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Greetings, and welcome to the Ready Capital Third Quarter 2023 Earnings Call [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to the Chief Finance Officer, Andrew Ahlborn. Please go ahead.

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 third quarter 2023 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

Thanks, Andrew, and thank you all for joining the call today. The third quarter results reflect the strength of Ready Capital’s core business and short-term earnings pressure from the ongoing integration of our merger with Broadmark. Our strong relative credit metrics, increased liquidity and lower leverage position the company to grow earnings to target levels against the headwind of the unfolding recession in the CRE sector. The integration of Broadmark is progressing successfully in terms of both financial and product integration. First, portfolio repayments and liquidations. Since the merger closed, 13% of the portfolio totaling $121 million is either paid off or has been sold at or above our basis. As of September 30, the remaining $853 million portfolio of loans in REO with a blended levered yield of 6%, resulting in a portfolio yield drag of approximately 110 basis points. Currently, we have scheduled liquidations of $100 million through year-end with runoff of the remainder by the fourth quarter of 2024. Second, leverage and liquidity. The transaction reduced Ready Capital leverage from 5.1x to 3.4x versus a target of 4.0x. Although this target is lower than our historical leverage of 5.0x, the ability to raise debt capital for reinvestment will be a large driver of earnings accretion going forward. To date, we have financed 45% of the acquired assets via 2 new facilities yielding proceeds of $360 million, which were primarily used to meet existing debt maturities, including the payout of our $115 million convertible note and of $133 million of securities repo. In addition to de-risking the balance sheet, we expect go-forward incremental dollars to be used for investing purposes at cyclical high 15% to 20% ROEs. Third, cost synergies. The benefit of scale is the ability to operate the business at a lower operating expense ratio. Through September 30, we have cut 60% of the existing Broadmark fixed expense base, resulting in a 200 basis point reduction to our OpEx ratio with additional expense reduction of $4 million executed since quarter end. Finally, in October, we launched our rebrand of the Broadmark product, a small balance construction and residential finance program featuring loans from $5 million to $20 million, including development and construction financing for multifamily, build-to-rent and lot development for residential developers. These new products complement the existing construction lending program, which provides capital solutions for projects up to $75 million, highlighted primarily by multifamily and industrial. We expect full accretion of these items by the latter half of next year with a gradual ramp in earnings to or above our historical 10% target. In the quarter, while stress CRE market conditions pressured both transaction volumes and existing portfolios, Ready Capital’s origination business remained active and portfolio credit metrics are healthy. CRE loan originations totaled $463 million in the quarter, comprising Freddie Mac volume, which includes both our tax exempt affordable and small balance multifamily channels of $374 million and bridge volume of 90 million -- 90% multifamily. Profitability reflects cyclical highs with Freddie gain on sale margin averaging 100 basis points and retained yields of 18% on bridge lending. While we expect tight CRE debt market conditions to persist for the balance of ‘23 and into ‘24, we note Ready Capital’s multichannel and multiproduct offering provides a competitive advantage, particularly the acquisition of distressed bank portfolios sourced by our external manager, Waterfall. The current CRE pipeline across all CRE products totaled $740 million with $690 million committed. With current CREIT trading discount portending book value erosion from higher CECL reserves, particularly in office, Ready Capital’s strong relative credit metrics stand out. In measuring credit risk in our CRE portfolio, it’s important to bifurcate the portfolio into core direct lending and those acquired via mergers or loan pool acquisitions often purchased distressed at significant price discounts. In our originated CRE portfolio, representing 82% and $8.2 billion, our credit metrics continue to outperform the CREIT peer group. First, 60-day plus delinquencies remained low at 2.9%, with most delinquencies concentrated in a modest 5% allocation to office. Assets with risk scores of 4 or 5 also remain flat at 6%. Second, 80% of the portfolio is concentrated in the middle market multifamily, where record single-family affordability issues skew the buy versus rent metric creating demand and low under 5% vacancy rates. However, with rising multifamily cap rates up 50 basis points year-to-date to 5.8% for Green Street and negative absorption in select markets pressuring rental growth, multifamily prices are down approximately 20% from the peak with another 5% expected, which compares to 40% to 50% for office. Although our portfolio is not immune from these market pressures, we do believe it benefits from our 2021 pivot to more conservative underwriting, including 0% to 5% rent growth, low underwritten stabilized LTVs and an avoidance of negative absorption markets. For example, using our proprietary GEOtier scoring model, our exposure to the worst multifamily markets that experienced mid- to high single-digit year-to-date rent decline, Austin, Atlanta and San Francisco, is only 6% of our total portfolio. The net result, our current mark-to-market LTV is under 100%. Third, the maturity ladder. Only 2% and 29% of our multifamily bridge assets mature over the next 3 and 12 months, respectively, with the majority of maturities occurring later in ‘24, into 25. Although this provides some protection from immediate takeout risk, the under 100% mark-to-market portfolio loan-to-value and sponsor counterparty liquidity are significant mitigants to negative leverage, affording flexibility in loan extensions and modifications. For example, extensions typically feature sponsor equity contributions or repurposing of unneeded CapEx to interest reserves. Further, our solution capital program provides unitranche senior or preferred equity financing for refinancing our best sponsors and projects. Ready Capital’s historic expertise in NPL management and current liquidity from the Broadmark acquisition position us well to avoid foreclosures and losses on REO. In our acquired portfolio, where we frequently purchase impaired loans, 60-day plus delinquencies are unsurprisingly elevated at 17%. The basis for which we purchase these assets accounts for the impairment at the time of purchase and should not be an indication of further principal loss. Now an update on our Small Business Lending segment, a high ROE business unique to the commercial mortgage REIT peer group. To review, Ready Capital is one of 17 nonbank lenders under the Small Business Administration’s 7(a) program. In the quarter, we originated $129 million 7(a) loans, comprising 63% large and 37% small loans, a 6% quarter-over-quarter increase, with premiums averaging 8.3%. Ready Capital remains the largest nonbank and fourth largest overall 7(a) lender with a 3-year target to double volume to $1 billion, which would bring us to roughly 3% market share. In terms of 7(a) credit, despite the rise in prime to 850 basis points, 60-day plus delinquencies in the 7(a) portfolio remain extremely low at 1%, well below the 6% GFC peaks. The earnings book value impact of defaults in this segment are limited due to both the small equity allocation, less than 5%, and the high ROE of the business, which can sustain higher defaults and losses. In our residential mortgage business, core returns remain pressured due to lower transaction volume and margin compression. As previously discussed, we have been exploring strategic options for the platform, given the market and our core focus on CRE lending. We expect to move out of this segment over the next few quarters with proceeds reinvested in our core channels. Looking forward, while there will be near-term pressure, the company is well positioned to increase earnings and expand investment activity longer term. First, reversal of portfolio drag and NIM accretion from reinvestment of excess liquidity and balance sheet releveraging post the Broadmark transaction into cyclically high ROEs in both our direct lending and acquisition silos of over 15% versus 12% pre the first quarter of ‘22. Second, our liquidity remains elevated with $182 million of cash and $1.8 billion of unencumbered assets. Finally, our conservative debt profile with total and recourse leverage of 3.4x and 0.9x, respectively. This collectively provides significant protection from market volatility as well as the ability to raise incremental debt capital to drive investment activity. With that, I’ll turn it over to Andrew.

