Ready Capital Corporation (NYSE:RC) Q2 2023 Earnings Call Transcript

Ready Capital Corporation (NYSE:RC) Q2 2023 Earnings Call Transcript August 8, 2023

Operator: Greetings, ladies and gentlemen, and welcome to the Ready Capital Second Quarter of 2023 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chief Financial Officer, Andrew Ahlborn. Please go ahead, sir.

Andrew Ahlborn: 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 second quarter 2023 earnings release and our supplemental information, which can be found in the Investors section of the Ready Capital website. In addition to Tom and myself 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.

Tom Capasse: Thanks, Andrew. Good morning, everyone, and thank you for joining the call today. The second quarter results reflect ongoing expansion of the Ready Capital franchise, positive relative credit metrics of our multi-family centric portfolio and the strength of earnings along with the a more conservative balance sheet. The closing of the Broadmark Realty Capital acquisition marked another significant milestone for the company. At closing, the transaction increased our capital base by 44% to $2.7 billion boosting Ready Capital to the fourth largest commercial mortgage REIT added liquidity of $270 million and reduced leverage by 1.6x. On a go-forward basis, the transaction is expected to generate $400 million in investible liquidity over the next 18 months and reduced our operating expense ratio by 30%.

This quarter to accelerate the earnings accretion of the transaction, we reduced $10 million of annual existing Broadmark expenses marked less liquid REO to anticipated liquidation values and integrated all shared services into the existing RC framework. During the quarter, while stress CRE market conditions led to industry-wide contraction in gross portfolios, Ready Capital’s increased 6% to $10.1 billion, reflecting $127 million of loan originations, as well as an addition of $773 million of Broadmark loans. Our core product bridge origination was constrained at $123 million, reflecting the cyclical 25% to 50% year-over-year sector specific declines in commercial real estate transaction volume. That said vintage retained yields of 17% and 63% loan-to-value strengthen future net interest margin.

While we expect tight CRE debt market conditions to persist into 2024, we note Ready Capital’s competitive advantage and distressed asset management capabilities. This allows us in a market downturn to offset lower originations with portfolio acquisitions or our current pivot in our direct lending to solution capital products such as note-on-note financing or preferred equity with a focus on multi-family. Offsetting capital intensive lower bridge originations were strong volumes in our CRE gain on sale channels. Freddie Mac SBL, which totaled $34 million and Redstone, our Freddie Mac tax exempt lender, originated $351 million in the quarter, bringing the total to $611 million originated year-to-date. This was a nearly 2x year-over-year increase.

The current $1.4 billion pipeline across all CRE products is the highest since the fourth quarter of 2021, with $1.2 billion committed from borrowers. Our credit metrics this quarter continue to outperform the commercial mortgage repair group. We note three observations in this regard. First, while consolidated 60-day delinquency percentage increased 50 basis points to 4.6%. This was entirely attributable to additional NPLs associated with the closing of the Broadmark transaction. Second, while the 60-day delinquency rate on the acquired portfolio, primarily Mosaic and Broadmark is 13%. The 60-day percentage for our originated portfolio actually decreased 10 basis points to a near industry low 2.6% with conservative LTVs and debt yields of 68% and 9%, respectively.

Last, given the $61 million current contingent equity reserve on the Mosaic portfolio and 4% CECL reserves on the Broadmark portfolio, we do not anticipate losses above these reserves. Now, beyond the reserving on the acquired portfolio, the credit strength of the originated portfolio can be attributed to the following factors. First, the portfolios 77% concentration in workforce multi-family assets, the affordability crisis in single-family housing due to the doubling in mortgage rates and the 40% post-COVID increase in home prices continues to tilt the buy versus rent metrics in favor of rent, particularly for the middle class demographic we target. Second, is prudent underwriting. We underwrote most bridge loans to 0% to 3% rent growth avoiding aggressive pro forma rents with the majority of inception to-date rent growth outpacing our underwriting.

This mitigates refinancing risk as an offset to the 100 basis point to 150 basis point movement in cap rates and debt service coverage ratios. Third, the maturity ladder only 3% and 18% of our multi-family bridge assets mature over the next 3 months and 12 months respectively, with the majority of maturities occurring later in 2024 and into 2025. Last, limited exposure to the office sector. Those portfolio office is only 5%, approximately 20% of the commercial mortgage REIT peer group average and accounts for the majority of our delinquencies. With a 6% CECL reserve, we believe our office exposure is fully protected for continued office market stress. Now an update on our small business lending segment, a high ROE business we view as an underappreciated differentiator in the commercial mortgage REIT peer group.

