Greetings. Welcome to the Ready Capital Corporation's Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference call over to 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 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 measures is available in our fourth quarter 2019 earnings release and our supplemental information. By now, everyone should have access to our fourth quarter 2019 earnings release and the supplemental information. Both can be found in the Investors section of the Ready Capital website. I will now turn it over to Tom Capasse, our CEO.

Thanks, Andrew. Good morning and thank you for joining our fourth quarter earnings call. In addition to Andrew, we also have Tom Buttacavoli, our Chief Investment Officer with us today. In light of the recent market volatility, I'll begin with some observations about our business. First in regards to our balance sheet, the company is well positioned in terms of both liquidity stress and purchasing power to take advantage of buying opportunities. Today we have $130 million of cash available borrowing capacity, providing 9 times the coverage of our liquidity stress tests. A $105 million capital raise we executed In December, was prescient in reducing our recourse leverage under 2 times, thereby improving liquidity risk in volatile markets. Further, as we always do, we continue to evaluate the value of share buybacks versus accretive investment opportunities. Second, I want to underscore our limited interest rate exposure. The current portfolio is 56% floating rate. The majority of these loans are originated with LIBOR floors, and with an average premium to current LIBOR of 80 basis points. In our fixed portfolio, we mitigate our pipeline risk by issuing letters of intent, with rate floors equal to the current swap rates plus a spread, currently at 350 basis points. During warehouse periods, we use interest rate swaps to mitigate significant changes in fixed rate, loan fair values, as we look to lock in cost of funds. Third, and terms of originations the rate decline benefits our small balanced commercial or SBC business across products. Freddie Mac multifamily rates have declined 75 basis points to 100 basis points year-over-year, and with rates as low as 3%. We can compete with banks that based the facto floors on deposit funding rates. Our fixed rate pipeline is floored at 4.25% and even after likely concessions will…

Thanks, Tom. GAAP and core earnings were $0.43 per share, marking a $0.03 per share increase over Q3. GAAP and core return on stockholders' equity were 10.9%, exceeding our targeted return of 10%. The $2.7 million quarter-over-quarter increase in core earnings was attributable to an increase in reoccurring revenue from net interest income, and servicing of $3.9 million. The addition of $2.4 million in revenue from our Knight Capital funding subsidiary, and a $700,000 increase in gain on sale revenue. Additionally, derivative not designated for hedge accounting had incremental gains of $1.6 million. Offsetting increased revenue was a $4.5 million decline in net mortgage banking activity, and a $2.7 million increase in operating expenses, partially due to the inclusion of the Knight Capital operations. Key balance sheet items include the net addition of $280 million in portfolio loans, the addition of $43 million of purchase future receivables from the consolidation of Knight Capital, and the securitization of $586 million of SBC and SBA loans. Additionally, the balance sheet reflects the aforementioned issuance of baby bonds and common equity. With the completion of the SBA securitization, we are required to include $485 million of guaranteed 7(a) loans previously sold, on both the asset side and the liability side of the balance sheet. This gross up does not affect bottom line net income. Recourse leverage decreased from 2.3 times to 1.9 times, as a result of two securitizations and the equity issuance. The anticipated completion of our fourth CLO is expected to further reduce recourse leverage by 0.5 times. Turning to the earnings deck. Slide 3, sets forth key items and metrics for the quarter. Of note, is the dividend coverage, core ROE above 10% and record combined SBC and SBA origination volumes. Adjusted net book value per share dropped $0.04 to…

