Ready Capital Corporation

Greetings and welcome to Ready Capital's first 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 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 Alborn. 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 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 first 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 Zausmer, Ready Capital's Chief Credit Officer. I will now turn it over to Chief Executive Officer Tom Capaci.

Thanks, Andrew. Good morning, everyone, and thank you for joining the call today. Persistence of higher rates and inflationary pressures continued away in the commercial real estate sector. At this point in the CRE credit cycle, RC's near-term ROE profile is impacted by three diverging trends. First, reduced ROE from credit impairment in the originated portfolio due to late cycle stress in the multifamily sector. Second, increased ROE from ongoing liquidation of the M&A portfolio, reduced operating expenses, and growth in our small business segments. The M&A portfolio comprises assets from the 22 Mosaic and 23 Broadmark acquisitions. And third, more aggressive liquidation of targeted non-performing loans in our portfolio. In the quarter, we transferred $655 million of loans into held for sale, taking $146 million valuation allowance against those loans. We have determined that the right path forward for this population, including all office loans without a short-term resolution, is to reposition the capital into market yielding and cash flowing investments. The NPV of repossessioning of this capital is greater than holding these assets through recovery and absorbing carry costs through the process. The book value for share decline of 4.5% will be recaptured through reinvestment and share repurchases. In this regard, for analytical purposes, we have bifurcated our $9.4 billion gross portfolio into the originated 87% of the total and M&A portfolios, which is 13%. Before we delve into credit metrics, it's important to reiterate that tail risk in our portfolio is mitigated by three factors. First, our concentration in multifamily and mixed use at 78% of our portfolio. Although overall market multifamily delinquencies increase in the first quarter, longer-term valuations are supported by demand, with the average median of home payment, $3,000, exceeding rent by 50%. The current distress in multifamily, particularly transitional loans, is a trifecta of higher rates, declining rent growth from oversupply in certain markets, and inflationary increases in OpEx. Compared to the peer group as it relates to rent growth, our 2020-22 vintages benefited from our proprietary geo-tier model, which ranks markets one through five, one being the best, with projected negative absorption a major factor. Recent data shows significant dispersion in rent metrics with supply influx in overbuilt markets causing mid-single-digit rent declines. As of March 31st, 91% of our originated portfolio is in markets ranked three or better. Overall, multifamily industry prices are down 16% from the 22P, with an additional 5% forecast for the 2024 bottom. Given our going-in LTV of 62%, These changes result in a portfolio mark-to-market under 100% versus office, where a 50% decline has created over 100% LTVs. We do not believe the increased delinquency in our multifamily portfolio is indicative of further principal loss. The financial effect will be short-term earnings pressure for the interim period between default and modification, forbearance, or refinance. Unlike other CRE sectors subject to the vagaries of the regional bank and CMBS markets, multifamily benefits from the government put with $150 billion of annual GFC allocation providing a pathway for takeout of bridge loans requiring additional time to execute a business plan. Across the $1.3 billion of our loans that reached initial maturity over the last 12 months, 42% paid off with 90% of the remaining loans qualifying for extension. Second, our concentration in lower to middle market loans. Our 9.4 billion dollar total portfolio includes approximately 1,800 loans with an average balance of 4.4 million, avoiding single asset concentration risk. In the broader multifamily sector, the disparity on refinance risk is wide, where 95% of loans under 25 million paid off at maturity compared to 55% of loans over 25. We've seen this in our originated portfolio, where 16% of loans over 25 million are 60 days delinquent compared to 7% of loans under 25. And last, limited office exposure. As of March 31st, our office portfolio consisted of 167 assets totaling $456 million, only 4.4% of our total portfolio. Further, only 11 of those loans had a balance of over $10 million and were concentrated in central business districts. 31% of the office loans are delinquent. We believe that recovery of the current stress in the office sector is long dated and the NPV of repositioning of this capital is greater than holding these assets through recovery and absorbing carry costs through the process. As such, 72% or 140 million of our delinquent office loans are included in the population transferred to held for sale. Post this transfer and liquidation, our office exposure will decrease to 3.3% of the population Next, an update on the credit metrics in the originated portfolio. Please refer to slide 11 in the deck where we present 60-day plus delinquencies, non-accrual, and four to five risk-rated percentages. Overall, 60-day delinquencies increased to 9.9%, resulting in a rise in the non-accrual loans to 7.2%. However, the four to five risk-rated loans, a leading indicator of future 60-day plus, exhibited positive migrations, improving 29% to 9.6%. 