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spk09: 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.
spk08: 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.
spk07: 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.
spk08: Thanks, Tom. Quarterly GAAP and distributable earnings per common share were $1.87 and 36 cents, respectively. Distributable earnings of $51.3 million equates to a 9.3% return on average stockholders' equity. GAAP net income was significantly impacted by $229.9 million bargain purchase gain associated with the Broadmark merger. The bargain purchase gain is calculated as the difference between the fair value of the net assets acquired and the market price of the total compensation delivered to Broadmark shareholders on the closing date of the merger. Interest income increased $15.3 million to $232.9 million due to both the effect of rising rates on the floating rate portfolio, as well as a $7.8 million contribution from Broadmark assets added at the end of May. The weighted average coupon in the quarter increased 56 basis points to 8.8%. Interest expense increased $12.1 million to $172.5 million as average funding costs rose to 657 basis points in the quarter. The levered yield in the portfolio declined to 10.2% due to both the inclusion of additional non-performing assets from Broadmark as well as increased cash balances inside our CRE CLOs due to higher prepayments. We expect levered yields to grow from here as those items are reinvested into current market yields. The provision for loan losses totaled 19.4 million, with 4.6 million related to the Broadmark business combination. Feasal increases were primarily driven by changes to TREP's macro assumptions, in particular the CRE price index. Of the total provision, only 680,000 related to additional expected losses on non-performing assets within our CRE portfolio. Realized gains increased $12.3 million to $23.9 million due to increased SBA 7A and Freddie Mac production. In the SBA 7A business, average premiums remained consistent at 9.1%, with $97.9 million of sales producing $8.5 million of income. Originations in our Freddie Mac affordable business increased 39% quarter-over-quarter. This production contributed $6 million of gains. Additionally, the conversion of our LIBOR-based interest rate swaps to SOFR-based interest rate swaps resulted in a $2.4 million gain. The conversion did not affect the fixed pay leg or the duration of our hedges. Unrealized gains equaled $7.4 million. An $8.8 million increase in the residential MSR value was offset by $1.4 million of unrealized losses across other loan and bond positions. Only the losses have been included in distributable earnings. Lower income from unconsolidated joint ventures continued into Q2 and totaled $33,000. This is due to a half-million-dollar mark-to-market loss inside of the JVs and continues to be the result of cap rate movement. Operating expenses increased $2.6 million in the quarter due to $2.8 million of escrow advances that were expensed and the inclusion of $2 million of operating expenses from the Broadmark platform. We expect the operating expense ratio in the business to improve as we roll out synergies from the transaction. On the balance sheet, book value per share declined 3.6% to $14.52. The change was attributable to 3% dilution from the Broadmark merger and 0.6% dilution from Cecil reserves. This dilution was offset by share repurchase activity in the quarter, where we repurchased 1.7 million shares at an average price of $10.82. The dilution from the broadcast merger was slightly higher than modeled due to more aggressive marks on the REO portfolio and certain employee termination costs that are included in the business combination accounting. As expected, leverage decreased 1.6 terms to 3.5 times. On the capital markets front, we remained active. First, we closed our 12th CRE CLO, a $649 million deal with seniors pricing at SOFR plus 255. Second, we added two additional warehouse lines to support the business. The first, a $300 million facility to finance Broadmark's existing residential portfolio priced at SOFR plus 300 at a 70% advance. The second, a $125 million facility, the finance flat or retained on balance sheet, hosts the call of two of our earliest CRE CLOs. Post-quarter, we completed our third securitization of SBA 7A's unguaranteed loan. The $190 million deal closed at a 69% advance rate with pricing at SOFR plus $325. We continue to explore a variety of avenues in the corporate markets given current leverage levels. In the short term, the initial deleveraging and increased MPLs associated with the closing of Broadmark will create temporary earnings drags, but subsequent liquidity generated from re-leveraging and asset sales deployed in target-rich theory debt markets with reinvestment ROEs exceeding 15% will be long-term accreted. We are positioned to maintain a dividend consistent with our stated 10% target return on equity while protecting book value and believe the earnings power of the company to be higher as we move past the broad market integration. With that, we will open the line for questions.
spk09: Thank you, sir. Ladies and gentlemen, we will now be conducting the question and answer session. If you would like to ask a question, please raise your hand. on your telephone keypad. A confirmation turn will indicate that your line is in the question queue. You may press star 2 to leave the question queue. For participants making use of speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Crispin Love of Piper Sandler.