Thanks, Tom. Quarterly GAAP and distributable earnings per common share were $0.25 and $0.28, respectively. Distributable earnings of $52.2 million equate to an 8% return on average stockholders’ equity. Pressure on core earnings related to the Broadmark transaction was approximately 220 basis points and driven by a reduction in portfolio yield due to a higher percentage of nonaccrual assets and the deleveraging of the balance sheet. Interest income increased $17.7 million to $250.6 million due to the inclusion of the Broadmark portfolio for a full quarter and a 25 basis point increase in the weighted average coupon in the portfolio to 9%. Interest expense increased $19.1 million to $191.6 million related to both an increase in debt balances from the financing of Broadmark assets and slightly higher funding costs, which averaged 7.5%. The levered yield in the portfolio declined to 10.9% as Broadmark’s 7% portfolio yield weighed on the average. We expect levered yields to increase to historical levels as we cycle out of the loans acquired and into new production. The provision for loan losses totaled a recovery of $12.2 million and was entirely attributable to movements in the general loans under performing loan book. We did not see any material movement in expected losses on our impaired or nonaccrual assets. Realized gains decreased $9.5 million quarter-over-quarter, primarily due to lower amounts realized in the settlement of derivatives. Core realized gains from the sale of loans in our SBA and Freddie Mac business were slightly lower due to a decrease in sale activity and lower 7(a) premiums, which averaged 8.3% in the quarter. Unrealized gains of $80 million were driven by a $2.6 million increase in our residential mortgage servicing rights and the reversal of $13 million of unrealized losses previously recognized on CMBS loans that were transferred from available for sale to held for investment. These reversals were partially offset by the inclusion of new loan loss provisions. The operating expense ratio of the business declined 130 basis points to 5.7%. Included in the OpEx this quarter were several onetime items, including a $2 million noncash impairment related to a Mosaic REO, increased professional fees related to the processing of employee retention credit revenue and $2.6 million of servicing advances payable upon the refinancing of our fourth CRE CLO. On the balance sheet, book value is $14.42 compared to $14.52 on June 30. The change is due to an adjustment of the bargain purchase gain related to the Broadmark transaction related to the valuation and pending liquidation of 3 assets. Leverage continues to be at historic lows with recourse leverage at 0.9x and total leverage at 3.4x. In the capital markets, we closed our third securitization of SBA 7(a) loans. The $186 million deal had a 71% advance rate with sold bonds having a cost of silver plus 325 basis points. With that, we will open the line for questions.

