Ready Capital Corporation (NYSE:RC) Q4 2023 Earnings Call Transcript

Ready Capital Corporation (NYSE:RC) Q4 2023 Earnings Call Transcript February 28, 2024

Ready Capital Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Ready Capital Fourth Quarter 2023 Earnings Call. At this time all participants are in a listen-only mode. A brief 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, Andrew Ahlborn. 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 fourth 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.

Thomas E. Capasse: Thanks, Andrew. Good morning and thank you for joining the call today. Despite broader headwinds, Ready Capital enters 2024 with a resilient business model and a proven ability to navigate challenging periods. As we look to 2024 and beyond, the key drivers that we will focus on to return to a more historic level of earnings are less about current market conditions and the resulting credit pressures, but rather about our strategic capital redeployment from recent long-term value accretive M&A. While our prior acquisitions have led to short-term earnings impacts over recent quarters and we are cognizant it will take time to work through the persisting pressures, we believe executing our plan will generate meaningful long-term accretion.

To begin, a quick recap of 2023. Full year distributable return on average stockholders’ equity was 8.6%. The shortfall versus our 10% target was primarily due to a 250 basis point drag in ROE from M&A and a 25 basis point drag from the underperformance of our residential mortgage banking business. Our expectation is that the sale of underperforming assets, relevering equity from M&A, and exiting our residential business will begin to provide material net interest margin accretion through reinvestment of the current levered ROEs exceeding 14%. On the investment side, we have remained active in both our lower middle market CRE and small business lending segments. On the CRE side, despite a year-over-year 68% decline in CRE industry transaction volume, we originated $1.7 billion across all products primarily comprising $1.3 billion of Freddie, small balance and multi-family affordable products and $333 million of bridge production.

On the small business lending side, we originated $494 million with contributions from both our legacy SBA business focused on large loans and our fintech business focused on small loans. This dual large small loan strategy uniquely positions our small business lending segment to achieve its target of $1 billion in annual production in the next two to three years. With only a 5% equity allocation, but an 18% full year distributable earnings contribution, the small business segment remains a material and we believe underappreciated aspect of our earnings profile. As we enter the back end of the CRE market cycle, our two primary areas of focus are credit and earnings growth. On the credit side, while not immune to the CRE macro environment, we are differentiated from the broader sector in terms of our concentration in lower middle market multi-family, more conservative vintage underwriting, and avoidance of both overbuilt markets and high-risk CRE sectors such as office.

As of December 31st, 60-day plus delinquencies in our originated and acquired CRE portfolios were 7.2% and 22.3% respectively. My comments will focus on our originated portfolio, which represents 73% of total loans. The acquired portfolio concentrated in Mosaic, which closed in the first quarter of 2022, and Broadmark, which closed in the third quarter of 2023, featured combined purchase discounts for non-performing assets of 28%. We have liquidated 29% of the total acquired portfolio at prices above the combined purchase discounts. The main drivers of our 60-day delinquency are first, multi-family which is 78% of the loan portfolio. At quarter end, multi-family 60-day plus delinquency was 6.6%, as certain properties experienced NOI reductions driven by flat rent growth and increases in operating and interest costs.

71% of the new delinquencies in the quarter were attributable to one large sponsor across four loans. As of February 25th, 60-day plus delinquencies have been reduced to 5.5% through payoffs or modifications, which in most cases require an equity infusion from the loan sponsor. Second is office, which is only 5% of the CRE portfolio, but accounts for 21% of total delinquencies. Eight loans are delinquent with an average balance of 15 million, and notably only two have a balance greater than 20 million, the largest loan is 44 million. Our office portfolio is granular across 165 assets with an average balance of 3 million, but 70% of the delinquencies are collateralized by larger CBD properties located in Chicago, Denver, and New York. Looking forward in the current higher-for-longer rate outlook, we are focused on refinancing our current maturity ladder, of which 45% or $2.8 billion in multifamily loans reached initial maturity in 2024 and 31% and $1.9 billion in the first half of 2025.

