Greetings and welcome to Ready Capital Corporation’s First Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to your host Mr. Andrew Ahlborn, Chief Financial Officer. Thank you. You may now 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 measure is available in our first quarter 2021 earnings release and our supplemental information. By now, everyone should have access to our first quarter 2021 earnings release and the supplemental information. Both can be found in the Investors section of the Ready Capital website. In addition to Tom and myself, we are also joined by Adam Zausmer, our Head of Credit. I will now turn it over to Chief Executive Officer, Tom Capasse.

Good morning and thank you for joining our first quarter earnings call. Ready Capital is off to a strong start in 2021. We have accomplished much in the first quarter of the year with our small balance commercial or SBC, CRE lending operations and Small Business Administration, or SBA 7(a) lending businesses posting record originations including high volume in round two of the Paycheck Protection Program or PPP. Liquidity in the quarter was bolstered significantly by closing of the Anworth merger, and accretive capital markets transactions. Additionally, post-COVID credit metrics in our SBC portfolio continues to outperform our large balance brethren. Now to start we originated a record $823 million of SBC loans. First quarter volume focused on high conviction sectors such as multifamily and industrial, which makes up 90% of 2021 volume. For loans originated to hold on balance sheet average spreads were 431 basis points and average duration is three years. These efforts increased our net portfolio 13% quarter-over-quarter. Additionally, originations in April totaled $202 million, and our current money up pipeline is in excess of $420 million. Our multi-strategy SBC theory platform has enabled us to capitalize on post-pandemic loan demand, particularly in transitional and agency multifamily. Transitional loan demand increased due to pandemic related rental volatility, whereby sponsors have elected to take shorter term bridge loans to prepayment flexibility to allow them to stabilize the real estate and optimize exit financing at a later time. This strategy elevated bridge loan volumes since the fourth quarter last year, into the first four months of this year. We expect continuation of this trend, along with demand from strong sponsors pivoting to opportunistic acquisitions in sectors hard hit by COVID, such as hospitality and office to sustain demand into 2022. In multifamily the Federal Housing Finance Agency reduced the…

Thank you, Tom, and good morning, everyone. GAAP earnings and distributable earnings per share were $0.49 and $0.41 respectively. With distributable earnings of $24.7 million and a 10.9% distributable return on equities we’ve surpassed our 10% target for the fourth consecutive quarter. Our earnings profile is reflective of efforts to grow our loan and servicing portfolio from COVID lows, continued performance from our gain on sale operations, and the trend towards normalization in our residential mortgage banking operations. Interest income in the quarter grew $8.6 million due to a 13% increase in our loan portfolio, as well as the accretion of fees related to recent PPP originations. Interest expense rose in the quarter as a result of short-term borrowings to fund our PPP originations increased warehouse balances due to our securitization cycle and slightly higher leverage due the Anworth acquisition. $5.4 million of the increase in interest expense in the quarter should be considered non-recurring and is related to short-term borrowings incurred to fund PPP production. Adding to our stable earnings profile was $4.2 million growth in servicing revenue, which is reflective of the quarter-over-quarter growth in our servicing asset. Net realized gains from our SBA and Freddie Mac gain on sale operations was 500,000 due to lower volumes in the SBA 7(a) operations. As Tom mentioned, these declines were anticipated due to updated SBA guidance received in February, which slowed the first quarter pipeline. We expect the quarterly run rate in our SBA business to be higher and the 90% guaranteed through the end of Q3 is expected to increase gain on sale revenue. A reduction in our SBA business was partially offset by increased Freddie Mac production were gain on sale revenue increased 76%. As indicated in our last earnings call, mortgage banking income was down $7 million…

Thanks, Andrew. We continue to believe that our differentiated platform diversified across markets and across investments provides stability of earnings and output from our embedded operating companies. With that, we’ll now open up the line for questions.

[Operator Instructions] Our first question comes from line of Tim Hayes with BTIG. Please proceed with your question.

Hey, good morning guys. Congrats on another very strong quarter. Sounds like things are all trending in the right direction for you. Just as relates to the PPP earnings, Andrew might be helpful, if you can just give us a little context of the schedule recognizing those – should we be, is it kind of like straight line recognition over a certain time period, is it going to be lumpy? And then as it relates to the carry on the loans on balance sheet? I think that was about like a 65 basis point gross spread, is that how – I guess we’ll have net out some cost. But if you’re going to talk to the economics of that and how long you think those loans will stay on balance sheet, that would be helpful?