Thank you, Andrew. We had a record year in many key areas of the business in 2019. We believe the quarterly results and full year demonstrate Ready Capital's ability to effectively originate and deploy capital in an creative manner across our diverse platform. The current environment notwithstanding and understanding it will have an impact in 2020, we remain confident that we will continue to build on the progress we've made in the past few years to create value for our stakeholders. With our diversification in terms of both business lines and portfolio risk focused on a defensive niche in the commercial real estate market, we believe we're positioned better than many of our large balance commercial brethren facing a higher beta to a stressed economic environment. We do recognize that at least in the near term, we are in a fluid and uncertain market environment, given the uncertainty surrounding the coronavirus situation, there are many unknowns as we sit here today. But we do want to provide a couple of thoughts as you work to model our current year results. In addition to the typical seasonality inherent in our business, there are other factors that could influence our results near term, both headwinds and tailwinds. The headwinds include the risk of the coronavirus tipping the U.S. into a recession, with the resulting increase in portfolio defaults, for which our portfolio diversification and focus on the SBC sector are risk mitigates. A related headwind is delayed ability to access the capital markets for and higher incremental costs of, securitized and recourse debt. So, we note unusual resiliency in the former and the current market. As for tailwinds, the recent treasury rally favors our gain on sale businesses, and the ongoing repricing of risk, a higher incremental ROE on new investments. Finally, the current market underscores the all-weather nature of Ready Caps business model, lending in bull markets and buying distressed assets in bear markets. We entered 2020 with tremendous competitive momentum and liquidity, which will carry us through this market and beyond. We're excited to build on our success and we thank you for your time and continued support. So with that operator we will now open it up for questions.

Thank you. [Operator instructions] Our first question is from Tim Hayes with B. Riley FBR. Please proceed with your question.

Hey, good morning, guys. Congrats on a great quarter, and thanks for taking my questions. My first one, Tom, I appreciate the introductory comments on credit, but if we can just circle back to retail and hospitality exposure in the portfolio, retail accounts for 17% of total SBC, not including the exposure in the SBA portfolio where nearly a quarter of that seems pretty vulnerable with restaurants and lodging. How do you see these loans performing over the next several months? I assume there's been no indicators over the past few weeks since it's just been such a short timeframe. But still a little bit more on unexpected performance there in a stress scenario, where the outbreak continues to spread throughout the country. And then maybe if you could just maybe touch on the LTVs, or any other covenant protection you have that gives you confidence in your basis.

Good questions, and obviously, given the current market conditions. So just to drill down, if you look at -- your first question was on the SBA small business loan portfolio. So if you look at Page 13, you'll see that, in the lower right, you'll see that lodging, hotels and restaurants is about 20% of the total SBA portfolio. Secondly, the other thing I'll point out is that the net equity invested in the business, which you can see on Page 5, in terms of the equity allocation to the business is 8%. So the at risk capital is one fifth of eight or about, call it at most 2%. So that's just -- I want to clarify that upfront. Secondly, it has been a gate number two, the President announced last night, a $50 billion SBA package, and we're still trying to figure out exactly what all that is. But, one thing we aren't clear, we talked to our trade association this morning and the large majority of that is for basically making disaster loans at 0% to 3% interest rates, to just these types of businesses, lodging, hotel and what have you, that will be directly affected by what we all hope is a temporary disruption in their revenues. And so these are loans to allow them to pay their operating expenses into essentially a bridge over troubled waters. So those two mitigates that it's a 2% exposure and number two, there's significant coverage in the industry and I'm sorry -- in terms of the government safety net. So that's the SBA. With your second question, I think relates to our SBC or small balance commercial portfolio. And in there that's retailed for just the SBA.

Tim, just to clarify what you're asking, you're asking about the 17% exposure in our portfolio that relates to retail in SBC collateral, correct?

Correct.

Okay, and that's on Page 13. So, as we've reiterated in the past, our retail is not malls. It's not the larger ABC class mall. What our retail is, exponential small strip stores that I think the average balance is around $1.7 million, typical average mall, commercial real estate loan is around $25 million. So, these are in small strip locations, which we feel will not be as impacted by the obvious decline in economic activity, because they're going to be that kind of neighborhoods. The neighborhood story go to get your -- get the pharmacy or pick up a pizza. So we've limited big box exposure. Therefore, we think the impact on our retail will be substantially less than what you'll see obviously in the mall space.

Yes. The only thing I'll add there is a lot of these loans have GI reserves in them, so there is some cushion embedded in the properties themselves.

Okay. Good to know. And then if you guys -- that's helpful, I appreciate those comments. But, if you could maybe give us an overview of the resources you have at waterfall to work out troubled credits or bring -- take over the keys if need be, if defaults materially increase.

