Ready Capital Corporation (NYSE:RC) Q3 2024 Earnings Call Transcript

Ready Capital Corporation (NYSE:RC) Q3 2024 Earnings Call Transcript November 8, 2024

Ready Capital Corporation beats earnings expectations. Reported EPS is $0.25, expectations were $0.23.

Operator: Greetings, and welcome to the Ready Capital Third Quarter 2024 Earnings 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. It is now my pleasure to introduce Andrew Ahlborn, Chief Financial Officer. Thank you. You may begin.

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 third quarter 2024 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.

Thomas Capasse: Thanks Andrew. Good morning, everyone, and thank you for joining the call today. The third quarter marked what we believe to be at or near the bottom of the commercial real-estate cycle, particularly in our core multi-family sector. We’re seeing stabilization in both rent growth and property prices driven by three key factors: rate cuts; a nearly 50% reduction in multi-family starts; and strong occupant demand. To those points, we should begin to see the benefit of the improving market conditions over the coming quarters. Our CRE portfolio is showing stabilizing credit metrics, while our small business lending operations are achieving record growth, supported by strength in the broader economy. At Ready Capital, we continue to make significant progress on the strategic portfolio initiatives outlined at the start of the year, which focus on repositioning non-performing loans.

Our $8.1 billion CRE portfolio consists of two segments, originated and M&A, representing 90% and 10% of the total, respectively at quarter end. The originated portfolio declined 6% in the quarter to $7.3 billion. The rate of negative credit migration in the portfolio continues to stabilize. 60-day plus delinquencies in the portfolio increased marginally by $53 million and equaled 6.2% of the total portfolio at quarter end. Within our originated portfolio, 21% has been modified with term extensions through the third quarter of 2025 being the primary modification. These modified loans are predominantly multi-family at 76% with average stabilized LTVs of 73%. These loans, while modified, continue to produce cash flow and carry contractual interest rate of 9.2% with 66% being cash-paying.

Q&A Session

More broadly, the CRE portfolio features a 9% contractual rate, of which 78% is cash-paying. Stronger multi-family fundamentals have increased transaction volume, leading to increased payoffs of $490 million. The majority of these proceeds went to reduced leverage in our existing CRE CLO structures. We are also gradually increasing our offensive stance, executing $246 million of new originations and our pipeline has grown 34% since the second quarter to $730 million. Our M&A strategy has historically focused on acquiring and liquidating legacy non-core assets, then reinvesting the proceeds into our core CRE lending business. We continue to reduce our M&A portfolio, which now stands at $850 million, a 17% improvement. Our active asset management has stabilized 60-day delinquencies at 16%.

The levered yield in our remaining M&A portfolio has increased to 13.7%. With the capital invested in our small business lending segment, Ready Capital has become a leading national non-bank lender to small businesses, providing a full suite of loan options. From $10,000 unsecured working capital loans to $25 million-plus real estate backed USDA loans. This resulted in a record quarterly originations of $440 million. This consists of $355 million of small business administration or SBA 7(a) loans, $39 million of USDA loans and $46 million of small-business working capital loans. Our dual SBA 7(a) strategy targeting both large and small loans has now exceeded our $1 billion annual target. This quarter’s volume was split between our traditional large loan channel up to $5 million or 53% and our small loan channel below $350,000 at 47%.

Our FinTech iBusiness has grown to be a market leader in the origination of small SBA 7(a) loans. The strategic mix has generated higher SBA guarantee percentages and gain on sale premiums averaging 81% and 11%, respectively. We are now the number one non-bank and fourth overall SBA lender in the country. We continue to execute four initiatives to navigate this CRE credit cycle. First, 72% of our portfolio repositioning efforts are complete following the settlement of $331 million in loan and REO sales across 44 assets. These sales generated $55 million in net proceeds and reduced negative carry by $0.08 per share. Our remaining loan inventory includes 23 assets totaling $218 million in carrying value, comprised of 40% originated loans and 60% M&A loans, of which 5% are office assets, 21% land assets and a mix of multi-family and industrial properties.