Historically, our core bridge strategy is to underwrite to take out our Freddie SBL license and 25 strategic partnerships, which provide access to all GSE multifamily channels. For example, in 2023, 64% of our bridge loans paid off at maturity, primarily via agency takeout, and 12% met the criteria for contractual extension. For the 11% of the multifamily portfolio currently rated 4 or 5, our asset management teams are executing modifications and extensions where supported by the business plans, and we are prioritizing on-balance sheet liquidity for related capital solutions. Notably with a mark-to-market LTV of less than 100% on this population, we do not expect any material erosion to book value from additional CECL reserves and modifications of 4% of the total originated portfolio remain comparatively low.

Now, a few observations on our CRE CLOs. Like most in our peer group, we have historically used CLO financing as one of our secured financing options. Over the last eight years, we’ve issued $7 billion with $5 billion outstanding, ranking number four with top quartile AAA spreads, largely a result of one of the most conservative and investor-friendly CLO structures. Specifically, our overcollateralization test is set at 1% versus the 3% average for the peer group, and our deals are static. Unlike managed deals, we are limited in our ability to swap collateral, prevented from repurchasing collateral until after 60-day delinquency is reached, and reliant upon the special servicer to manage decisions on asset resolution. This has three impacts versus the peer group.

First is said CRE CLOs trip test sooner. For example, our FL5, 9, 10, 12 deals have tripped their IC or OC tests. Secondly, credit quality metrics will be skewed versus managed deals where the issuer can preemptively swap in performing loans before a loan is delinquent. And finally, our path to asset resolution via repurchase or modification is longer due to both the 60-day trigger and need to obtain special servicer approval on our asset management decisions. As of the February 25th remittance date, there were 12 loans 60-day plus delinquent inside of our CLOs. Of those we expect 15% to pay off, 57% to qualify for modification, and 27% to enter for closure. Modifications will require new equity contributions provide a bridge for properties to stabilize and reach agency take up.

Expected principal losses on these loans have been accounted for in our current CECL reserve. We expect as of the March remittance date that FL 5, 9, and 12 will be above their IC and OC thresholds. On the earnings side, I want to lay out the bridge for increasing distributable ROE 250 basis points over the next two years, from the 7.5% in the fourth quarter to our 10% trailing seven-year average. First is reallocation of equity raised in the Broadmark merger into our core strategies. Since the third quarter 2023 merger close, 23% of the portfolio has liquidated of which the remaining 788 million at quarter end is yielding approximately 2.1% producing a current drag on ROE of 170 basis points. Currently we have actionable liquidations for 36% of the remaining portfolio with a budget to monetize the balance over the next four quarters.

The anticipated contribution margin to ROE from full reinvestment of this equity into our current investment pipeline is 250 basis points. Second leverage, current leverage of 3.3x and recourse leverage of 0.8x are at historical lows below our target leverage of 4x to 4.5x. We expect to raise incremental debt capital over the upcoming months, with the resulting increase in leverage contributing 125 basis points to ROE. Third, the exit of residential mortgage banking which based on current planning is targeted for full liquidation by the end of the second quarter. Due to current mortgage rates distributable TOE in this segment was laggard at 1.8% and we expect reinvestment of this capital to increase ROE 25 basis points. Fourth growth of small business lending.

The SBA 7(a) program continues to be the highest ROE segment where given its capitalized nature, growth in production does not require significant capital resources. But those stated long-term 7(a) origination target of doubling our current production to 1 billion every 100 million increase in volume adds an incremental 15 basis points to ROE. Last, cost structure. As part of the merger, we realize synergies on the OPEX side, cutting 19 million of Broadmark expenses. Given market conditions we expect to continue to right size the cost structure and staffing levels with a target 40 basis points ROE contribution. Probability weighting each of these actions with a total 455 basis points increase in ROE alongside focused credit management over the next 12 to 18 months of the series cycle, we believe will provide significant upside to the company’s current earnings profile.