Yes. And I think that's defensively that's one of the benefits that we as a externally managed REIT by one of the largest structured credit managers globally, with a focus on buying distressed assets, in particular real estate secured assets have. During the last credit crisis we bought $5 billion of small balance commercial loans. We worked out 6,000 small business and small balance commercial defaulted assets. So we have in place, a system we call WAMCAM, Waterfall Controlled Asset Management, it's a wrap technology that enables us to plug and play with special servicers, not just here in the U.S., but in Europe as well. And we have staff and our asset management team leveraging that technology of about 30 to 35 people to bring the bear. And so we actually -- besides just as a defensive side of managing the credit risk in our portfolio, we have a enterprise risk management, where we have surveillance across our entire book of business. Waterfalls, gross assets are roughly $13 billion, of which we're worth $4 billion of that large pie. So, I think both in terms of the ability to detect early defaults, and then put the appropriate resources with our special services on to the potential workout and utilization of that technology, defensively, we're probably better positioned than most of the real estate lenders in our space. And finally on the offense, we view this as an opportunity to obviously buy other people's problems, the way we did in the last credit crisis.

Right, that makes sense. And I guess just on that comment there, how has supplied been of new SBC loans, or when I say new, not new vintage, but just what supply had been for SBC loans over the past few weeks? Are you seeing more distressed selling? Are you able to pick up these loans at greater discounts? And where are they coming from?

Well, right now obviously, before I -- arguably the credit cycle is turning. Before the credit cycle have turned, most of what we were buying was performing legacy loans from out of securitizations or sales of noncore assets by banks. So I think the supply, we had a pretty good year on acquisitions this year -- the past year it was roughly 700.

To answer your question, no, I don't think we've begun to see any opportunities to buy distressed loan portfolios.

Yes, this obviously only happened, we're 30 days into this. So you're going see, generally speaking, in terms of, if you look at the prior credit cycles, it will take about a quarter to two quarters before you see the real distress in the portfolios.

Okay, got it. And then just one more from me, and I'll hop back in the queue. You mentioned highlighting or that you were evaluating buybacks. I’m just wondering, how you think about the ROE on that investment here, versus your core business, the stock trading at a near 30% discount to book and 13.7% dividend yield?

Yes. Tim, the current plan we have in place at those levels, we think the total accretion of book value is around 100 basis points. So it's a matter of balancing, making sure we have enough liquidity on the balance sheet to sort of weather the uncertainty that we've experienced over the last week or two, making sure that we're able to fund what I'll call more selective origination opportunities and the obvious accretion of buybacks. So we are going to continue to evaluate that on a daily basis in the context of our pipeline, as well as sort of some of the risk management procedures of making sure there's ample liquidity, so it's something we're discussing daily.

Okay, got it. Thanks again for taking my questions.

Tim, actually one footnote to your prior question on the special servicing. We did hire four asset management specialists in the REIT last quarter, to in-source some of that supplement the services provided by the external manager, in particular, with a particular focus on our bridge portfolio.

Got it, that's helpful. Thanks again.

Our next question is from Jade Rahmani with KBW. Please proceed.

Thank you very much. Just high level question, how are you thinking about earnings per share for the coming year? Looking at the consensus, it's I think about $1 69 and we're estimating $1.59 and we are factoring in, the full share count, which will impact the first quarter. So, the last few quarters have ranged from $0.37 to as high as $0.43, but that was on a lower share count. So, thinking about the pipeline that you have underway, prospective returns and what's in place. Is there some kind of a range or directionally any guidance you can provide?