[Operator Instructions] Our first question is from Sarah Barcomb of BTIG.

So it was another quarter of strong volumes for the SBA segment. I was curious if you could talk a bit more about the competitive set in that market and your outlook for growth in that portfolio over the coming few quarters?

Yes. The -- just to refresh, the SBA 7(a) program is basically for banks and that there’s a handful of nonbanks. Most recently, the government allowed the approval of 3 new ones, most of which are community development associations, smaller mission-driven lenders. But the market as a whole runs at about $25 billion to $30 billion of originations. And Ready Cap has emerged as the largest nonbank and the fourth largest lender. We’re shooting for $0.5 billion this year. The goal -- right now, the banks just in terms -- to answer your question, the banks are definitely retrenching as part of the whole issues around bank deposit liquidity, et cetera. So we’re seeing a lot of resumes in terms of loan officers, which we’re capitalizing on. And then with respect to the nonbanks, there’s really not a lot of scalable lenders. So what we’re doing -- so we’re going to -- so the 2 trends are: one, we’re going to take market share from banks in many ways by acquiring groups or blocks of loan officers in specific regions that specialize in verticals, for example, daycare and tax accountants. And so that will be part of our market share growth. The second area is the implementation of our Fintech iBusiness, which is basically targeting the smaller categories, the micro and the small loan segments of the 7(a) program, which rely on credit scoring methodologies, which are very much aligned with their business, which is the unsecured lending non-SBA and unsecured lending. So they’re utilizing that tech. So a long-winded way of saying through the expansion of our small loan iBusiness program into the small loan program, which banks don’t really engage in at all and bank market share, our target is to double volume over the next 3 years to $1 billion, which would represent about a 3% market share.

Okay. Great. And you’ve talked about your targeted growth there. And you’re producing some pretty strong gains on sales as well. Should we expect those volumes to stay pretty consistent in terms of sales and the ROEs there?

Yes. I think you’re referring to the gain on sale for the 75% participation in the SBA 7(a) loan. Yes, those have -- in the current rate environment with prime up, you’re now starting to see a reemergence of the bank liquidity bid. That’s the biggest buyer of the 7(a) loans historically. The premiums, what did it average this quarter, Andrew?

They’re around 8.5%.