We have 26 REO assets valued at $140 million currently listed for sale. We expect monetization of the entire position to extend into the first half of 2025. And second, our leverage position remains conservative. Our total leverage of 3.3 times is below our long-term target of four times. Improving sector liquidity has enabled us to pursue opportunities to raise accretive capital and optimize our existing capital structure. Of our 17 outstanding CRE securitizations, nine are eligible for call with an average current advance rate of 73%. In the third quarter, we called the legacy fixed-rate securitization RCMT 2015-2, generating $9.3 million in liquidity and improving yields by 400 basis points. As discussed on prior calls, our static CLOs have less flexibility than typical managed CLOs in managing delinquent loans, which affects peer group credit comparisons.

However, our CLOs remain strong, six of our eight outstanding issuances passed their interest coverage and over-collateralization tests. October remences showed delinquencies and loans in special servicing improving to 8.7% and 17%, respectively. We expect our next issuance in the first half of next year using collateral from both called legacy deals and new production. Third, growth in our small business lending operations reached new heights this quarter, marking the highest earnings contribution from the platform in our history. In total, our Small Business Lending segment generated $21 million of pre-tax distributable income or $0.12 per share. These results exclude any impact from Madison One, our USDA lender or Funding Circle, our small business lending platform acquired in the third quarter.

The Madison One and Funding Circle are expected to be accretive to earnings once fully ramped. During the quarter, these acquisitions posted a quarterly distributable earnings loss of $1.8 million or $0.01 per share. This loss was due to timing of building a forward pipeline in recognition of post-acquisition operating efficiencies. Looking forward, the scale and high ROE capital-light nature of our Small Business Lending segment provides a clear differentiator amongst our peer group with the segment’s book value at only 8% equity and a significantly higher market value. The growing earnings contribution along with normalization of our CRE business to historical levels should support a longer-term ROE premium to our peer group. Fourth, our exit from residential mortgage banking progresses well.

We are currently marketing our remaining MSRs with a settlement plan for late November expected to generate approximately $40 million in net proceeds. The platform sale is expected to be completed over coming weeks with the settlement pending agency approval in early 2025. Ready Capital is well positioned to capitalize on the tailwinds in the CRE market. While it will take a few more quarters to fully realize the benefits, three key drivers will contribute to our future earnings growth, our stabilizing CRE platform, continued turnover of our M&A portfolio and sustained growth in our Small Business Lending platform. With that, I’ll turn it over to Andrew.

Andrew Ahlborn: Thanks, Tom. Third quarter GAAP losses per common share were $0.07, while distributable earnings showed a loss of $0.28. Excluding realized losses on asset sales, distributable earnings were $0.25 per common share, representing an 8.4% return on average stockholders’ equity. The distributable loss primarily reflects the timing difference between the valuation allowances recorded in the first and second quarters and realized losses from settlements in the third quarter. Three key factors impacted our quarterly earnings. First, revenue from net interest income, servicing income, gain on-sale and origination income increased $19 million or 22% quarter-over-quarter to $104 million. The change was primarily driven by $8.7 million growth in gain on-sale revenue from our small business lending business, with sales of $254.3 million, generating gain on-sale revenue of $24.2 million.

$6.6 million growth in origination income from small business working capital loans through the Funding Circle platform and higher SBA 7(a) production. $2.1 million growth in servicing income from MSRs acquired through the Madison One and Funding Circle acquisitions. Net interest income held steady quarter-over-quarter at $51 million. Interest income declined $7.6 million, primarily from portfolio reductions through payoffs and liquidations. This was offset by lower interest expense from deleveraging of our CRE CLOs. Quarterly interest income was 73% cash and 27% accrued or paid in time. This equates to a cash yield in the portfolio of 6.6%. Of the 27%, 50% related to construction assets acquired in the Mosaic transaction, of which, 74% are expected to be repaid at the end of the year.