Jade, our goal is dividend coverage for 2020, I think there's a lot of moving pieces here. Obviously, the current markets are causing us to be a little bit more cautious in deploying capital at some of the rates we were over the last few months. With that being said, those businesses of ours that require very little capital, mainly our Freddie Mac product or residential business, as well as our SBA platform, are all seeing sort of record origination volume. So, you're going to have a lot of -- especially in the first quarter, you are going to have a lot of gain on sale revenue offset by what may end up being through March, more tampered originations in terms of balance sheet loans. I also think there is seasonality in the business. If you look historically, at how our business has performed, especially in the SBA space, we've seen Q4 being much stronger quarters than Q1 has historically been. So, we do believe there's going to be a ramp just based on seasonality. And I also believe that with the additional equity, which is providing a lot of safety in the balance sheet today, and it's also going to take time to deploy that in a prudent manner. So, our goal is dividend coverage for the year. We're certainly hopeful that if the opportunities to continue at these growth rates exist, I think we have the capabilities to do that. But that's our goal.

Yes. The only thing I would add to that Jade is obviously, the most companies across the board are pulling guidance. And I will just say one point on our business mix, which will inevitably change depending upon where the path of this from an economic standpoint. But in the event that our base cases, this tips us into a minor to '92 type recession. And if that happens, the third and fourth quarter, we're going to be buying more, we're going to be allocating more of equity capital to buying distressed assets. We're already seeing -- one way or concern we have is not so much in our portfolio, but the larger balance bridge, there was a lot of froth in that market, which is now going to come to the surface. And so we've already tightened pricing and pulled back on certain sectors. So the ROEs on incremental loans being made in this environment are going to be probably another 300 basis points to 400 basis points higher. But, volumes will be lower. So, I think just my point I'm trying to make is depending upon where we had in terms of the second, third and fourth quarter of this year, in terms of the recession or no recession, a V recovery or a U recovery, we're well positioned to reallocate our capital to see to buying distressed assets or making loans in a more conservative basis.

And in terms of the pipeline, I appreciate the numbers you gave, in the release about what you've funded so far and what's on hand. But, what's the gestation period for that pipeline? And in terms of current market conditions, meaning today, is there a stall in the pipeline? Are deals being pulled from the market or any deals being cancelled? I'm starting to hear about CMBS loans, that the originators are not sure they could securitize. So, a few of those have fallen out. What could you say about current market conditions?

Well, that's a good question. Yet, the answer to that, by segment, right, because there were -- again, our platform is very unique and that we're in a number of different verticals. So, number one, in terms of the small balance commercial, focusing on the bridge that there will be -- those deals will -- more likely they're not closed but with tighter covenants and because the competition will be less. Ones that we have some concerns on, in terms of, just step back in that space you look at the ability for refinancing, both the execution of the business plan and the refinancing. And with respect to that we will probably tighten up on debt yields, which I've pointed out already at 10 points -- on our existing portfolio are nearly 11%, as well as stabilized LTV. So you might have some fault there because of credit tightening, but I think we'll most of that will close. In the Freddie business, it's obviously a boon because of the fact that it's government sponsored financing and a lot of these properties are existing assets, less for acquisitions at this point, so they'll be -- that pipeline it will increase and you'll see the same pull through rate. The fixed rate portfolio, there will be some -- a falloff in that pipeline more than the others, because of the fact as you pointed out that the CMBS market has stalled. Although, I'd point out, I will make one editorial comment on that, securitized debt led us into the last hellhole, it's actually the angel on this current market, because deals are still getting done albeit at significantly wider spreads. But one of the areas that has been affected has been the CMBS market, so there may be some fallout in that pipeline. And finally the SBA pipeline, we expect maybe a 10%, 20% fallout there, mostly in the sectors that are most affected by the virus, which is the lodging and hospitality and what have you. So overall, there'll be a small fallout in those sectors offset by some -- and I'm sorry, finally, the residential mortgage banking, obviously we're in unprecedented territory. Our pipeline there are locked and that was 520.

520.

Yes, 520. 50% above our prior peak in the last rate rally in 2019. So I think on balance the elasticity of fallout for our business in relation to others that are, for example, that CMBS conduit business with large balance loans, we're hearing that they're pulling about over 50% of the pipeline. So sorry for the long winded answer, but I just wanted to highlight that by segment.

No, thanks, that's helpful. And I appreciate the diversity of the business. It's also helpful to see Slide 12 that shows the earnings breakout, because I think that it's something that investors have been grappling with. Just turning to the repo market. Are you seeing any margin calls or any changes in how repo lenders are behaving currently?

