Ready Capital Corporation (RC) Q4 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to the Ready Capital Corporation fourth quarter 2022 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] As a reminder, this conference is being recorded. I would now like to turn the conference over to Andrew Ahlborn, Chief Financial Officer. Thank you. You may begin.

Thank you, operator, and good morning to those of you on the call. 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 fourth quarter 2022 earnings release and our supplemental information, which can be found in the Investors section of the Ready Capital website. On today's call, we are also joined by Adam Zausmer, Ready Capital's Chief Credit Officer. I will now turn it over to Chief Executive Officer, Tom Capasse.

Thanks, Andrew. Good morning, and thank you for joining the call today. We have a lot of news and information to share. This morning, we announced a definitive agreement to acquire Broadmark Realty Capital, which we will discuss shortly. First, we'll recap our fourth quarter and full year results. 2022 was another successful year of Ready Capital delivering on our long-term objectives. First, for our customers, Ready Capital remains a leading non-bank lender to CRE lower to middle market sponsors and small businesses nationwide, providing products across the property lifecycle. To that end, in 2022, we originated over 1,200 commercial and small business loans totaling $5.7 billion, and expanded our loan product offerings with the launch of our CRE construction program originating $220 million across four multifamily transactions at expected yields of 20%. Notably, in the fourth quarter, we completed our OneTEAM initiative, consolidating relationship management, providing borrowers with seamless access to all of our products, better customized to their needs. Second, for our shareholders, we continue to set the company apart, as we both preserved and grew book value, while generating a dividend yield of 12%. 2022 marked another banner year, with 12.8% distributable return on average equity, distributable earnings per share of $1.87, and a 1.1 times dividend coverage. Importantly, and further setting us apart, book value per share is up 5% since the first quarter of 2020. To achieve the scale necessary to support our first and second objectives year-over-year, RC increased its capitalization 48% via both secondary markets and through our merger with Mosaic, a leading private credit lender focused on construction lending. We also increased corporate debt 25% via the issuance of $220 million in corporate debt across two transactions. This growth continues to generate significant value for our shareholders. Now, moving to fourth quarter results, despite the economic headwinds, we originated $891 million of small balanced commercial loans or SBC loans, comprising $430 million of affordable multifamily, $190 million of bridge, $167 million of construction, and $104 million of Freddie and fixed. Multifamily remains our core focus, accounting for 93% of the quarter’s volume. We also were impacted by lower industry origination volume, but by focusing on strong underwriting efforts, we produced retained yields that were up 200 basis points from 2021 to 15%, with stronger credit metrics, average LTVs of 63%, and stabilized debt yields of 8%. Entering 2023’s tenuous economic environment, in terms of investment capacity, it's important to note, Ready Capital's ability to pivot from direct lending to purchasing distressed bulk portfolios, mitigating any net interest margin drag from lower originations. Underscoring this, in the first quarter, we've experienced a pickup in offerings of distressed portfolios from banks. In our small business lending segment, fourth quarter originations of SBA 7(a) loans, equaled $137 million, capping another record year at $500 million in total production. Ready Capital is currently the second and sixth largest non-bank and overall SBA lender, respectively. This growth is due to expansion of our large loan program, as well as successful launch of our small lending program, which increased volume 300% to $66 million. As we indicated on previous calls, we have made substantial investments in our proprietary fintech technology platform to support SBA lending. In addition to using the software for our own production, we have started to monetize the software with third party customers, and expect this to be an area of growth in upcoming years. Now, in terms of credit, from our vantage as a leading non-bank lender, we believe that while the overall economy is not technically in a recession, the commercial real estate market is in the throes