We appreciate the continued support, understand the work ahead of us, and firmly believe that the platform is built to both withstand current market pressure and grow earnings as we move forward. With that, I’ll turn it over to Andrew.

Andrew Ahlborn: Thanks, Tom and good morning. Quarterly GAAP earnings and distributable earnings per share were $0.12 and $0.26, respectively. Distributable earnings of 48.5 million equates to a 7.5% distributable return on average stockholder’s equity. 2023 full year GAAP earnings and distributable earnings per share were $2.25 and $1.18, respectively equating to an 8.6% distributable return on average stockholder’s equity. On the balance sheet and income statement, residential mortgage banking has been accounted for as a discontinued operation with assets and liabilities consolidated into held for sale line items and net income included in discontinued operation. The main driver of the variance between our quarterly GAAP and distributable earnings were $3.2 million of the $6.7 million increase to our CECL reserve, a $20.7 million mark down of our residential MSR, a one-time $5.5 million termination fee related to the refinance of a Mosaic lending facility, and a $3.7 million unrealized loss.

The increase in our CECL reserve was due to a $15.8 million increase in specific reserves, offset by a release of reserves on our performing loan portfolio. The 7.5% distributable return on equity continues to be pressured by the effects of a decline in the retained yield of the portfolio as well as lower leverage. In the fourth quarter, the levered portfolio yield was 11.5% down 9% from the same period last year. The change is due to a 11% allocation into Broadmark assets, margin compression on the backbook, and increased REO from M&A. We expect levered yields to increase as the backbook moves into our securitization vehicles and the Broadmark assets are repositioned into market yields. Net interest income declined 6.4 million quarter-over-quarter.

The change was primarily due to a $5.5 million one-time charge upon the refinance Mosaic lending facility, the migration of 258 million of loans to non-accrual, and $2.6 million of interest expense related to the financing of non-performing Broadmark assets. Realized gains were up quarter-over-quarter due to increased SBA 7(a) production and sales with average premiums of 8.9% and 288 million of production in our Freddie Mac businesses. Servicing income increased 1 million quarter-over-quarter due to the recovery of previously booked impairment of our SBA and Freddie Mac servicing assets. Other income increased 14.2 million due to the recognition of ERC income. To date we have processed 62.9 million of ERC contracts recognizing net income of 42.8 million.

We expect this program to continue into 2024, albeit at a slower pace. The improvement in operating expenses was due to a reduction in staffing and related compensation expense, slightly lower servicing expenses as a result of lower advance reimbursement, and lower transaction volume. On the balance sheet, liquidity remains healthy with 139 million in total cash and over 1.5 billion in unencumbered assets. Recourse leveraging the business declined 0.8 times and mark-to-market debt equals 17% of total debt. The company’s debt maturity ladder remains conservative, with no material debt maturities until 2025, and the majority maturing past 2026. On the leverage front, we continue to explore multiple avenues of raising corporate debt. Markets for new issues have improved since the beginning of the fourth quarter and we are confident in our ability to access the markets in the upcoming month.

Incremental capital raise will be deployed into our origination acquisition channels, which are witnessing opportunities in excess of current capital levels. Book value per share was $14.10. The changes due to a $0.09 per share markdown of the residential MSR, a $0.04 per share reduction in bargain purchase gain, and $0.06 of non-recurring items discussed previously. While we understand it will take time given current market conditions, we remain agile, creative and opportunistic to deliver differentiated credit solutions for our lower to middle market customers. As we execute on our strategy, we expect the power of our earnings to cover the dividend consistently and returns to migrate to historical levels. With that we will open the line for questions.

Operator: Thank you. [Operator Instructions]. The first question we have is from Crispin Love of Piper Sandler. Please go ahead.

