Broadmark Realty Capital Inc.

Greetings and welcome to Ready Capital fourth quarter 2024 earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andrew Alborn, Chief Financial Officer. Thank you, sir. 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 uncertainty 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 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 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 Zasmar, 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 fourth quarter concludes a year of mixed results in our business. In 2024, we and the broader CREIT sector continue to be impacted by the later innings of this cycle in our transitional CRE lending business. However, entering 2025, aggressive reserving on problem loans, a right-sizing of the dividend, recurring cash earnings, and an improving multifamily market will accelerate the path to recovery. In contrast, our small business lending operations experience significant origination growth of 1.7x, harvesting capital investments made over the preceding years. To begin, we have undertaken two aggressive actions to reset the balance sheet and go forward earnings profile. The first, a $284 million combined CECL and valuation allowances, which marks 100% of our non-performing loans to current values. This reserve resulted a 14% reduction in book value per share to $10.61, but by ring fencing 100% of the problem loans in REO sets a bottom. This action lowers our basis in non-performing loans, providing asset managers with more options for accelerated resolutions, generating liquidity for reinvestment and higher yield new originations, and in turn, a recovery in our net interest margin, or NIM. The second, a reduction of the dividend to 12.5 cents per share for the first quarter to better align the dividend with projected cash earnings in the short term and to preserve book value. it will be our expectation to grow the dividend from this new level with improved earnings in future periods. We also set it at this level to preserve capital for reinvestment in our core portfolio and to allow for more aggressive utilization of the recently announced $150 million share repurchase program. To be clear, we believe these actions will establish the bottom for both book value per share and the dividend. In this context, to better frame the evaluation of future earnings and book value per share, and further enhance transparency. Our late cycle portfolio asset management strategy involves splitting the CRE portfolio into two buckets. First, core assets designated as hold to maturity with strong credit metrics that generate competitive returns. And second, non-core assets, both originated and M&A. This bifurcation provides additional transparency to track our primary asset management strategy, aggressive liquidation of the 3.1% cash yield non-core book, and reinvestment of liquidity into 15% plus ROE core loans, providing a path to recovery in NIM. With the M&A portfolio successfully reduced to under 10% of the total year-end CRE portfolio, the prior classification of originated and M&A is no longer relevant. At year-end, the CRE loan portfolio totals $7.2 billion, split 83% core and 17% non-core. Our $6 billion core portfolio across approximately 1,500 loans evidences strong credit metric and yield metrics, providing a solid foundation for the net interest margin to recover in 2025. A contractual yield of 8% with a 93% pay rate. 60-day plus delinquencies are only 2% with an average risk rating of 2.2. 86% is multifamily and mixed-use or industrial. Average mark-to-market LTV is 78%. Average debt yields are 9.7%, and the average maturity is 20 months. In 2024, the core portfolio contracted $1.3 billion as loans matured with reinvestment in new production limited to $485 million, resulting in an 840 basis points contribution to distributable ROE before realized losses versus our long-term target, of 11% to 13%. In 2025, through our various liquidity initiatives, notably liquidation of the non-core portfolio and collapse and reissuance of our CRE CLO book, we expect to originate between $1 and $1.5 billion of new production in lower middle markets CRE loans with increased pace as we move through the year. In addition to the attractive return profile, vintage credit fundamentals have tightened with LTVs in the low 60s and debt yields over 8, versus 2021 with mid-70s LTV and mid-6% debt yield. Of note, the current debt yield support refinancing into agency permanent loans with an 8% required forward 12-month debt yield based on the current forward yield curve. Our non-core $1.2 billion portfolio is split into 59% RC-originated loans, 8% M&A loans, and 33% in a high-quality Portland, Oregon mixed-use asset. Excluding the Portland asset, the non-core portfolio assets are tagged with aggressive liquidation strategies and have the following credit profile. Cash yield of 3.1%, 60-day delinquencies of 36%, risk ratings comprise 24% 5-rated, 13% 4-rated, and 63% with a 3 or better rating. and 8% is concentrated in office and land. Based on our asset management plans, full liquidation of this portfolio will take approximately 7 to 10 quarters, with nine assets currently under contract, expected to generate approximately $20 million of liquidity. The Portland mixed-use asset is a $600 million construction project acquired in the 2022 Mosaic transaction, where RC holds a $503 million senior loan and a $62 million preferred equity position. As discussed in our last earning call, construction was completed on the mixed-use property in the fourth quarter with the Ritz-Carlton Hotel opening October 2023. The