of one, with significant sector differentiation, notably office. This has been reflected in recent deterioration in industry-wide credit metrics, particularly among non-bank lenders. Against this backdrop, Ready Capital's historic strategy of diversification in small balanced lending and defensive sector focus in multifamily, has resulted in significant outperformance over time, and continued in this quarter. First, in our originated CRE loan portfolio, comprising 84% of the total, 60-day plus delinquencies increased only two basis points to 1.9%, while high risk assets, those rated four to five on our one to five risk rating scale, were only 4.8% of the total. Furthermore, our focus on mid-market multifamily, which accounts for 81% of the current portfolio, is positioned to withstand the post-COVID and macroeconomic factors plaguing other sectors such as office, where we have a very modest 5% exposure in small ballots, average of 6.3 million loans. Second, in our acquired CRE in Mosaic loan portfolio comprising 10% of the total, much of which was distressed at purchase. 60-day plus delinquencies were only 10.1%, and high risk assets were 22%, mitigated by the remaining Mosaic contingency equity right reserve, and significant purchase discounts on non-performing loans or NPLs. Third, in our SBA portfolio, which comprises only 6% of the total exposure, 60-day delinquencies were a modest 1.4%, and high risk assets totaled 7%. Despite the small equity allocation to SBA, the segment generates returns well in excess of the CRE lending business, which is a significant differentiator for Ready Capital. We also continue to demonstrate capital markets leadership, closing two CLOs since the third quarter. The first, a $860 million transaction with an 84 advance rate and AAA pricing at $283 basis points over the curve, closed in the fourth quarter. Subsequent to quarter end, we also closed a $590 million CRE CLO with AAA spreads tightening to 253 basis points over the curve. Our programs, which span six different shelves, have issued $12 billion over 12 years, and are a hallmark of our liquidity management, with demonstrated access to securitized debt in volatile markets. Although we successfully navigated the challenging 2020 and 2022 market environments, we recognize the benefit of scale to achieve long-term market share goals. To that end, we are excited to announce the definitive merger agreement to acquire Broadmark Realty Capital, a specialty real estate finance company investing in opportunities throughout the small to middle market, generally in the $5 million to $75 million range per transaction, for which we will provide the following strategic and financial benefits upon the closing of the transaction. The first is scale. The merger creates one of the largest non-bank lenders in the commercial real estate market, and the fourth largest commercial real estate REIT, with expected total capitalization of nearly $3 billion. The second is financial. The transaction is highly accretive and expected to increase 2024 to 2026 earnings per share, 10% to 15% above our annual 10% targeted return. Furthermore, book value dilution is modest at under 2%, and should fully recover in four to six quarters. Next is leverage reduction. Broadmark has only 0.1 turn of leverage. The merger is anticipated to provide over a full turn reduction in pro forma leverage while providing significant capital for growth in our core business. Next is liquidity improvement. Portfolio runoff plus immediate secured bank financing, provides $550 million of incremental forward 12-month liquidity, which can be deployed at high relative retain yields in the current stressed economic environment. Next is operating ratio improvement. We expect to realize meaningful expense synergies in spreading fixed costs over a larger equity base. And finally, cost of capital enhancement. There is a potential reduction in cost of capital from a credit rewriting. The third benefit is strategic. Expansion of Ready Capital's existing heavy transitional multifamily residential lending to smaller balanced loans in new geographic areas, notably the Pacific Northwest, Colorado, and Utah, while cross-selling existing Ready Capital products to Broadmark sponsors. Fourth is credit. We are confident that our underwriting of the Broadmark portfolio has adequately captured the necessary CECL reserves. We believe that with our asset management expertise and our experience of buying and working out NPLs, we are uniquely positioned to extract value from the Broadmark platform. Finally, shareholder liquidity. Float will increase 63% to E160 million. With that, I'll now turn it over to Andrew.