Non-accrual balances remained stable at $260 million, representing 2.8% of the portfolio. Second, the combined provision for loan loss and valuation allowance decreased $17.9 million. The $53.2 million increase in CECL reserves was due to a $4.6 million decrease in the general allowance, plus $57.8 million of specific reserves on several assets. The decrease in the valuation allowance is due to an $88.2 million recovery from loan sales offset by a $17.2 million increase on loans remaining on the balance sheet at quarter end. The release of the valuation allowances related to the settlement of $315.7 million of loans. Loan settlements had an incremental impact of $11.5 million net of tax. Third, as expected, operating costs rose 1% to $60.4 million, reflecting $11.5 million in Funding Circle costs and a $4.1 million increase in variable costs related to production.

Non-cash REO charge-offs included in other operating expenses were $525,000 in the quarter, down from $9.1 million in the second quarter. We recorded a $32.2 million bargain purchasing from the completion of the Funding Circle transaction, primarily driven by realizing a deferred tax asset net of valuation allowances. On the balance sheet, book value per share is now $12.59 per share versus $12.97 per share last quarter. The change was primarily due to declines of $0.31 per share related to CECL, $0.11 per share related to net realized losses and $0.06 per share reduction from net changes in cash flow hedges through other comprehensive income. These declines were partially offset by a $0.13 per share increase related to the bargain purchase gain.

Distributable earnings absent realized losses cover the dividend. Our strong liquidity position includes $181 million in unrestricted cash and $20 million in committed but undrawn borrowings. With that, we will open the line for questions.

Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Crispin Love with Piper Sandler. Please proceed with your questions.

Crispin Love: Thank you. Good morning, Tom and Andrew. First, can you just give a little more detail on the loan sales in the quarter? I saw the $110 million loss. What was the total sale amount and the discount you sold to that? And then on what’s left to sell, is it $218 million or did I get that wrong?

Andrew Ahlborn: Hey, good morning, Crispin. So, we settled in the quarter a total of $331 million. And the pricing was relatively in line with what we disclosed last quarter, which was right around $70 million. The sales generated roughly $55 million in proceeds and the EPS impact of those sales in the quarter was $0.11 — a loss of $0.11. In addition to that, we do have a population of $218 billion of loans remaining on the balance sheet that we anticipate selling. We took increased valuation allowances roughly $15 million growth of the effects of tax and that had a $0.13 effect on EPS.

Crispin Love: Okay. I appreciate that, Andrew. And then just in the third quarter, can you disclose how much was — how much interest income was from PIK and just expectations from PIK over the next few quarters?

Andrew Ahlborn: Yes. As Tom said in his comment, a little over 20% was either PIK or accrued. When you break those two components down, the PIK component is coming from construction loans acquired in the Mosaic transaction. The expectation is that a large portion of those pushing 75% clear out in the fourth quarter and turn to actually through cash-paying investments. The other subset relates to the modified loans. And as Tom also mentioned here, roughly 66% of that is cash-paying with the component being accrued if the ultimate recoverable — recoverability is supportable. So, that’s the breakdown.

Crispin Love: Okay, great. And then sorry, but is that 20% that’s PIK? Is that 20% of interest income or net interest income?

Andrew Ahlborn: It’s on the top-line.

Crispin Love: Great. Thank you, Andrew. Appreciate it.

Operator: Thank you. Our next questions come from the line of Douglas Harter with UBS. Please proceed with your questions.

Douglas Harter: Thanks. I guess thinking of the originated portfolio, how do you expect the trajectory of either delinquents or non-accrual assets to perform both resolutions and inflows of potential new problem assets?

