Jade Rahmani: Thank you for taking the questions.
Operator: The next question we have is from Steve Delaney of JMP. Please go ahead.
Steven Delaney: Good morning, everyone. And thanks for taking the question. Andrew, if I could start with you, you mentioned leverage some opportunities looking forward. Should we assume that would be a new CLO under your existing shell and could we see that as soon as 2Q or 3Q of this year? Thanks.
Andrew Ahlborn: Yeah, it’s certainly continuing to use our shells as a core financing strategy will be important. I do expect us to issue in the CLO market this year, most likely a Q3 event. I think when you look at increasing leverage across the business, it certainly — that is one component but adding on additional corporate debt for reinvestment will be a key part of that as well.
Steven Delaney: And usually try to target about a $300 million offering under your program?
Andrew Ahlborn: Typically, our CLOs are between 750 million and 1 billion, so they’re a little larger in size. Yeah, some of our other shells, are smaller, such as our SBA shell, or acquisition shell, etc. But our CLO offerings tend to be larger in size.
Steven Delaney: Got it, thank you for that.
Thomas E. Capasse: Yeah, just to add to that, since the inception of the market, we were the fourth largest overall issuer that have issued 7 billion, 5 billion is outstanding so that we do larger new issue sizes. And, just to say one point on that, our spreads on the AAA’s historically are on top of the even the best names in the sector and a big part of that is our structures are the most investor friendly, in terms of IC over collateralization triggers, which are one versus the industry at three and the deals being static. So that does present versus the peer group a skewness in our delinquency metrics, and the time it takes for us to buy loans out of the trust or what have you. So just wanted to highlight that. And that, that does give us access to the market even in times when there’s liquidities as constraints in the primary ABS market.
Steven Delaney: That’s good color, thank you. And either one of you, I guess, or maybe Adam, 12 I made a note, 12 loans that were 60-days delinquent, and then you laid out how many payoffs, mods, or foreclosure. I didn’t get the — of those 12 loans I didn’t get the total UPB and how much specific reserve may be against those 12 loans? Thank you.
Thomas E. Capasse: Yeah, so those 12 loans is roughly 500 million. There’s no specific reserve against them beyond the CECL. And I think the other highlights are, I think you have — 15% of that we expect to pay off in the next few quarters, 60% is under pending modification where we’re strategically working with the sponsors. And then about 30 of them will likely go through a foreclosure process.
Steven Delaney: Yeah, and that 30 would then get fair value at the time it goes to REO, correct.
Thomas E. Capasse: That’s right.
Steven Delaney: Yep. Okay, great. And just one final thing, Tom, I guess I’ll throw this out to you. I know you’re busy running your own company but you probably have heard about these short sellers out there on CLO issuers. They’ve obviously hit Harbor, they have hit Blackstone as well. You never mentioned in terms of what you look at and how you look at the performance of the loans. I didn’t hear you mention, trustee 10-day late payment data as being an early warning signal. I guess you know which borrowers are making payments and which are not, but just your thoughts about, I know it’s a market question and not an RC specific but nobody — you’re not mentioning that data, you mentioned your 30-day and 60-day D cues and just curious what your thoughts are about any value in that trusty data?
Thomas E. Capasse: You’re referencing the special servicers reports on the…
Steven Delaney: Yes, the payment data that USB and others put out, the CLO special services, correct.
Thomas E. Capasse: Oh, the CRESSI reporting. Yeah, Andy do you want to comment on that. Because we just view the — and that’s the differentiator about from our perspective is we do have — we do work with an external special servicer, but our — Adam and his team are managing all of the actual disposition asset management strategies. And we do have an early warning indicators that is embedded in our four to five model I would say our risk rated system. So maybe just comment on that in the context of the broader market linkage between looking at CRE, CLO reporting, CRESSI reporting versus how we manage it, in terms of looking just looking at it as on balance sheet.
Steven Delaney: Thanks, Tom.
Adam Zausmer: Yeah, I mean given where DCH on our deals, we have a [Multiple Speakers] the direct certificate holder — with the first loss holder on our CLOs. So, given our position, right, so we have our asset management team that works closely with the special servicers. There’s a portfolio management team first off that is really acts as a liaison between the sponsor and the special services in terms of the draw process updates, asset level updates. And, so we’re in constant connection with the sponsors, and the special servicers to work through solutions. The special servicer is certainly working closely with the sponsors, and then they’re making recommendations to us. And I think our robust team with the overlay of the special service, I think provides us a unique strategic advantage in in the market. That, that is your question.
Steven Delaney: That’s helpful. Thank you Adam and Tom.
Operator: The next question we have is from Christopher Nolan of Ladenburg Thalmann. Please go ahead.
Christopher Nolan: Hey, guys. Rent stable, excuse me, multifamily, do you have any rent stabilization apartment exposure in New York City?
Thomas E. Capasse: We have about — I think we have about 175 million of multifamily exposure in New York City. The vast majority of it is unregulated. So the answer is no, there’s very, very little.
Christopher Nolan: Okay, great. And Tom in past calls you have indicated Broadmark is expected to be EPS accretive by fourth quarter 2024, does that still hold?
Thomas E. Capasse: Andrew in the context of the what the bridge related argument, maybe you can comment on that.