To review Ready Capital as one of 14 non-bank lenders under the small business administration 7(a) program. Total 7(a) volume averages $25 billion to $30 billion annually with the program split between large loans $500,000 to $5 million and small under $500,000. We segment the business in two separate operations: 7(a) lending through small and large loans channels, and our fintech iBusiness. In the lending segment, in the quarter, we originated $121 million in 7(a) loans comprising 84% large and 26% small loans, up 31% quarter-over-quarter increase with premiums averaging 9.1%. Ready Capital remains the largest non-bank and fourth largest overall 7(a) lender with a three-year goal to double volume to $1 billion, approximately a 3% market share.

Forward 12-month 7(a) industry volume projection is 10% growth as small businesses turned to 7(a) lending as banks curtail conventional lending. The Biden administrations stated SBA policy goal is to increase small loan volume, primarily minority and women-owned small businesses, which are approved using scoring models. iBusiness’ related technology has driven increases in our small loan volume since implementation in mid-2022 and is contributing to our efforts to reach our $1 billion origination target. Our fintech segment iBusiness has launched its proprietary software called Lender AI for business lending clients, and is also deriving third-party revenue from providing lending-as-a-service primarily to banks. The Lender AI technology is derived from iBusiness’ success in developing its own software and algorithms for unsecured business lending and SBA loan processing, including 7(a) and the $5 billion plus in PPP origination.

The value proposition of the iBusiness software lies in providing reduced customer acquisition costs via a vertically integrated loan origination system. This allows higher pull-through rates with an online portal and fully digital customer and lender experience, which simplifies a highly regulated 7(a) underwriting process. The iBusiness business platform onboarded 100 new clients to the lending software with five additional clients added to the lending-as-a-service platform. We have invested over $18 million to-date in iBusiness and expect the platform to breakeven in 2024. In terms of 7(a) credit, the rise in prime to 8.5% has pressured our small business borrowers with 60-day delinquencies in the 7(a) portfolio increasing to 2.2%, well below the 6% GFC peaks.

The earnings and book value impact of defaults in this segment are limited due to the small equity allocation less than 5% equity, and the high ROE of the business, which can sustain higher defaults and losses. Looking forward, the company is well-positioned to increase earnings and expand investment activity. First, the return profile of new originations and the opportunity on the acquisition side has not been more attractive since the — after the GFC. Retained yields on new originations are consistently in excess of 15% and acquisition opportunities under diligence are 2 to 3 points in excess of that. Second, the relative credit strength of the portfolio with projected losses fully covered by current CECL reserves. Third, liquidity is at a record level with $228 million of cash and $2.1 billion of unencumbered assets.

Additionally, we expect $250 million of incremental liquidity in the upcoming quarters from portfolio turnover, financing efforts, and selected asset sales. Finally, our conservative debt profile, with total and recourse leverage of 3.5 and 1.0x, further only 17% of leverage is subject to mark-to-market and only 4% represents repo. Total available warehouse line availability exceeds lending capacity by $4 billion, and number of lenders is at of record 2022. With that, I’ll turn it over to Andrew.

Andrew Ahlborn: Thanks, Tom. Quarterly GAAP and distributable earnings per common share were $1.87 and $0.36 respectively. Distributable earnings of $51.3 million equates to a 9.3% return on average stockholders’ equity. GAAP net income was significantly impacted by $229.9 million bargain purchase gain associated with the Broadmark merger. The bargain purchase gain is calculated as the difference between the fair value of the net assets acquired and the market price of the total compensation delivered to Broadmark shareholders on the closing date of the merger. Interest income increased $15.3 million to $232.9 million due to both the effect of rising rates in the floating rate portfolio, as well as a $7.8 million contribution from Broadmark assets added at the end of May.

The weighted average coupon in the quarter increased 56 basis points to 8.8%. Interest expense increased $12.1 million to $172.5 million as average funding costs rose to 657 basis points in the quarter. The levered yield in the portfolio declined to 10.2% due to both the inclusion of additional non-performing assets from Broadmark as well as increased cash balances inside our CRE CLOs due to higher prepayments. We expect levered yields to grow from here as those items are reinvested in the current market yields. The provision for loan losses totaled $19.4 million with $4.6 million related to the Broadmark business combination. CECL increases were primarily driven by changes to TREPS macro assumptions, in particular the CRE price index. Of the total provision only 680,000 related to additional expected losses on non-performing assets within our CRE portfolio.