Jade, no, we haven't been seeing large margin calls on any of our retained bonds. We did take the steps of extending short term repo out six months, so any short term repo rolling in the next month we did extend, without a real change in the weighted average cost of those repos. Obviously, it changed compared to different terms. So we have extended short term repos out. But, no, to answer your question, we have not seen significant margin calls in that book.

Thanks very much for taking the questions.

Thank you, Jade.

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

Hi. Good morning. Can you give us the details on the buyback? What is the remaining authorization in place? I was looking through some filings earlier, but couldn't find that.

We haven't used it yet. It's $25 million.

Okay. And -- go ahead.

No, sorry. After you.

No, I was just going to say to follow-up on the pipeline question that Jade covered, can you maybe talk a little more about the hotel or how do you view those loans currently in the pipeline now? Is it, you mentioned some better protection or covenants, but are you significantly increasing pricing or is it more draconian, where you're simply not looking to add exposure in that capacity in the current environment?

Yes. We've done our pricing. Our Chief Credit Officer and the individual that our President of that business have worked together to essentially implement a plan, where we're essentially pulling hotel deals and not quoting them currently, in our bridge business and a very limited way on the fixed component. So that's how we're focusing on essentially risk-based pricing by both reducing or eliminating for the time being sectors most exposed to the virus, -- if you will, the highest beta to the decline in economic activity. And also in our SBA business, we're limiting restaurant in some of the other asset classes. But as of today, we have 7% in hotels. I think the average balance on that exposure was around $2 million. So we're very much better positioned to obviously than some of the large balance REITs, which might have $150 million bridge financing outstanding to urban hotel, it's going to be significantly affected by the current market conditions.

I appreciate the color there. And then thinking about the operating expense and I guess the due diligence side, but travel is being restricted, I realized not domestically, but some companies have to have limited travel. How do you guys handle the underwriting process as far as site visits or site checks? Can you do it online or expenses go down with less travel, will expenses go up, because you'll have to use third party people? Can you talk a little bit about how the current environment is going to impact the expense side in the due diligence process?

It's segment-by-segment, but whereas the greatest expense for underwriting is in the small balance commercial space, both with respect to bridge and the fixed and the Freddie. And there we've developed economies in terms of using third party firms were appropriate, it's probably about a third of our total underwriting, not in the bridge space but on the Freddie Mac and the fixed. So we have those resources available. And then just again, the practical aspect is that, we use local appraisers for these assets. We have a network of established appraisers, we track on how their appraisals there, in terms of subsequent defaults and loss severity. And recall that we have staff, we have offices in Dallas and New Jersey. But most of our staff is -- a lot of it is -- they work out of their homes or smaller offices. And finally, the only two things I'll add is, you could use things like Google Street views, and we're happy to supplement all of it, but at the end of the day, the issue around travel and most of what we do is local, the people that are appraising the properties in other words are local. They get in the car, they look at the building and there's no car and they're not in communal area. So I think that's not going to be a major impact on our business either cost or churn times.

I appreciate the details on that and thank you for taking my questions.

Our next question is from Crispin Love with Piper Sandler. Please proceed.

Hi, guys, thanks for taking my question. So following-up on that expense question but asked just a little bit differently. Is 2020 is pressured by headwinds related to the coronavirus which I think we could see over the next couple of quarters. Are there expense levers that you think you could pull in the next couple of quarters to kind of make up for any shortfall if there is any?

Yes, I mean, certainly we're going to manage the expense load of the business for both current and expected growth. It's hard to be honest, it's hard for us to provide specifics on what that might be given that I just -- the uncertainty is pretty pronounced. But yes, I think we are always going to manage the business on the expense side for not only current activity, but we need to step up or activity is going to be in three, six months. So, we will manage to those expectations as we see the pipeline move around.

