Broadmark Realty Capital Inc.

Greetings and welcome to the Ready Capital second quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the 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, Andrew Olborne, Chief Financial Officer. Thank you. You may begin.

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 can 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 gap measure is available in our second quarter 2024 earnings release and our supplemental information, which can be found in the investors section of the Ready Capital website. In addition to Tom and myself on today's call, we are also joined by Adam Zasner, Ready Capital's Chief Credit Officer. I will now turn it over to Chief Executive Officer Tom Capassi.

Thanks, Andrew. Good morning, everyone, and thank you for joining the call today. While we experienced a challenging quarter marked by what we believe will be bottoming multifamily credit fundamentals, we successfully executed several initiatives discussed on our last earnings call. These included active asset management, reallocation of low-yield assets, adding accretive leverage, the ongoing exit of the residential mortgage banking, and growing our small business lending platform, which together better position the company for earnings growth as we move into 2025. As we've done in prior quarters, we present credit metrics for both the originated CRE and M&A loan portfolios. To begin, all credit metrics across our $7.9 billion originated CRE loan book improved quarter over quarter. First 60-day plus delinquencies improved 270 basis points to 5.2% as of June 30. Notably, office continues to dramatically underperform our core sector multifamily. Office constitutes only 4% of the portfolio, but represents 16% of the delinquencies, with 60-day plus delinquencies of 26% compared to multifamily at six. Second, a 460 basis point improvement of risk score four and five rated loans to 5%. And third, non-accrual loans declined 120 basis points to 4.6%. Additionally, 91% of accruing loans pay current. The remaining 9%, which feature a PIC component, have an average current mark-to-market LTV of 86%. The quarterly improvement in credit metrics was a result of two active asset management strategies on our part. Through June 30th, we have modified 25 loans totaling $801 million in our originated CRE Bridge portfolio, with 82% completed in the second quarter. The modifications focused on projects with healthy fundamentals requiring additional time to stabilize and secure permanent financing. Modifications had the following average metrics. In-place debt yield of 5%, term extension of 12 months, 25% included spread reduction of 170 basis points, and 50% of sponsors contributed fresh equity. Second, we focused on the sale of underperforming assets where the net present value of liquidation exceeded in-house asset management strategies in both the originated and M&A portfolios. As discussed last quarter, we transferred 720 million of loans into held-for-sale, comprising 47% originated and 53% M&A. Upon transfer, we've recorded $138 million valuation allowance net of tax benefits. Through today, $576 million of the portfolio is either under contract to be sold or has closed. These sales are expected to generate incremental annual earnings of $0.24 per share from a reduction in interest and carry cost, as well as the income generated from reinvestment. Closed loans were reflected in quarter-end credit metrics with potential further improvement from loans closing post-quarter end with the earnings accretion benefit beginning in the fourth quarter. Origination activity in our CR loan business totaled $256 million in the quarter, comprising 61% in our transitional and 39% Freddie Mac, with the latter experiencing an uptick to $122 million in July. We continue to reposition our M&A portfolio, which consists of assets acquired in the Mosaic and Broadmark mergers to reallocate the capital into our core businesses. As of June 30, the loan portfolio totaled $1.1 billion across 81 assets with improving credit performance. 60-day-plus delinquencies improved 910 basis points to 15%. The portfolio has a subpar leverage yield of 10.8, but post-completion of our loan sales, we expect this portfolio to total $775 million and leverage yields to increase to 11.6%. Now, one additional observation on our overall CRE portfolio. In the quarter, continued negative migration in office loan credit negatively impacted peers with significant office concentration. Our recent asset management activities has further de-risked our portfolio. At quarter end, office exposure net of specific reserves was reduced to 4% of loan exposure, with planned liquidations reducing to a target of 3% by year end. Of the 3% remaining, the average loan balance is only $2.8 million, and 85% are performing. Meanwhile, 82% of our portfolio is concentrated in mid-market multifamily, where