Realized gains increased $12.3 million to $23.9 million due to increased SBA 7(a) and Freddie Mac reduction. In the SBA 7(a) business, average premiums remain consistent at 9.1% with $97.9 million of sales producing $8.5 million of income. Originations in our Freddie Mac affordable business increased 39% quarter-over-quarter. This production contributed $6 million of gains. Additionally, the conversion of our LIBOR-based interest rate swaps to SOFR-based interest rate swaps resulted in a $2.4 million gain. The conversion did not affect the fixed pay lag or the duration of our hedges. Unrealized gains equaled $7.4 million; an $8.8 million increase in the residential MSR value was offset by $1.4 million of unrealized losses across other loan and bond positions.

Only the losses have been included in distributable earnings. Lower income from unconsolidated joint ventures continued into Q2 and totaled $33,000. This is due to a $0.5 million mark-to-market loss inside of the JVs and continues to be the result of cap rate movement. Operating expenses increased $2.6 million in the quarter due to $2.8 million of escrow advances that were expensed and the inclusion of $2 million of operating expenses from the Broadmark platform. We expect the operating expense ratio in the business to improve as we rollout synergies from the transaction. On the balance sheet, book value per share declined 3.6% to $14.52. The change was attributable to 3% dilution from the Broadmark merger and 0.6% dilution from CECL reserves.

This dilution was offset by share repurchase activity in the quarter where we repurchased 1.7 million shares at an average price of $10.82. The dilution from the Broadmark merger was slightly higher than modeled due to more aggressive marks on the REO portfolio and certain employee termination costs that are included in the business combination accounting. As expected, leverage decreased 1.6 turns to 3.5x. On the capital markets front, we remained active. First, we closed our 12th CRE CLO a $649 million deal with seniors pricing at SOFR plus 255. Second, we added two additional warehouse lines to support the business. The first, a $300 million facility to finance Broadmark’s existing residential portfolio priced at SOFR plus 300 at a 70% advance.

The second, $125 million facility to finance collateral retained on balance sheet posts a call of two of our earliest CRE CLOs. Post-quarter, we completed our third securitization of SBA 7(a) unguaranteed loans. The $190 million deal closes at a 69% advance rate with pricing at SOFR plus 325. We continue to explore a variety of avenues in the corporate markets given current leverage levels. In the short-term, the initial deleveraging and increased NPLs associated with the closing of Broadmark will create temporary earnings drags, but subsequent liquidity generated from deleveraging and asset sales deployed in target risk theory debt markets with reinvestment ROEs exceeding 15% will be long-term accretive. We are positioned to maintain a dividend consistent with our stated 10% target return on equity, while protecting book value and believe the earnings power of the company to be higher as we move past the Broadmark integration.

With that, we will open the line for questions.

Q&A Session

Operator: Thank you, sir. Ladies and gentlemen, we’ll now be conducting the question-and-answer session. [Operator Instructions]. Our first question comes from Crispin Love of Piper Sandler.

Crispin Love: Thanks. Good morning, everyone. Just following the bank crisis or kind of mini crisis several months ago, there were definitely views as loan acquisition opportunities would pick up later in 2023 or early 2024. And Tom, you mentioned that a little bit earlier as well. But can you just speak to and expound on the loan acquisition opportunities out there? What you’ve seen already? And if you’re surprised if you haven’t seen more recently or and just kind of do you expect them to pick up over the next several months and quarters, and is the key inhibitor recently more been on the bid-ask and pricing on these deals?

Tom Capasse: Yes, Crispin. That’s a good point. I would say that our view is that it, it’s definitely less than we thought it would be and what we’re seeing in terms of the reason for that is really price discovery because there’s this weird bid-ask, weird in the sense that the economic assumptions regarding an assumption and cap rate increases in price declines are very different between the buyers and the sellers. And just to give you a few numbers Mission Capital noted, they tracked $8 billion of sales offered and $5 billion traded in 2022. Year-to-date they’ve noted $5 billion of offers and only $1 billion have transacted. And that’s due exactly to what the point that I think you’re getting at, which is, this kind of bid-ask that differential.