spk06: Thanks. Good morning, everyone. Just following the bank crisis or kind of mini crisis several months ago, there were definitely views that loan acquisition opportunities would pick up later in 2023 or early 2024. And Tom, you mentioned that a little bit earlier as well. But can you just speak to and expound on the loan acquisition opportunities out there, what you've seen already? And if you're surprised, if you haven't seen more recently, And just kind of do you expect them to pick up over the next several months and quarters? And is the key inhibitor recently more been on the bid-ask and pricing on these deals?
spk07: Yeah, Chris, that's a good point. I would say that our view is that it's definitely less than we thought it would be. And what we're seeing in terms of the reason for that is really price discovery because there's this weird bid-ask, weird in the sense that You know, the economic assumptions regarding an assumption and, you know, cap rate increases and price declines are very different between the buyers and the sellers. And just to give you a few numbers, Mission Capital noted they tracked 8 billion of sales offered and 5 billion traded in 22. Year-to-date, they've noted 5 billion of offers and only a billion have transacted. And that's due exactly to what the point that I think you're getting at, which is this kind of bid-ask situation. differential. And so what we see happening, though, is we are definitely predicting a pickup in the fourth quarter of this year, because what a lot of banks are doing now is with the rise in rates, they still have losses on their securities portfolios. So in terms of generating liquidity, they are turning to the bank, to the CRE loan portfolios, where the regulators are still pressuring them in terms of concentration limits in relation to tier one capital. But what they're doing is they're more focusing on kind of assets that are criticized, that have a lease price discount versus clean performing or, let's say, on the other end of the spectrum, office or NPL. So that's kind of the blog jam in the bank market. That being said, what we're seeing is, from our perspective, and Adam Zausner could comment on this if we have time, we're pivoting a lot of our direct lending to so-called solutions capital in the multifamily market, where we provide preferred or bridge-to-bridge refinancing or note-on-note, where we are able to deploy capital in a restructuring context for third parties that provide about a two- to three-point increment in yield versus our straight-up direct lending in the multifamily bridge sector. And that's reflected in our current pipeline of about $1.4 billion.
spk06: Thanks, Tom. That's helpful. And your solutions lending comment might be kind of tying to my next question as well. But do you expect to have extensions for many of your bridge multifamily loans once they mature for all the kind of the growth and loans that were originated in 2020 and 2021. And just curious how you would expect many of those maturities to be handled over the next several quarters. And it would be great if you could just repeat the maturity schedule that you highlighted earlier in the call.
spk07: Yeah, I'll just repeat that and hand it off to Adam to comment on our strategy with respect to bridge and extensions. But in the next... six months, we only have 3%, and over 12 months, what was it, Andrew, 18%?
spk08: Yeah, 18%.
spk07: Yeah, 18%. So, you know, a lot of our maturities are backloaded. That being said, Adam, what are you guys seeing in terms of asset management and your approach to the extension and into a refinancing?
spk05: Yeah, sure. You know, I... Deals are structured with extension options, but some may not qualify given the market. Our typical extension stip is 70% LTV, but given cap rates, we're seeing about 80% plus LTVs. We can certainly consider the 70% to 80% slice as sub-debt and price as such. If extension conditions aren't met, you think in many cases it's going to force sales as there will be some equity to protect. And then also, you know, on the refinance front, you know, I think for a majority of the deals, you know, our clients have the ability to execute cash-in refinances, and we feel that the check the client would have to write isn't that material relative to the equity that these sponsors have in these deals.
spk07: Adam, I'm sorry, could you define a so-called cash-in refinance? What is that?
spk05: Yeah, so when the natural takeout for our multifamily bridge would be a conventional agency product, so to the extent that the debt yield's not there, that the agency's required or the LTV steps aren't met, the sponsor would have to come out of pocket and basically contribute additional equity into the transaction to execute a refinance to the agencies.
spk02: Thanks. I appreciate you taking all my questions.
spk11: That's it for me.
spk09: Thank you. The next question comes from Stephen Laws of Raymond James.
spk04: Hi, good morning. Andrew, I wanted to follow up with some of your comments on earnings drag and then, you know, new investment activity and synergies. So, you know, as we think about optimizing capital deployment, you know, how much near-term earnings drag do you anticipate versus the two Q levels? You know, and, you know, is redeploying this capital given the seems like opportunities are attractive, but you're not seeing maybe as much as you thought in some spots. You know, how quickly do you think or how patiently do you want to wait to redeploy that capital over the back half of the year and early next year?
