Broadmark Realty Capital Inc.

Ladies and gentlemen, please remain online. This call is due to start shortly. Thank you. Ladies and gentlemen, please remain online. This call is due to start shortly. Thank you. music music 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. If anyone should require operator assistance during this conference, please press star and then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chief Financial Officer, Andrew Alborn. Please go ahead, sir.

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. The reconciliation of these measures to the most directly comparable gap 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 Capacci.

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, the positive relative credit metrics of our multifamily-centric portfolio, and the strength of earnings along with a more conservative balance sheet. The closing of the Broadmark Realty Capital Acquisition marks 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 investable 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 broad market expenses marked less liquid REO to anticipated liquidation values, and integrated all shared services into the existing RC framework. In the quarter, while stressed CRE market conditions led to industry-wide contraction in gross portfolios, Ready Capital increased 6% to $10.1 billion, reflecting $127 million of loan originations, as well as an addition of $773 million of broad-marked 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 strengthened future net interest margin. While we expect tight CRE debt market conditions to persist into 2024, we note Ready Capital's competitive advantage in 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 multifamily. 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 portfolio's 77% concentration in workforce multifamily 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, but the majority of inception to date realized rent growth outpacing our underwriting. This mitigates refinancing risk as an offset to the 100 to 150 basis point movement in cap rates and debt service coverage ratios. Third, the maturity ladder. Only 3% and 18% of our multifamily bridge assets mature over the next three and 12 months, respectively. with the majority of maturities occurring later in 24 and into 2025. Last, limited exposure to the office sector. Gross portfolio office is only 5%, approximately 20% of the commercial mortgage 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 repair group. To review, Ready Capital is one of 14 non-bank lenders under the Small Business Administration 7A program. Total 7A volume averages $25 to $30 billion annually, with the program split between large loans, $500K to $5 million, and small under $500K. We segment the business in two separate operations. 7a lending through small and large loans channels in our fintech i business in the lending segment in the quarter we originated 121 million in 7a loans comprising 84 large and 26 small loans a 31 quarter over quarter increase with premiums averaging 9.1 percent ready capital remains the largest non-bank and fourth largest overall 7a lender with a three-year goal to double volume to $1 billion, approximately a 3% market share. Forward 12-month 7A industry volume projection is 10% growth as small businesses turn to 7A lending as banks curtail conventional lending. The Biden administration's stated SBA policy goal is to increase small loan volume, primarily minority and women-owned small businesses, which are approved using scoring models. iBusiness's related technology has driven increases in our small loan volume since implementation in mid-22, and it's 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's success in developing its own software for and algorithms for unsecured business lending and SBA loan processing, including 7A 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 7A underwriting process. The iBusiness 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 break even in 2024. In terms of 7A credit, the rise in prime to 8.5% has pressured our small business borrowers with 60-day delinquencies in the 7A portfolio increase into 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 after the GFC. Retained yields on new originations are consistently in excess of 15%, and acquisition opportunities under diligence are two to three 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, which and the number of lenders is at a record 22. With that, I'll turn it over to Andrew.