Thanks, Tom, and good morning. Quarterly GAAP earnings and distributable earnings per share were $0.08 and $0.42, respectively. Distributable earnings of $51.6 million equates to an 11.4% distributable return on average stockholders’ equity. 2022 full year GAAP earnings and distributable earnings per share were $1.73 and $1.87, respectively, covering our dividend and equating to a 12.8% return on average stockholders’ equity. The main driver of the variance between our quarterly GAAP and distributed earnings was a $31 million increase to our CECL reserve. The increase in our CECL reserve was on our performing loan portfolio, and was driven by changes to the macroeconomic inputs in TREPS model. Importantly, the increased reserve is not a reflection of a deterioration of performance or credit in the portfolio. And as Tom mentioned earlier, the originated portfolio remains very stable, with 60-plus day delinquencies at 1.9%. As of year-end, 86% of the portfolio was floating, leading to a $30.7 million increase in interest income absent PPP-related income. This increase was offset by an increase to interest expense, as leveraged increased slightly to 5.1 times, with proceeds being deployed into new origination. Realized gains were down quarter-over-quarter due to the liquidation of $146 million of CMBS loans, with an offsetting reversal of unrealized losses taken in previous quarters. The net impact of the sale on the quarter was a $4.4 million loss. This loss was offset by realized gains from the sale of SBA loans, which decreased 6% to $5.8 million due to a 9% decrease in average premiums. Additionally, Redstone, a national multifamily affordable lender, had its largest quarter to date, adding $5.5 million in gains. Servicing income was lower by $3.5 million quarter-over-quarter due to an impairment of our SBA servicing asset. The impairment was primarily due to changes in the model's discount rate, which are sensitive to movement in secondary pricing. Other income increased $4.8 million due to origination fees booked at Redstone. This business is historically seasonal, and fourth quarter originations were 140% of the previous three quarters combined. The improvement in operating expenses was due to an improvement in variable expenses related to production, as well as lower fixed compensation costs of approximately 10% due to targeted reductions in staffing. On the balance sheet, liquidity remains healthy, with $164 million of total cash, and over $1.1 billion in unencumbered assets. We continue to balance the desire to carry higher liquidity levels through these markets, with an investment landscape at very attractive yields. Recourse leverage in the business declined to 1.5 times due to the CLO Tom mentioned earlier. And mark-to-market debt decreased to 14% of total debt. Book value per share was $15.20. The change is due to $0.30 per share related to CECL, with an offset of $0.15 per share related to the repurchase of 3.6 million shares at an average price of $10.34. As Tom mentioned, we are excited about the Broadmark transaction, which we expect to close by the end of the second quarter. The merger will add approximately $900 million in equity, is expected to be accretive to earnings within four to six quarters of closing, and provide in excess of $3 billion of liquidity for reinvestment over the next few years. With that, we will open the line for questions.

[Operator Instructions] Our first question is coming from the line of Crispin Love with Piper Sandler. Please proceed with your questions.

Thanks, and good morning, Tom, Andrew, and Adam. First, on the Broadmark deal, can you just talk about how your strategy might shift at all as a result of the Broadmark deal? Just with Broadmark's loans being very short in duration, do you expect to recycle that capital into construction loans at higher leverage than what Broadmark was doing, or do you expect to allocate that capital into - or excuse me, recycle that capital into other types of small balanced commercial loans that you've done over your history?

Yes, those are two good - let’s unpack that two ways, Crispin. And Adam, please chime in, but I just want to make two points there. The first is that the core Broadmark product, which is very analogous to our heavy transitional lending, and obviously with the Mosaic transaction last year, we've entered into construction lending, but it’s really - in terms of what we currently do, we currently do multifamily residential heavy transitional, and this is with an average balance, let's say, of $15 million. The average balance of Broadmark is $7 million. So, it's really just going downscale in terms of balance for us. And then the second component in terms of construction or heavy transitional, we are targeted to limit that to 20%. Currently, we’re achieving the highest levered returns in the company, roughly 20% ROE in the construction product. So, with that, Adam, maybe comment on the current allocation and pro forma in terms of how we’re looking at managing that exposure.

Yes, sure. The construction exposure today as a percentage of total commitments, will increase from approximately 6%, which is mostly the Mosaic merger and our new originations to about 15%, with the addition of the Broadmark portfolio. And as Tom mentioned, we have a target concentration for construction of about 20% of total CRE. So, we have room to book another 5% of construction loans up to that 20%. And we think there'll be even greater opportunity for volumes of construction subject to stabilization of projects, and then successful execution of workout strategies.