8.5%, yes. So that’s -- the low end during the GFC got as low as, call it, 7% and the high ends are like 15%. So we’re kind of on the low end, and we expect that to trend up as bank liquidity bid improves over the succeeding quarters, more like a 10% to 11%, which is the normalized premium rate.

The next question is from Jade Rahmani of KBW.

There’s been some news this week about Freddie Mac and a multifamily broker, Meridian, and some issues with loan documentation and other such things. Can you talk to what’s going on with GSE multifamily, if you’re hearing any feedback from Freddie Mac that would change your originations outlook there and any of your processes? And also, do -- have you historically worked with brokers on the loan origination side for Freddie Mac?

Adam, you want to add -- you’ve basically been on top of that issue. You want to touch on that?

Yes, sure. So on the agency side, certainly noise in the market regarding certain brokers that may have engaged in fraudulent activity. And I think given the market dynamic where sponsors are certainly trying to refinance their loans and slowdown in activity. I think being cautious of the broker market, I think, is certainly at the forefront and certainly something that the agencies are making sure that lenders are aware. So from a process standpoint, what we’re doing differently today given this noise in the market, we are doing things such as obtaining source documents directly from the sponsors. I think historically, brokers have provided the source documents themselves. And so we’re getting directly from the sponsorships, making sure that when we go to property visits that the sponsors are touring with us, we’re getting into a significant amount of the units to confirm that they’re occupied and that those units kind of match what the rent rolls are saying. In terms of ordering third-party reports, certainly staying on top of that, making sure that sponsors are not involved during the inspection process for the third-party inspectors and also that the brokers keep their distance. I do expect that this trend of seeing kind of additional fraudulent activity in the market is going to continue given this environment. I’d say on the agency side, probably 90% plus of our originations comes from the broker community. Certainly, there are some very strong solid reputable brokers out there that we do business with. But certainly, there are some that we have to be cautious of.

So does this change your forward outlook? I know the third quarter had a fairly strong quarter with Freddie Mac. Does it change your forward originations outlook?

Yes. No. I mean, I think overall, the agency volume is down probably around 30% versus last year. Where you see our uptick this year is more on our tax-exempt affordable business. Those guys are expected to originate record volumes significantly over where they originated last year. Our Freddie Mac small balance lending, that is certainly slow compared to prior years. We do expect as rates move down a bit here that going into -- certainly, the Q4 today, we’re certainly building a pretty sizable portfolio, which would close in Q1. So I think 2024 outlook for the Freddie SBL I think is strong and expectations that we’ll -- we should originate more than we did this year. And then continued growth on the tax exempt to 4%.

So that sounds like you do not expect this Freddie Mac issue to curtail or reduce originations?

That’s right. That’s right. Yes. I don’t think the noise with these brokers, I don’t think is going to slow down our business. So it’s just going to cause us to really be extra cautious as we underwrite these transactions and deal with the brokers. But yes, I don’t expect it to slow down volume at all.

The next question is from Henry Coffey of Wedbush.

Two things. If I heard you correctly, you’re talking about potentially selling the mortgage -- residential mortgage business?

Andrew, do you want to touch on that, mortgage and...

That’s right. As we -- yes, I just wanted to touch...

I’m sorry. Go on.

Yes. Just on the residential mortgage banking business, for quite some time, we’ve talked about a strategy of simplifying the REIT to be more purely focused on the lower to middle market CRE space. Over the last couple of months and quarters, we have taken time to explore a variety of strategic options for either downsizing or moving that business. And I think we are getting close to the conclusion of that process and expect that as we move into the new year, we repositioned that equity into our core channels.

There is actually demand for those assets, though it’s usually at a fairly discounted price, perhaps at or below book value. Would it be simpler just to liquidate it or -- and then let the brokers find their own spots? Or what are your thoughts about how that would kind of wind down over the next few quarters?

Well, the large -- maybe you could touch on that, but just a comment on how the large percentage of the net equity invested in the business is a very stable and strong MSR portfolio.

And that you would sell? That has a nice value for it, okay?