Thomas Capasse: Yes, Andrew, do you want to comment on that? And just actually I think one thing to underscore is the so-called denominator effect, which we’re seeing in the industry in terms of the portfolio decline being greater than the new assets — I’m sorry, new 60-day delinquents, but maybe, Adam, just comment on that more broadly.

Adam Zausmer: Yes, sure. On the originated portfolio, as we’ve been highlighting, the majority is multi-family product, right? So, it’s 70%-plus in multi. We feel that there’s strong equity in these deals. And certainly the market is improving. And as Tom and Andrew highlighted the commercial real estate space, specifically the multi-family area where we’re so heavily exposed is certainly on a stabilizing path, especially as rates begin to ease the fundamentals are certainly more favorable. I’d say that, it — delinquency will remain volatile, right, as we work through the portfolio. But as we’ve highlighted, it’s certainly peaked our delinquency. And also, the denominator effect as we’re originating less new loans today, — that denominators going — is going down as loans are paying off.

So, we had about $700 million of exits this year, which is certainly reducing that denominator. We’ve only had about $50 million of new 60-plus delinquency in the quarter. And so, that’s — although there was a 90% — sorry, a 90 basis-point increase in the 60-plus, it’s only attributable to about $50 million of new 60-plus. So, as Tom highlights, that denominator effect is certainly impacting the delinquency increase.

Douglas Harter: I appreciate that. And as you think about kind of the pace of recovery within commercial real estate, how do you — or how do you think about the difference maybe between lower short-term rates, but kind of a backup in longer-term rates, and kind of which one of those is likely to have more of an impact on the market?

Andrew Ahlborn: Yes. I mean, certainly.

Thomas Capasse: Go ahead, Andrew.

Andrew Ahlborn: I was going to say just on the more broadly, we’re definitely seeing unequivocally a flattening in the curve on the multi-family space, especially lower-middle market. Delinquencies on [indiscernible] were flat at 5.8% for the first time in four or five quarters. Vacancy rate is 5.8% and rent growth is kind of flat-lined at around 0.3% and even some of the negative markets you’re starting to see like Austin, which was down year-over-year 7%, you’re starting to see that flatten out as well. So that — that’s on the — on the asset side, that’s — you’re seeing a definitive stabilization in cap rates and property values. So — and our mark-to-market LTV is well under 100, especially on the loans that are — have been modified or have some four or five risk rating.

So, that’s the relative, a positive there. As far as rates, it’s an interesting dynamic. The short rates, as the curve steepened, as you see a steepening in the curve, the short — decline in short rates will definitely benefit our modified loans by improving the debt service coverage ratio, all else being equal, while they work out their business plans and on a delayed basis and improve NOI. So, there’s kind of a — on the back end of the cycle, you’re seeing the benefit of the debt service coverage expansion, which got crushed during the — when rates gapped out in 2022. So, I think that’s going to benefit us. And then another sell thing we’re seeing is that there’s a lot of new private debt capital coming into the — into this multi-family — multi-family market.

And we’re seeing some of our better loans that have that were extended and modified being taken out by bridge on bridge from private debt. So, that dynamic is going to — is a tailwind. The headwind is — however, though, is to the extent long rates, the 10-year stays elevated at above 4.5, that means the takeout from — and we — our takeout is focused on GSE, Fannie, Freddie, is going to be harder to hit that debt yield on a takeout. So, those are the two countervailing trends in terms of rates.

Douglas Harter: I appreciate that answer. Thank you.

Operator: Thank you. Our next questions come from the line of Jade Rahmani with KBW. Please proceed with your questions.

Jade Rahmani: Thank you very much. Other assets is a category I’ve been tracking, and the large components include deferred loan fees and accrued interest about 25%, goodwill and intangible similar ratio and then deferred asset — deferred tax assets. Is there any risk of write-down or impairment of any of these categories as you sell non-performing loans since presumably some portion of the deferred loan fees, accrued interest relate to that and potentially some of the goodwill relates to the Mosaic and Broadmark acquisitions?