Okay, thank you. That’s all …

Hey, Crispin, yes, this is Andrew. The only thing I might add is, certainly the runoff of the portfolio increasing leverage slightly more in line with our historical leverage levels, is going to provide a lot of capital for reinvestment in our core channels. So, although the Broadmark product will become a smaller allocation into our balance sheet, the amount of liquidity that's going to come up - the balance sheet and the transaction will really support those future investments in our existing core products for many, many quarters to come.

Okay. So, it’s not - this deal isn't quite like the Anworth deal that was a capital raise - that was kind of a backdoor capital raise, but instead, it will increase your construction, but then also give you kind of capital to invest elsewhere as well. Is that a fair representation?

Yes.

And then just one other one. Tom, you talked about in the prepared remarks, loan acquisition opportunities. Can you just give a little bit more detail there and what these distressed portfolios from banks that you mentioned, are looking like, and what types of discounts you have been or you think you could acquire some of these portfolios and loans?

Yes. I’ll let Adam comment on that as well, but basically, what we're seeing, we see this in what I call a normal real estate cycle. You're seeing bank regulators look to have banks with heavy concentrations of CRE in relation to tangible book value. I think that the target is, or the threshold for their CAMEL ratings is 250%. Once you achieve that level of 350, something like that, they look to reduce exposure. So, we're seeing actually sales of performing or slightly distress stabilized portfolios at maybe call it, yes, like 10 to 15 point discounts. A lot of that's interest rate, not credit. That's one aspect. And then - so that's the pruning going into the cycle to reduce CRE exposure in relation to tangible cap equity. The second is, there is definitely some distressed bridge where some of the banks underwrote them more aggressively than what we had done. And there's negative leverage, let's say on multifamily. So, those are portfolios which have good properties, but because of the negative leverage i.e., the bond - the interest rate on the loan is greater than the cap rate on stabilization. It has issues for refi. And so, the sponsor has to put in more equity, which is exactly what we love. We love good sponsors, but a little bit too much financial leverage. So, those are some of what we're seeing. And the third category I'd say is some of these private lenders that were more pop-ups in 2020, ‘21 and early ’22, have hung warehouse lines that at some point will have to be disposed of. Adam, if you'd add to that, but that's kind of the cocktail of what we're seeing on the pipeline.

Yes, I think supply of this product, these acquisition portfolios is going to be up, given bank inventory and kind of shock to the market. So, I expect majority of the opportunities will be in less attractive asset classes, hospitality, retail offers, as these banks are really de-risking their story deals. So, we expect to evaluate portfolios where more hands-on asset management is required to monetize returns. And it's really where our firm originally cut our teeth in terms of working through distressed portfolios. So, yes, we expect to see quite a bit of volume coming through from the acquisition side and certainly already seeing that, as Tom pointed out.

Great. Thank you for taking my questions.

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

Yes. Hi, good morning. Tom, maybe to follow up on a previous question. What leverage is currently on the Mosaic assets, or will you be adding leverage to the BRMK portfolio, or will you just look to maybe take up leverage in other areas to kind of increase the blended leverage from the pro forma level?

Yes, well, the pro forma reduction is on gross leverage, around 1.7 times and a half a turn on the recourse leverage. But Andrew, why don't you talk a little bit about the post-merger capital market strategy, both as it relates to Broadmark and Mosaic?

Yes. As Tom said, the transaction is going to reduce leverage by basically a turn and a half immediately. Upon close of the transaction, we certainly expect to apply asset level financing on certain subsets of their portfolio. So, pulling out somewhere between $300 million and $500 million of liquidity pretty shortly after the close of the transaction. And as we look forward, as we continue to scale, the potential to bring down overall leverage from where we've been running historically and look to access a different rating and potentially different debt markets, is certainly something we're considering. But the combination of that asset-specific leverage portfolio runoff in a turn of corporate leverage is what will supply the liquidity we talked about in our prepared remarks.

