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spk10: 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 Alborne. Thank you. You may begin.
spk09: 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-GAP 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 GAP. A reconciliation of these measures to the most directly comparable GAP 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 Capasi.
spk11: Thanks Andrew. Good morning everyone and thank you for joining the call today. The persistence of higher rates and inflationary pressures continue to weigh 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 segment. The M&A portfolio comprises assets from the 22 mosaic and 23 broad mark 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 .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 increased in the first quarter, longer-term are supported by demand with the average median 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 op-ex. Compared to the peer group as it relates to rent growth, our 2020-22 vintages benefited from our proprietary GeoTier model, which ranks markets 1 through 5, 1 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 -single-digit rent declines. As of March 31st, 91% of our originated portfolio is in markets ranked 3 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 -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 defaults 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 GSC 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 -to-middle market loans. Our $9.4 billion 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 million. 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 million. And last, limited office exposure. As of March 31, our office portfolio consisted of 167 assets totaling $456 million, only .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% 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 4-5 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 4-5 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 4-5 rated loans and protecting our CLOs. As of April 30th, we had total liquidity of approximately $170 million. The utter 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 sub-market and flattening absorption. The as-is LTB on the new loan is 88%, funds and interest reserve to cover the 18-month term was priced at SOFR plus $5.85, 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 ReadyCapitals 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 CRE CLO report on April remittances, the top three commercial mortgage rates based on GAF 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 .6% improvement in the non-accrual percentage. Meanwhile, a .5% decline in 4-5 risk rating loans suggest future improvement. Now 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 regional 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 advanced rates and terms. In April, we closed a $150 million five-year private term loan pricing at SOFR plus $5.50. 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 of our Fintech iBusiness with the added benefit of cost efficiencies in loan origination and servicing. Additionally, we are excited to announce this week we signed a definitive purchase agreement to acquire the Madison One Company, 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, result 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.
spk09: Thanks, Tom. Quarterly gap in distributable earnings per common share were a 44-cent loss and 29-cents, respectively. Distributable earnings of $54 million equates to an .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 .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 .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 loans held per sale. This was offset by a 7-cent 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.
spk10: 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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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.
spk04: Tom and Andrew, you guys have been busy, it sounds like. Just a fine point, Andrew, the reserve on the $650 million held for sale. Does that work out to about 85 cents per share hit to book value?
spk02: Hey, Steve. Good morning. How are you? Yeah, sorry.
spk09: I was on mute. Yeah, that's about right. It was a .4% decline in the book value. So doing the math there, it's a little less than the 80th and the mid-60th.
spk04: 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 L crisis before that. How comprehensive, I mean, in terms of identifying across different segments of the portfolio, is this primarily one group, whether it's bridge loans or is it pretty comprehensive, a little bit of everything, and what's your confidence level that you've circled 80%, 90% of the problems you're likely to have? Thank you.
spk11: Yeah, and that makes sense. 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 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 either direct lending or acquisitions, and supplemented by share repurchases. That's the broader strategy. So Adam, maybe you could give a little bit of a specific color around the selection of the population.
spk06: 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, we think that that's greater than holding these office assets through recovery and absorbing legal costs to foreclose and carry costs to operate the property. So certainly office is a big component of that. Secondly, I'd say on the broad mark side, I think the continued high mortgage rates and construction costs have certainly continued to impact our residential land and development portfolio from that merger, especially in secondary and tertiary markets. So it's really the non-core assets and really assets that would ultimately have large carry costs.
spk04: And not part of your core ongoing lending programs is what I'm gathering. That's exactly right. Transactions not from your own targeting that market and your own underwriting within ReadyCap. That's exactly right,
spk11: Steve. Yeah, and so Steve, it's really more of, as we said in the fourth quarter, this was the most impactful in terms of ROE accretion, selling low-yielding assets with long duration, which is essentially what this portfolio comprising broad mark and after this, our office will be down to nearly a little over 3%. So anyway, that's how we selected the population.
spk02: Thank you so much for the comment. Our
spk10: next question comes from Jade Romani with KBW. Please proceed with your question.
