Rick Herbst – Chief Financial Officer Tom Capasse – Chief Executive Officer.

Steve Delaney – JMP Securities Jade Rahmani – KBW Tim Hayes – B. Riley FBR Stephen Laws – Raymond James Crispin Love – Sandler O’Neill Ben Zucker – BTIG Scott Valentin – Compass Point Christopher Nolan – Ladenburg Thalmann.

Greetings, and welcome to Ready Capital Corporation Third Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rick Herbst, Chief Financial Officer. Please go ahead..

Thank you, operator, and good morning and thanks to those of you on the call for joining us this morning. 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 2018 earnings release and our supplemental information.

By now everyone should have access to our third quarter 2018 earnings release and the supplemental information. Both can be found in the Investors section of the Ready Capital website. I will now turn the call over to Tom Capasse, our Chief Executive Officer..

Thanks, Rick, and good morning. Before discussing the quarterly financial results, I’d like to take a few minutes to discuss in greater detail the transaction we announced last evening. Specifically, we are extremely excited to have signed a definitive merger agreement with commercial mortgage REIT, Owens Realty Mortgage Inc.

Owens is a publicly listed and established specialty finance REIT that focuses on originating small balance and middle market commercial real estate loans, very similar to our own transitional loan business. We have also posted a summary transaction presentation on the Investor section of the Ready Capital website.

This will be a stock-for-stock merger. We are acquiring the assets of Owens at a discount to what we believe their fair value, fair market value. As a result, we expect the transaction to be accretive to our 2019 results. We anticipate this transaction will close by the end of the first quarter of 2019, and we will manage the combined company.

Additionally, Owens owns hard assets that we expect to dispose of through sale. We anticipate we will redeploy the proceeds from the sale of those real estate assets and their principal proceeds from their loans into Ready Capital’s existing investment strategy. We believe this transaction will benefit our shareholders in many ways.

First, it is an extremely cost efficient way to raise capital, particularly when compared to a stock offering, which will need to be executed at a significant discount to book value. In this case, we believe the initial book value dilution, if any, will be nominal.

Second, this will be accretive to 2019 earnings per share and recapture the book value dilution within 1 year. Third, we have underwritten Owens’ real estate asset and estimate their fair value based on current market condition well in excess of the book value of this asset as of September 30, 2018.

Based on the range of values of these assets, we believe this transaction will result in initial adjusted tangible book value dilution of 0% to 1%.

Our estimated range of values based on our underwriting efforts, our assessment of the fair value this asset under current market condition, including a review of third parties valuation and appraisals, assessment of original loans filed, physical inspection of real estate and review of transactions with key employees.

Fourth, the shares issued will increase our float nearly 50%, which we expect will improve the liquidity of the shares and reduce the impact of technical dynamics given our relatively low current trading volume. Fifth, commercial mortgage REITs with larger market cap tend to be valued higher on a price-to-book basis.

Sixth, the transaction will provide growth capital to expand our platform and execute our business plan. In addition, it will allow us to raise incremental debt capital to further increase our scale. Finally, we expect the increased scale will be cost-effective, resulting in reduced OpEx ratios from their current level.

We look forward to working with the Owens team during this transition, and we believe this is a classic win-win situation where shareholders of both companies will benefit. Now before I comment on quarterly financial results, I’d like to touch on the name change.

As you all know, we rebranded at the corporate level to Ready Capital Corporation last month as part of our strategy to further enhance shareholder value. The makeover brings greater exposure to our Ready Capital lending businesses, enabling us to unify and simplify our marketing to enhance growth across all of our platform.

We are well positioned to continue to develop the Ready Capital franchise as a leader in mortgage finance. Now I’ll turn to the third quarter financial results.

For the third consecutive quarter, we exceeded an 11% return on equity, ahead of our targeted 10% given the steady earnings contribution from our small balance commercial origination franchise with returns enhanced with output from our acquisitions business.

The results this quarter further support our operating thesis that having a multipronged platform provides greater earnings diversity and, thus, consistency compared to single strategy lenders. Strong returns in one segment can offset a softening in another.

For example, increases in our conventional loan origination volume and gains on sales of acquired assets positively impacted results this quarter. These were partially offset by reduced gains of small business administration and Freddie Mac loan sales.

We continue to believe small balance commercial space is an underserved market niche, a dynamic that continues to be reflected in our results, including some of the following highlights from the third quarter. First, GAAP earnings were $17.6 million or $0.53 per share, representing a GAAP ROE of 12.4%.

On a core basis, we earned $0.48 per share or an ROE of 11.3%. Through the first three quarters of this year, our cumulative GAAP ROE is 12.3% and core ROE is 11.2%. Secondly, our ability to originate and acquire new SBC assets continues to be a strength of our company.

New asset additions were $429 million, the second highest quarter since we became a public company although off a bit from last quarter. We originated $342 million of new loans in the quarter and acquired another $86 million of loans. In addition, we originated $125 million of new loans in October.

Now included in the acquired loans was an inaugural purchase of $10 million subordinate interest in the securitization of conduit small balance loans, those between $5 million and $30 million, originated on a forward-flow basis with a leading regional bank.

This represents an additional liquidity channel for Ready Capital and underscores the key depreciating factor in our platform, investment capacity that exceeds our liquidity.