46% of our top 10 delinquencies, totaling $137 million, are included in our held for sale bucket and have been marked to expected liquidation values. Liquidity is being prioritized for capital solutions, including refinancing four or five rated loans and protecting our CLOs. As of April 30th, we had total liquidity of approximately $170 million. Year to date, we have either refinanced or repurchased $114 million of delinquent loans out of the CLOs with another $190 million in process. For example, in March, we refinanced a $68 million loan on a Class A multifamily property located in an Austin, Texas, sub-market, which went delinquent due to high operating costs and lower rents from oversupply. The 18-month extension provides a path to reach projected occupancy of 94% from 90% today and 5% annual rent increases to $16.91 a month. both highly probable given the strength of the submarket and flattening absorption. The as-is LTV on the new loan is 88%. Funds and interest reserve to cover the 18-month term was priced at SOFR plus 585, resulting in a retained yield of 18%. In terms of projected liquidity through year-end, accelerated asset sales will provide an additional $200 million for capital solutions. As of the April 25th remittance date, five of our CRE CLOs were in breach of either interest coverage or over-collateralization tests. To date, we have approved 161 million of loan modifications, with another 732 million in process and under review. We expect the cumulative effect of repurchases, refinance, and modifications to provide a path for compliance. One important factor to reiterate underlying Ready Capital's peer group comparison. We use a third-party special servicer which requires additional lag time and less flexibility to execute modifications. As such, our modification ratio is lower and delinquencies inflated versus the peer group. For example, according to a Deutsche Bank series CLO report on April remittances, the top three commercial mortgage REITs based on GAAP equity had average 71% modifications and under 1% 60-day delinquencies versus 5% and 11% for RC, the fourth largest. We continue to work with our existing special servicer to rectify this issue, and if unsuccessful, we'll implement alternatives, such as another servicer or obtaining our own special servicer rating. Furthermore, in our M&A portfolio, please refer to slide 11 in the deck, overall credit improved. 60-day plus decline, 9%, resulting in a 5.6% improvement in the non-accrual percentage. Meanwhile, a 16.5% decline in 4-5 risk rating loans suggests future improvement. Turning to earnings, as outlined in our fourth quarter earnings call, we continue to undertake five initiatives to improve ROE. First, reallocation of low-yield assets from the M&A portfolio into 15% plus levered ROE current yields, such as the 18% Austin refinance previously discussed. As of quarter end, the M&A portfolio had a levered ROE of 7.2%. As it relates to Broadmark specifically, which comprises 51% of the M&A portfolio, we liquidated an additional 50 million of assets, or 5% of the original portfolio, at our basis. Second is leverage. Current total leverage at quarter end was 3.4x, below our target of 4x. Target leverage will be achieved from both accessing the corporate debt markets and the leveraging of new investments at better advance rates and terms. In April, we closed a $150 million five-year private term loan pricing at SOFR plus 550. Third, the exit of residential mortgage banking. We continue to target the end of the second quarter to conclude our efforts to divest of our residential mortgage business. To that end, we are under contract to sell 40% of the MSRs with the remaining 60% currently marketed for sale with an expected July settlement. Distributable ROE in the business has lagged at 6.8%. Fourth, the growth of small business lending. Our stated long-term target for the platform is $1 billion in annual originations with $194 million in the first quarter, $47 million over the prior quarterly record. To support this growth, we appointed Gary Taylor as CEO of Small Business Lending to continue the dual strategy of large and small loan 7A originations through continued integration and of our FinTech iBusiness with the added benefit of cost efficiencies in loan origination and servicing. Additionally, we're excited to announce this week we signed a definitive purchase agreement to acquire the Madison One Companies, the nation's second largest USDA originator. The transaction is expected to generate over 300 million of USDA volume annually, expanding our government guaranteed small business offerings while increasing the company's gain on sale earnings. And last is OpEx. Given market conditions and expected activity levels, we reduced staffing 11% in April, resulting in annual savings of $8 million. Those reductions, in addition to $3 million and other fixed operating costs, results in a 46 basis point improvement to current ROE. The total 200 to 300 basis point ROE accretion from these five initiatives provides a significant offset to the ROE drag from an increased non-accrual percentage as the multifamily credit cycle matures. With that, I'll turn it over to Andrew.