Great. Thanks, Andrew. And a couple of quick ones on the deal, but how much in deal-related expenses should we expect RC to incur in the first half, or I guess between now and closing? And then, does the deal structure allow Broadmark to continue paying their dividend through the close?

Yes. So, deal expenses on our side are roughly $10 million, and yes, the deal does allow the dividend to be paid through close.

Great. And then one last one, switching gears. Residential mortgage banking, kind of volatile year in income contribution, even with volumes declining, but can you talk about the outlook for profitability in that segment, kind of given where we are with mortgage rates and outlook for mortgage volumes?

Yes. They - again, team MFS has always been top quartile in terms of efficiency ratios, which obviously provides for outperformance in bear markets when we have a cyclical - yes, where we are in terms of the rate cycle. In terms of our rate outlook, which is now more biased to a persistent - the 10-year being above .5 through year-end, we’re still assuming a decline of around 50%, 60% versus the prior year and origination volume and high single-digit - but high single-digit ROEs given the retention of the contribution of their significant MSR book in which - in relation to their current downsized expense base. I don’t know, Andrew, if you would add to that, if you have something.

No, I think that was good, Tom.

Thank you. Our next question is coming from the line of Steven DeLaney with JMP Securities. Please proceed with your question.

Good morning, Tom, and Andrew, and congratulations on the deal. We covered the company BRMK, and I think it's a perfect fit and a win-win. Can you comment on your expected time of closing the transaction? And also, Andrew, could you give us like an estimated range of where you see pro forma book value per share coming in? Thanks.

Good morning. Yes, so we expect to close the transaction towards the latter half of the second quarter.

Okay.

I suspect initial book value is going to be slightly under the $15 we - or slightly under $15 post close of the transaction.

Okay, that's helpful. And then the fourth quarter, obviously interest rates is what's driving a lot of things in portfolios and certainly CECL reserves. Most of the increase for the year was obviously in the fourth quarter. Could you comment just generally on, was it rates? Was it other macro things that led you to that number? And then also within that, can you comment on how much is specific rather than general? Thanks, and that's it for me.

Yes. So, in TREP model, obviously the macro drivers are rate assumptions, unemployment, GDP, et cetera. So, the application of all those movements on to our performing portfolio is what resulted in the CECL reserve. On a specific basis, we actually released roughly $2 million in reserves. So, almost all the pressure on book value per share was from those macro assumptions and application of the TREP model.

Fantastic. Okay. Thank you for the comments.

Thank you. Our next question is coming from the line of Christopher Nolan with Ladenburg Thalmann. Please proceed with your questions.

Hey guys. How much of - my questions are mostly Broadmark-focused. Do these guys have any office exposure?

Adam, you want to comment on that?

Yes. They have very little office exposure. I'd say about less than 2% of their overall portfolio.

All right. And then I guess my next question really …

Oh, sorry. We’d just point out, we're five - under five.

Okay, great. My next question focuses on your earnings accretion outlook. I noticed that the LTV is 60%, I presume that's December 31st, 2022, and 27% of the loan portfolio is in default according to the slides. Is your earnings accretion outlook estimates centered on discount accretion just recovering from those defaults and so forth?

Yes. So, no, the earnings accretion is really focused on two components. One is the expected cost synergies from the transaction, which we think will be substantial over the next couple of years. And then just the redeployment of the capital coming off the increased equity base at levered yields that are very attractive today. I think when we look at the defaults in their portfolio, we certainly think their existing CECL reserves, plus any additional CECL reserves embedded in the deal due to our underwriting, are enough to capture the protection in their balance sheet. But the accretion is really from synergies and redeployment of capital. Am I correct that when the acquisition is done, all the assets will be marked at fair value? So, in terms of incremental reserves, you'll be on those clean slates effectively with this portfolio?

That's right. Upon the closing of the merger, we'll book their balance sheet at fair value.

Okay. That's it for me. Thank you.

Thank you. Our next question is coming from the line of Jade Rahmani with KBW. Please proceed with your questions.