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Q&A Session

Crispin Love: Thanks. Good morning. Can you just talk a little bit about what recent credit trends could mean for potential losses, delinquencies have increased, but what kind of losses do you believe that just based on what current debt service coverage ratios are and LTVs in the book, and then how you might plan to work out some of the lower performing loans?

Thomas E. Capasse: Andy, do you want to touch on the loss reserves and Adam, maybe touch on the credit component.

Andrew Ahlborn: Hey, good morning, Crispin. Yeah, on the loss reserve, we look at the book in two ways when we determine determined CECL. There is a general overlay, which accounts for roughly 50% of the reserve and then the asset management team is adding on specific reserves for those loans contained in a higher risk category. So we think the current CECL reserves account for the expected losses on those assets in our higher risk buckets. Based on sort of the details where are the asset management teams, current mortgage market LTVs, etc.

Adam Zausmer: And then hey, it’s Adam. Yeah, on the credit front, certainly seeing delinquencies as you highlighted increase quarter-over-quarter, we do feel that our basis is still healthy in the majority of our portfolio. We feel that if you look at the bridge delinquencies, where there was a spike, you’re certainly seeing — we think that the realized losses will be more at the equity level versus the debt level. So, as Andrew highlighted we think that our reserves are certainly adequately sized. The SCR is stressed, LTVs are generally below 100% on the majority of the portfolio, and really don’t anticipate material losses but some loans will certainly require some modifications or restructuring, and certainly some sort of time to resolve and kind of have some time available for the marketer to rebound.

Crispin Love: Great, thank you. Appreciate the color there Andrew and Adam. And then just one on the disposition of the Resi mortgage segment segments. Do you — can you just detail why now and then are you able to provide any color on your confidence of the disposition being completed by June 30th, which was in the presentation, and I assume that would likely involve the a sale and likely gain just following the loss on discontinued operations this quarter?

Thomas E. Capasse: Just one market observation and Andrew you can comment on the process but right now the majority of the equity in that business is in the MSR of which two thirds are agency. We believe that right now, MSR valuations have peaked. And just from a timing perspective, in terms of valuation, that’s one driver. But Andrew, do you want to touch on the process timing.

Andrew Ahlborn: Yeah, so certainly, we have a high degree of confidence of the transaction closing before the end of the second quarter. You know, part of the criteria of moving a segment into held for sale and discontinued operations is having that confidence level that the components of the process will be, as Tom mentioned, obviously, a sale of the MSR which comprise the majority of the equity, as well as the assumption of the assets and the liabilities of the company, and the consideration what will most likely take the form of some upfront payment and then an earn out of sorts. So, I think at this point in time based on where we are in the process, we do believe this will close before the end of the second quarter.

Crispin Love: Thank you. Appreciate you taking my questions.

Operator: The next question we have is from Stephen Laws of Raymond James. Please go ahead.

Stephen Laws: Hi, good morning. Appreciate all the details in your prepared remarks Tom, and if I have got my notes down correctly I think you said the CLOs have defaulted loans about 57%, so roughly 60% you expect to modify and I believe you said you need the special service for approval. Can you talk a little bit more about that process and how you work with that that special service? What are those mods primarily look like, is it capital N for more time, or are there other moving parts, each one can be unique, but any general trends across those loans?

Thomas E. Capasse: Yeah, Adam, can you comment on that?

Adam Zausmer: Yeah, sure. So, in terms of the process on the mod, so borrowers had submitted relief requests for modification in their loans. Those then are under review by the special servicer. In the ordinary course, request for a modification by the borrower, the special servicer would review, approve and cure the delinquency, with certainly our approval as the directing certificate holder. In several cases, the modification is a contractual bridge to a short-term payoff. So an example being like a sponsor is refinancing the debt or selling the real estate, and the modifications can then be executed. In terms of what they look like, certainly, the preference is to have the sponsor bring a fresh equity injection to the modification given that more time is certainly needed in this market.