Andrew Ahlborn: Good morning, Jade. So, I’ll take them in the components. So, the deferred tax asset gets evaluated regularly and impair based on, profitability expectations down at the TRS. We don’t expect any impairment issues there based on the trajectory of those businesses. On the accrued interest, we are only accruing interest that we believe to be recoverable. With that being said, there are certain circumstances where the asset management staff may recommend something like a DPO. And in that case the accrued interest would be part of the write-off. So, although we believe that — the effect of that to be fairly minimal. Goodwill also gets evaluated regularly. At this time, we don’t see any impairment on the goodwill.

Jade Rahmani: And does any of the goodwill relate to Broadmark or Mosaic?

Andrew Ahlborn: Both of those were bargain purchase gains.

Jade Rahmani: So is that a no?

Andrew Ahlborn: Yes. So the goodwill — you can’t have goodwill if you have a bargain purchase game. So no, they do not relate to [Multiple Speakers]

Jade Rahmani: Okay. Thank you for clarifying that. And then just the — in your mind, the balance because I know there’s a lot of moving parts across the portfolio. Some of the non-performing loans in REO were inherited through M&A, and clearly, you anticipated some of that. But what’s the balance today of non-performing loans and REO?

Thomas Capasse: Yes. Andrew, do you want to touch on that in the context of the — yes, Jade, the way we bifurcate the portfolio is the originated portfolio of $7.3 billion. And then the M&A portfolio now is down to, what is it, it’s only 10% of our total $800 million. So, maybe frame that question — the answer to that question in the context of those two portfolios.

Andrew Ahlborn: Yes, Adam, you want to touch on the bifurcation there?

Adam Zausmer: Yes. So from a dollar perspective, and pardon me, just do the math here. So, the — so, the originated has delinquency of about $400 million — just north of $400 million. And then on the acquired portfolio the M&A — excuse me, the M&A piece, it is — excuse me, one minute, it is $150 million.

Jade Rahmani: And the balance of REO?

Adam Zausmer: And the REO is $160 million.

Jade Rahmani: Okay. And then.

Adam Zausmer: Which is all in the sale process today.

Jade Rahmani: Okay. The — could you give the dollar value of modifications completed in the quarter? The 20% PIK is a really high number. It implies $45 million of PIK interest in the quarter, which I think was up from, you said, last quarter $21 million. So, it basically doubled. If you could just give the dollar value of modifications and correct me if any of those numbers are not right.

Adam Zausmer: Yes. So, the modifications on the bridge book were about $250 million in the quarter. Previous quarter, it was approximately $700 million. So across the entire bridge portfolio, the modifications are roughly $1 billion across 32 assets and the vast majority of those sit within CLOs.

Jade Rahmani: Okay. So — but it is around $45 million of interest income. Do you think the $45 million increases or stay stable, decreases?

Thomas Capasse: Andrew, you want to —

Andrew Ahlborn: Jade, as I said earlier, a good — a good chunk of that is coming from those construction loans acquired in the Mosaic transaction. And the expectation is that 77% of that balance pays off at quarter end or it rolled into a cash-link loan at quarter end. So, I think that number is going to come down.

Jade Rahmani: Okay. And when those pay off, do you think they’re going to pay off at par and there won’t be issues — credit issues there?

Andrew Ahlborn: Well, the takeout of those loans can take a variety of forms. Part of the platform we built is staying involved in the economics of these projects through the life-cycle. And so, the payout could come in the form of an actual payoff via refi somewhere else or movement into a cash-like bridge loan on our balance sheet. And so, it could take a variety of different forms.

Thomas Capasse: Yes, that’s an important differentiation, Jade. Well, our business model now is to the whole-life cycle. So, you start with ground-up construction and once the project is near stabilization, it slipped into a bridge loan and ultimately if it’s multi-family, we’ll do a GSE — multi-GSE loan. But we’re looking to stay with these sponsors across the project life-cycle.