This is a stark contrast with other commercial mortgage REITs space focused exclusively on large balance short-term transitional lending where intense competition has resulted in reinvestment of increased prepayments at compressed margins. Third, pipelines of both segments are strong totaling nearly $500 million in new SBC and SBA loans.

On the acquisitions side, the pipeline is over $216 million as we continue to see numerous accretive opportunities to collapse legacy securitization of seasoned performing loans and other one-off transactions.

Of note in our SBA business this quarter, we hired a team in the Pacific Northwest, which sourced approximately $85 million of small business administration loans in the prior 12 months. Fourth, since the beginning of the year, our adjusted book value increased $0.40 to $17.08.

This underscores another differentiating factor for Ready Capital versus the broader mortgage REIT universe, book value stability in a volatile rate environment. This is due to the fact that only 7% of our assets are subject to mark-to-market pricing risks.

Our taxable REIT subsidiary structure allows earnings retention and 74% of our portfolio is floating rate match funded and is therefore not subject to interest rate risk.

Further, the majority of our mark-to-market assets are mortgage servicing rights in our residential mortgage segment, which increased in value again this quarter and we would expect to continue to do so in a rising rate environment. Lastly, Ready Capital’s access to the securitized debt markets remains strong.

Earlier this week, we priced a legacy commercial mortgage-backed securities transaction. This transaction had an advance rate of 83% with proceeds of $217 million with a current coupon of 4.7%, which is 150 basis points over swap. Ready Capital now completed 18 securitizations totaling $3.4 billion since 2011.

This transaction highlights a niche in our acquisition business in collapsing legacy securitization more common in the residential market. Let me now offer a few relevant observations on the small balance commercial property markets, which continue to show strength.

Trends in the SBC market continue to track the housing market, prices of which are highly correlated. As with the housing market, tighter post-crisis registration reduced bank lending for small balance construction – small balance commercial construction finance, curtailing supply.

Meanwhile, demand from SBC apartment dwellers and small business occupants increased as the business cycle turned. This is reflected in 32 consecutive quarters of positive SBC net absorption through the third quarter and a 4.3% historic low vacancy rate. The results are a major credit positive for SBC lending.

Record year-to-date annualized rent increases of 4% to 10% with a big 6% surprise in retail, which bucks the negative large balance commercial real estate trend and highlights the experiential nature of SBC retail.

Also a 6.4% year-over-year gain in SBC property prices through July, marking the full recovery since the crisis peak, which is one and four years behind the housing and large balance CRE markets, respectively.

As with housing, we expect a departure from the traditional small balance commercial oversupply-driven correction in prices, as supply scarcity overtly suppresses demand, slowing the rate of price appreciation but avoiding a material cyclical decline in prices.

Against this backdrop, small balance commercial originations excluding small business administration loans increased 13% to $57 billion with full year projections exceeding $200 billion for the fourth consecutive year. The market remains highly fragmented with the top 15 lenders accounting for just 19% of origination.

To put all this in perspective, we have a current market share of under 0.5% with a longer-term goal of 1%. Given the size of the market, we believe we can grow our new loan origination volumes without compromising our strong credit standards.

As I mentioned on last quarter’s call, the Freddie Mac small balance multi-family experienced decline in new loan applications starting in the middle of the second quarter when Freddie increased rates 60 basis points. This resulted in a $90 million or 56% reduction in new Freddie loans this quarter.

New loan applications did pick up when Freddie subsequently reduced rates 40 basis points and our Freddie pipeline has grown to $84 million as of October 31, up from $46 million at the end of July.

On the positive side, our conventional fixed rate product became much more competitive with Freddie, and we had record originations this quarter of $125 million, up $56 million or 80% from the previous quarter. Our small business administration 7A loan originations topped $50 million this quarter for the first time in our history.

While our pipeline remains strong, it is down a bit from last quarter and the overall SBA number has softened slightly as the elections got closer. In addition, we did see a slight decline in sales premium starting this summer but we’re announcing those premiums have bottomed and are starting to rebound.

I’ll now hand it off to Rick to discuss our financial results..

Thanks, Tom. Before hitting the highlights on some of the slides included in the supplemental information deck, I’d like to discuss a few of the income statement items for the quarter. As Tom mentioned, we continue to benefit from our diverse platform. As you review our quarterly results, there are a few items I’d like to highlight.

On the positive side, we continue to benefit from returns on quality assets. This quarter, we recorded a $3.4 million positive mark on a bond that we sold in October. This was partially offset by reduced gains on sales in our Freddie and small business administration businesses.

In the Freddie segment, income generated from gains on sale and creation of mortgage servicing rights were down about $2.4 million from last quarter. As Tom mentioned, new Freddie loan volumes were down 56% this quarter, though our pipeline is now back in a growth loan. Business products lower volumes had an immediate impact on our bottom line.

Offsetting this were the increased conventional originations, which will have a positive impact on our bottom line going forward. Slide 3 depicts some summary highlights for the third quarter 2018. We continue to be pleased with our financial results and the composition of our balance sheet.

Our adjusted book value per share is now $17.08, up $0.40 since the beginning of the year. Growing our book value is an important component of our ability to maximize shareholder value. Between originations and acquisitions, we added $429 million of new assets in the quarter, the second highest in our two years as a public company.