spk01: 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 comment on that.
spk09: Yeah, so when you look at the tax benefit, roughly 20 million related to the total related to the restructuring, which equates 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 the tax impact of our operating companies. So certainly an outside 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 a cruel status, that certainly will have one of the largest impacts. So the loss revenue on our non-accrual population today is a little under $60 million. If you think about as we work with our special servicer to move through that, that equates to roughly close to 35 cents 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 in the range of 12 to 15 cents. So there's a variety of moving pieces, and what you will see as we work through those issues and clear out some of the under yielding assets is that some of the larger one-time items that have occurred over the last quarter's ERC income, some of the tax benefits, get replaced by a more steady stream of revenue that is approaching our 10% target.
spk01: 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.
spk09: So... Lost income. Lost income.
spk01: Yeah. So...
spk09: Yeah. So
spk01: that's 12 cents remaining is what DE can look like until you redeploy capital.
spk09: 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 stays, nothing. So as those come back into accrual status through the work that we're doing with the special service or the financial impact on a go-forward basis will be a positive.
spk01: Were those non-accruals on non-accrual through the quarter?
spk09: The majority of them, except for the additional ones I mentioned in the comments, were there for the quarter.
spk01: 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?
spk09: Yeah. So out of that, the total pool that moved there, 70% of that is in some state of delinquency.
spk01: Okay. I guess the constitution of that is the majority of that the acquired loans from Broadmark and Mosaic or is it originated loans?
spk09: It is a little less than an even split. 40% of that is coming from our M&A buckets and 53% is coming from what, as Tom described, an RC loan. So it's really basically an even split.
spk01: 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 consideration that's expected?
spk09: Yeah. So it'll be broken up into three different components. The first two are the sale of the MSRs broken into the retail and non-retail, which is roughly 40% of 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 are marked at your 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 out plus a slight premium and earn out. Our expectation is that all of this gets cleared up over the next three to four months.
spk01: What's the range of proceeds just adding all that together?
spk09: Yeah, we expect that the net proceeds after financing to be somewhere between $70 and $80 million.
spk02: Thanks a lot.
spk10: Our next question is from Douglas Harder with UBS. Please proceed with your question.
spk07: Hi, this is Corey Johnson on for Doug. Historically, you've currently issued about two to three CLOs per year. I don't believe you issued any yet to date, despite the CMBS market opening up. Could you maybe explain a little bit of why
spk02: that is the case?
spk11: Yeah, Andrew, you want to touch on that? I'm obviously with the origination volume is down currently, but maybe just discuss on the overall series CLO strategy.
spk09: Yeah, so I think the drop off is just as I mentioned that bridge originations have been lower in the platform this year. As I look at our backlog in our future pipeline, I think there is a chance we bring a CLO to 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, all things we're working through in advance of that CLO. But it certainly will continue to be
spk02: a core part of our financing strategy. Great. Thank you. That was it from me. Thanks. Our
spk10: next question comes from Steven Laws with Raymond James. Please proceed with your question.
spk05: 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. What is the process or timeline as far as changing a servicer or moving that internal? And your CLOs are static. I know you talked about that and the impact that has a lot on the last call. But how would changing a servicer change your ability to either buy out loans before they deque or replace them or modify more quickly?
spk06: Adam, you want to comment on that? Yeah. Hey, this is Adam. Yeah, just make some comments around that. In terms of replacing the servicer, given that we're the directing certificate holder, we can certainly do that very easily. We just need to line up 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. We're certainly encouraging them to have a great sense of urgency to effectuate, which is really a backlog of pending resolutions. Assuming that we can get the special servicer there in terms of moving quicker, we've got half a dozen modifications that are pending effectively north of $500 million, which we think 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, pretty good technology and whatnot. But I think, again, that would be like six to nine months. So we're certainly continuing to have regular conversations with that third party special servicer. But we're also, as Tom and Andrew noted earlier, certainly exploring other alternatives to give us more flexibility as we work through the crisis here.
spk11: Yeah, and just to add to Adam's comments, 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 with a lot of experience in the transitional loan space. So that is definitely an option we're pursuing and pursuing it aggressively.