Thanks, Tom. Quarterly gap in distributable earnings per common share were a $0.44 loss and $0.29, respectively. Distributable earnings of $54 million equates to an 8.6% return on average stockholders' equity. Earnings were impacted by the following factors. First, revenue from net interest income servicing income, and gain on sale declined 1.6% quarter over quarter. The $4 million decrease in net interest income was driven by the addition of $347 million of non-accrual loans and the addition of $97 million of leverage for which proceeds have yet to be invested. This was partially offset by a $3.7 million increase in realized gains due to a 25% increase in gain on sale revenue driven by a record quarter in SBA 7A production. The levered yield in the portfolio remained flat quarter over quarter at 11.5% as negative migration was offset by the continued reduction in equity allocated to our previous M&A deals. Second, operating costs improved 2% to $71 million. Absent the effects of REO impairment and ERC loss reserves, which equaled $18.8 million and are included in other operating expenses, total operating costs declined 14% to $52.1 million. The improvement was primarily due to a reduction in employment costs associated with staffing reductions and lower professional fees associated with employee retention credit or ERC production. These improvements were partially offset by an additional $3.4 million of servicing advances made in the quarter. Third, a $120 million combined provision for loan loss and valuation allowance. 56% of the increase relates to specific assets, primarily across office properties, each slated for liquidation in the coming months. At quarter end, the total provision and valuation allowance equaled 2% of the unpaid principal loan balance. Last, a $27 million reduction in ERC income was offset by a $30.2 million income tax benefit. ERC production in the quarter totaled $2.5 million and is not expected to increase further going forward. The income tax benefit was the result of restructuring that allowed us to benefit from previously recognized losses. On the balance sheet, book value per share was $13.43 compared to $14.10 at December 31st. The change was primarily due to the valuation allowance on loan sale per sale. This was offset by a $0.07 increase from share repurchases, which totaled 2.1 million shares at an average price of $8.88. In the capital markets, we renewed four warehouse facilities totaling over $1 billion in capacity. each used to support our CRE business. 75% of those renewals were at either net even or improved economics, with the other bringing under market terms to market. On a go forward, we expect continued pressure on earnings to persist with the benefits of the initiatives Tom outlined earlier reflected in earnings towards the end of 2024. With that, we will open the line for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from Steve Delaney with JMP Securities. Please proceed with your question.

Tom and Andrew, you guys have been busy, it sounds like. Just a fine point, Andrew, the reserve on the $650 million helper sale, does that work out to about $0.85 per share hit to book value?

Hey, Steve. Good morning. How are you?

Yeah, sorry, I was on mute. Yeah, that's about right. It relates to a 4.4% decline in the book value. So doing the math there, it's a little less than the 80th and the mid-60s.

Okay, got it. And, Tom, the held for sale, the $650 million, reminds me a little bit about what we used to call, what was it, good bank, bad bank, back in RTC days, I guess, or back in the S&L crisis before that. How comprehensive, I mean, in terms of identifying across different segments of the portfolio, is this primarily, you know, one group, whether it's bridge loans or is it pretty comprehensive, a little bit of everything? And, you know, what's your confidence level that you've circled, you know, 80%, 90% of the problems you're likely to have? Thank you.

