept at, and that bucket will likely be potentially transferred to another special servicer.
And then the other bucket is the foreclosure bucket, which currently is under probably 5%.
Right.
... of the total. So our mark-to-market LTV is under 100 on that whole $500 million, as opposed to some of the other peer groups. And so, office being the elephant in the room. So I think we're in a really good place to have a path forward to overcome the administrative, if you will, overlay that's hampered our... Although it's investor-friendly for the CRE CLO structures, it's hampered our ability to do what the other peer group lenders have been able to do in the peer group, which is freely mod and repurchase from the structures.
Right.
One other comment on that. Currently, four of our CRE CLOs, you know, we're the fourth largest issuer with $5 billion outstanding, and four of those deals, totaling a little under $2 billion, are eligible for call. So we are currently thinking through a strategy of maybe calling those deals and then refinancing them in a jumbo transaction, along with clean assets on our warehouse lines sometime in the third quarter.
Sounds like triple-A spreads have been. Market's really there right now with spreads.
Yeah, AAA's are at the peak, we're 275. They're probably in by 100 basis points from there.
I wanna ask you about the SBA business, but just to in lieu of time, I wanna talk about it. It's clear that you have a path to not just cover your dividend, but probably grow it, if you're talking about the firepower that you have. But with the stock's discount to book, reported book, you're out there buying back shares. I have to congratulate you on that. What is the disconnect with the market, where you're trading relative to NAV, you know, and the firepower and the growth that you have ahead of you?
Yeah, I would say it's kind of the baby with the bathwater cliché, but I would say the big reason for the discount is the concern that there is a deeper, another leg down in multifamily-
Right.
... in particular, in syndicated with the syndication, of which we have very limited. I mean, the exposure we have is a good chunk of what's gone delinquent. But there's a concern that there's another, if you will, migration of loans that will go from multifamily into, you know, delinquency status with, you know, in markets that are like Houston or, let's say, Austin, where there'll be significant distressed sales. So that, I think that overhang, compounded by the inflated nature of our delinquencies because of the inflexibility we've talked about, has created a discount in the peer group, which we view as unwarranted.
Once we flush through the pipeline and reduce delinquencies to the peer group norm or below, and work through this CRE CLO master refinancing, that, along with the wall of liquidity, the $500 million being reinvested at these current, you know, mid- to upper-teens yields, will cause the stock to re-rate and actually give credit to, I think, the other differentiating factor, which is our SBA business.
Yeah, and again, I wanna congratulate on the share buybacks. You don't, you don't always see it, and you guys have been in there, and it's, I think, highly accretive. I wanna get to the SBA. I think you have a target of... You don't see this platform in really many REITs at all, and-
No.
Y ou have a platform of $1 billion, I believe. I mean, talk about the return profile in that business. The margins seem incredible for what you're getting. You're getting 15% sale margins on this, and then you hold a very high-yielding piece of that, that securitization, correct? Is that how you think about it?
Yeah. I think the easiest way to illustrate it is, one loan. So let's say you're a doctor, and you wanna buy a medical office building, so you buy it for $1.2 million. You put up $200,000 equity. We'll finance $1 million in a fully amortizing loan at prime plus, call it 2, over a 25-year amortization period. I mean, that's a high rate of, you know, prime is what? 8%, and so that's a 10% loan, but it's amortized over 25 years, so your monthly payment is 40% less than what a bank would lend loan at. So, married to a doctor, they love free cash flow. So the, in that, what happens with that loan is a $1 million loan is sold in...
I'm sorry, 75% of that, $750,000, is sold in the secondary market at a 10-15 point premium. So let's be conservative and say this is the 10 points. So you book an immediate $75,000 gain on sale, cash gain on that loan. The other, and the other $250,000 is retained by you, and it's pari passu with respect to credit, and you earn a 10% rate of interest on that retained interest, and you get a 1% servicing fee on 100% of it. And it's like those Ginsu knife commercials, it gets better. You also are able to, in the asset-backed market, securitize, borrow against 70% of that $250,000 retained interest, in the asset-backed bond market.
So your basis is now only $100,000, and you've booked roughly a $100,000 gain on sale, so you have a 0 basis. So there's an and the other interesting thing is, if the loan goes into default and you crystallize a $100,000 loss, that $100,000 is allocated $75,000 to the government on the part that was securitized and the $25,000 to your retained interest. So the ROE in that business is 25%-30%, and it currently only represents 5% of our equity, but 15%-20% of our contribution margin to our ROE. So what we've done is we were running at about $500 million. We're the fourth largest lender in the country, number one non-bank, and we have a plan to get to $1 billion.
Our run rate recently has been, call it, in the $750 million area, so we're well on that path by combining large loan approach, which uses loan officers and also and large loan, by the way, in SBA, is $3.5 million-$5 million. Small loans, which is minority, women-owned businesses, actually, which has been a big initiative of the Biden administration with the SBA. There, you'd use a scorecard. So we have a fintech in Miami that we bought right before COVID that killed it in PPP, and they've retrofitted that tech to this, originating small loans. So the combination of those two is gonna get us to that $1 billion mark.
I think we're not, obviously not getting credit for that in our in terms of what will happen with the re-rating of the share price, given that low risk cash, you know, cash, government-guaranteed earning stream.
Ready shareholders own this outright completely, correct?
Yeah, all of these operating companies, that's another thing about the alignment. These businesses are owned as taxable REIT subsidiaries. Along with our Freddie Mac SBL lender, we have a Freddie Mac tax-exempt lender for affordable as well, used to be called Red Stone. So all of these government-guaranteed and origination businesses are owned in the REIT as taxable REIT in a tax TRS structure.
In longer term, could there be some type of spin or, you know, you think about that business and it grows to $1 billion, would there be a place for it?
Yeah, we have definitely considered that the fintech itself is developing a banking as a service for all these other banks. They already have 20 customers, and so that tech, along with the SBA business, is potentially, once it gets to scale, a potential for a tax-free spin-off.
Great. That's it. Any other questions from the audience? If not, I want to thank Tom and Andrew, and certainly appreciate it.