On Slide 4, our levered yields continue to be strong with a 18.6 levered yield all in. While slightly lower than last quarter, this return continues to average about 300 basis points higher than last year, reflecting the increased earnings capacity as a result of deploying the proceeds of our corporate debt offering.

Slide 5 summarizes our loan originations over the previous five quarters and shows solid volumes in each business line with the exception of the Freddie business we mentioned earlier. In addition, we acquired $86 million of loans during the quarter. Slide 7 covers the activities of the originations segment.

The gross levered yield was down a bit this quarter due to lower leverage in the segment during the quarter. Credit performance remains outstanding with nominal delinquencies. Slide 8 summarizes our small business administration segment. The gross levered yield was again over 30% this quarter.

As we mentioned earlier and last quarter, we did see some softening in the premiums, which averaged 9.8% this quarter as compared to 11% last quarter. Our average coupon in SBA loans rose again for the third quarter in a row as these adjustable rate loans reset supporting strong levered returns here.

Slide 9 shows some summary information for the acquired portfolio. The returns in this segment were helped with the asset sale I mentioned and continued strong return from the joint venture investment. In the last three quarters, we’ve acquired almost $500 million of assets and have generated accretive risk-adjusted returns.

The pipeline here remains strong, and we will selectively acquire more assets as liquidity permits. Slide 10 summarizes our residential mortgage business. Volumes were down less than 4% from the third quarter of last year, much better than the MBA average.

This is due to 80% of the business related to new home purchases rather than refinancing of existing loans, which are more sensitive to interest rate increases. We retained servicing rights on new loans, and the value of the servicing rights portfolio continues to grow.

As we’ve said in the past, the value of servicing rights generally increases in a rising rate environment. Slide 11 is an update to the summary of the securitizations we’ve done within Ready Capital and does not include the one we repriced earlier this week.

The new originated product continues to perform well from a credit perspective with nominal delinquencies. Slide 12 provides information without interest rate sensitivity of our portfolio.

The positive impact from rising rates was down a bit this quarter because we do have an inventory of fixed rate loan acquisitions, which were funded by variable rate warehouse debt as September 30.

The majority of these assets were included in the securitization I just mentioned, and they are now match funded and no longer subject to interest rate risk. Slide 14 summarizes our capital stack as of September 30.

Our goal is to continue to minimize liquidity risk by converting recourse mark-to-market warehouse debt into match funded securitized debt. The warehouse debt is a bit higher at quarter end this time, but a portion of the debt was converted to securitized debt as a result of that securitization we just faced.

The next few slides are similar to those presented in previous quarters and reflect the diversity of our loan pool and composition of our capital structure with various liquidity sources. Now I’ll turn it back over to Tom for some final thoughts before we take questions..

We’ve now completed our second year as a public company and we plan to build on our success as we continue to grow our business under the Ready Capital name. We thank our team for their ongoing efforts and our shareholders for your continued confidence in our company. Operator, we would now like to open up the line for questions..

[Operator Instructions] Our first question comes from the line of Steve Delaney from JMP Securities. Please proceed with your questions..

Good morning and congratulations on the quarter and also on your merger. Tom, we noticed the Freddie Mac volumes right off the bat, so I appreciate the color you provided on that.

Seems over in both their small balance and their regular programs that they often get crossways in the market in terms of their view towards being aggressive, whether it’s in pricing or what have you. And we’re actually saw – in the larger market, we saw Freddie being more competitive with Fannie in the third quarter.

Given that point, obviously, you’ve mentioned before that you would consider pursuing a Fannie Mae small balance license.

Can you give us an update on any progress there or whether that is still in the plans?.

Yes. Thanks, Steve. We’re continuing to look at things and evaluate the various licenses but nothing specific to report today..

Okay.

And you mentioned Freddie, do you feel that Freddie is back with pricing that is competitive, that, that program will be on solid footing going forward for the next couple quarters until you can get a Fannie license, as far as just dealing with the multi-family opportunities?.

Yes. No, and I’ve seen this over the years between the two of them even on the Ready side that there was – I think some part of what the Freddie hype was in part a catch-up on their – on where rates are moving and their senior execution on the pass-throughs that are used to finance the sales of the small balance multi-family pools.

And the other part of it was the competition with Fannie reducing their rates. So it’s a little bit of both. I think they’re – we’re in period it seems now where the pricing has been more normalized between the two, so we expect the volume to continue to increase over the next quarter or two..

Great. And just a couple quick things on Owens. As you know, we covered that little company.

And my first question is do you envision maintaining any kind of a regional office out there in the Bay Area?.

We currently don’t have a presence there. We are definitely continuing to evaluate working with the team and establishing an office there..

So I would assume that anything that you maintain going forward would be production-oriented and things – all be administrative and servicing asset management, will that all transition to New York or Dallas as early as possible?.

Well, we haven’t – just to be clear, we haven’t made a determination at this point to take on the team, which we’re very impressed in terms of credit underwriting. But in – conceptually, if we did, it would be a loan production office..

Got it, okay. And the REO was $68 million in June. I see in your deck $20 million, maybe plus in terms of potential gains. I’m curious if realizing those gains is going to require material CapEx or further investment, and I’m specifically thinking about the Lake Tahoe property..

No. The – referring to Zalanta, those are primarily completed projects without much additional CapEx required. It’s more sales of units or leasing and retail property, so we don’t expect any material additional investment in the REO..