spk05: Great. And as a follow up to the previous question, regarding future CLOs and issuance, do you really think about that as new origination volume or any deal is going to be collapsed with collateral rolled in? And as you think about those structures, will you look to do manage deals? Do you feel like you get better pricing with the static nature that you have with the existing county? How do you think about how you will structure those future CLOs?
spk11: Well, historically, we, Ready Capital, if you look at the universe of this, probably what Adam, a dozen or more issuers, market peak at about 30 billion a year in 21, 22. We're the fourth largest issuer since inception. Our deals equivocally 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 one in the one percent. Yeah, even worse, or even more conservative or investor friendly. So that did afford us a pricing, you know, 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 the managed structure. But, you know, they were 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
spk06: triples. Right. And then just I was just saying just Tom, just in terms of the, you know, I think 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, the top one, I think, you know, certainly evaluating, you know, the managed structure or some hybrid structure with certainly greater greater flexibility.
spk05: Great. Appreciate the color on this. Thank you.
spk06: Thanks for your questions.
spk10: Our next question comes from Crispin Love with Piper Sandler. Please proceed with your question.
spk08: Thanks. Good morning, everyone. I'm just looking at delinquency rates on the lower middle market slide at 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?
spk11: Yeah,
spk02: Adam or Andrew? Yeah, I'm looking at that. I'm just looking at all right. Andrew, go ahead. Andrew, go ahead.
spk09: Those those numbers do include the delinquency rates from the held for sale loan. So it's inclusive of the the entire portfolio. You know, when you look at the held for sale, delinquency rates, as I said before, they're 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
spk08: quite a
spk09: bit.
spk08: OK, great. That's that's helpful. And then just following upon to the question earlier, just how do you expect that the movement of loans held for sale to impact near term net interest income and distribution earnings? And I guess just relatedly, what are your near term projections for core ROE? Andrew, it's kind of like you said that you're expected to trend closer to the 10% target, but just curious over the next couple quarters.
spk09: Yeah, so in the short term, on a net interest income standpoint, I think these this population of loans will continue to have, you know, very minimal effect, given that the majority of them, you know, are not accruing today. You know, as we move out of them, and we are working to to do so over the next three months, and that capital gets repositioned either into new originations that 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 PLOs, which we expect to have, let's call it a nine cent per quarter impact on EPS, pushes as we move to the back of this year, you know, core earnings back towards the 10% target. I think in the interim period though, while we work through those, the financial effect
spk02: will be fairly de minimis. Okay, great. And then just one
spk08: 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 data on what kind 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.
spk11: Yeah, I mean, Andrew, maybe, I'm sorry, Adam, maybe you can comment on the overall strategy with specific brokers. And I would comment though, and in terms of buyers, it wouldn't definitely not have other mortgage rates. It's more private credit funds that have raised a lot of capital around the distressed CRE space, and as well as mom and pop for these smaller broad mark assets. But Adam, maybe you can comment on that.
spk06: Yeah, sure. I mean, listen, you know, we've got a very large portfolio, you know, 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, you know, the plan is to likely go out in a bulk sale on, you know, across a few different pools. I think the, you know, the buyer for these, I think it's going to be regional folks, you know, that want to take these assets on, you know, given that they're NPL. And really, you know, come up with a new business plan to redevelop the assets. And then certainly there's going to be funds looking at these assets for, you know, some of the larger office deals where they can come in with operating partners for
spk02: development. Great. Thank you. I appreciate you all taking my questions.
spk10: Our next question comes from Matt Howlett with B Riley Securities. Please proceed with your question.
spk00: 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'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?