Hi, Tim. Yes, I think the majority of it is going to be accreted over four to six quarters. If you look at sort of the velocity of forgiveness from round one production. That should correlate into that to report a six quarter timeline. And the recognition of the carry, which is the 65 basis points will be highly dependent upon how the portfolio moves. So, the earnings profile won’t be straightlined, I think it will be a little choppy over the next four to six quarters. But that’s the expectation around when through the overwhelming majority of this income will be recognized.

Okay. Got it. And then, last quarter, you guys talked about, you’ve been targeting a 10% ROE for, I think ever since becoming a public company, maybe even before that. But last quarter, you mentioned that your ROE target was a little bit higher than that. I don’t think you’ve put an exact number around it. But can you just give us an idea of the ROE you think you’re able to achieve and whether the target is inclusive of kind of the PPP economics that you’ll be recognizing over the next year and a half? Or if you have something in mind, once you kind of get on the other end of that and no longer have that tell at earnings?

Yes, I think Andrew please, step in, but I think what we’re looking at a kind of a core ROE from our CRE, more capital intensive business, our SBC acquisition and origination business, high singles, and then another, 200-ish basis points of gain on sale income from the government sponsored operating – secondary market companies, we have the residential mortgage banking, the SBA and Freddie Mac, so Andrew if you would add to that?

And I think that’s right. I know, when we look at our outlook, our goal is to really grow our SBA 7(a) capabilities that business requires very little equity. And so as we increase production there, those returns, are highly accretive on an ROE basis. So, we’re focused on putting investing in that platform. As Tom mentioned, we hired a several front end people this year, and I think we’ll continue to invest in the technology and front end customer experience to make that better success.

Okay. So it sounds like kind of, still that maybe 10% to 11% range is what you should be targeting and in a post PPP world?

Correct.

Okay. And then, very strong SBC originations this quarter, record for you guys, how much of that was attributable to kind of expanding the products that versus, just your normal run out of – run of the mill SBC loans that you’ve been originating since inception?

Well, a lot of it is kind of this – I’ve been a number of secular shifts in the commercial real estate market relate – obviously related to COVID. So, what we did was we pivoted to target, in particular multifamily, and industrial sponsors, strong sponsors that otherwise would have opted for a stabilize loan. And instead, we were able to successfully, sell them on the benefits of a bridge, such that it gives them time to increase occupancy rates that decline during COVID. And then exit in 2022, with a much better stabilized loan and higher LTV and lower costs. So that was part of – that was and we designed a product around that kind of a stabilizer bridge light. I’m sorry, yes, bridge light, if you will. So it’s kind of combination of our team, targeting the demand from COVID and tweaking existing product lines to capture that business.

Okay, got it. I mean, did that weigh on? I know that maybe I don’t know how many of your originations this quarter or that origination light product, but was that – is that collateralized by the CRE CLO? Are you still able to get the same ROE on that type of product? I imagine it’s a little bit of a tighter spread their versus some of the other stuff you’re doing, so just wondering how the ROEs there compared to the other SBC loans.

Well, yes, multifamily generally is a little bit tighter, maybe 100, 50 to 100 on an ROE adjusted basis, but with lower loss volatility. But I would say on a blended basis, and Andrew, correct me if I’m wrong, but the secondary market execution that we’ve been looking at and have executed this quarter, we’re still pricing loans about 150 [ph] basis points higher ROE in that program than where we were pre-COVID? And, yes, and I would say it compares favorably to the larger balance reach where there’s definitely been much more margin compression versus what we’ve seen in our lower middle market space.

That’s helpful. Well, thanks for taking my questions this morning. Appreciate the color.

Thanks, Tim.

Thanks, Tim.

Our next question comes from the line of Steve DeLaney with JMP Securities. Please proceed with your question.