Okay.

So you’re going to be in the real estate sales business, not the real estate development business, it sounds like?.

It’s correct. That being said, recall that Ready Capital and its predecessor private fund, Waterfall, bought $5 billion of distressed small balance property just like this. Very complex, very quirky in terms of their exit strategy so we have a very strong team.

Roughly our asset management team is probably about 25, 30 people with really strong wrapped technology around it. So we’re – as part of our diligence, we spent a lot of time looking at the projects and coming up with either confirmation of the existing exit strategy or maybe some enhancements to that.

But in short, we’re very comfortable with management of the REO book..

Great. Thank you for the comments..

Our next question comes from the line of Jade Rahmani from KBW. Please proceed with your questions..

Thanks very much. Just sticking with the merger.

What’s the magnitude of transaction costs and friction costs as a function of the asset sales that you expect?.

It’ll be disclosed in the proxy statement. I’m not sure we can talk about it now, but it is – those transaction costs are factored into our – the potential dilution where we said max, we think it’ll be at most 1%, hopefully a little bit less than that but those transaction costs are factored into it..

Okay.

What’s the magnitude of assets that you plan to sell? Is it beyond just the REO?.

We would plan to sell the REO as quickly as possible, recognizing it’ll take a little while particularly with the condo units that Tom mentioned. The loans are fairly short-duration loans, kind of average maybe duration of about 1 year, so we would expect those to pay down.

And then depending if we are able to retain the loan origination team there, that would replenish those or that capital would be diverted into our own loan portfolio and our own originations..

In terms of liquidating the REO, is it reasonable to expect like a 1.5 year timeframe?.

I think, yes, 1.5 to two years on the back end, hopefully. Yes, that’s the range we’re talking about..

What’s the magnitude of earnings accretion that’s reasonable? And does that factor in carrying cost of the REO?.

It does. The earnings accretion, we expect to earn back the minimal dilution within 1 year. So you can do the math there. And then going forward, potentially it goes beyond that as we dispose of the REO and redeploy it into higher-yielding assets..

And the – when you say accretive, what is that relative to? Is that relative to your internal forecast for 2019?.

Yes. Correct..

Okay. Just in terms of the overall environment, I’m not sure if you have a strong view about the impact of additional Federal Reserve interest rate increases.

But do you think that additional interest rate increases could start to cause increasing credit deterioration in commercial real estate?.

Well, in terms of the large balance market, we see – our view is you’re going to see probably a pricing contraction of between 5% and 15% once the, what we think will be a mild recession is triggered by where we are in terms of the rate cycle.

But I wanted to just underscore that the small balance commercial market, which is about 15% of its total $4 trillion of commercial real estate debt is fundamentally attached to the housing market in terms of correlation of prices and dynamics.

And so we’re about – and then finding that is below $5 million in appraised value, that market is about three years, four years behind in the cycle.

And it’s suffering the same way as housing is suffering from a dramatic under supply of properties as reflected in record rent increases over the last year of 4% to 10% and property price appreciation of, I think it was around 6%.

So again just to – that trend, very similar to what you’re seeing in the housing market with undersupply causing a secular increase in prices, we believe that the small balance market will be buffered and have a much lower beta to a recession than what you’re going to see with the large balance market..

On the large balance side, the 5% to 15%, is that referring to declines in commercial real estate prices? And over what time period do you expect that to play out?.

5%, 15% when recession hits, that could happen over a period of 12 to 24 months. You look at some of the large firms that are steeped in credit research, you’ll see that that’s not out of consensus. But that’s our view in terms of the large balance market.

And we would expect a contraction of maybe 0 to 5% in the small balance market and 2% to 5% in housing..

The decline in CRE prices, does that create acquisition opportunities? And would you fund those primarily through the small balance space?.

We look at – when we look at acquisitions, we do look at somewhat larger, but still in the midcap space, maybe up to $50 million. But yes, that definitely will create a lot of opportunities. In particular, it’s kind of like the BDC in the leveraged loan market, which we think is in a bit of a mini bubble in terms of credit.

You’re going to see a lot of private real estate funds that we see are doing very aggressive transitional lending that some of our credit underwriters call bridges to nowhere that we think will present acquisition opportunities when the inevitable correction occurs..

In terms of the correlation to housing, we are seeing a slowdown in home sales and homebuilders potentially having to offer increased selling concessions.

Does – have you seen any spillover effects from a softer housing market into your asset class?.

You’re definitely seeing – it’s similar but different. The regulations that were passed after the crisis really targeted community banks and HVCRE, the high-value commercial real estate loans, and squarely in that was acquisition or construction finance for small balance commercial properties.

As a result of that, and I don’t have the numbers in front of me, but the new deliveries have been running at like 25% of the pre-crisis highs. And meanwhile, demand has been increasing from small businesses and apartment dwellers. So you’ve had 32 consecutive quarters of net positive absorption in the small balance commercial market.

And so while the rising rates will affect maybe refi and acquisition – to some extent acquisition demand, that fundamental factor is such that you’ll see prices slow down to let’s say from 6% to down to maybe low single digits. We think the same thing is going to happen in housing.

And so yes, so there’ll be the more of a correction in terms of a slowdown in prices rather than an actual decline – a significant decline in prices at this stage of the cycle..

