Ready Capital Corporation

Greetings and welcome to the Ready Capital Corporation third quarter 2022 earnings conference call. At this time, all participants are in a listen only mode. Our question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Andrew Albarn, Chief Financial Officer. 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 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. A reconciliation of these measures to the most directly comparable GAAP measure is available in our third quarter 2022 earnings release and our supplemental information, which can be found in the investor 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 Capassi.

Thanks, Andrew. Good morning, everyone, and thank you for joining the call today. Before we dive into the numbers, a few observations on the macro backdrop. Since late first quarter of 22, the historic velocity of the Fed's rate increases has led Ready Capital to pivot to a defensive posture in the event of a recession. However, we believe Ready Capital's multifamily sector-focused and diversified business model afford strength in our liquidity, credit, book value, and earnings in a stressed economic environment. First, in terms of liquidity, as of 9-30, ReadyCap had $1 billion in unencumbered assets, including $200 million in cash and an additional $2.4 billion in available warehouse capacity. Further, recourse leverage of 1.6x is within our 2-to-1 target, and critically, short-term repo returns That $392 million is only 4% of total debt and is primarily secured by floating rate short-duration assets subject to low price volatility. Additionally, only 16% of our debt is subject to mark-to-market, and the average maturity of our warehouse lines is two years. Finally, near-term maturities on corporate debt are modest, with 10% of the outstanding $1.1 billion due in August 2023, and the balance laddered after April 2025. Second is credit. Our historical sector focus on lower middle market multifamily, which comprises 72% of our current CRE portfolio, will benefit from the shock in housing affordability, which has tilted the buy versus rent calculus to rent. The doubling in mortgage rates to 7% has increased the U.S. mortgage to rent ratio from the 103% prior 10-year average to 159% today. This will support lower vacancy rates and positive rent growth, even in a recession, particularly in our affordable multifamily niche. In terms of our small business segment, our credit team forecasts an increase in delinquencies from 1.5% currently to approximately 3.5%, for which we are adequately reserved. This segment represents 4.5% of equity, and as such, net credit loss exposure would be modest. In the event of a recession, a big differentiator versus the peer group is portfolio diversification. The 10 largest loans equate to only 9% of the total loan portfolio. And we notably have no exposure to the CBD office. Our office allocation is only 5% of our portfolio with a 2.4 million average balance. Third is book value. Given the first two factors, a hallmark of ReadyCap since COVID has been stable book value. Post the first quarter 2020 application of CECL, book value has actually increased 7% to $15.40 per share. This contrasts with the 15% to 30% year-to-day book value declines in the residential REIT sector, as well as write-downs of CREITs with significant CBD office exposure. We view book value preservation and growth as a key metric in evaluating ReadyCAP's return. To that end, given the strength of our liquidity, we repurchased 3.6 million shares since September 30th, resulting in approximately 16 cents per share accretion. Finally, dividend yield. As we've been communicating for a few quarters, we expect earnings to normalize over the coming quarters due to the runoff of the COVID stimulus revenue from PPP and the decline in mortgage banking. These declines will be moderated by lending and acquisition activity with a 300 to 500 basis point increase in ROE in the current distressed environment for core commercial real estate. Over the last two years, ReadyCap has paid and covered a dividend yield of 11.6% on average book value, which is in excess of the peer group average. As we look forward, we expect our business model to be capable of continuing to deliver a peer group premium, albeit at levels more similar to pre-COVID quarters. Our Board of Directors plans to realign the dividend in the fourth quarter to ensure our go-forward dividend is covered by normalized distributable earnings. Now, reflecting industry trends, CRE lending volume was down 34% quarter over quarter at $831 million. However, this vintage features a significant yield premium with a more conservative underwriting compared to 2021. In terms of pricing, spreads on new production increased 80 basis points to SOFR plus 480, which, even with the wider CRE CLO spreads, equates to a 15% levered ROE. These higher yields are despite a defensive pivot in credit. 83% of volume was in cash-flowing multifamily and 70% in Tier 1 and Tier 2 markets, migrating to our strongest sponsors. Additionally, under-written stabilized yields on new production increased 8%, while loan-to-values decreased 65%. Quarterly production in Europe increased with $75 million closed across five deals in the UK, sourced via the three strategic European partnerships executed over the last year. The loans have a similar credit profile as our U.S. bridge lending products, but feature a 200 basis point yield premium. Our near-term defensive strategy positions CRA lending volumes to stabilize near third quarter levels as we harvest excess liquidity for higher ROE opportunities in the distressed secondary markets. Investment in distressed small balance commercial real estate loans is a differentiating factor in our business model. We were a top three buyer of distressed small balance loans from banks post the GFC, acquiring $3.4 billion, and we note a new supply in this recession from the post-GFC surfeit of 250-plus private credit funds. In the quarter, the CRE portfolio increased 2% to $9.6 billion across 2,300 loans. A number of credit metrics position the portfolio to outperform in a recession. Weighted average LTVs of 66%, with 84% of the portfolio concentrated in lower-risk sectors, cash-flowing multifamily, mixed-use, and industrial versus office. Current 60-day delinquencies remain low at 2.8%. Lastly, from an earnings perspective, 84% of the portfolio is floating rate. In our small business lending segment, 7A production increased to $134 million, split 85% between our large loan and 15% in our emerging loans. small loan segments, pricing average prime plus 190 basis points. On the volume side, we expect a cyclical decline in 7A volume from $26 billion at FYE 930, but are projecting continued growth in our volume due to market share gains, especially in our small loan segment. This is evident in our money up pipeline of $225 million as of quarter end. Now, as discussed in prior quarters, we have leveraged our fintech rebranded as iBusiness, to drive efficiencies and volume in the small business lending segment, particularly the SBA 7a small and micro loan sectors, which are major policy acts for the Biden administration in terms of reaching minority and women-owned businesses. Beyond application to our own production, we began marketing the technology as a separate lending as a service profit center. Seeding these technologies within our lending ecosystem and creating scale with a longer-term potential spinoff provides another avenue for creating shareholder value. Our residential mortgage banking business, GMFS, continues to be impacted by rising rates and lower refinancing volume with originations of $534 million for the quarter. Despite compressed margins averaging 74 basis points and volume declines of 28%, GMFS remains profitable due to its servicing retained strategy. As discussed in prior quarters, we continue to pursue and evaluate initiatives which may include strategic transactions. With that, I'll turn it over to Andrew.