Jade Rahmani: Thank you.

Operator: Thank you. Our next questions come from the line of Stephen Laws with Raymond James. Please proceed with your questions.

Stephen Laws: Hi, good morning. Tom and Andrew, appreciate the color you guys have provided so far, you’ve covered a lot. Wanted to touch on CECL. Can you talk about the reserve build and how that’s allocated between general and specific? And what assets kind of drove that CECL reserve build this quarter? And I guess, confidence around this level, or considerations about potential increases in that as we move forward?

Thomas Capasse: Yes. So, I’ll let Adam talk on the specifics, but and overall, the CECL reserve today is a little over 1% and 32% of the total CECL is in the journal bucket. Adam, do you want to talk on the movements this quarter?

Adam Zausmer: Yes. And then the movements this quarter, that $50 million, it’s almost entirely in the M&A portfolio across a broad range of property types, office, industrial and there’s some multi in there.

Stephen Laws: Okay, great. Appreciate some color there. And as we think about the distributable earnings number ex-loss is $0.25. As we think about sequential change moving into Q4, what are the one-time items in that number that we need to think about? Or do you feel comfortable that distributable earnings ex-losses can continue to cover the $0.25 dividend?

Andrew Ahlborn: Yes. I think the $0.25 level is a good baseline. When I think about go-forward earnings, I think there are a few things that are important. The first is, the contribution of the small business lending platform given all the growth and capital investments we’ve made over the last couple of quarters and years is now substantial to the totality of the company contributing over 350 basis points of return to the overall platform. And that is a level we expect is sustainable and grows as some of the businesses we’ve purchased come online. And so when you think about how that affects go-forward earnings as the CRE portion of our business, which accounts for the majority of the equity rebounds and migrates back to historical return levels as the portfolio turns over and the M&A portfolio is repositioned, migrates back to that — a 600 basis-point to 800 basis-point return level, we get closer to our original thesis of building the business this way, which is having that small business lending platform provide a premium to sort of competitive commercial real-estate returns.

And so. I think there’s a growth path from these levels. There are no one-time items and I’m aware with the exception of, there is still a bucket of loans held for sale where you are going to have the impact of realized losses flow through the distributable earnings cap. But absent those losses, I think there is a growth path headed into 2025.

Stephen Laws: Great. I wanted to touch on the CLOs. You guys talked about them, I think, every quarter this — every call this year. They’re different, as you mentioned, the static nature. And earlier this year, you talked about the special servicer and your thoughts on potentially changing that or doing it in-house. Can you talk about how that relationship is and your ability to kind of manage some of these assets? And how quickly you can start? Or do you have to continue to let them go bad before you can actually step in and start to do something?

Thomas Capasse: So, Adam, maybe kind of frame it in the context of the relative success we’ve had with the existing servicer in terms of changing the protocols around. How quickly we address mods and that dynamic with our asset management team. So, maybe touch on that.

Adam Zausmer: Yes. I think, at the onset of this distress due to the rate environment towards the end of the last year, I think as we started to see relief requests from our — from our clients, I think, the special servicing industry, I think, struggled with how to address the environment, what type of modifications they would employ. I think early on, we certainly struggled to execute market modifications and to provide our clients with relief. I think in Q2 and especially this quarter we have made significant progress with our special servicer again continuing to industry — sorry continuing to execute industry-standard mods to help these projects have some breathing room to kind of navigate through this — through this challenging environment.

These modifications help the tenant base in terms of putting capital into these projects, and not having to utilize different alternatives versus a mod. So in summary, I’d say, our relationship with our special servicer remains healthy and the pace at which we are executing solutions for our clients is healthy as well.

Stephen Laws: Great. I appreciate the color on that and good to see that relationship is improving. So, I appreciate the comments today and I hope you all have a very good day.

Operator: Thank you. Our next questions come from the line of Christopher Nolan with Ladenburg Thalmann. Please proceed with your questions.