with a nationwide affordability gap driving rental demand, stress primarily relates to negative leverage, and the recent rate rally is a green shoot. Now, turning to our small business lending segment, origination of SBA 7A loans Exceeded target growing 80% year-over-year to 217 million and puts us on pace to achieve our 1 billion dollar target run rate by the fourth quarter the quarterly volume was split 37 percent from our legacy large loan business up to 5 million and 63 percent from our FinTech I business which specializes in loans under 500,000 in addition to organic growth the company has a successful history of acquiring independent standalone operating companies and that are complimentary tuck-ins to core lending strategies, such as iBusiness in 2019 and Redstone, our Freddie affordable segment in 2021. This contrasts with our Anworth 2020 and Broadmark 23 acquisitions, which were primarily accretive capital raises. We closed on two strategic acquisitions in the quarter for cash, which support origination growth in our small business lending segment through expanded product offerings and increased market share. First, the acquisition, of the Madison One Company is one of the largest national USDA lenders. The USDA program provides 80% government guarantees on commercial and real estate loans in rural areas and complements our core 7A offering with similar economics. These include gain on sale revenue from the sales of the guaranteed portion, a retained servicing strip, and the net interest carry on the retained portion. Forward 12-month originations are expected to be $300 million, which adds $0.10 to annual EPS once fully ramped. Second, the acquisition of Funding Circle U.S. platform by iBusiness, which is expected to increase 7A small loan production by leveraging Funding Circle's leading front-end technology and established origination channels. Additionally, Funding Circle's core business loan product allows us to monetize leads from SBA 7A turndowns. Integration and rightsizing of the platform are expected to be complete by year end, with projected 24 earnings drag of $0.04 per share and profitability achieved in 25, with EPS accretion of $0.05 per share as we move through next year. Looking forward, we believe organic growth in these platforms will over time enable us to comfortably exceed our $1 billion target and achieve number three USA market share. The high ROE capital light element of our small business lending segment is a clear and we believe underappreciated differentiator among our peer group, as it provides earnings contribution in a countercyclical manner compared to CRE. Turning to earnings. As outlined over the last two calls, we continue to execute on four initiatives to improve EPS by year end. First, the reallocation of low yield assets into 15% levered ROE current yields. As discussed earlier, our sale efforts are expected to generate incremental annual earnings of 24 cents per share upon full reinvestment. Second, leverage. Current total leverage at quarter end was 3.5x below our long-term target of 4x. We continue to pursue adding accretive leverage, including the collapse and re-securitization of under-leveraged CLOs and the rotation into secured and corporate debt when accessible. The annualized EPS contribution from A half turn of leverage at current spreads is $0.08 per share. Third, the exit of residential mortgage banking. In the quarter, we completed a sale of 40% of the MSRs at a $3 million premium to our basis, with the remaining 60% coming to market shortly with expected settlement in the early fourth quarter. The platform sale is expected to close also in the fourth quarter. Total proceeds from the sale of the MSRs in the platform are expected to be approximately 50 million with annual EPS accretion upon reinvestment of approximately 4 cents per share. And fourth, as described earlier, growth of the small business lending platform, which upon stabilization of our recent acquisitions and projected growth, we expect to add an incremental annualized 20 cents per share contribution. The potential annual cumulative earnings impact of these efforts is 56 cents per share. We believe that even probability weighting the success of each the actions will lead us to returning to achieve our 10% annual return target. We're confident about the future earnings potential of the platform. At the same time, we're acutely aware of recent challenges, including not reaching our 10% target. Our recent strategic efforts have focused on initiatives that prioritize long-term earnings power rather than delivering immediate benefits. The impact of commercial real estate recession has been felt, and we believe that the tides are turning in the CRE cycle with green shoots in the form of rate declines and in multifamily peaking deliveries and improving transaction volume. With that, I'll turn it over to Andrew.