And so what we see happening though is, we are definitely predicting a pickup in the fourth quarter of this year because what a lot of banks are doing now is they def — with the rise in rates, they still have losses on their securities portfolios. So in terms of generating liquidity, they are turning to the bank, the CRE loan portfolios where the regulators are still pressuring them in terms of concentration limits in relation to Tier 1 capital. But what they’re doing is they’re more focusing on kind of assets that are criticized that have a lease price discount and versus clean performing or let’s say on the other end of the spectrum office or NPL, so that’s — so yes, that’s kind of the log jam in the bank market. That being said, what we’re seeing is from our perspective, and Adam and I’ll certainly comment on this at good time, but we’re pivoting a lot of our direct lending to so-called solutions capital in the multi-family market, where we provide preferred or bridge REIT bridge to bridge refinancing or note on note where we are able to deploy capital in a restructuring context for third parties that provide about a 2 to 3 point incremental yield versus our straight up direct lending in the multi-family bridge sector.

So — and that’s reflected in our current pipeline of about $1.4 billion.

Crispin Love: Thanks, Tom. That’s helpful. And your solution lending comment might be kind of tying to my next question as well, but do you expect to have extensions for many of your bridge multi-family loans once they mature for all the kind of the growth in loans that were originated in 2020 and 2021? And just curious how you would expect many of those maturities to be handled over the next several quarters? And it would be great if you could just repeat the maturity schedule that you highlighted earlier in the call.

Tom Capasse: Yes, I’ll just repeat that and hand it off to Adam to comment on our strategy with respect to bridge and extensions. But in the next six months, we only have 3% and over 12 months what was it, Andrew 18%?

Andrew Ahlborn: Yes, 18%. 18%.

Tom Capasse: Yes, 18%. So a lot of our maturities are backlog. That being said, Adam, what are you guys seeing in terms of asset management and your approach to the extension and into a refinancing?

Adam Zausmer: Yes. Sorry. I deal the structure with extension options, but some may not qualify given the market. So our typical extension step is 70% LTV, but given cap rates, we’re seeing about 80% plus LTVs. So we can certainly consider the 70%, 80% slices sub debt and price as such. If extension conditions aren’t met, I think in many cases it’s going to force sales as there will be some equity to protect. And then also, on the refinance front, I think for a majority of the deals, our clients have the ability to execute cash in refinances, and we feel that the check the client would have to write isn’t that material relative to the equity that these sponsors having in these deals.

Crispin Love: Sorry. Could you define a, so-called cash in refinance? What is that?

Adam Zausmer: Yes. So when the natural takeout for our multi-family bridge would be a conventional agency product. So to the extent that the debt yield’s not there, that the agency is required or the LTV steps aren’t met, the sponsor would have to come out of pocket and basically contribute additional equity into the transaction to execute a refinanced to the agencies.

Crispin Love: Thanks. Appreciate you taking all my questions. That’s it from me.

Tom Capasse: Thank you.

Operator: Thank you. The next question comes from Stephen Laws of Raymond James.

Stephen Laws: Hi, good morning. Andrew, I wanted to follow-up with some of your comments on earnings drag and then new investment activity and synergies. So as we think about optimizing capital deployment, how much near-term earnings drag do you anticipate versus the 2Q levels? And is redeploying this capital given the — it seems like opportunities are attractive, but you’re not seeing maybe as much as you thought in some spots. How quickly do you think or how patiently do you want to wait to redeploy that capital over the back half of the year and early next year?

Andrew Ahlborn: Yes. So when you look at what I’ll call the under yielding parts of the portfolio from both Broadmark and to some extent Mosaic, it’s probably creating an earnings drag somewhere between 100, 150 basis points to the bottom line. In terms of the turnover, we have marked the Broadmark portfolio to levels where we think we can move out of the under yielding REO asset fairly quickly over the next couple quarters. And then, certainly on the Mosaic side, we have the contingent equity, right, which gives us some flexibility to move those assets without sustaining losses. So I do expect to prioritize moving those assets as we move throughout the rest of the year into the early part of next year. In terms of capital deployment, certainly we are balancing the need to carry higher liquidity level, which today stand at all times high with the investment pipeline.

And I think we’ll continue to just out of that balance as we sort of see how this all unfolds to the upcoming quarters here.

Stephen Laws: Great. And just as a follow-up, as I think about the growth in the back half of the year, where do you expect to see that primarily or like we saw in Q2, do you expect each of the segments kind of share some strength as we move through the year?