Yeah, that makes sense. And, you know, in terms of – and I'll hand it off to Adam. Maybe you can kind of give Steve a little bit – even more detail in terms of the selection of the population. But what we've done analytically in this quarter is we've separated the gross portfolio into the originated portfolio, which includes, you know, the small amount of acquisitions that we've done over the years, as well as the M&A portfolio. So we selected from both of those with – The idea to do a net present value analysis where the discount versus book is recaptured via the significant reinvestment opportunities we have, which are 15 to 20, low 20s, depending upon the direct lending or acquisitions, and supplemented by share repurchases. That's the broader strategy. Maybe you could give a little bit of a specific color around the selection of the population.

Yeah. Hey, Steve. In terms of the selection of the portfolio, certainly office, as Tom highlighted, our office exposure relative to our peers is still fairly low. But I think as we evaluate the net present value of really repositioning our capital, you know, we think that that's greater than, you know, holding these office assets through recovery and absorbing legal costs to foreclose and, you know, carry costs to operate the property. So certainly office is a big component of that. Secondly, I'd say, you know, on the Broadmark side, I think, you know, the continued high mortgage rates and construction costs you know, have certainly continued to impact our residential land and development portfolio from that merger, especially in, you know, secondary and tertiary markets. So it's really, you know, the non-core assets and, you know, really assets that would, you know, ultimately have large carry costs.

And not part of your core ongoing lending programs is what I'm gathering. That's exactly right.

Yes.

You know, it's... Transactions not from your own... you know, targeting that market and your own underwriting, you know, within ReadyCap. Yeah. That's exactly right, Steve.

Yeah. And so it's really more of a, as we said in the fourth quarter, this was the most impactful in terms of ROE accretion, selling lower, low yielding assets with, uh, you know, long duration, which is, which is essentially what this portfolio comprising Broadmark. And, you know, after this, our office will be down to nearly three, a little over 3%. So anyway, that's, that's, that's the, uh, That's how we selected the population.

Thank you so much for the comment. Sure.

Our next question comes from Jade Romani with KBW. Please proceed with your question.

Thank you very much. What do you think distributable earnings would have been excluding the tax benefit? And what's a reasonable range, do you think, going forward? I estimated in our note 14 cents, but wanted to get your comments on that.

Yeah, so when you look at the tax benefit, roughly 20 million of the total related to the restructuring, which equates to around 12 cents. The one thing I will say is given the structure of the business, it does provide us the ability on a continual basis to optimize sort of the tax impact of our operating companies. And so certainly an outsized tax benefit this quarter, but I do expect that line item to be somewhat volatile as those businesses evolve. On a go-forward basis, when you look at core earnings, I think there are several moving pieces here to take into account. I think the first is when you look at the pace of putting non-accrual loans back on accrual status, that certainly will have one of the largest impacts. So the revenue, the lost revenue on our non-accrual population today is a little under $60 million. You think about as we work with our special servicers to move through that, that equates to roughly close $0.35 in annual core earnings, which is highly impactful. The next is obviously transitioning over that held for sale population, where the yields in that portfolio are negative today. So if that negative yield gets repositioned into market yielding assets, you're seeing go forward EPS accretion of in the range of $0.12 to $0.15. So there's a variety of moving pieces, and what What you will see as we work through those issues and clear out some of the underyielding assets is that some of the sort of larger one-time items that have occurred over the last quarters, ERC income, some of the tax benefits, get replaced by a more steady stream of revenue that is approaching our 10% target.

So just to put that together, distributable earnings was 29 cents. there was around 12 cents of tax benefit related to restructuring. So that gets to 17 cents. And then there's 35 cents per year or 9 cents per quarter of income from non-accruals.

So... Lost income. Lost income.

Yeah. So that's 12 cents remaining is what DE can look like until you redeploy capital.

No, no, sorry, just to be clear. The non-accrual assets are earning zero today, right? So as they get, and so the impact of those in the quartering stay is nothing. So as those come back into accrual status through the work that we're doing with the special servicer, the financial impact on a go-forward basis will be a positive.