Thank you very much. I think front and center for investors in the current environment is commercial real estate market liquidity, and secondly, credit. So, starting with liquidity, we've seen some improvement this year, and Ready Capital's clearly been a leader in the market with the CLO issuance. Do you believe there's been any recent negative changes as a result of the recent uptick in interest rates?

And Adam, please add to my comments, but we're definitely seeing in the securitized debt markets, a spread, kind of a delayed spread tightening versus corporates. And so, that was evident in our - yes, we did the first CRE CLO of the year, and what were the senior spreads? We think it was 253 over, Adam, and that was - at the peak, we hit 275. So, we're in about 25 to 50 basis points. So, we see that. Although that being said, there's been, with the recent selloff in equities and widening in corporates, we’re definitely seeing that kind of flatten. But generally speaking, I would say that the - if you look at like over-subscription ratios and filings with the SEC, we're definitely seeing a pickup in the CRE CLO market from the much tighter financial conditions that existed in the fourth quarter of last year.

Thank you. A follow on would be on the bank side. I think Commercial Mortgage Alert ran a story that banks, after pulling back from the market in the second half of 2022, are looking to increase their credit facility, but with a select fewer number of counterparties. Clearly, the Broadmark Capital transaction does provide additional leverageable equity. Does that improve or have any impact on access to credit facility capacity?

Andrew?

Yes. Certainly, we have ample capacity on our existing line today. I think we have seen increased demand for size and product from our lenders. I think when we look at the Broadmark portfolio, there will be asset-specific financing applied to their existing portfolio via new facilities we put in place, but certainly, the increased equity and the corresponding increase in the production associated with that equity, could result in increased sizing of our existing facilities. And so, it's really a combination of those two.

Turning to credit, I didn't see a notable deterioration based on the supplemental, and I think most of the uptick in provisions were due to a general CECL reserve. Can you comment on credit migration across the portfolio? I don't know if you want to focus on product type or property type, but some color there would be helpful.

Adam?

Yes. I think the greatest strength of our portfolio really remains the fact that we're - the majority of our assets are in the multifamily sector. So, that's given us significant protection over the years. And that continues to be our strategy. So, that's really the rationale for why you really haven't seen much negative movement in default rates and general credit losses. And I'd say, with this merger as well, we're going to be redeploying the excess capital into our core products, continue to remain a strong credit discipline around deploying capital into multifamily, the multifamily sector, specifically bridge and Freddie Mac, which is products that have proven out to be very successful at the firm and that have performed well over the years.

Yes, I would just add to that, Adam. If you look at the - one thing we focus on is the four to five risk rating as a percentage of the total exposure. Ours is what, for the CRE book, Adam, is around 4.8%.

Yep.

The - if you look at some of the larger balance peers, because of OpEx exposure, where we as a firm, both Freddie Cap and the external manager, are very negative on the sector. We think we're only in the third inning of what's to come in terms of the double whammy of recession on rent - on tenancy, vacancy, and then of course the work from home trend, similar to the malls in COVID. Anyway, so those ratios are running 10 to - I think sub one was north of 20%, 25%. So, anyways, I think the historic strategy we've had in terms of, A, small ballots, and, B, more defensive sectors like multifamily and industrial, are going to serve us well through this cycle.

In terms of originations, did you provide any outlook for the full year by product type, which in the past is something you've done?

Adam or Andrew, do you want to comment on that?

So, Jade, we have not provided any outlook at this point.

Would you care to provide any parameters maybe broadly on the SBC side, on the SBA side?

Yes. On, the SBA side, I think you're going to see continued growth. Our large balanced program is up year-over-year, and suspect originations there come in around $400 million for the year. Add into that, our small loan SBA program is seeing exponential growth year-over-year. It was up three times. I suspect they will double volume headed into next year as well. So, I think in the SBA base, you're going to see 10% to 20% growth from where we finished the year at 500. Adam, I'll let you comment on the CRE out there.