Thanks. Good morning, Tom and Andrew. And listen, congrats on the quarter, but also the Anworth deal, not a large, not a huge transaction. But it really was, in my mind, it was a brilliant capital play on your part. So, thank you for helping to roll up the industry and strengthen your company in the process. So, to think about your company that I find interesting is that we’ve been watching the large originators just get wiped out this week on high rates, competition, so its rocket, loan depot it’s everybody. And you’ve got the same issues at GMFS, despite the purchase focus, but the beauty is the diversification of your platform, you are not a pure-play if you will on resi mortgage by any means. So, yesterday we saw a mortgage REIT, a REIT credit mortgage REIT by a specialty originator. And I’m just curious if there are any products out there. Credit products lend themselves to securitization, which is your forte, and anything that you’re not in today that you might find, of interest in whether adding another bolt-on platform is something that we might see over the next year or two to broaden your product line even further. Thank you.

Yes, I mean, as you know, we’re always looking given our track record and acquisitions, we’re always looking for accretive add bolt-ons, I think, just look at the impact that Knight Capital the small secured business like down in Florida acquired, they crushed it with a overlay of technology on our SBA business for PPP, and now that’s going, that investment will then be levered into more technology affinity based expansion of the SBA business, so it’s similar in the commercial side, we’re looking I’d say two silos. One is bolt-ons for the residential business, run by a news group that would round out the agency component of it, so for example, looking at things like syndicated tax credits, competitive niches that’s one thing we’re looking at. Then the other – and you’re also looking at the other aspect of our business. We’re true SBC, small balance commercial, which is a $0.5 million to $5 million. We’re looking at potentially going downstream to micro, which has a heavy weighting towards single-family commercial, providing credit SFR, for example. And so that’s within the commercial space. And then on the more broaden that, I would say, the other two things we’re looking at is continued expansion in Europe, as the market recovers, because remember, we had a flow arrangement with a bridge lender in Ireland, which we’re going to refer reinstating and other products, we’re looking at manufactured housing, as well, which is what we call the broad swath of resimercial [ph], build a lot loans is another example. So yes, we are definitely looking with the strong liquidity position we have, with Anworth, not just the capital that we have currently, but the additional ability lever the for an unsecured standpoint, recourse debt on the incremental equity, we’re definitely looking to redeploy into those two silos. Yes.

Great. Well, sounds like you’ve got a full widescreen out there of where the opportunities are. So thanks for that color, Tom.

Okay.

I’m good.

Our next question comes from Jade Rahmani with KBW. Please proceed with your question.

Thank you very much. And I was wondering on the dividend, if it’s reasonable to expect a full quarter $0.40 dividend to be declared?

Jade I think the board, as Tom mentioned earlier, is looking at the income from PPP to be distributed part of our sort of normalized dividend run rate over the time that income has accreted. So, I do – based on that and the outlook in the rest of the business, I would say, $0.40 is most likely the floor for the sort of go forward dividends over the next few quarters. And then, depending on how much of that PPP revenue is sure reinvested back into the business to position ourselves in a good place for the future. And that’ll drive, moving off of that $0.40. I think $0.40 is [indiscernible].

Thanks. And one commercial mortgage rate that is also managed by a company that manages BDCs. Declared a regular dividend and a supplemental dividends as their distributable earnings are running ahead of the current dividend. But given potential spread compression, I don’t think they wanted to change the run rate dividends. So, they introduced that distinguishing characteristic, is that something you might consider?

I think. Yes, go ahead, Tom.

Andrew, sorry, I was going say in that case, that’s really more, that’s a single strategy CRE. And again, we’re seeing definite margin compression in the larger more upscale from us, that kind of like $25 million plus bridge loans. And that’s due an influx of private debt funds that had gotten wiped out, during first quarter last year that coming back. So, I think that’s more tactical to keep the dividend to not have a situation where you have increase in the dividend that you have to distribute and then reduce it because of margin. More the normalized core earnings, that’s lower due to the margin compression. So, we’re not in that situation, as Andrew said, we’re in a situation where we have – the earnings over 40 quarters from PPP and we see a normalization and an increase in our other businesses, particularly the SBA and the continued deployment of the Anworth Capital and the SBC business. So that’s my view of that situation, and how it does not apply to us.

Thanks. Just on credit, I know, I noticed you said that the 60-day delinquency bucket or 60-day plus delinquencies were constant at 2.3%. Could you give the percentage of loans in the CRE book on non-accrual? And how that compared with last quarter? And any color on the percentage of loans that are in forbearance?