We feel that about anywhere from 12 to 18 months is the right amount of time to modify these loans given the timing that’s needed for the market to rebound. Additionally, there’s cash management controls that are put in place on these modifications. And in some cases, we’re requiring third party professional management to come in on behalf of the sponsors and kind of help maintain the asset utilized CAPEX to really provide the necessary maintenance of the asset.

Stephen Laws: Thanks and Andrew, thinking about interest income can you talk about the quality of interest income, how much is cash interest received, how much was approved, or maybe some type of tech income, if there’s any, can you give us any color on interest income quality?

Andrew Ahlborn: Yeah, the majority of the interest income is cash paying. There is a small segment of loans that are accruing based on expected recovery on the loan, but not paying — but it is a very small portion of the book.

Stephen Laws: Great. And then finally, if I may, returning capital to shareholders, you closed I believe with a comment on the dividend that you think earnings can cover this, how do you think about the glide path of earnings coverage for the dividend as we move through the year and you execute these challenges — these efforts to expand ROE and any consideration around stock repurchases, given the current valuation? Thank you.

Thomas E. Capasse: Let me unpack that too as Andrew. Maybe just comment on — there’s five measures we delineated, obviously, some of them are immediate like OPEX and some are longer-term, like the re-levering of the Broadmark equities. Maybe comment on that and then the prioritization of cash on repurchase versus capital solutions for the existing portfolio.

Andrew Ahlborn: Yeah, as Tom mentioned in his remarks, we believe that the totality of all of the options ahead of us, leads to roughly over a 400 basis point increase in earnings from their current level. That’ll certainly be incremental over the next four or six quarters. As Tom mentioned, things like OPEX savings, which we anticipate will add 40 basis points will be more immediate. The effects of leverage will be somewhat dependent upon the times in which we choose to access the market and the redeployment of capital. And then the effects of the portfolio turnover will sort of be felt every quarter. I think, Adam can elaborate on the plan for and the timing of Broadmark liquidations, but that’ll certainly bleed into earnings.

So I think you will see, sort of a glide path over the next four to six quarters. In terms of capital allocation, including the share repurchase program, we have today 80 million in capacity on our current program for share repurchases. I do believe we will be active in the repurchase program while also balancing the need to add net interest margin into the income statement in a market where yields are very attractive and putting long-term earnings into the income statement is important. So, I think we will balance both of those. Given where the stock is trading certainly, the return on our share repurchases is quite powerful. So, I do anticipate we will be active in the upcoming months, at least at these levels.

Stephen Laws: And then share repurchase strategy?

Andrew Ahlborn: Yeah, that’s sort of [Multiple Speakers].

Operator: Next question we have is from Douglas Harter of UBS. Please go ahead.

Douglas Harter: Thanks. I’m wondering if you could talk about the expected pace of putting new capital to work, how you see the opportunity set developing both in order to redeploy capital, but also to increase leverage?

Thomas E. Capasse: Yeah, I’ll just make a comment on the current investment opportunity pipeline and ROEs and Andrew, maybe comment again on the or Adam on the liquidation of the Broadmark, as well as the forward liquidity. But the current market in terms of — we kind of look at it in three areas, sort of silos. One is our core bridge lending, where for lower middle market you’re getting retained yields on really strong vintage underwriting in the area of 13.5% to 15.5%, that’s up maybe call it 300 to 400 basis points since before the rate rise. That is silo one. Silo two, which is cyclical is the capital solutions, where we provide capital to opportunistic equity, entering mostly the multifamily space, then we will provide senior mez, etc., in the context of restructuring, that’s probably more in the call out the 15.5 to 18.5. And that’s the other area.