Andrew Ahlborn: Yes. I think as we go segment by segment, in the small business lending segment, I think we will see volumes increase as we move throughout the year. The first quarter typically tends to be slower and volumes ramp up from there. Just through the nature of the industry, I also think we are seeing sort of exceptional quarter-over-quarter growth from our small loan segment. So I took small business loans to increase as we go-forward. In our Freddie Mac businesses, the pipelines are historically high. So I can expect continued strength and growth throughout the end of the year there. On the capital intensive lending side of the business, volumes have been slow over the last two quarters. Given the current pipeline and the liquidity, we have, we do think volumes will grow and we can do that while balancing the need to sort of carry increased liquidity levels to match and manage other parts of the balance sheet.

So I do expect growth in those segments. I would expect in our residential business, volumes to sort of stay where they’ve been the last couple quarters.

Stephen Laws: Right. Appreciate the comments this morning.

Operator: Thank you. The next question comes from Christopher Nolan of Ladenburg Thalmann.

Christopher Nolan: Do you expect the Broadmark deal to be EPS accretive by second half of 2024?

Tom Capasse: I mean, a lot of that has to do with the, as Andrew indicated, the velocity at which we liquidate the non-performing loans. And as of quarter end, their NPL ratio was 22, which is down from the November of last year earlier and I think they were up around that 30% area. But Andrew, do you want to comment on terms of the earnings accretion?

Andrew Ahlborn: Yes. I think that’s the right target time period for the full effect of the merger to flow through. The speed at which the — I’ll call the lower yielding assets are turned over as well as the read leveraging of the equity certainly will have an effect on the timing. But I do think the second half of next year is certainly what we’re targeting.

Christopher Nolan: And then on the multi-family — I’m sorry. What’s that?

Tom Capasse: I was going to say we did — in terms of the earnings accretion, we did, we were pretty ahead of budget on the OpEx savings. We reduced, what was it, Andrew $13 million this quarter of the Broadmark —

Andrew Ahlborn: Yes, $10 million to-date.

Tom Capasse: $10 million, sorry, okay.

Christopher Nolan: Okay. I guess loan loss provision you had 4.6 from Broadmark, $680,000 from non-performers, what was the balance $14 million for?

Andrew Ahlborn: It was really driven by our general allowance on the performing portfolio. We run that portfolio through track as many of our peers do. They had some significant movements in their CRE price index for, which was really the main driver of the additional reserve.

Christopher Nolan: Were there any charge-offs in the quarter?

Andrew Ahlborn: Very little material know under $1 million.

Operator: Thank you. [Operator Instructions]. The next question comes from Jade Rahmani of KBW.

Jade Rahmani: Thank you very much. What’s the dollar amount of Broadmark NPLs? You said the ratio is 22%?

Tom Capasse: That’s right. Andrew, what’s the dollar breakout?

Andrew Ahlborn: Yes. So of the total up portfolio, which is roughly 775, roughly 150 of that is NPL. And then in addition to it, the remainder of the portfolio is REO, which obviously is non-performing as well so out of the total $900 million, close to $300 million.

Jade Rahmani: Okay. So the total is $900 million, $150 million is NPLs and another roughly $150 million is REO?

Andrew Ahlborn: That’s right.

Jade Rahmani: Okay. And on the legacy ReadyCapital side, what’s the dollar amount of NPLs?

Tom Capasse: Adam, you want to take that? I’m sorry. Go ahead. Andrew, for the bridge and fixed, the ratio is only 2.5% for 60-day plus. So Andrew, what’s the dollar amount?

Andrew Ahlborn: Yes. Of the total $10 billion, it’s 2% of that, so it’s $200 million-ish.

Jade Rahmani: Okay. Wanted to ask about the dividend comment, since book value is $14.52, the target is roughly a 10% ROE that would imply $1.45, which is more like $0.36 a share. And also the comments about distributable EPS having some near-term earnings drag, 100 basis points to 150 basis points, that’s around $0.04 to $0.05. So that would also be somewhat consistent. Just wanted to see if those numbers square in the range of reasonableness. And I do appreciate you’re all providing those comments.