Yes. And plus it’s located, concentrated in Louisiana, Alabama, Mississipi area, which has a lower convexity risk than, let’s say, a California MSR portfolio. So they tend to trade cheaper than -- the more demand, especially in the MSR market, what we’re seeing now, which you could best be described as orderly despite the obvious turmoil in the nonbank mortgage space. So we think we’re pretty comfortable with the ability to monetize the existing MSR book at or near its current value.

And then origination [indiscernible] sales or just moves to liquidates?

Yes, Henry, that’s what I can say. I think we firmly believe there is platform value in the business beyond the MSR. When you look at how the market share that business has in Louisiana, when you look at how well it’s run, when you look at profitability outside of disservicing across cycles, certainly, we think there is demand and value for the business just beyond the MSR asset. So I do not suspect this is an exercise in selling MSRs and letting everything else unwinds and do believe we’ll be able to recapture some of the value that’s been created on the origination side as well.

Yes, just to add to that. This is a very -- it’s a solid management team, 25 years’ experience, heavy retail and purchase percentage. And we believe the platform as a result will be a very attractive to the [indiscernible], especially given the linkage of recapture that they’ve been able to produce over the last 2 decades.

We’ve seen several acquisitions, mainly by one prominent public company of retail platform. Number two, completely unrelated in the construction, development, fixed and slip, whatever you want to call it, that whole subsection of the business. What are you seeing in terms of new demand? And how are both Mosaic and Broad fitting into that?

Yes, if you want to comment on kind of the rollout of the residential finance and small balance program in conjunction with the Broadmark acquisition and what you’re seeing there for demand?

Yes. I mean, certainly, demand remained strong. Still the supply/demand is certainly in balance. Our team, since we announced the product, which is really a consolidation to a single high yield, what we call the residential construction finance product, the demand has been significant. I think folks have a similar view to us that building ground up today, specifically on projects such as multifamily and other components of the residential space. In a market -- a challenging market like today, I think as these projects stabilize in 2 to 3 years, we think that the demand -- and that the demand is going to be significant, especially in the multifamily side. We’re also able to lock in higher rates today, given pullback of banks, which is certainly attractive. And lending in today’s market, we’re certainly going to come out, like I mentioned before, these projects are going to stabilize and what we think is going to be an improving -- much improved market in 2 to 3 years.

If you look at that overall equation, is most of the demand per se the ground up building or fix and flip? Or how is it...

Yes, I mean, it’s really a mixed bag. I mean, I think our focus is really going to be more on the multifamily side. We think there’s a real opportunity in the market to really -- especially in the small balance space to really take a project from multifamily projects from ground up, then convert that debt into a bridge product and then convert it again into our agency product. So really capturing 3 different products and keeping that sponsor with the firm is something that we’re focused on. And we’ll certainly take a look at select build-to-rent projects. I think fix and flip definitely less so, but really more focused on the multifamily rental side.

And then is the pricing on those loans fixed or variable?

The pricing on those loans is variable.

[Operator Instructions] Our next question is from Matt Howlett of B. Riley Securities.

Just on capital allocation, maybe you could just go over it again. I know when you turn over the capital from Broadmark, you have obviously a range of options. You’re more of a specialty funding this model than your REIT. When I look at the options versus just originations and your core product combined with those acquisitions from distressed loans and/or buying back stock at a discount and/or buying another origination platform. Can you just go over what you think how the capital allocation will change over the -- let’s call it next year? You talked I think the last call about buying maybe an agency platform, something from the banks. And you didn’t look like you bought back any stock this quarter. I mean, with the discount here, you bought back last stock in June at 10.82%. How willing are you to really relever the balance sheet via buybacks here?