Andrew Ahlborn: Yeah, we do expect by the fourth quarter the transaction certainly to be accretive to current EPS, we expect it to drive your earnings past our current dividend levels. And as we move into 2025, we expect the full impact of the various items that Tom laid out, including, Broadmark to sort of reach their totality. So I think the ultimate earnings accretion based on where we are running in the few quarters leading up to Broadmark probably happens in on the late stages of and mid stages of 2025.
Christopher Nolan: Okay, so it’s fair to say that the EPS, excuse me, the accretion to distributable ROEs that you guys were outlining earlier is going to be backloaded in the second half of 2024 and we’re really not going to see the full effect of it until 2025, correct?
Andrew Ahlborn: I think that’s a fair statement.
Christopher Nolan: And so for 2024, we should see probably a distributable ROE somewhere below your 10% target, is that fair?
Thomas E. Capasse: I think that’s fair. We expect that the cumulative earnings of the company over the full year to cover the dividend. So, you will — what we are expecting is a ramp up from where we’re at today to something towards the back half of the year, that is covering the current $0.30. And then the growth in earnings from that level into our historical return target to happen in as we move into 2025.
Christopher Nolan: Okay, that’s it for me. Thank you very much.
Operator: The next question we have is from Sarah Barcomb of BTIG. Please go ahead.
Sarah Barcomb: Hey, everyone. Thanks for taking the question. So you just gave some dividend coverage commentary. Thanks for that. Just quickly, a follow-up on the topic of CLO performance. Sounds like we should see stronger IC and OC coverage come March. But could we expect to see some further downside to DE on the residual income side of the interest income equation from Q4 levels, can you give any guidance on the potential Q1 earnings impact there before those loans are resolved?
Thomas E. Capasse: So certainly there’s a couple of impacts of tripping these tests. The first one, as you mentioned, is cash flow gets diverted away from our [indiscernible] to sort of delever the seniors. The way it’ll work in the financials as you go see to the extent of loans, hit non-accrual status. You’ll see interest compression there, and you’ll see some — the effects of the delevering of the securities. So it won’t because of how we consolidate, it’s not going to show up in the bonds themselves. The total cash flow sort of diverted over this period where the test of interest has been roughly $8.5 million. I think the other financial impact is during this period where the tests are tripped, that the funding accounts that sit inside these deals are diverted away from repurchasing laws we have funded on balance sheet and diverted through the waterfall of the structure.
And so you have a component of loans roughly $80 million today that are sitting on balance sheet unlevered. So you’ll have some yield compression there. Those loans eventually will get repurchased into the deals as these right size. But for that period of time, you do have, what I’ll call marginal yield compression. So those will be the sort of the main effects.
Sarah Barcomb: Okay, thanks for the color there. And then I think you mentioned that 27% of the delinquencies are likely to foreclose. Will those remain in the CLOs as real estate owned?
Thomas E. Capasse: Adam, you want to comment.
Adam Zausmer: Yeah, I think those were historically as loans have become REO that we have had in securitizations. We have purchased them out. So that’s certainly something we will consider as we work through these. But to date, there’s been very limited REOs that we have within our CLOs. So today it’s not material, but as we kind of work through these assets, some things that we will certainly evaluate.
Sarah Barcomb: Okay, and then just really quickly, sorry if I missed this at the beginning, but can you remind me if you gave us a target for your volumes in the Freddie Mac and SBA verticals this year?
Thomas E. Capasse: Yeah, I mean, on the SBA front we’ve been running at about five, a little under 500 million over the last three years. And we back around second quarter of last year we are FinTech implemented a small loan and micro loan strategy. Just to recap, SBA has five three tiers. 350 to 5 million is large loan, mostly real estate secured. And below that there’s small and micro, which are two different tiers. I think below 50,000 is micro, and those are loans that the SBA allows a credit score methodology, which obviously is a very adaptive to what we’ve been developing with our FinTech in Florida, which was one of the leading providers in the PPP program. So we’ve retrofitted that tech to a strategy whereby we’re using that to originate small loans.
I think we were running Andrew, right about, 33 million, yeah, call it 30 million to 40 million run rate of looking at it over the next couple of months, and ramping. And then that’s part of the initiative of the Biden administration to promote loans to minority women owned businesses of which to that tier, that lower tier is a big chunk of that. So with that the combination of the large loan continued growth there, we’ve been poaching a lot of — we’ve been seeing opportunity to get take on loan offers that are exiting work — from banks that are exiting the SBA business. And there’s FinTech, that leads us to a target of 500 to 750 for this year and 1 billion over the next couple of years, which is very accretive given the premiums that you have on these loans, and which are usually north of 10 points in the secondary market and the fact that it utilizes very limited capital.
So I think again, that’s something that is a differentiation in the peer group that’s a little bit underappreciated. So that’s the SBA. Adam, you want to just to comment on how you’re positioning the business from the standpoint of the core bridge and the other related construction and other products?
Adam Zausmer: Yeah, I think just related to — I think the question was around the cap — our capital Freddie businesses on the multifamily side. I think, the volumes they’re expecting about — we’re targeting a $1 billion for 2024. And those capital light multifamily programs are split between our small balance loan program, where we have the license through Freddie Mac, and then separately our affordable multifamily business, which is the tax exempt business, which makes up the $1 billion target for 2024.