The third area is the acquisitions. And there we’re seeing — we’re starting to see, and this is from the external manager, a growing pipeline of sales by banks, which are not — I guess, not unexpected, those are more in the upper teens, low 20s with retained yield. So in short, you’re seeing blended returns available to us, well into the mid to upper teens, which is about a 400 or 500 basis point increase versus where we were prior to the turn in the rates. But that’s the opportunity sets. Andrew, maybe just comment again on the liquidity, forward liquidity and deployment.

Andrew Ahlborn: Certainly outside of the portfolio runoff, specifically in Broadmark, there are a handful of larger liquidity items we expect to come through the balance sheet in the upcoming weeks and months here. Obviously, the sale of the residential mortgage banking platform is expected to bring in on a net basis, approximately $100 million. We are in the process of financing some of our retained positions from our CLOs that’s expected to bring in $130 million. And then I do believe we have line of sight into some corporate issuances. So, outside of portfolio runoff we expect there in the upcoming weeks and months there to be roughly $300 million of additional liquidity coming in. Adam, you may just provide some commentary on the timing of the Broadmark liquidations and expected proceeds just to get a complete picture.

Adam Zausmer: Yeah, so we expect to have about 50% of the Broadmark assets paid off within our bases by year end 2024. I think this is a conservative estimate. This excludes current loans where several we expect will pay off during this period. And then secondly, there’s more opportunity to liquidate other assets in the portfolio that aren’t currently flagged for a payoff. Just kind of the velocity of these payoffs, just kind of given the historical perspective since the merger close, so about 50 loans paid off for about 250 million to about 23% of the portfolio. We have pending payoffs of about 30 assets, and those the ones that I mentioned would pay off by the end of the year. That’s about another call it about 250 million.

So that’s another 20% of the portfolio. So all in all, we should be out of about 500 million by year-end. The liquidity, from a UPBs perspective would be about 250 million of UPB. Obviously, some of that is levered today. And then, certainly a slew of other payoffs that we are expecting in the more and more portfolio that we’re currently working through by loan sales, sponsors that are giving indications that they’re working on refinances and sale of assets.

Thomas E. Capasse: Just, it is Tom, I think this is what differentiates us versus the peer group, to some extent is apart from the focus, the concentration in lower middle market multifamily, which has less credit volatility, we do have because of the delevering from Broadmark, we have this path to step function and growing liquidity towards the back end of this year, which will — this result in deployment at the spreads, which we don’t believe this is a 2020 flashing — pandemic flash in the pan with a snapback. So we see the NIM accretion being very significant over, especially the back half of — this year into 2025.

Douglas Harter: Great, thank you.

Operator: The next question we have is from Jade Rahmani of KBW. Please go ahead.

Jade Rahmani: Thank you very much. Just on the credit side with Broadmark and Mosaic, you said 28% purchase discount. Do you believe that that’s sufficient to absorb losses, and therefore from those two portfolios they would have no further deterioration on book value?

Thomas E. Capasse: Andy, do you want to comment?

Andrew Ahlborn: Yes, maybe we will break it down into two components. On the Mosaic side, our deal was structured with a contingent equity, right. That was at — approximately $90 million. We do not expect to exceed that contingent equity revenue. On the Broadmark side, as you mentioned you noticed the discount applied to the NPL, we still continue to believe is enough to cover expected principal losses. I think what you will see over the next few quarters is movement, I would call them immaterial movements around the bargain purchase gain in both directions, as sort of values get finalized. But yes, we do believe the purchase discounts in both of those mergers will prevent future principal losses.

Jade Rahmani: And then on the multifamily side, in the bridge portfolio you mentioned 70% of the delinquencies due to one borrower. Do you believe that we’re at peak delinquencies or do you expect it to be lumpy and there will be further deterioration, I mean, I personally don’t see why we would now be at peak delinquencies considering the staggering of maturities and the 2021-2022 vintage originations, I think there probably will still be some deterioration, do you agree with that?