Andrew and Adam, can you?

Yes. Hey, this is Adam on the side. Yes, so loans on forbearance it’s only 1.5% of our total CRE portfolio. I think just from a performance perspective loans that had been forbearance about 85% plus remains current and then loans on a accrual it’s less than 0.5% is non-accrual.

Thanks very much.

Thanks, Jade.

Thanks, Jade.

Our next question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.

Hi, good morning. Very nice quarter wanted to you covered a number of things and appreciate the comments. On the Anworth side certainly, quickly able to liquidate a lot of the agency securities. I do think they had a SFR type portfolio down to South Florida maybe some other assets. Can you talk about the non-agency things that came with – sorry, the non-MBS that came with Anworth as well as your intention there on whether those assets are going to be sold or something you’re looking to opportunistically grow?

I just, Andrew you can comment on the disposition, but I just, I would say that that portfolio is targeted for broader liquidation because of the excess demand we have in our core SBC and the ROE is available there, but the liquidity for those resi credit assets given the strength of the housing market is very strong in terms of the potential base. But Andrew, what’s the current target for liquidation and the strategy there?

Yes, I mean, since quarter end. We brought down the balance sheet quite a bit. And what remains is roughly $200 million of the non-agency RMBS, there’s the a $100 million loan portfolio that you alluded to as well as some REO, that we’re in the process of liquidating that’s around $25 million. So, I think the plan is on the REO to move out of that in short order and then on the rest of the RMBS and the loan book to liquidate those in conjunction with redeployment. And so it’s effect that happens sometime over the next two, three quarters as we sort of reinvest not only the liquidity we already generated on top of just our natural liquidity, but the liquidity that’ll come off of those remaining assets. So, I think it’s quarterly liquidation through the end of the year.

But that’s liquidation and not something early on with that too. Okay. Steve touched on this a little bit around GMFS, but can you talk to April volumes there, how those have trended given the increase in mortgage rates and, and what you’re seeing on the mortgage margin front, just given the news in that sector yesterday?

Yes. So originations in April remained above $300 million. So, we haven’t seen a drastic change in our monthly run rates. But as Tom mentioned earlier, no margins really are hanging in sort around pre-COVID levels.

Great. Lastly looking at page eight in your presentation, it looks like the 60 plus day delinquency is declined quite a bit on the SBA segment. And I think the Q1 number probably doesn’t have a lot of – and I’m not sure how impacted that was. And that was my question. Can you give us an idea of where that’s trending, what’s driving that improvement in the performance of those loans and that segment?

Yes, sure. Hey, this is Adam Zausmer. So, the second one of CARES Act payments started in February, 2021. But SBA loans originate prior to the pandemic qualified for three months of payments and then hotels and restaurants qualified for up to eight months of automatic payments up to 9,000 a month. That’s the majority of it. The SBA is really just keeping those loans current and then additionally there’s also some deferments in there as well.

Great. Appreciate the comments there. Thanks for taking my questions this morning.

Sure.

Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please proceed with your question,

Tom on your, to follow-up on an earlier question on the affinity program is this sort of a strategic direction in terms of, you’re trying to become more like one of the, like lending club or something where it’s you’re going down market to smaller loans and using technology like for apps and so forth to your advantage.

Yes, but in the context of the SBA, we continue to in a measured way, do these smaller unsecured lending, but it’s, really not a material percentage of our total gross portfolio. Really what that’s being applied to is the – what we call the SBA small loan program, where the SBA allows you to use a credit score and accept more accelerated underwriting versus the larger loans. And that’s kind of the 150 to 500,000 targeted loan where it’s typically not used for real estate. It’s used more for equipment. And so based on a loan that – so that’s how we’re going to take our front end technology and apply that to that program. So that that’s – there’s actually a private company called SmartBiz that does that. They do actually the micro loans below 150, but it’s a little bit of applying that same lower customer acquisition cost, and quicker underwriting decisioning to what you’re referring to on the unsecured side.

Right. And then you package the loans and then just securitize them like you with others.

Yes. They go right into the SBA 7(a) pools. So our pool as supposed to being more – less diversified because they’re real estate. I think Andrew our average balance there has been running what $850,000, $900,000 in the SBA 7(a) space? This would have, let’s say a third of the pool being smaller loans with better diversification and more stable prepays, which might justify incremental premium increase in the secondary market.