Were those non-accruals on non-accrual through the quarter?

The majority of them were. except for the additional ones I mentioned in the comments were there for the quarter.

Okay. And then the next question would just be the loans held for sale. Do you know what the delinquency rate in that pool is?

Yeah. So out of that, the total pool that moved there, 70% of that is in some state of delinquency.

Okay. I guess the constitution of that is the majority of that, the acquired loans from Broadmark and Mosaic, or is it originated loans?

It is a little less than an even split. So 40% of that is coming from our M&A bucket, and 53% is coming from what, as Tom described, an RC loan. So it's really basically an even split.

And then just lastly, the GMFS transaction, do you already have a signed sale agreement? And is that expected? Could you give a range of, you know, consideration that's expected?

Yeah, so it's being, it'll be broken up into three different components. The first two are the sale of the MSRs broken into the retail and and non-retail, which is roughly 40% on the non, 60% on the retail. The non-retail, we do have agreements to sell. The multiple on that is in the low to mid fives, which is right around where we were marked at year end. The retail component is currently getting ready to go to market. I suspect that the execution there is also in the range of our mark. And then the last component will be the sale of the platform, which we do not have under contract yet, but suspect that that will take the form of book value plus an earn out or book value plus a slight premium and earn out. Our expectation is that all of this gets cleared up over the next three to four months.

What's the range of proceeds, just adding all that together?

Yeah, we expect the net proceeds after financing to be somewhere between $70 and $80 million.

Thanks a lot.

Our next question is from Douglas Harder with UBS.

Please proceed with your question.

Hi, this is Cory Johnson on for Doug. Historically, you've generally issued about two to three CLOs per year. I don't believe you issued any yet to date, despite the, you know, CMBS market opening up. Could you maybe explain a little bit of, like, why that is the case?

Yeah, Andrew, you want to touch on that? I mean, obviously, the origination volume is down currently, but maybe just discuss on the overall CRECL strategy.

Yeah, so I think the drop-off is just, as Todd mentioned, that bridge originations have been lower in the platform this year. As I look at our back book and our future pipeline, I think there is a chance we bring a CELOTA market as we move towards the end of the year, potentially in the first quarter of next year. It'll continue to be a core part of how we finance the business. I think the structure it takes, whether it's a static or managed deal, whether we outsource special servicing or become a rated special servicer are all things we're working through in advance of that PLO, but it certainly will continue to be a core part of our financing strategy.

Great. Thank you. That was it for me.

Thanks. Our next question comes from Stephen Laws with Raymond James. Please proceed with your question.

Hi. Good morning. Appreciate the comments so far. I wanted to touch base on the follow up on your comments and prepared remarks about CLO and servicer. You know, what is the process or timeline as far as changing a servicer or moving that internal? You know, and your CLOs are static. I know you talked about that and the impact that has a lot on the last call. But, you know, how would changing a servicer change your ability to either buy out loans before they DQ or replace them or modify them more quickly?

Adam, you want to comment on that? Yeah, hey, this is Adam. Yeah, I'll just make some commentary on that. I mean, you know, in terms of replacing the servicer, you know, given that we're the directing certificate holder, you know, we can certainly do that very easily. We just need to line up, you know, an alternative rated servicer to put into the CLL. So that would allow us to move quickly And then also we'd have certainly significant flexibility on the modification front, utilizing our own extremely experienced team that knows these assets well, et cetera. I'd say from the servicing standpoint, the issues really that we've been experiencing is that it's taking too long for the third party servicer to efficiently process the resolutions. You know we're certainly encouraging them to have a greater sense of urgency to effectuate the you know what's really a backlog of pending resolutions So you know it you know once once we You know assuming that we can get the you know the special services there in terms of you know moving quicker You know we've got like half a dozen You know modifications that are pending You know effectively you know north of 500 million dollars, which we you know we think is is high probability to get a very strong number of them resolved in this quarter. Secondly, I think you asked about us becoming a rated special servicer. That full process from start to finish would take somewhere from six to nine months. I think we have a solid team in place, strong guidelines. you know, pretty good technology and whatnot. But, you know, I think, again, that would be like six to nine months. So we're certainly, you know, we're continuing to have regular conversations with that third-party special servicer, but we're also, you know, as Tom and Andrew noted earlier, certainly exploring other alternatives to give us more flexibility as we, you know, work through the crisis here.