Thomas E. Capasse: I think we do agree with that from a broad market perspective, in particular large balance or upper middle market — I’m sorry, upper — the largest sponsors in the Sunbelt markets, for example, where there’s significant negative absorption, that has to be a period of negative absorption as new supply hits over the next year, year and a half. But our portfolio is very differentiated. And we look at this in terms of roll rates and negative migration, so, Adam, maybe could you comment on how you’re looking at our bridge portfolio versus terms of its lower middle market focus and what you’re seeing with those sponsors?

Adam Zausmer: Yeah, specific to our multifamily bridge portfolio you mentioned that the largest asset had defaulted. So, in sum, I mean, our two largest sponsors have actually already defaulted. And we are working through asset solutions modifications, bridge to bridge finances, etc. through the special servicers, and through loans that we hold today. The majority of our small middle-market sponsors, we feel had greater liquidity and funding to temporary cover the interest shortfalls. We think that Q1 may see a spike as we execute some of the modifications and bridge to bridge strategy on our existing delinquency. But we expect really negative migration to peak late and call it Q1 or Q2, which is really due to the granularity of our remaining portfolio.

Jade Rahmani: And geographically how would you describe the concentration, is it largely Sunbelt?

Thomas E. Capasse: Well just to add to this and Adam, you can comment on it. But if you recall, Jade, one of the — kind one of our credit Bibles is our Geo tier model, which uses regression analysis from GFC on lower middle market, mostly multifamily. So we basically, in that model, we look at forward negative absorption as one of the big drivers. As a result of that markets like Austin, San Francisco, etc. and in particular, some of the — in the heat map of the Sunbelt, where there’s a lot of supply coming, we’ve avoided that. But given that overlay, Adam, what have you seen in terms of the our concentrations in those markets.

Adam Zausmer: Yeah, markets such as the Carolinas and Texas, where we have heavy concentration, these markets have positive net migration and strong demos. And, as you know, our focus is really on workforce housing and we still expect that there’s tremendous demand for these units, specifically for good quality affordable housing. And given the — really given the positive net migration, we feel that where our assets are located, will remain strong markets. Our top MSAs in our bridge portfolio, Dallas, Texas being the largest, which represents about 25% of the overall portfolio, Atlanta comes in second at about 15%, and then the Phoenix market is about 13%. Charlotte, Houston and Chicago, kind of round out the remaining of where our big exposures are.

Jade Rahmani: Thank you. On the office, can you talk to the character of the collateral because there’s huge differentiation in the market between skyscrapers and CBD versus suburban office parks versus owner occupied where, say a law firm owns the building, and they sublease two floors. So how would you characterize the office because I’m surprised that there’s delinquencies in small loans, sub 15 million type loans?

Adam Zausmer: Yeah, so offices as Tom highlighted in his opening remarks, right. So it’s about 5% of the total portfolio. Our average balance on our office portfolio is about $3 million. It’s about 160 individual assets. The small balanced nature of these office assets, a lot of it is focused on stable, like medical office type properties and really just smaller assets which again it’s a lot easier to lease up, a lot of this is on short-term leases. But given the amount of space that needs to be leased up in these small projects, the ability of our sponsors to do that isn’t as challenging as you highlight when you have these larger office buildings and CBDs. And that’s really where the majority of our office delinquencies are located, which is in the CBD, specifically in Chicago, New York, where those delinquencies are, now also Los Angeles.

So I think, just given that granularity, we feel that we’re certainly insulated from a lot of the headlines around the office sector. And it’s also from a liquidation asset management perspective, also more efficient to work through and liquidate these smaller assets.

Thomas E. Capasse: Yeah, just at a high level, it’s 70% of our 5% office is — that is the large balance and that may account for 70% of delinquency. So it’s a handful of small CBD properties in a handful of cities that we have to originate but for which we have we believe very, very strong CECL reserves. So I think if you will the tail risk in our book versus the sector is very, very limited to CBD office.