Yes, because it's a variable cost factor in the origination business to the extent we have distressed assets, we're going to step up on the problem, asset, special servicing side less in origination and the flip flop that originations pickup. So there is a variable costs component to our operating expenses within the lending and acquisition businesses that we are able to rely on to provide a buffer for a decline. For example decline origination volume and a pickup in distressed asset acquisitions.

Okay. And then for the fourth quarter, I think residential mortgage originations saw an 11% sequential decrease, and that's following the record third quarter, you guys had. Can you talk about what drove that, is part of that having to do with you guys. I'm mostly focused on purchase, or is there any other factors at play there that caused the kind of sequential decrease rather than kind of the overall market?

You know, it's probably, mainly driven by rates.

It was rate driven, yes.

Okay.

We -- sorry go ahead.

No, you can go ahead.

Obviously, I was just going to say that historically our mortgage banking -- residential mortgage banking segment and the one that I think one of the most efficient in the industry based on benchmarking that we've done with some consultants, but they tend to follow the 10 year treasury and with a lot less volatility around that, because of the fact that there have a bigger focus on purchase than the industry average as a whole.

Okay. And then just one last one from me. So looking at the $0.40 dividend, I'm just kind of curious how you're thinking about the $0.40 dividend right now. And if you're confident about covering it in the next couple of quarters, and I understand there could be a lot of volatility near term. But say if you weren't able to cover it for a quarter or two, do you think that could be a risk to cut it, even if you feel better longer term?

You know that, that's obviously an interesting question in this environment. I think, we had our -- our board is currently committed to maintaining the current dividend and we see again the ability to pivot from. If lending volumes go down, then we can pivot to asset acquisition at probably historically, higher yields and we look across the credit cycle, the ROEs on distressed, SBC we're in the upper teens, low 20s the last cycle. So I think that there is no crystal ball, but I think our diversified business model enables us, gives us more confidence in the sustainability of the dividend in a stressed economic environment.

Our next question is from Steve Delaney with JMP Securities. Please proceed.

Thanks for taking the question and congrats on a strong close to 2019. Tom, you’ve been around these securitization markets for over 30 years. I think we all expect not only see spread widening but possibly even the markets to be frozen for a short period of time. What are you hearing? What is your expectation from how your warehouse vendors are going to behave? And how much flexibility do you think they will afford you for the slowdown and loans moving through the pipeline to enter securitization? Thank you.

Yes, thanks, Steve. We've been around the track couple times in these markets. But it's interesting, this time, because of all the rules that have been put in place, everything for the bankruptcy code to the capital charges by banks to the way that to the more super vocal role is more of a service orientation by the larger counterparties in the street. We see that street acting incredibly responsible in the current economic environment in terms of margin calls and how they assign marks to assets. The securitized debt markets themselves are holding up much more strongly as measured by credit spread widening. I think everybody in particular the housing market is a safe haven for risk assets in this current sort of sell offs. So the unbalance, as it affects our specific business given that more benign or calm in the storm in our markets as compared to other markets, in terms of the impact on our business with funding, the fixed rate product would probably be held in warehouse. And we have a long term warehouse lines for that vertical in our business. The second one is the bridge portfolio, which relies on the so called CRE collateralized loan market that…

CRE yes.

Yes. I think last year that was around $15 billion or so. Obviously, it could to be a little bit less this year. So that actually double line, it was in the market as of today -- I'm sorry, yesterday. And we have a deal pending and it looks like the deals can get done but at much wider spreads. But I will point out that we've been doing some analysis. On our bridge portfolio, the floors which currently average around 2%, the LIBOR floors are such that even if we did a deal at wider spreads, and let's say, we just sold the high investment grade tranches, our ROE is still higher than it was before this market sell-off. So in that segment, however, if we decide not to print a deal at wider spread, we also have long term financing in place for that bridge portfolio. And as far as the other asset classes, they're less dependent right? SBA 7(a) that's government guaranteed, we can resell those little every month. And then Freddie Mac, that's where it has on balance sheet by Freddie. So I think in short, we're very well-funded across the board, even our relatively small Irish portfolio is funded a little under the long term facility with a large European Bank. So, I think, as far as our approach to these markets, we're very conservative on leverage and we go into this crisis, much better position, I would say, than some of the other mortgage REITs out there, that are more dependent on market sensitive liabilities.