Yeah, and just to add to Adam's comments, we We've had, as recently as this week, put in place an action plan with the existing servicer. We do have a relationship with another special servicer who is, you know, with a lot of experience in the transitional loan space. So that is definitely an option we're pursuing and pursuing it aggressively.

Great. And as a follow-up to the previous question, as you're wording, you know, future CLOs and issuance, you know, do you really think about that as new origination volume or any deal that's going to be collapsed with collateral rolled in and As you think about those structures, will you look to do managed deals? Do you feel like you get better pricing with the static nature that you have with the existing? How do you think about how you will structure those future CLOs?

Historically, Ready Capital, if you look at the universe, there's probably a dozen or more issuers. Market peak at about $30 billion a year in 2021-2022. Yep. We're the fourth largest issuer since inception. Our deals unequivocally have the most investor-friendly structures, and that's A, static, B, our triggers. Our triggers, like, for example, what's the OC test? Adam is two and the industry is five. So that's how we structure the deal, and we did – One, actually. One in the industry. One percent. Yeah, even worse. Or even more conservative or investor-friendly. So that did afford us pricing on the triples best in class in the peer group. Now in the current market, we're probably now more leaning, we're looking at refis in our existing book and leaning more towards the managed structure. But through the external manager, which manages our securitizations, You know, we're one of the largest issuers across a broad array of ABS sectors. And I think at this stage of the credit cycle, we'll probably lean more towards more flexibility in exchange for slightly higher spreads on the triples.

Right. And then just, I was just saying, Tom, just in terms of the, you know, I think the pool would be, you know, really a combination of legacy assets, you know, some collapses, you know, some new issuance. And, you know, I think, you know, at the time, I think, you know, certainly evaluating, you know, the managed structure or some hybrid structure with certainly greater flexibility.

Great. Appreciate the color on this. Thank you.

Thanks for your questions.

Our next question comes from Crispin Love with Piper Sandler. Please proceed with your question.

Thanks. Good morning, everyone. I'm just looking at the delinquency rates on the lower middle market slide of the presentation. First, do those rates include the loans held for sale? And if so, what would those delinquency rates look like absent the $655 million of loans held for sale on a portfolio basis and any other color that you think would be helpful?

Adam or Andrew? Yeah, I'm looking at that. I'm just looking at it. All right, Adam. Andrew, go ahead. Andrew, go ahead.

Those numbers do include the delinquency rates from the held-for-sale loans, so it's inclusive of the entire portfolio. You know, when you look at the held-for-sale delinquency rates, as I said before, they're much higher. So, you know, roughly 70% of that population is in some state of delinquency. So on a comparative basis, Once those are sold, we expect the delinquency rate to come down quite a bit.

Okay, great. That's helpful. And then just following up on Jade's question earlier, just how do you expect the movement of loans held for sale to impact near-term net interest income and distributable earnings? And I guess just relatedly, what are your near-term projections for Andrew, it sounded like you said that you expected to trend closer to the 10% target, but just curious over the next couple quarters.

Yeah, so in the short term, on a net interest income standpoint, I think this population of loans will continue to have very minimal effect, given that the majority of them are not accruing today. you know, as we move out of them and we are working to do so over the next three months and that capital gets repositioned either into, you know, new originations at market yields or refinancing of existing loans at market yields, it should add an incremental 12 to 15 of go forward EPS, right? So the combination of that repositioning and the modification work that's being done in the CLOs, which we expect to have, let's call it a $0.09 per quarter impact on EPS, pushes, as we move to the back of this year, core earnings back towards that 10% target. I think in the interim period, though, while we work through those, the financial effect will be fairly de minimis.

Okay, great.