I’ll let Andrew kind of tackle that. But just at a high level, what we do is we look at the -- through our liquidity and investment committee, we look at the available capital for that month and the areas where we can deploy the capital at the highest ROE. So there’s a number of -- you’ve touched on a number of the silos. One I’ll point out is in the current distressed environment, there are definitely opportunities to provide what we call solutions capital to our multifamily borrowers and in the form of unitranche or preferred to enable extensions, which benefits us 2 ways. One is the incremental capital being deployed at 18% to 20% retained yield. And it obviously is accretive to the credit protection. So that’s one area, and we’re actually doing that also with third parties where we no sponsors and are in touch with the multifamily market where we can execute there. The other side is the core -- number two is supporting the core franchise around direct lending in the various silos that we have from the construction all the way through to the larger balance multifamily bridge. And there, we’re seeing retained yields in the, call it, mid- to upper teens. And the third is the distressed acquisitions where we’re just now starting to see some of the bank portfolios come to market. I was -- I think a lot of surprise given what happened in March that we didn’t see a lot more. But we’re definitely seeing opportunities there also with nonbank lenders that are liquidating portfolios. And there we’re bidding those to the kind of that upper teens as well. So -- and then the M&A, obviously, there’s definitely some M&A opportunities, which we look at from the standpoint of accretion in our core business, for example, additional licenses. And with those 4 silos, we then compare that to the ROE on buybacks. And right now, we’re seeing the unique aspect of where Ready Capital stands today is due to the acquisition of an unlevered Broadmark portfolio. Our leverage is now down from 5x to 3.4x, and we now have earnings drag from the low portfolio yield as well as being underlevered from a recourse debt standpoint. So those -- so what we’re doing is we’re taking -- we have a very strong liquidity position as a result, and we’re looking at all 4 of those silos in relation to buybacks to determine the best allocation of capital. But I think the punchline is that the ROEs that we’re seeing across the platform are -- will generate significant NIM accretion in large part due to the fact that they’re roughly 400 or 500 basis points higher in ROE than where we were pre the first quarter of ‘22. It’s a long way to answer your question, but that’s kind of how we’re thinking about it.

Thank you for explaining. It’s much more clear now. I mean, the silos and the areas you have put the capital -- areas where you can put capital to work, I mean, those ROEs, no one -- I mean, those doses are terrific. I guess, I mean, they all look attractive. I guess I just want to zero on 1 and that would be the stress third-party acquisition from banks. You just said you just started seeing it. I mean, our channel checks suggest the banks will be selling probably after the year-end, there all probably. Do you have expertise to buy every type of commercial loan? Or is there one that you want to focus on? It just sounds like there’s going to be ways of that going forward and the pricing is going to be very attractive?

Yes. I mean, most of what we -- I mean, this is the expertise of the external manager Waterfall, which along with Ready Capital was one of the largest buyers of small balance commercial loans from banks after the GFC. We bought about $5 billion, $6 billion, worked out about 5,000 loans. But our expertise is we stick to our knitting, and our knitting is lower middle market commercial loans, commercial real estate loans. Do we have the ability to buy other asset classes? Yes. But I think what we’re going to be focused on is more of these small balance pools that will be sold by banks with a bias towards multi and less opportunistic purchase, for example, of office. So that’s where we historically been focused and where we’ll be focused going forward.

And just the last question. You guys have always been creative with M&A. It seems like there’s more platforms out there today than there has been in a while. I mean, would you look at with your excess capital, which is significant, nobody has the leverage -- the low leverage that you have. I mean, would you look at possibly buying one of these publicly traded REITs or something else to really put the money to work faster?

I’m not sure on the publicly trade side, but there are definitely businesses embedded in banks and nonbanks that have agency licenses, which would dramatically expand our origination capabilities, especially given that we’re one of the leading bridge lenders in the country to that lower middle market, that Fannie and Freddie, for example, traffic in. So yes, so I think they definitely gives us with the ability to do with their high yield or other preferred to relever the equity base, it does give us some buying power for an acquisition along those lines, for which we’re currently looking at opportunities.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I’d like to turn the call back to Tom Capasse for closing remarks.

Again, we appreciate everybody’s time. And again, I think we highlighted in this quarter the temporary drag on earnings due to the Broadmark acquisition, which we’re highly confident via deployment of capital and releveraging will result in accretion of at least $0.26 a share for that aspect to achieve our 10% core earnings target. So with that, we appreciate everybody’s time, and we don’t speak and which we won’t. Have a good holiday.