spk08: Yeah, so when you look at what I'll call the under yielding parts of the portfolio, you know, from both Broadmark and to some extent mosaic, it's probably, you know, creating an earnings drag, you know, somewhere between 100, 150 basis points to the bottom line. In terms of, you know, the turnover, you know, we have marked the Broadmark portfolio to levels where we think we can move out of the under yielding and REO asset fairly quickly over the next couple of quarters. Certainly on the Mosaic side, we have the contingent equity rate, which gives us some flexibility to move those assets without sustaining losses. So I do expect to prioritize moving those assets as we move throughout the rest of the year and into the early part of next year. In terms of capital deployment, certainly we are balancing the need to carry higher liquidity level, which, you know, today stand at, you know, all-time highs with the investment pipeline. And, you know, I think we'll continue to straddle that balance as we sort of see how this all unfolds over the upcoming quarters here.
spk02: Great.
spk04: And just as a follow up, you know, as I think about the growth in the back half of the year, you know, where do you expect to see that primarily? Or, you know, like we saw in Q2, do you expect, you know, each of the segments kind of to show some strength as we move through the year?
spk08: Yeah, I think as we go segment by segment in the small business lending segment, I think you will see volumes increase as we move throughout the year. You know, the first quarter typically tends to be slower. and volumes ramp up from there just due to the nature of the industry. I also think we are seeing sort of exceptional quarter over quarter growth from our small loan segment. So I expect small business loans to increase as we go forward. In our Freddie Mac businesses, the pipelines are historically high. So I expect continued strength and growth. throughout the remainder of the year there. On the capital intensive lending side of the business, volumes have been slow over the last two quarters. Given the current pipeline and the liquidity we have, we do think volumes will grow and we can do that while balancing the need to carry increased liquidity levels to manage other parts of the balance sheet. So I do expect growth. In those segments, I would expect in our residential business, you know, volumes of services to stay where they've been the last couple quarters.
spk02: Great. Appreciate the comments this morning.
spk09: Thank you. The next question comes from Christopher Nolan of Linenberg Selman.
spk00: Tom, do you expect the Broadmark deal to be EPS accretive by second half of 24?
spk07: I mean, a lot of that has to do with the, as Andrew indicated, the velocity at which we liquidate the non-performing loans. As of quarter end, their NPL ratio was 22, which is down from the, you know, November of last year. Earlier end, I think they're up around that 30% area. But Andrew, you want to comment on terms of the earnings creation?
spk08: Yeah, I think that's the right target time period for the full effect of the merger to flow through. You know, the speed at which the, what I'll call the lower-yielding assets are turned over, as well as the re-leveraging of the equity, certainly will have an effect on the timing. But I do think the second half of next year is certainly what we're targeting.
spk00: And then on the multifamily... I'm sorry, what's that?
spk07: I was going to say, we did, in terms of earnings accretion, we were pretty ahead of budget on the OpEx savings. We reduced, what was it, $13 million this quarter of the Broadmark?
spk00: Yeah, $10 million to date.
spk07: $10 million, sorry.
spk00: Okay, and I guess loan loss provision, you had 4.6 from Broadmark, $680,000 from non-performers. What was the balance $14 million for?
spk08: It was really driven by our general allowance on the performing portfolio. We run that portfolio through TRAP, as many of our peers do. They had some significant movements in their theory price index, which was really the main driver of the additional reserves.
spk00: Were there any charge-offs in the quarter?
spk02: Very immaterial, under a million dollars.
spk09: Okay, that's it for me. Thank you. Thank you. Ladies and gentlemen, just a reminder, if you'd like to ask a question, you're welcome to press star and then 1 on your telephone keypad. The next question comes from Jade Ramani of KBW. Thank you very much.
spk03: What's the dollar amount of Broadmark NPLs? You said the ratio is 22%?
spk07: That's right, Andrew. What's the...
spk08: Yeah, so of the total portfolio, which is roughly 775, roughly 150 of that is MPL. And then in addition to it, the remainder of the portfolio is REO, which obviously is non-performing as well. So that is a total of 900, close to $300 million.
spk03: Okay. So the total is $900,150,000. is NPLs and another roughly 150 is REO?
spk02: That's right.
spk03: Okay. And on the legacy ready capital side, what's the dollar amount of NPLs?
spk07: Adam, you want to take that? I'm sorry, go ahead. The bridge and fix, the ratio is only 2.5% for 60-day plus. So, Andrew, what's the dollar amount?
spk08: Yeah, so of the total $10 billion, it's the 2% of that, so it's $200 million-ish. Okay. I wanted to ask about the dividend comment. Since book value is $14.52, the target is roughly a 10% ROE.