Jade, just one quick follow-up to your earlier question on the accretion, just to help you out a little bit. If you look at their balance sheet, they’re very, very under levered.

We would anticipate that we would move our loans to our financing facilities, which have higher advance rates and lower cost of debt and then the redeployment of those proceeds will contribute to that accretion..

Our next question comes from the line of Tim Hayes from B. Riley FBR. Pleas proceed with your question..

Hey good morning guys, and thanks for taking my questions. Just a couple on the earnings accretion. I’m sure the bulk of that comes from, to Rick, your point, redeploying proceeds and higher-yielding assets, getting better advance rates, lower cost of capital, all that.

But are there any material cost savings contributing to your earnings accretion forecast?.

There will be some cost saves depending on how everything is resolved in the team there versus where they’re operating currently. Obviously, as a combined company, our expense ratios would be much lower because there will not be a lot of incremental costs going forward on a much larger capital base.

So some of those statistical numbers will be much more efficient..

Okay.

And do you have an estimate of the potential benefit that this enhanced scale and liquidity will have on your cost of capital going forward, all else equal?.

On a cost of capital, obviously it will depend on where our stock price goes and how the market reacts. I would think it would have obviously a slight positive impact on our cost to capital as we scale up. We view somewhere between $750 million, which is where we’ll be, and $1 billion as more of an optimal size for our cost of capital.

So this is a good big step forward in getting us on that path..

Okay.

And do you believe any of the Owens loans could be collateral for securitization? And can you just clarify what your securitization pipeline looks like today?.

They’re somewhat challenging for a couple of reasons. One, they’re short-term duration loans, currently one year, maybe with a one-year extension and they generally do not have prepayment protection. So those two make it challenging, not impossible, but that’s not our – it’s not the most likely funding source for these types of loans.

In terms of our securitization, we priced one yesterday, or Tuesday, I guess, it’s going to close today of the legacy fixed-rate products. And then we have on path another of our bridge product that will hopefully get off in the first quarter..

Okay, appreciate that. And then there’s a good amount of retail exposure in the Owens loan book.

Just can you give a little bit of color of what type of stores are backing the loans?.

Somewhat similar to ours. Their average loans size is that $2 million, not too far off from ours. So they’re experiential type retail centers where if it’s something in a small strip center, we have to be there. It’s not going to be rated by Amazon or that type of competition..

Yes, the average balance is what, Rick, $1.7 million, yes, about $2 million. So yes, it’s like athletic facilities, that sort of thing, strip malls..

Okay, got it. Appreciate the color and thanks for taking my questions..

Our next question comes from the line of Stephen Laws from Raymond James. Please proceed with your question..

Hi, good morning, congratulations on the acquisition and the nice quarter. Appreciate to taking my questions. I think everything has been covered that I had on the acquisition front. Really just wanted to touch on the SBA 7A market and the pricing there. Clearly, those prices has come down. Those premiums have come down quite a bit in the last month.

Can you talk about what’s driving that and how you look at the opportunity there? And maybe impacts or any thoughts on that business now that it’s kind of – some prices on those products have dipped below that 10% premium threshold, so comments there, Tom or Rick?.

Yes. Actually, we’ve seen and we have some deals out in the market, we have seen a little bit of recovery on those pricing. For example, the – and we have – we do both 10-year term loans and 25-year term loans, about 1/3 are 10 years and 2/3 are 25. So on the 10-year, back in like spring, they were trading around 111.

They dipped down to 108 back in September and we just priced the deal at 109.5. So it’s not quite back to where it was. And keep in mind that the SBA retains half of anything over 10%. So it goes from 111 to 110, and it’s 50 basis point impact to us, not a full 100. So we’re seeing some strengthening there.

On the 25-year product, which is 2/3 of our product, that has flattened out. It was around 113. Now we’re seeing 111.5 or so, and we haven’t seen any further decline over the last couple of months. So that’s – we’re hopeful about.

There seem to be a glut of product – couple things, there was a glut of product after Labor Day, after the summer, so the pricing softened up a little bit. There was some uncertainty around the election and the election results and what might happen.

Obviously remains to be seen now that election is behind us where that ends up, the market never likes uncertainty. And there was some concern about prepayment rates. Obviously, the buyer was paying a 10% or 11% premium. They’re concerned if prepayment rates are accelerating. So there was some of that pressure in the pricing.

But again, we’ve seen it either at a minimum bottom out or start to turn out on the upside..

Great. And just want to touch base, so the stock’s been a little weak. I know back when you announced your year-end results, you authorized the $20 million stock repurchase.

Is that still in place? Is that something you would consider? Maybe talk about how you view deploying capital to new investments versus repurchasing stock with shares trading at about a, I don’t know, roughly 13% discount, I guess to the adjusted book value here?.

It’s something we’re constantly looking at. We were kind of out of the market recently given where we were in the merger transaction. So that was – we were kind of precluded from doing that. In terms of the weakness of the stock price, we’ve looked at it and I think it relates to our average trading volume.

And we’ve looked at our ETF ownership, as ETF sold off on some financial stocks. Our – because of our low trading volume, we’ve looked at an ETF ownership, they own about 28 times our average daily trading volume, which is much higher than most of the peer group given our low trading volumes.

So if ETFs are lightening up on the financial services, I think we get hit probably a little bit more than some others. Conversely, if they start to reload, then we should recover a little quicker than some of the others.