Andrew Ahlborn: Yes. I expect that the go for dividend sort of to be set within that target — stated target range of 10% to 11% on book. I think with an emphasis of establishing a level that is consistently covered by distributable earnings. So as you indicated, the current dividend is roughly little over 11% on book value and certainly at the upper range of that stated target. I think the determination of where the dividend ultimately settled within that range will be dependent on the speed at which excess capital is reinvested, the repositioning of the under yielding assets, we just described and the growth of the small business lending segment. I think the Board will evaluate progress on all those fronts over the next few months here to determine where we land for Q3 and going forward.

Jade Rahmani: Thanks. That’s very helpful. Financial covenants are becoming an issue to watch interest coverage ratio in particular, but also liquidity with the lower leverage of 3.5x, which is healthy. Where are you feeling about financial covenants and the company’s overall capitalization clearly you seem to feel confident because the company bought that stock in the quarter.

Andrew Ahlborn: Yes. Certainly, we don’t have any issues with our financial covenants today. From a leverage capitalization liquidity, we have significant room there. I think even with the North brought over from Broadmark the way we structured them, we have confidence that, we can meet those financial covenants as well. Certainly, carrying higher liquidity, lower leverage and the right type of leverage throughout this time period is important, will be a focus of ours alongside, capital deployment, but no issues with covenants there and significant room.

Operator: The next question comes from Matt Howlett of B. Riley Securities.

Matt Howlett: Hey, thanks for taking my questions. Just on the subject of risk adjusted capital, I know there’s a lot of opportunities to originate and by loans. I want to ask in terms of additional repurchases, what you’re doing, and congrats for that. And then the second with the banks, we’re hearing a lot of the banks are looking to upload brick-and-mortar origination platforms, not just loans. You guys are more of a specialty finance model than a REIT. You have a diversified platform, and would you be interested in acquiring some type of origination platform as well?

Tom Capasse: Yes. I mean, 100%, Matt, that’s part of our DNA versus the peer group. The fact that we ROE that owns a number of opcos and good examples of that fill in acquisitions on an origination platform was the Redstone, Freddie Mac, tax exempt lender. So yes, so we definitely are looking in particular at a number of specialty finance platforms, both on the commercial real estate and the SBA front one bank, for example, was selling its 504 business and that we did, it just didn’t pencil out, but we are looking at USDA platforms that’s assist to the SBA program. And of course, we’re looking always in the hunt for agency-related licenses to bolt-on to our Freddie Mac platform. So yes, that may Adam, if you want to add to that, but we are definitely in the hunt for platforms, not just here, but in Europe as well.

Adam Zausmer: Yes. Tom, No, I echo that specifically on the agency side. Just given the amount of multi-family bridge that we’re executing in the market, certainly agencies, the natural takeout for these and to have a platform that can originate multiple agency products would be powerful for the franchise value. So yes, certainly interested in the agency space.

Matt Howlett: Great. And then just on your capital structure, also with the Broadmark to be leveraging the equity mean, what’s the update on the — on doing something maybe bond preferred? Is that market still — is there an update there, might be you are going to have capacity at some point to enter it or would you like to do that?

Andrew Ahlborn: Yes. Certainly, the leverage profile of the business provides room for raising additional corporate debt. I think we’ve seen some encouraging issuances over the last couple months here, some in the convert market. I think when we think about how work positions, we’re focused on exploring both unsecured and secure debt, I do think we have a unique structure, which allows us to sort of play secured corporate debt within taxable entities, which minimizes the ultimate cost to us. So it is something we continue to explore. I think we are balancing the excess liquidity we do have in the business. Certainly, the asset level financing we can pull out of the portfolio today with over $2 billion of unencumbered assets with sort of the cost of entering the debt markets today, but certainly it’s something we continuously value.

Matt Howlett: And even on the preferred side, there’s room — extra room there now, correct?

Tom Capasse: Sure. Certainly.

Operator: Thank you. Next we do have a follow-up question from Jade Rahmani of KBW.

Jade Rahmani: Thank you very much. Just wanted to ask a big picture question somewhat related to the loan portfolio sales question at the outset. Generally from my vantage point, I would characterize second quarter earnings as continued deterioration in commercial real estate credit performance, but for the most part, no big new shoes to drop. It’s been somewhat surprising. I think that the major loan losses we’ve seen have been deals that had issues for some time. And then I think on multi-family overall performance has been pretty resilient. Do those comments square with what you’re seeing? Do you think that this represents an improvement in the economic outlook and moderation inflation and that’s why we haven’t seen major new loan losses? Or do you think it’s really just a timing factor as loans come up for maturity?