spk11: Yeah, I mean, there's eight food groups and the Moody's increase 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, we believe that it's rotational bottoms in sub markets, which are tied to negative supply hitting the market that the, you know, the multifamily starts were up, you know, since 2020, I think, to the big 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're down 16% in multifamily prices, we think we have another five to go. But broadly speaking, we think the bottom is sometime in the late, the later, 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 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, that's so that's so we think at the end of the day, the multifamily valuations are are floored based on the huge delta in buy versus rent. Now the average monthly payment United States now is nearly $3,000 for a medium priced home. And the average rent is a under 2000. That's a that's a 50 year high. So that that will underpin the demand for apartments in relation to a single family and also create a floor on on multifamily valuations, which is why we're highly confident in our, you know, our legacy book, because of the going in LTV of low 60s. Even with these declines, you know, there's, there's a government takeout through Fannie Freddie, and they just need some time to work through the business plans and but the valuations we think are unlike office, which is a we think a five year secular decline, multifamily is solid.
spk00: That's the way the way you explain it makes makes complete sense. 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 NPV of buying back shares here, selling loans and buying back shares that 100% upside potentially, can what can you tell me in terms of the pace of repurchases are up in April versus 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 just curious on share repurchase of that that's really come in everybody for for buying back shares?
spk11: Thanks. And you want to comment?
spk09: Yeah, so we 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. As you mentioned, the return profile on repurchasing shares is very attractive at these levels. And certainly as we as proceeds come in from, you know, sales and payoffs, we'll evaluate whether the $50 million is a, you know, a sufficient amount allocated to the purchase, you know, when we get through it all. But I do expect that repurchases assuming, you know, liquidity levels remain healthy, you know, margin risk in the portfolio remains really small. I do expect it to be a part of what we do going
spk00: forward. My two cents for what it's worth is you can, you know, put capital or somebody could work 100, you know, 100% up for, you know, 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. I mean, obviously 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 reach out now issuing five year paper, you know, eight, 9% unsecured. What can you tell me, you know, on the on the, you know, on the non secured side, maybe going to be out in the market? Is that channel open to you?
spk09: Yeah, so that the term of price and so for plus 550 on a not tax affected though. So, you know, we will be able to tax back the interest cost of this, this issuance, which will bring it down into the into the seven. I'm in terms of, you know, accessing other corporate markets, certainly see deals get done and we explore them on a continuous basis. I do think, you know, as we move forward and we evaluate the liquidity needs of the company, it'll will consider all options.
spk00: Great look
spk10: forward
spk00: to
spk10: that. Thanks, everybody. As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment while we poll for questions. Next question comes from Jade Romani with KBW. Please proceed with your question.
spk01: 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?
spk09: Yeah, so in the, the other income, the biggest driver is going to be the contingent equity right, which was offset by, you know, losses that are also included in core. So the net impact of that is zero on the, the operating side. The biggest one in there is impairment on REO, which flowed through that, through that line item, that was roughly 17 million in the quarter. There's also carry costs and REO like tax expenses, etc. that flow through there. But the main one was the, the REO impairment. So,
spk01: I guess on the 15 million of other income, I mean, in the 10 K, the description is that it includes a whole variety of stuff. Your 10 Q is not out, but origination income, change in repair and denial reserve, employee retention, credit consulting income. Are those line items expected to continue?
spk02: Origination income will continue.
spk09: So what I'll pull through there are mainly fees received from Redstone. That was down slightly down 2 million quarter per quarter. So that'll 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, you know, have to repair the SBA for that default. The reason it's there in the income line item is that when we purchased the business 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 in that line item was down 27 million quarter 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 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 item inside you know, other income absent other things that come through the business in the future really is going to be our origination income.
spk01: Okay, that's great. And then capital plans aside from a potential CLO, are you contemplating anything at this point?
spk02: We are not.
spk01: Okay, I thought there was a plan for some sort of unsecured debt or preferred, I guess the term was issued and maybe that's what you were previously referring to.
spk09: 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 as it obviously as we've moved to the back of the year, we will balance, you know, the opportunity set on the investment side with the opportunities for raising additional debt at that point. But in the short term, the liquidity forecast for the company is quite healthy.
spk02: Thanks a lot.
spk10: We have reached the end of the question and answer session. I'd now like to turn the call back over to Tom Capasi for closing comments.
spk11: Sure, appreciate everybody's time and look forward to the second quarter earnings call.
spk10: This includes today's conference, you may disconnect your lines at this time, and we thank you for your participation.
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