And then just one last question. When do you think the loans held for sale will be sold? And are you already in discussions with buyers for these loans? And just any detail on what kinds of buyers are looking at them, whether it's asset managers or mortgage rates or mortgage finance companies, just anything that would be awesome. Thank you.

Yeah, I mean, Andrew, maybe, I'm sorry, Adam, maybe you can comment on the overall strategy with the specific brokers. And I would comment, though, and in terms of buyers, it wouldn't definitely not other mortgage rates. It's more private credit funds that have raised a lot of capital around the the distressed CRE space and as well as mom and pop for the smaller broad market assets. But Adam, maybe you comment on that.

Yeah, sure. I mean, listen, you know, we've got a very large portfolio, you know, this this subset of loans, certainly very granular. you know, mixed bags of mostly NPL and REO. I'd say, you know, a lot of the assets are already with, you know, brokers and or have purchase and sale agreements executed. So, you know, specifically around the REO bucket, you know, the majority of those are with individual brokers in the market. On the loan side, The plan is to likely go out in a bulk sale across a few different pools. I think the buyer for these is going to be regional folks that want to take these assets on, given that they're NPL, and really come up with a new business plan to redevelop the assets. And then certainly there's going to be debt funds looking at these assets for some of the larger office deals where they can come in with operating partners for development.

Great. Thank you. I appreciate you all taking my questions.

Our next question comes from Matt Hallett with B. Reilly Securities. Please proceed with your question.

Oh, hey, thanks for taking my question. Hey, just big first question from a high level. I mean, Tom, where are we in the commercial real estate cycle? I mean, I'm assuming a lot of these delinquencies were 21, you know, low cap rate vintages. Can you give us an indication whether you think the worst is over here?

Yeah, I mean, there's eight food groups in the Moody's and Creep, and there's eight answers to that question. But the one that's relevant for Ready is obviously Multi, and that's 80% of our exposure. So to answer that very briefly, yeah, we believe that it's rotational bottoms in sub-markets which are tied to supply hitting the market. You know, the multifamily starts were up, you know, since 2020, I think, to early this year, late last year, up like 50%, 60%. They're now down year over year 35%. So what you're seeing is – price declines and rent and rent therefore rent declines in select sub markets where there's a lot of supply hitting the market so certain markets so to figure the bottoms in each of the markets you look at the amount of supply and how long it takes to absorb that that excess supply before the market bottoms and overall we were down 16% in multifamily prices we think we have another five to go and But broadly speaking, we think the bottom is sometime in the later half of 24 with significant variations in markets. And again, to reemphasize what we said in the earnings call, we use a geo tier model for years to break markets one through five. And one major input in the model is negative absorber supply and negative absorption. So, we've dodged a lot of the big bullets. you know, like in Austin, Texas, for example. But, you know, so we think at the end of the day, the multifamily valuations are floored based on the huge delta in buy versus rent. Now, the average monthly payment in the United States now is nearly $3,000 for a medium-priced home, and the average rent is a little under $2,000. That's a 50-year high So that will underpin the demand for apartments in relation to a single family and also create a floor on multifamily valuations, which is why we're highly confident in our legacy book because of the going in LTV of low 60s. Even with these declines, there's a government takeout through Fannie Freddie And they just need some time to work through the business plans. But the valuations, we think, are unlike office, which is, we think, a five-year secular decline. Multifamily is solid.

Gotcha. The way you explain it makes complete sense now. I appreciate that additional color. And perhaps I should have started off with the first question. I should congratulate everybody with the share repurchases, particularly in April. And we can all do the math. you know, in terms of the MPV of buying back shares here, selling loans and buying back shares, that 100% upside potentially. What can you tell me in terms of the pace of repurchases? They're up in April for the first quarter. Would you like to see that April base continue? Could we see Dutch tenders when you get big pulls of capital in? Just curious on share repurchase and that. I'd really commend everybody there for buying back shares.

Thanks. Andrew, you want to comment?