Christopher Nolan: Tom, am I correct to that your comments earlier were sort of your thinking that you’re through the worst of the commercial real-estate cycle for Ready Capital?

Thomas Capasse: Yes, we’re definitively seeing as evidenced by Adam’s comments in terms of the kind of sawtooth down in the absolute dollar delinquencies, and what we’re seeing in terms of the migration of the four or five assets as it relates to the originated portfolio, it definitely is mirroring the what you’re seeing in terms of the macro data in the multi-family sector.

Christopher Nolan: Great. And then in your earlier comments in terms of lower interest rates, improved coverage ratio, is your coverage ratio calculation before or after property taxes and other municipal fees?

Thomas Capasse: Adam, do you want to comment that in terms of the calculation on the debt DSCR? What — I mean, it’s somewhat formulaic because we look at it from a Fannie, Freddie methodology, but maybe Andrew comment on that in terms of the OpEx.

Adam Zausmer: Yes, sure. Yes, the coverage ratios are after taxes and reserves.

Christopher Nolan: Okay. And final question is given all that, what’s the outlook for the 10% distributable ROE target you guys discussed in previous quarters?

Thomas Capasse: Andrew —

Andrew Ahlborn: I think we are good. So, absent the realized losses, is in the mid-8s this quarter. Given my comments before about the sustainability of profitability from the Small Business Lending segment. As the CRE part of the business recovers, I think we march towards that 10% target.

Christopher Nolan: Okay. So, the calculation should be excluding realized losses going forward because before I didn’t think that was really an issue?

Andrew Ahlborn: So, the realized losses that we posted are related to the population of assets we transferred into held-for-sale primarily. And so, not 100% of that bucket settled in the third quarter. So, you are going to see some noise as the remaining $218 million settles into next year. So the economic impact of that transfer for the most part has been felt through the book value of the company, but you will see the realized components flow through distributable earnings. We think that distributable earnings less realized losses is an important metric just to have comparability of the core operations of the business across periods.

Christopher Nolan: Okay. I’ll follow up offline. Thank you very much.

Operator: Thank you. Our final questions will come from the line of Matt Howlett with B. Riley Securities. Please proceed with your questions.

Matt Howlett: Hey, thanks, Tom and Andrew. Did you say you freed up $55 million in cash from the loan sales this quarter?

Andrew Ahlborn: Yes.

Matt Howlett: So, what would be — just walk me through the cadence of the loan sales in the fourth quarter, you get the mortgage company? How much cash are you going to continue to free up in the next few quarters from these sales?

Andrew Ahlborn: Yes. So the — maybe take the component. So, on the resi side, as Tom mentioned, the MSRs are currently in market. The expectation is the sale of those, none of any financing clears roughly $40 million of incremental cash. The platform itself and most likely settles in the first quarter of next year. And the impact of that transaction is roughly $10 million in that range. So, there’ll be some earn-out component, but the upfront cash will be roughly $10 million. And absent that, we do expect the settlement of the remaining assets to flow into next year and that should clear roughly $40 million or so of cash as well. And then you’re just going to have the normal cadence of the portfolio paying off, but those are the main items.

Matt Howlett: Okay. So, you have $180 million in cash. It seems like that’s going to obviously go up with those sales. My question is, you have one small maturity next year like $120 million. My question is, I mean — I mean financing — are you talking to the banks, we’re hearing the banks are out there, they want to lend. Can you — do you have assets in secured costs, could you do an unsecured deal? And then two, I’m assuming you didn’t buy back any stock this quarter. Why wouldn’t you really get aggressive with the buyback since the worst is over, docks at 60% of the book, obviously this value in SBA, this is not reflected In book, I think we’ll both agree that. And why wouldn’t you get aggressive here and take advantage of this discount, the worse is over?