We were a little bit above book value that a month or six weeks ago and obviously the stock performance hasn’t been as strong as we would like since. We’ll see how the market – we feel very strongly, very positive at the merger as well as three strong quarters of earnings and hopefully the market will start to reflect that..

I would just add to that one of the benefits – to underscore that, one of the benefits of the transaction is to increase our float from currently 55% of our Ready Capital market cap to roughly 56% on a pro forma basis, which is on Page 7 of the transaction summary..

Great. And I guess I do have one question on the transaction, I may have missed this or I don’t see it in the press release.

When is it expected to close? And depending on that closing, do you anticipate paying separate dividends for the quarter before and after the close or anything like that? Or how do we think about the distributions around the closing date?.

We estimate, it’s always hard to tell, but we estimate it’ll close sometime towards the end of the first quarter. Both companies are expected to pay their normal quarterly dividends.

In the case of Owens, we don’t think it’s highly likely, but if they need to make a distribution for tax purposes, recompliance purposes, they are entitled to do that and it’s appropriately adjusted..

Great, okay. Thank you for the color. Appreciate to taking my questions. .

Thanks..

Our next question comes from the line of Crispin Love from Sandler O’Neill. Please proceed with your question..

All right. Good morning and thanks for taking my question. In the presentation, I believe it said that the floating rate loans are now about 51% of the total. Can you comment on what’s causing the change there? Because I believe it has been kind of closer to about 60% in recent quarters..

Yes. The adjustable rate loans are the – primarily the transitional loans, the bridge transitional loans and the SBA loans. The SBA volumes, while we did over 50 million, they’re a small fraction or a smaller fraction of the total. Our fixed-rate product between Freddie and the conventional fixed-rate product is the majority of our loan volume.

So depending really on where we are in the cycle of originations, on the stock balance, that can pop up a little bit. And then we’ve done some acquisitions which are often fixed-rate acquisitions. And again, a majority of those got flipped into the securitization today when we closed that transaction..

Okay, great. And then just one on the Owens acquisition.

Are you going to be selling all of the Owens real estate assets? And if that is the case, what would you expect the timeframe of selling them and then redeploying them into Ready Capital assets after the deal closes?.

Yes, we expect to – we’re not an operator of real estate, although we’re capable of doing and Waterfall’s history has done that, but that’s not our intent. We would – our plan is to dispose of the assets over two years.

And as those proceeds come in, redeploy those into either new Owens type loans or the loans or acquisitions that we’ve historically done..

But well over half, if you look at the business plans assigned by our asset management team to each of the assets, REO assets is sometimes confirmatory with respect to Owens’ strategy who, by the way, has a long history and track record of managing these types of assets as well, you’d see that more than half of the process would be realized in the first year..

Okay. Thanks for taking my question..

Our next question comes from the line of Ben Zucker from BTIG. Please proceed with your question..

Good morning everyone. Thanks for taking my question and congrats on the strong quarter and the acquisitions of the echo the earlier comment. I’m also a little familiar with Owens and its REO book, and I believe that company was taking more of a measured approach to its divestitures because it was limited by some REIT selling restriction.

So I’m just curious, now that you’re bringing that capital into Ready Cap, where you can generate a net return of 10%-plus, have you looked at ways or are there ways to accelerate that 1.5- to two year disposition timeline to get that money redeployed maybe a little bit quicker? Or are your hands kind of tied by those same REIT selling rules that I know were impacting ORM? I’m just kind of curious how you came up with that expected timeline..

Well, first of all, you’re exactly right. They were – really due to size limitations where the REIT rules are, you can only sell what some percentage of your assets or number of transactions. Given our much larger size, theoretically, we could dispose of it all tomorrow if we had a buyer.

We’re not constricted by those size limitations, so that’s one advantage of size does matter. And the two-year timeframe, hopefully we can do it quicker. But as you probably know, Ben, a good chunk of those assets are those condo units out in Tahoe, that’ll just take a while to dispose of those assets as we go.

For the most part, the rest of them should be done, as Tom mentioned, hopefully within 12 months..

Well, they do look like nice assets on the Zalanta website, for what that’s worth. I know that....

I recommend you take a – you should take a site visit, Ben..

Yes, appreciate it. That’s a great idea, Rick. I think it was touched on that Owens has a strong presence in California in the Pacific Northwest.

How does their borrower network and relationship mesh with your current footprint and market exposure there? Is this an area and region that you like and felt you were underrepresented in? Or were you really just after ORM’s capital?.

We were hoping for both. Obviously, from a capital perspective, what was just talked about, the increased size, increased float, increased market capital of that, that’s the primary objective. We don’t have a huge presence in Northern California, so we would like to expand there.

I think Tom mentioned, we just hired a team up in Seattle, primarily on the SBA business, but they’ll be able to generate other business as well for us. And we do have loan officers more in Southern California. So we would like to expand in that Northern California type market. We don’t see a lot of overlap with the borrowers.

Quite frankly, they’re just a little bit different type of borrower than what we typically target. However, we’d love to expand our relationships with them..

That makes a lot of sense. I guess turning to the securitization that you guys recently priced, I think in your deck you can calculate an advance rate of like 83% or initial leverage of 4.7, 4.8:1.

Just curious what the gross levered returns on that pool is looking like once the securitization closes?.