Yeah, so we, you know, we have $50 million remaining on our existing share repurchase program. I think we will continue to utilize the program while also balancing, you know, the need to use liquidity both in terms of protecting our CLOs as well as putting, you know, money to work in a very attractive environment. You know, as you mentioned, The return profile on repurchasing shares is very attractive at these levels. And certainly as proceeds come in from sales and payoffs, we'll evaluate whether the $50 million is a sufficient amount allocated to the repurchase when we get through it all. But I do expect that repurchases, assuming liquidity levels remain healthy, Margin risk in the portfolio remains really small. I do expect it to be a part of what we do going forward.

My two cents for what it's worth is if you can put capital where it's something that could be worth 100% up. I know you're getting 20% on new investments, but clearly share repurchases at these type of discounts and AD just look like the best use of capital in the context of all the other liquidity that you're managing. And I appreciate you guys are out there doing it, and it's nice to see. Last question, Andrew, what was the coupon on the term loan? And then we're seeing the REITs out now issuing five-year paper, you know, 8%, 9% unsecured. What can you tell me, you know, on the non-secured side? Are you going to be out in the markets? Is that channel open to you?

Yeah, so the term of price is SOFR plus 550 on a not tax-effective bill. So, you know, we will be able to tax back the interest cost of this issuance, which will bring it down into the sevens. In terms of, you know, accessing other corporate markets, we certainly see deals get done, and, you know, we explore them on a continuous basis. I do think as we move forward and we evaluate the liquidity needs of the company, we'll consider all options.

Great. Look forward to that.

Thanks, everybody. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment while we poll for questions. Our next question comes from Jade Romani. with KBW. Please proceed with your question.

Thank you very much. Can you give any color on the other income line, which is around $15 million, and also the other operating expenses, which was about $30 million?

Yeah, so in the other income, the biggest driver is going to be the contingent equity right. which was offset by losses that are also included in core. So the net impact of that is zero. On the operating side, the biggest one in there is impairment on REO, which flows through that line item. That was roughly $17 million in the quarter. There's also carry costs on REO, like, Tax expenses, et cetera, that flow through there. But the main one was the REO impairment score.

So I guess on the 15 million of other income, I mean, in the 10K, the description is that it includes a whole variety of stuff. Your 10Q is not out, but origination income, change in repair and denial reserve, employee retention, credit consulting income. Are those line items expected to continue?

Origination income will continue.

So what will flow through there are mainly fees received from Redstone. That was down slightly, down $2 million quarter per quarter. So that will be a continuous item. The repair and denial reserve relates to the reserve we put on the books on the guaranteed portion of 7A loans, you know, in the event that a loan goes delinquent and we do have to repair the SBA for that default. The reason it's there in the income line item is that when we purchase the visits from CIT, there's a fairly large reserve put in there. I would expect that dollar, that line item to get smaller over time. Employee retention credit income, you know, in that line item was down $27 million per quarter. It's now included $2.5 million in Q1. I would expect that to trend toward zero as we move throughout the rest of the year. And then the contingent equity right, which is sort of the last remaining bucket that's flowing through there, will also fade away as we get to the end of the Mosaic transaction. So the main items inside other income, absent other things that come through the business, in the future really is going to be our origination income.

Okay. That's great. And then capital plans, aside from a potential CLO, are you contemplating anything at this point?

We are not.

Okay. I thought there was a plan for some sort of unsecured debt or preferred, I guess the term loan was issued and maybe that's what you were previously referring to.

Yeah, with the execution of the term loan, the proceeds from the sale of the helper sale loans, as well as just the natural liquidity projections in the business, we're pretty well positioned for the immediate term. Obviously, as we move to the back half of the year, we will balance the opportunity set on the investment side with the opportunities for raising additional debt at that point. But in the the short term, the liquidity forecast for the company is quite healthy.

Thanks a lot.

We have reached the end of the question and answer session. I'd now like to turn the call back over to Tom Capaci for closing comments.

We appreciate everybody's time and look forward to the second quarter earnings call.

This concludes today's conference. You may disconnect your lines at this time. and we thank you for your participation.