Thomas Capasse: [Multiple Speakers] It’s two components there. On the debt maturity for next year, we are certainly talking to all of our banking counterparts and previous lenders about refi-ing that into a new issuance. With that being said, we are positioning the company to take care of that maturity in cash should those not materialize. And then on the buyback program, I think we agree that at this price, the stock looks attractive from the — from a buyback perspective. And I do expect it’s something you will see from the company in the upcoming months.

Matt Howlett: Okay. No, I mean, obviously we can do the math, but it’s enormously accretive at this discount. But when you say paying into cash, why — I mean could you — I mean, are there any financing — other financing options may not really lever it on a recourse basis? I mean there are other assets you could play? I mean [Multiple Speakers]

Thomas Capasse: Yes, sure. We are exploring — sorry to cut you off. Yes, we are exploring all of those. Refi-ing into an unsecured issuance. We have a significant amount of unencumbered assets on the balance sheet that we could use for secured issuance. There’s a variety of other structures we are also exploring. So, that is obviously the preferred path. I think just to be conservative we are also planning the company’s liquidity profile to make sure that that maturity is not an issue for us in the upcoming months.

Matt Howlett: Got you. Okay, good. Look, we look forward to that. Obviously, I think you — I think the market will applaud any type of share repurchases at these discounts. I guess the last question is on the SBA, I mean that digital business or the iBusiness and the SBA, maybe what could you do with that? Any sort of how is that doing? I mean, you got this digital business, I mean it could, obviously, in the world, the fin-techs get a much better multiple on its own. I just would love to hear [indiscernible] something you don’t see in mortgage rates, and you guys have one.

Andrew Ahlborn: Yes. So the — you can see the — and I think it’s significantly underappreciated in our peer group just given that it’s a nuanced regulated capital-light cum insured business. But the — in terms of the iBusiness aspect, they — we purchased them back in 2019. They were a leader in unsecured small business lending and then they adopted their tech to the PPP, which was very accretive. And since then, there’s been the initiative within the SBA to emphasize small loans below $350,000, which many times are minority women own businesses. And so, that’s been a significant initiative by the SBA. So, what we’ve done — and there you could use a scorecard methodology, which is very similar to how you underwrite unsecured loans.

So, what we’ve done is we’ve developed — the iBusiness has developed a tech stack, which is now being marketed as a third-party underwriting model for banks. Banks just do not focus at all. Even if they do SBA loans, it’s mostly for larger loans, again, above the $350,000 and the $5 million. So, this iBusiness — the idea with iBusiness is to grow the — if you will, the revenue stream from this software a base business. And then once it achieves a, as you pointed out, the valuation in a mortgage REIT is nowhere near what it would be in a stand-alone C corp. So, the idea would be to look at a kind of a backdoor IPO via a tax-free spin-off to shareholders. I mean, again, that’s kind of how we think of Ready Cap in a way it — for these capital-light businesses that achieve scale.

It — it’s like as if we’re a private equity or fund that has the ability to finance these businesses very cheaply versus venture capital and then spin it off. So anyway, so long way to answer to your question, but that this — the growth you’ve seen in the SBA 7(a) business is testimony to that — to that strategy in that they’ve — we’re achieving in our traditional large loan around $500 million, and roughly $500 million this past — on a run-rate basis this past quarter in the small loan as well.

Matt Howlett: But will you be — I mean that could trade-off a multiple to revenue. Will you begin providing a separate data on that it’s employed? What it’s doing and the financials on it?

Andrew Ahlborn: Yes. As the business scales and achieves what we believe to be scale in terms of the number of bank customers and revenue streams as it relates to that, we would look to do segment reporting.

Matt Howlett: Great. Look forward to that. Thanks very much.

Operator: Thank you. That concludes our question-and-answer session. I’d like to hand the call back over to Thomas Capasse for any closing remarks.

Thomas Capasse: Yes. We appreciate everybody’s time and look forward to next quarter’s call.

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