spk03: That would imply $1.45, which is more like $0.36 a a share, and also the comments about distributable EPS having some near-term earnings drag, you know, 100 to 150 basis points, that's around 4 to 5 cents, so that would also, you know, be somewhat consistent. Just wanted to see if those numbers square in the range of reasonableness, and I do appreciate your all providing those comments.
spk08: Yeah, you know, I expect the go-forward dividend sort of to be set within that stated target range of 10 to 11 percent on book, I think with an emphasis of establishing a level that is consistently covered by distributable earnings. So, as you indicated, the current dividend is roughly a little over 11 percent on book value and certainly at the upper range of that stated target. I think the determination of where the dividend ultimately settles within that range will be dependent on the speed at which excess capital is reinvested, the repositioning of the underyielding assets we just described, and the growth of the small business lending segment. I think the board will evaluate progress on all those fronts over the next few months here to determine where we land for Q3 and going forward.
spk03: Thanks. That's very helpful. You know, financial covenants are becoming an issue to watch. You know, interest coverage ratio in particular, but also liquidity with the lower leverage of three and a half times, which is healthy. Where are you feeling about financial covenants and the company's overall capitalization? Clearly, you seem to feel confident because the company bought back stock in the quarterback.
spk08: Yeah, certainly we don't have any issues with our financial covenants today. You know, from a leverage, capitalization, liquidity, we have significant room there. I think even with the notes brought over from Broadmark, the way we structured them, we have confidence that we can meet those financial covenants as well. You know, certainly carrying higher liquidity lower leverage and the right type of leverage throughout this time period is important. It will be a focus of ours alongside capital deployment. But no issues with covenants today.
spk02: Insignificant room. Thank you for taking the questions.
spk09: The next question comes from Matt Hollett of Birani Securities.
spk01: Thanks for taking my question. Just on the subject of excess capital, I know there's a lot of opportunities to originate and buy loans. I want to ask in terms of share repurchases, what you're doing, and congrats for that. And then the second with the banks, we're hearing a lot of the banks are looking to offload brick-and-mortar origination platforms, not just loans. You guys are more of a specialty finance model than a REIT. You have a diversified platform, and would you be interested in acquiring loans some type of origination platform as well.
spk07: Yeah, I mean, 100%, Matt, that's part of our DNA versus the peer group, you know, the fact that we are a REIT that owns a number of OPCOs. I mean, good examples of that fill-in acquisitions on an origination platform was the Redstone, Freddie Mac tax example under. So, yes, we definitely are looking in particular at a number of specialty finance platforms both on the commercial real estate and the SBA front. One bank, for example, was selling its 504 business, and it just didn't pencil out. But we are looking at USDA platforms. That's a sister to the SBA program. And, of course, we're looking always in the hunt for agency-related licenses to bolt onto our Freddie Mac platform. So, yeah, so that's the – I may add, I don't know if you want to add to that, but we are definitely in the hunt for platforms, not just here, but in Europe as well.
spk05: Yeah, Tom, no, I echo that specifically on the agency side. Just given the amount of multifamily bridge that we're executing in the market, certainly agencies, the natural takeout for these and to have Um, you know, a platform that can originate multiple agency products, uh, would be a powerful for the, uh, the franchise value. So yeah, certainly, certainly interested in the, uh, agency space.
spk01: Great. Then just on your, on your capital structure, obviously with the broad mark and to de-leveraging and the equity. What's the update on the, you know, on doing something, you know, baby bond preferred, is that market still. Is there an update there? You're going to have capacity at some point to enter it. Would you like to do that?
spk08: Yeah, certainly the leverage profile of the business provides room for raising additional corporate debt. I think we've seen some encouraging issuances over the last couple months here, some in the convert market. I think when we think about how work conditions We're focused on exploring both unsecured and secured debt. I do think we have a unique structure which allows us to sort of place secured corporate debt within taxable entities, which minimizes the ultimate cost. So it is something we continue to explore. I think we are balancing the excess liquidity we do have in the business, certainly the asset level financing we can pull out of you know, the portfolio today with, you know, over $2 billion of unencumbered assets with sort of the cost of entering the debt markets today. But certainly it's something we continuously evaluate.
spk01: And even on the preferred side, there's room, extra room there now, correct?
spk02: Sure, sure. Great. Thanks for taking my questions.
spk09: Thank you. Next, we have a follow-up question from Jade Ramoni of
spk02: Thank you very much.