Yes. And then on the CRE side, again, with redeploying capital that we get from Broadmark into the multifamily sector, I'd expect to do somewhere between $3 billion to $4 billion of new originations and acquisitions in the CRE business.

And I would just add to that, Adam, we are definitely going to look to increase significantly our acquisition volume as well because of the - we just tend to - one of the benefits of our - Jade, as you know, of our platform, when we look at scarce capital and retain yields, we'll pivot. If we're not getting what we want in terms of let's say a 15 on the direct lending, and there's a 17 available on buying bank portfolios, then we allocate the capital to the acquisition business, which now there's a significant pipeline that we expect over the next 24 months as this cycle unfolds.

Thanks for taking the questions.

[Operator instructions] Our next question is coming from the line of Matt Howlett with B. Riley. Please proceed with your questions.

Hey, guys. Thanks for taking my question. Congrats on the deal. You certainly have the playbook on making these things work. As someone that covers Broadmark, I just want to address the unfunded commitments. I think they were around $0.5 billion last check. Just curious how you looked at those.

Andrew.

Yes, certainly. As we underwrote the DL, considered those future funding commitments and our ability to not only redeploy the organic liquidity that we expect off the portfolio, but also the additional leverage to increase cash reserves post transactions. So, their future funding commitments are slightly different than ours. And then, of course, you have the takeout into our existing CLO program. So, it means carrying higher cash reserves on the balance sheet as we move through the transaction.

Okay. So, you just have the higher cash. Okay, got it. And just, but you get the discount off, so you’ve got the discount in there. You assume the debt here, which is attractive. I think they had about $100 million of REO. I mean, that stuff - I mean, update on where that stuff is in terms of getting off that - getting out of that stuff sooner?

Adam?

Yes, sure. So, we intend to execute a similar strategy like we've done across multiple mergers similar to this. We're going to put a strong team in place to quickly get up to speed on the assets and really decide one of two paths. One, either work closely with borrowers to continue developing the projects. Certainly, we need to have conviction in the business plan, timeline, and collateral market, et cetera. Or two, engage local experts to foreclose or engage brokers to liquidate the assets, which Broadmark hasn't been aggressively doing today. So, I think with our asset management expertise and workout capabilities, I think it uniquely positions the company to resolve and de-risk the REO assets in the portfolio.

Got you. And most of it is residential construction, right? Correct? I mean, at least the overall portfolio is, right?

Yes, the overall portfolio is about 80% in the multifamily residential sector. And then on the residential side, is really a balance between for sale and rent strategies. But yes, it's about 80%. And then on the REL side, the REO is about 90% residential as well.

Right, got you. There's some Houston multifamily complex, I think it was one hotel in Denver, but that was - that looks fine.

Exactly. Yep.

Got you. And then just, Andrew, you mentioned the securitization. I mean, what was the spread? It said 290 plus on the press release. I think you mentioned 250 over somewhere. Is the market now in the CLO space at a point where you can originate into a securitization and make a mid-teens ROE on the retained interest, or is that now a viable funding channel given the rebound, or is it just too early to tell?

Yes. So, the spreads that were mentioned earlier, we completed one in the fourth quarter, which was in the mid-280s, and then one in the first quarter, which was in the mid-250s. As we look to price new loans today, we are pricing new production on the bridge side to 14% to 15% retained yields. So, given where the CLO market is, we think it's a very attractive investment landscape, roughly 200 basis points higher than we were for the mid last year.

Yes. And so, one thing I would add to that is, 100% we can originate in the current market at that kind of 250-ish over on the seniors at a 14 to 15 retained yield, and that's up 200 basis points plus from where we were before the rate, early ‘22. But the only caveat to that is that a number of the sponsors, their properties don't pencil out at that higher debt cost. So, there is - that's resulted in the commitment in decrease in demand, which, of course, we offset with our acquired - our ability to buy acquired portfolios.