Great. That's very helpful color. Thank you, Tom. And one final one, just if you will indulge me as a former public company CFO. The question about the dividend. One of the strongest comments to me that you made in this call was the increasing opportunities from a somewhat distressed market, and you want to be able, to be in a position to be liquid, be able to play offense. Just a thought, is that evolves? And I know, we've got to watch it. But on the dividend that you've already commented on, would it make sense at some point to convert part of your dividend to a stock dividend instead of cash, which meets REIT distribution rules, that allows you to retain cash to go after 15% to 20% ROE type opportunities in the short term. And then communicating to the shareholders that, we think we can do a better job with your money here in this unique opportunity. Just a final thought there. Thank you.

I see that's very, very astute, and we have considered that, obviously, with the sell-off across the board in the ETF REIT indices. We're no exception, obviously. That does enable us to grow our book value to reinvest at cyclically high ROEs. Again in the last cycle we bought $5 billion with realized IRRs in the upper teens and low-20s. So the one caveat, the one offset to that is the obvious dilution that occurs by issuing shares below book at charging. But that is something that we would consider in terms of -- at a point in the cycle where the ROEs and the business are highest, if that's a very accretive way to boost book value and reinvest at much higher ROEs.

Thanks for the comments.

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

Tom, how are you thinking about leverage? Higher, lower or same 2.0 level going forward?

So the current leverage is right around that 2.0 level. We think the CLO depending on when that gets done will reduce that by half a turn. But it's going to be a sort of the continuous cycle of levering and delevering on a recourse basis to that 2.0 number. I don't think we're real comfortable going much higher than that 2.0 number and that's part of the reason for the additional capital we've raised in December.

Great. And in the use of capital, where do you put buybacks as opposed to making acquisitions relative to use of capital?

Well, we are currently, I mean, that question it has to be repriced, in every risk, every market in terms of credit spreads and lending margins and reinvestment rates on let's say, a third party acquisitions. So I'd say obviously, the ROE hurdle has gone up in the current environment versus looking at the accretion from buybacks, and the impact, the knocked on impact on liquidity, right? You want to have the option -- it's a two edged sword, because obviously buying back at today's distressed value has an immediate impact. It reduces your share count and your equity base. On the flip side, as Steve was referring to previously, having the ability to grow book value and reinvest in the current environment has a long term impact. So we tend to view buybacks. And short answer to your question remodeling at a higher ROE and a reinvestment period of probably three years, in terms of looking at when we buyback. That is something we are actively -- that's in our waterfall of opportunities, that's definitely on the -- near the top of the list.

And Tom, finally, in the past you guys have been diving for 10% to 11% core ROEs, given the changing market conditions, how that changed?

It's really hard to say as of today. If you told me, we're going to going into a recession, there's a lot of distressed assets, I would say -- and the other point, the other important thing in these cycles with permanent capital vehicles and mortgage REITs in particular, is the availability of capital. Recourse debt and what have you, which is obviously would be more constrained in that environment. So, it's hard to -- if we had incremental availability of capital and we had a lot of distressed assets, I would say, the ROE would be more on 11% range. But on a downside scenario, we have this kind of, but you recession with limited availability of capital, it would be more in the upper singles to 10% range. So that's how we tend to think about that. The one thing I will add though, just on where we are in the cycle. You're going to see -- having been seeing four of these cycles over the last 30 years what you're going to see with a number of these [indiscernible] REITs even with the CECL is a lot of credit reserving and knock on impacts on reducing the dividend, because of the typical impact in a cycle. And I think we are really well positioned versus the other peers, because of the diversity of our asset, because of the nature of our sector, small balance commercial being more akin to housing, and the diversification of our asset base.

Great. Thanks for taking the question.

Thanks.

Thanks.

We have reached the end of the question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Thank you, everybody. We appreciate you taking the time today. In tough markets, we think we're going to -- we're pretty well positioned to capitalize on it. And we look forward to the next quarterly earnings call.

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