Yes, if you look at additional incremental repo on the subordinate tranches, it’s roughly midteens..

Very nice.

And would you say that that’s fairly consistent with how your acquisition and securitization strategy plays out historically?.

Yes, correct.

And I would point out, if you look at the duration of our equity, if you think about our equity in a context of a bond investment, we like these investments because they’re very – there’s limited structural leverage, these are seasoned loans, the loss curve is very stable and they generate a three to four-year duration net interest margin over – as opposed to, let’s say 100% of your balance sheet being in transitional loans with a duration of 1 year.

So we like those kind of acquisitions and we think they’re accretive to margin. And in fact, I would add that this acquisition does open us up now to more aggressively pursuing other acquisitions because we’ve been prioritizing capital for growth in our origination platform in order to create the operating leverage that exists in that business..

That’s great.

And Tom, can you just quickly remind me while we’re on the subject, on the acquired loans, what percentage of the total interest income, on average, I understand it’s different by loan pool acquisition, what percentage of the net interest income comes from the stated coupon? And what percent comes from the accretion of purchase discounts?.

It’s more on the coupon now. It used to be, a couple years ago, we’d buy loans at a significant discount to market. Now when we buy loans, it’s generally in the 90s type price range, being 90 and par so the discount accretion is far less than it used to be..

Understood. Thanks for all your comments and guys congrats again. .

Thanks Ben..

Our next question comes from the line Scott Valentin from Compass Point. Please proceed with your question..

Good morning everyone, thanks for taking my question. Just on the acquisition, simplistically, the way I look at it, they have about $200 million of capital if we assume asset are liquidated close to par.

Does that imply about $600 million of balance sheet growth for you guys over time? That kind of $200 million equity, three time to three and half time leverage, that a fair way to look at it?.

Yes, that’s reasonable assumption, yes..

Okay. And then on provision expense, I notice it was up this quarter. I think it was the acquisition segment that had a little higher provision.

Is there anything particular with the provision expense?.

We had one loan where we always remark or get appraisals and values or updated values for the property. We had 1 loan that dropped in value a bit..

Okay. And then Tom, you were making the analogy between residential mortgage or residential housing and SBC.

Do you expect a production – I mean origination slowdown for the market given what we’re seeing in residential housing? You kind of apply the same dynamics that are playing out where not much supply, prices are high, therefore demand is kind of slowing?.

It’s interesting, the answer is somewhat of a slowing in the rate of growth, I think it was 13% – I’m sorry, it was flat to slightly up the past year-over-year and will hit another $200 billion of – and this is on the investor loan.

But one of the things the projection – analysts are protecting in terms of why it might increase 5% or so next year is because a lot of the property owners are looking to – because of the rent versus buy decision, they’re looking to purchase buildings that they currently occupy.

So we expect to see a lot of increase in acquisition activity due to the relative economic decision related to buy versus rent given that rent, if you look at it index of rent, it’s well in excess of the – where it was pre-crisis, for the small balance commercial properties.

So that’s one thing that would lead us to believe you’ll see maybe a mid-single-digit increase percentage terms in originations for small balance commercial investor properties in the next year. On the SBA side, just the demand exceeds the caps that the government allows.

We continue to see probably a $25 billion to $28 billion year this year and the same next year for the SBA 7A program..

All right, that’s helpful. And then you mentioned you hired an SBA team.

Are there opportunities out there to there? Is it easy to find teams? Or is it going to – more costly?.

I wouldn’t say – we didn’t pay, I mean in terms of the team, the interesting thing is we’re one of 14 nonbank lenders and we use a model where we use both loans officer – we hire loan officers with production goals of $5 million to $15 million per loan officer and usually very seasoned.

But we haven’t had to offer big retention bonuses or acquisition packages because of a lot of what – the frustration of a lot of these teams had working at banks because of the tight credit box and the compensation structure such that moving to a nonbank is very attractive to them in terms of compensation and volume.

So we actually have had reverse increased commodity team. Another example is we hired a team out in Ohio that focuses on certain verticals, in that case, funeral parlors and dental practices. So yes, we’re going to continue to see organic growth in our originations, which this year are roughly $200 million to $230 million.

We want to continue to ramp that growth through both organically as well as through acquisitions of new team..

Okay. And 1 final question for me.

On the – you mentioned, Tom, you guys purchased, I guess a conduit or just chunk of a conduit, how does that compare to returns of stuff that you originate internally? Is it similar return? And then two, is there an opportunity to – is there a different opportunity there to do more of that going forward?.

There’s definitely an opportunity to do more of that going forward. This was a large regional bank that’s a very large player in the conduit market. They have their own servicing business as well. And this was a, I’ll call it, small balance conduit. If you look at the hierarchy of small balance commercial, micro is below $1 million.

Typically there, you look at the borrower’s credit well. Works well in the small and mid-market, which is, let’s say, $1 million to $5 million. And in the conduit market, there’s – they define it as $5 million to $25 million or $30 million.

So this bank, we worked on underwriting guidelines that are consistent with our credit criteria, and then they rolled out this program based on the forward commitments by the subordinate bond from – by ReadyCap.

So in terms of the answer to your question, it’s probably about, I’d call it 13% to 14%, 15% return versus similar loans that, for example, like that legacy pool we bought is probably more in the 15% – 14% to 16% range.