Got you. Right. You get as much as you can on this side, but you'll focus more on that other channel, which is great to have and something could really be big for you guys in ’23. Last question, the buybacks. Are you precluded now to repurchasing shares until this gets done? And I mean, what's your appetite? It looks at the stock here is going to open down 10%, 12% here. I mean, what's the appetite to start buying back stock? I mean, you're going to be trading well below anything that you bought back, a nice amount of shares. But what can you do now, or you have to wait until the deal closes?

Yes. Certainly, in available windows, we will evaluate using repurchase programs on a comparative basis where we can reinvest new dollars in some of the opportunities that we talked about. But certainly, we expect to use share repurchases over the next couple of quarters as another opportunity to provide shareholder return.

You said windows, so is that 10B, one - can you buy back through the plan or is it just - you just can't do it until the book goes through, the deal closes?

Yes. So, our existing authorized repurchase plan, we filled that in the fourth quarter. So, we have to go through the new authorization from the board to put a new plan in place. Some more to come on that once all of that's ironed out.

Got you. Look forward to that. Thanks, everyone.

Thank you. Our next question is coming from the line of Jade Rahmani with KBW. Please proceed with your questions.

Thanks for taking the follow-up. Could you give any color on the due diligence process? How long did you spend on the deal with Broadmark and going through their portfolio?

Sure. Hey, this is Adam. So, we've been doing due diligence on the portfolio for a while. Really several months, two plus months. Ready Capital and Broadmark team performed property inspections and analysis together, and we met many sponsors and towards the local markets. We had multiple roundtable meetings to dive into assets. And given many of the loans had a history of modifications or other moving parts, it's just really crucial for us to quickly understand what was happening at the asset level and form credit views. Fresh valuations were obtained and reconciled for every asset in the portfolio. Existing and future workout plans were evaluated for the highest risk loans in the portfolio, and we engaged counsel to perform loan document and title review, as well as borrow background searches.

Thanks very much. Great to hear. And a question for Tom on office. What's your company's experience level with office loan workouts in particular, and do you see any interest in perhaps creating a fund, an opportunistic fund to pursue distressed office deals or anything in that space?

Well, most of what we've done in Ready Capital in office is small balance, including workouts. Like we bought $6 billion plus of GFC, of which maybe 10% was office. So, you're not dealing with large CBD, BC office properties, which are really the pain point today. Away from that, in terms of, we always look opportunistically, we at Ready Capital, to work with the external manager, and there's unequivocally opportunities to look at broken office properties that - for readaptive use. And so, yes, there are opportunities to deploy capital there, and we also have an opportunistic private equity strategy that Ready Capital participates in with the external manager. And we're seeing a lot of office opportunities there to provide preps on recaps and a number of other things. So, yes, a long way of saying yes. We do have experience definitely on the small balance side. There's very little, what we have in current of our current portfolio. It's 2% of Broadmark and only 5% of Ready Capital. But we definitely are looking at portfolios from especially regional banks in cities where the work from home has been a real big impact, which could provide the opportunity for raising targeted opportunistic capital.

Thank you very much.

Thank you. Our next question is coming from the line of Crispin Love with Piper Sandler. Please proceed with your questions.

Thanks. Also, just one more follow-up for me. Tom, and Andrew, you mentioned, I think you said substantial expense synergies. Just curious if you can provide a little bit more detail there on where you expect to expect the majority of synergies, how much in like dollar terms or percent of Broadmark’s expense base do you think those synergies could be on the expense side?

Andrew, you want to comment?

Yes. So, the expense synergies are going to come through a combination of employee comp and benefits, as well as G&A. The integration plan on a go-forward basis, well, obviously, to evaluate staffing across the combined companies and sort of pick the best of the best across functions as we move forward. Total net cost synergies in ‘24, ‘25 and ’26, are expected to be roughly $7.5 million, $12.5 million, and $16.5 million, and that is net of the incremental management fee that comes with the new equity.

All right. Thank you, Andrew.

Thank you. There are no further questions at this time. I would now like to hand the call back to Tom Capasse for any closing remarks.

Again, we're excited about the transformative merger and the accretion to both Broadmark and Ready Cap shareholders and look forward to the next earnings call.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.