Tom Capasse: I’ll let Adam, add to my comments, but I think Jade, we’re definitely seeing in this quarter, I don’t — I hate the term bottoming, but a deceleration in the rate of decline is the best way to frame it. In particular in office, some of the markets — sub-markets are just collapsing completely. Others are stabilizing. Obviously, we’re small balance, we only have 5% office, so CBD is not our pain. But in the multi-family space, there is — there was a front page journal article today. There’s definitely some idiosyncratic issues with in particular luxury multi-family and a surprise of negative absorption due to new supply coming online. That, that was some of the trends we saw. Again, not affecting us because we’re more workforce small balance, but yes, there’s definitely been a de-acceleration in the rate of decline in a lot of the markets that we track.

I mean, Adam, if you would add to that from a macro perspective, what you’re seeing in particular on the multi-family front?

Adam Zausmer: Yes. No, Tom, I think that’s right. I think the multi-family market obviously experienced some historical rent growth, a lot of transactions in the marketplace. We’re certainly seeing things stabilize, rents kind of leveling off. But at the end of the day, I mean, when we look across our workforce multi-family portfolio, the performance, the rent growth and the occupancies have certainly really outperformed our underwriting. I think the stress in the market today remains the factors given where interest rates are and the stress that’s really coming in call it 2024/2025 in terms of the maturities that are going to hit the marketplace.

Tom Capasse: Yes. Having experience [indiscernible]. Yes. Having experience today, the early 1990s, and obviously GFC, you definitely don’t see this free fall or acceleration of the fundamentals acceleration and deterioration of the fundamentals again, just seems like a de-acceleration and we’ll see where it goes in terms of the economic outlook for 2024.

Jade Rahmani: So then I think you’d probably be somewhat constructive in terms of capital deployment, maybe looking to get more aggressive. Is that a fair statement? And then on the multi-family side, do you expect there to be sort of meaningful credit deterioration next year?

Tom Capasse: We’re add at this, but we’re definitely loosening the screws in terms of our retain yields on direct lending to some of the top sponsors. We’re seeing opportunities in really clean construction because the banks have really pulled back on that asset class. And we have that capability from the Mosaic acquisition. We are definitely in the so-called solutions capital segment that’s filling the box where we’re getting less bank sales that may materialize we think in the fourth quarter of this year. But Adam, if you — in terms of that again, that’s reflected in our $1.4 billion of current pipeline, committed pipeline highest since first quarter of 2021. Adam, I don’t know if you’d add to that in terms of the multi-family component?

Adam Zausmer: Yes. I mean just the multi-family outlook I’d say, certainly limited number of loans are in default today. We’ve really had nominal realized credit loss since inception of the firm. I think despite various challenges in the market, we certainly are not overly concerned about our large multi-family portfolio. Office is certainly our primary concern, although, it’s a limited percentage of our overall portfolio as Tom highlighted at 5%. And then just the — going back to the multi-family portfolio, I mean, just really seeing limited issues in the portfolio of late and we haven’t taken material reserves because we feel that our debt basis is still fine. But as we approach, 2024 or 2025 certainly originated pretty, pretty heavy volume of multi-family bridge 2021 through 2022.

So as those loans mature in the coming years, there could be some challenges depending where rates are. But again, we think our debt is well protected. And if there’s any — if there are any challenges, we think that the equity could take a hit here and there, but then as again as I mentioned earlier specifically on the cash and reprise these sponsors have significant equity in these deals and we think that they’ll continue to protect the assets.

Jade Rahmani: Thank you. And just lastly, the clarification on the near-term impact of Broadmark a 100 basis points to 150 basis points headwind, is that relative to the $0.36 of distributable EPS you all earned in second quarter?

Tom Capasse: Yes. Just a reference to the distributable ROE for the quarter that’s right.

Jade Rahmani: I mean, the $0.36 includes the 100 basis points to 150 basis points headwind, I assume not.

Tom Capasse: Yes, just one, sorry, exactly just a third of it.

Jade Rahmani: Oh, a third of it. Great. That’s really helpful. Thanks so much.

Tom Capasse: Thank you.

Operator: Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I’ll now hand over to Mr. Tom Capasse for closing remarks.

Tom Capasse: I appreciate everybody’s time again today. We look forward to our next earnings call. Thanks, everyone.

Operator: Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for attending and you may now disconnect your lines.