spk03: I just wanted to ask a big picture question somewhat related to the loan portfolio sales question at the outset. Generally, from my vantage point, I would characterize second quarter earnings as continued deterioration in commercial real estate credit performance, but for the most part, no big new shoes to drop. It's been somewhat surprising. I think that the major loan losses we've seen have been deals that had issues for some time. And then I think on multifamily overall, performance has been pretty resilient. Do those comments square with what you're seeing? Do you think that this represents an improvement in the economic outlook and moderation inflation? And that's why we haven't seen major new loan losses? Or do you think it's really just a timing issue? factor as loans come up for maturity.
spk07: I'll add to my comments, but I think, Jay, we're definitely seeing in this quarter, I hate the term bottoming, but a deceleration in the rate of decline is the best way to frame it, in particular in office. Some of the submarkets are just collapsing completely. Others are stabilizing. Obviously, we're small balance. We only have 5% office, so CBD is not our pain. But, you know, in the multifamily space, there is a front-page journal article today. There's definitely some idiosyncratic issues with, in particular, luxury multifamily and a surprise of negative absorption due to new supply coming online. That was some of the trends we saw. Again, not affecting us because we're a more workforce small balance. But, yeah, there's definitely been a deacceleration in the rate of decline in in a lot of the markets that we track. Adam, if you would add to that from a macro perspective, what you're seeing in particular on the multifamily front.
spk05: Yeah, no, Tom, I think that's right. I think the multifamily market obviously experienced some historical rent growths, a lot of transactions in the marketplace. We're certainly seeing things stabilize, rents kind of leveling off. But at the end of the day, I mean, when we look across our, you know, workforce multifamily portfolio, you know, the performance, you know, the rent growth and the occupancies have certainly really outperformed our underwriting. I think the stress in the market today remains the fact just given where interest rates are and, you know, the stress that's really coming in, you know, call it 2024, 2025 in terms of, you know, the maturities that are going to hit the marketplace.
spk07: Yeah, having experienced the early 90s and obviously GFC, you definitely don't see this free fall or acceleration of the fundamentals, acceleration and deterioration of the fundamentals. Again, it just seems like a de-acceleration, and we'll see where it goes in terms of the economic outlook for 24.
spk03: So then I think you'd probably be somewhat constructive in terms of – capital deployment may be looking to get more aggressive. Is that a fair statement? And then on the multifamily side, do you expect there to be sort of meaningful credit deterioration next year?
spk07: I'll add to this, but we're definitely loosening the screws in terms of our retained yields on direct lending to some of the top sponsors. We're seeing opportunities in really clean construction because the banks have really pulled back on that asset class. and we have that capability from the Mosaic acquisition. We are definitely in this so-called solutions capital segment. That's filling the box where we're getting less bank sales. That may materialize, we think, in the fourth quarter of this year. But, Adam, in terms of, you know, again, that's reflected in our billion four of current pipeline, committed pipeline, highest since first quarter of 21. But, Adam, I don't know if you'd add to that in terms of the multifamily component.
spk05: Yeah, I mean, just, you know, the multifamily outlook, I'd say, you know, certainly limited number of loans are in default today. You know, we've really had nominal realized credit loss since inception of the firm. I'd say, you know, despite various challenges in the market, you know, we certainly are not overly concerned about our large multifamily portfolio. You know, office is certainly our primary concern, although, you know, it's a limited... Limited percentage of our overall portfolio, as Tom highlighted, at 5%. And then just going back to the multifamily portfolio, just really seeing limited issues in the portfolio of late. And we haven't taken material reserves because we feel that our debt basis is still fine. But as we approach 2024, 2025, certainly originated you know, pretty heavy volume of multifamily bridge 2021 through 2022. So as those loans mature in the coming years, you know, there could be some challenges depending where rates are. But again, you know, we think our debt is well protected. And if there's any, you know, if there are any challenges, you know, we think that the equity could take a hit here and there. But then as again, you know, as I mentioned earlier, specifically on the cash and refis. These sponsors have significant equity in these deals, and we think that they'll continue to protect the assets.
spk03: Thank you. And just lastly, the clarification on the near-term impact of Broadmark, the 100 to 150 basis points headwind. Is that relative to the $0.36 of distributable EPS you all earned in the second quarter?
spk08: Yeah, just a reference to the distributed law ROE for the quarter.
spk03: I mean, the 36 cents includes the 100 to 150 basis point headwind. I assume not.
spk08: Yeah, just one. Sorry. Exactly. Just a third of it.
spk03: Oh, a third of it.
spk08: Great.
spk03: That's really helpful. Thanks so much.
spk11: Thank you.
spk09: Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I will now hand over to Mr. Tom Capersi for closing remarks.
spk07: I appreciate everybody's time again today. We look forward to our next earnings call. Thanks, everyone.
spk09: Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for attending, and you may now disconnect your lines.
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