property features the premier hospitality, retail, office, and residential offerings in Portland, with each component now moving to stabilization. Currently, the hospitality rev par is $188. The office and retail are leased 23% and 100%. respectively, and 8% of the condos are sold. While the original strategy was to refinance the construction into a bridge loan, the current appraisal and other factors favored ownership and serial asset disposition on the components as the best net present value outcome. The immediate impact to earnings is a quarterly reduction of $0.11 per share or 350 basis points on ROE. However, we expect to offset these changes by more immediate reinvestment of proceeds, received upon bringing the financing of the property to market advance rates and for reinvestment of proceeds from asset sales coincident with stabilization. We have reserved $130 million of our original exposure to mark the asset to its as-is value based on a current appraisal. We also expect to recover our current senior loan basis over the next 10 quarters as we stabilize the property. Of note, the mosaic loan represents an idiosyncratic position in our otherwise granular lower middle market CRE loan portfolio, with the remaining top 10 loan positions representing only 9% of the gross portfolio. Turning to our small business lending operations, Ready Capital has become a leading non-bank lender to small businesses, providing a full suite of loan options, from a $10,000 unsecured working capital loans to $25 million plus real estate-backed USDA loans. As of year-end, Ready Capital was the number one non-bank lender and number four overall SBA loan 7A lender in the country. Fourth quarter originations of $350 million across small business lending capped a record year of $1.2 billion, including $1.1 billion of SBA loans, $78 million of unsecured working capital loans, and $7 million of USDA production. Dearly's contribution from our small business lending segment is outsized, representing only 8% of capital, but contributing $0.08 per share, or 290 basis points of ROE. As the CRE NIM recovers with the liquidation of the non-core portfolio, the stable contribution from our small business lending activities is another attractive differentiator for the company in the CRE sector. Now, turning back to our outlook for 2025, we expect that the recovery to a 10% stabilized core return will take us through 2025 with the following four key items providing the bridge to that goal. First, as summarized on page seven of our supplemental deck, the liquidation of our non-core portfolio. As discussed previously, the liquidation of the non-core RC-originated and M&A portfolio will result in an annual benefit of 18 cents per share, or 165 basis points on ROE. Given the projected liquidation timeline, the increased earnings contribution is expected to be fully realized in 2026. Serial disposition of the three components of the RITS project over 10 quarters with the sale of hospitality office components occurring earlier upon stabilization. These sales are highly accretive and will result in an annual benefit of 31 cents per share or 275 basis points to ROE by replacing the future negative yield of the asset with 15% plus retained yield bridge loans. Second, liability management, both securitized and corporate. As discussed in prior quarters, Throughout 2024, the static structure of our CLOs resulted in rapid deleveraging of the cheap AAA tranches, resulting in an inability to deploy payoffs into new loans and higher debt costs relative to the peer group. In 2025, our plan is to sequentially collapse the non-core CLOs once callable and reissue more collateral-efficient managed deals. Of our eight outstanding deals, seven are currently callable, with the remaining deal collapsible in June of this year. The first tranche of three deals totaling $1.3 billion of collateral will be called reissued in March, with the higher advance rate providing reinvestment of $60 million of liquidity projected to increase earnings $0.05 per share or 45 basis points at ROE. With AAA series CLO tranches declining 65 basis points from first quarter 24 to 140 basis points currently, serial reissuance will not only generate liquidity to grow the core portfolio of but reduced liability costs, providing accretion to net interest margin. Additionally, the receptive corporate debt market, where we've completed two issues totaling $350 million since December 2024, provides for additional recourse leverage, which at 1.3x remains below our 1.5x to 2x target. Third, growth in our small business lending segment, which is positioned for additional growth in 2025, despite 1.7x growth in 2024. Specifically, we anticipate $1.5 billion to be originated in our SBA 7a lending business, which should contribute $0.05 per share and 45 basis points in ROE. Through February, 7a lending volume was $229 million, up 91% from the same period last year. Additionally, Madison 1, the USDA lender acquired last June, is expected to originate $300 million in volume in 2025. Due to larger loan sizes and complexity, USDA volume is more variable quarterly, but the platform is expected to deliver incremental earnings of $0.05 per share or 45 basis points in ROE. Fourth, the closing of the UDF-IV merger, which we expect to close in March, estimated to provide annual incremental earnings of 17% per share or 150 basis points on ROE. The cumulative effect of the current CRE cycle is transitory pressure on earnings, followed by subsequent recovery in ROE as we execute on our plan. With that, I'll turn it over to Andrew to go through the quarterly results.