Not to put too fine of a point on it, but it isn’t sort of a pilot – I understand it’s small. Is this sort of a pilot program to roll out for other sectors, we’ll say real estate and things like that, or it’s just really just a niche type of application?

It is obviously a niche within the context of the SBA program or the regulatory program, but that being said, we are looking our Chief Operating Officer, Gary Taylor and his team are looking at with Adam actually runs credit to roll this out to the commercial space as well.

Okay. And is this going to affect operating expenses much in terms of the real express to 2021?

No, because there’s not – because aside from hiring maybe a handful of specialist underwriters for maybe $0.5 million to $1 million total incremental expense. The revenue would far outweigh the incremental expenses, given the profit margins in the SBA business.

Great. Okay. That’s it for me. Thank you.

Thanks, Chris.

Our next question comes from line of Matthew Howlett with B. Riley. Please proceed with your question.

All right, guys. Thanks for taking my question. Just – can you give a little more color on decision to retain more of the servicing strip on the SBA? So premium which expect to have going forward, and then what you’ve seen in the market?

I’ll let Andrew comment. But from my perspective, it’s, we always said at some point where we’re going to undertake as the SBA business achieve greater volumes, and we have strong coverage of cordings from our capital intensive SBC business, that we would look to extend the duration of our cash flow stream and the SBA business by instead of selling, let’s say at a 13 point premium for a hundred fifth strip, maybe sell it par for 200 basis points strip. And the other thing strategy though, we also look at is in certain markets, the IO strip is valued at in terms of recapture years to recapture at its mispriced, if there’s excess concerns on prepayments that we don’t agree with. And that’s another way to capture from an overall valuation perspective to capture value in the business. I don’t know Andrew, if you would add to that.

No, that’s it.

And I appreciate that. And then just on the Freddy small balance outlook and they’re obviously doing what affordability mission-driven stuff. Can you give some production guidance on that or outlook on how to think about that in terms of the rest of the year?

Yes, Adam, maybe, because Adam manages that from a credit perspective, Adam, what are your views in terms of the Freddy outlook?

Yes, sure. Obviously demand for affordable housing United States remains extremely strong. There’s certainly a lot of rate movement on the Freddy side. They have mission driven targets to hit on their fronts. I mean, there’s – we’re continuing to ramp up and expectation is going to far exceed the 2020 production numbers. I think something of $600 million in total SBL, excuse me, SPL origination is the target.

Do you have a target on in terms of league tables? Where are you? Where you could go? I mean, just somebody just taking a really just getting going on this business.

Yes, sure. From the – from the seller services standpoint we’re certainly top five. And between, I think we’re probably closer to four today.

Every time our goal would be top three that’s kind of the [indiscernible].

Great. That’s all I have. Thanks a lot.

Okay.

And our final question comes the line of Crispin Love with Piper Sandler. Please proceed with your question.

Thanks. Good morning. Recent the preferred tender during the quarter, which is, of course, related to the Anworth merger, do you have any interest at tender the other preferred that you assumed with the merger?

Yeah. So the Series B and Series D they’re both redeemable now. I think when I look at was the dividend there that seems expensive compared to the rest of the capital stack and certainly compared to what – where we’ve seen other deals execute the market recently. So, I just expect us to look into refine those out sometime in the upcoming weeks and months.

Okay. Thanks. That’s helpful. And then Andrew, I just want to clarify something that I thought I heard in the prepared remarks will future PPP fees all be an interesting income rather than non-interest income, as you’ve mentioned in past quarters, or is it just that 65 bps spread that should be an interest income.

So given – we are counting for these as low and the entire revenue stream will flow through interest income.

Okay. Thank you. And that’s different than how it was in the first round, correct?

Yes. The first round production or the income generated in the first, I was treated as a service contract. So the fees were income [ph].

Okay. Thank you.

And with that we’ve reached the end of our question-and-answer session. And now we’d like to turn the floor back over to Mr. Capasse for any closing remarks.

We’re pleased with a strong quarter and the tailwinds we face going forward and look forward to next quarter’s earnings call. And please reach out to management with any additional questions.

This concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation. And have a wonderful day.