So maybe it’s about 100 basis points below the manufactured deals that we do, but it clearly meets the criteria on a levered return basis for generating – again, what we want to do on our balance sheet is to generate very stable longer-duration net interest margin match-funded via the securitization market.

So this is, we think is very accretive and we will continue to work with this partner and potentially roll it out to others in the future..

Okay. Thanks for taking my question..

Our next question comes from the line of Christopher Nolan from Ladenburg Thalmann. Please proceed with your question..

Rick, what do you expect the leverage ratios to be the combined entity at closing?.

At closing? They will be about – the overall leverage goes about – down to about 2.5:1 and recourse drops to about 1.5:1..

Great. And then on the earnings for the SBC, the levered yield came down.

Does that reflect just more conventional?.

No, it really had to do with leverage, a little bit less leverage we paid down. We had a little excess liquidity so we paid down the repo lines, which is what we do when we generally have excess cash. So it was really more a function of just the terms of leverage in this quarter versus last. There’s also – it’s not an exact science.

We use month-end balances to compute the average balances, so it’s not an average daily balance. So sometimes there are anomalies in there, but it has nothing to do with average coupon or cost of debt or anything like that..

Great. And then final question, the recourse debt-to-equity ratio ticked up this quarter.

Should we expect it to go back down given the securitization you guys have done?.

Yes, that’ll immediately convert recourse to non-recourse debt, that $200 million..

Thank you..

Our next question is a follow-up question from Jade Rahmani from KBW. Please proceed with your question..

Thanks very much.

How are you guys thinking about the dividend with core earnings having run in excess of the dividend for the year? Is the plan to maintain the dividend, retain additional capital given the amount of income coming from gains and from the TRS [ph]? Or do you think that in 2019, given potential earnings accretion from the merger, you would likely raise the dividend?.

Our board is kind of taking a policy of taking it year by year. It’ll be something we’ll discuss in the December meeting for our fourth quarter dividend.

My guess is unless there’s a tax need to distribute, as we think we have a very competitive dividend if you look at our dividend yield versus the peer group, I think we’re at the top; or if not, we’re very close to the top.

So we would – again, it’s up to the board, but my guess would be at the first quarter meeting when we go through the annual plan and projections and all that, we will potentially reset the dividend based on a number that we’re comfortable one, is competitive; two, we’ll be able to cover with our core earnings for the year as we did this year; and three, hopefully grow book value a little bit..

In terms of timing, do you anticipate the merger closing in early 1Q?.

I think it’s probably going to be later, Jade. If you go through the process, we have to put together a proxy, which will take, I don’t know, 30 days, then it’s got to go to the SEC. Depending on whether or not they review it, they likely will, you’re probably talking some – into late January by the time they review it and get back to us.

Then we have to circulate it to investors and give them 30 to 45 days to consider it. So you’re talking about a vote, according to that schedule unless the SEC pleasantly surprises us, you’re probably talking sometime in March..

Okay.

The vote would be in March and the closing would be in March?.

Yes, the closing would be shortly after the vote. Keep in mind, the full subject is – that’s what we’re currently kind of planning out in our own timeline. Things sometimes go quicker or longer, but that’s kind of the working model..

And do the asset dispositions continue at pace until the merger closes and then you guys take over? Or would they be, like on pause or something? Because potentially the market – okay, go ahead..

No, they will continue to run their business. We’ve kind of establish with them here are the prices that you’ve indicated and we’ve indicated we think these properties are worth. And so as long as they’re within that band, they can continue to dispose of and we factor those numbers into our projections..

Okay. In terms of overall credit in the market, just tracking the commercial mortgage REITs, we’ve detected a modest pickup of sort of one-off credit issues, but they do seem to be happening with a little bit more frequency.

Are you seeing any of that either in your own portfolio or in the trends that you track?.

Not really. We’ve had some – a few maturity extensions, but – and maybe one or two properties that didn’t lease up on time.

But what you’re seeing, and – because we see this in our – in terms of the external manager being a major investor in large balance commercial real estate, the stressed debt, we are definitively seeing idiosyncratic defaults, if you will, due to the intense competition in the large balance market and the migration to more specialty use properties with more difficult business plans to execute.

So I think that you’re definitely starting to see that, people stressed for credit in the competitive large balance market. But we’re just – we’re not seeing that as much in the small balance space in part due to the limited number of, especially nonbank private funds that target that market..

Sorry, what was the other type that you mentioned? I didn’t hear it clearly. Mixed-use or what was the other category you....

Specialty use..

Specialty use, okay..

Yes, like I said repositioning a large block of fitness centers or a project in a, let’s say a stadium project, a mixed-use development around a stadium project, which is for a $500 million transitional loan. It’s – you’re seeing more of that in the large balance space than you did, let’s say two or three years ago.

And if you drill down and look at the actual projects on each of the larger small balance – sorry, large balance REITs, that’s a lot of these – it’s the kind of idiosyncratic project risk that’s being introduced by taking on more difficult credits from a transitional loan standpoint than you did, let’s say two or three years ago..

Okay. Thanks. I appreciate the color..

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

Again, we appreciate everybody’s continued support, and we’re very pleased with this accretive merger and look forward to continuing to deploy the capital and growing earnings, and we look forward to next quarter’s earnings call..

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation..