Good day, everyone, and welcome to the Ready Capital Corporation Third Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Andrew Ahlborn, Chief Financial Officer. Sir, you may begin..

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 measures is available in our third-quarter 2019 earnings release and our supplemental information.

By now everyone should have access to our third quarter 2019 earnings release and the supplemental information. Both can be found in the investors section of the Ready Capital website. I will now turn it over to Tom Capasse, our CEO..

Good morning, and thank you for joining our third-quarter earnings call. We are pleased with the results and believe the quarter to be indicative of the attractive yield shareholders can expect from Ready Capital's diversified business model and balance sheet.

The quarter marked a record for both small balance commercial and residential loan originations. Total small balance commercial and SBA 7(a) origination was $514 million, a 50% year-over-year growth.

In addition to origination activity, we acquired $70 million of small balance commercial loans, bringing total SBC investment activity to just over $584 million. Residential originations reached $657 million, a 39% year-over-year growth.

Our platform diversity was evident in the SBC origination segment, where each product contributed to the strong quarter. Our fixed rate, bridge and Freddie Mac loan product volumes were $166 million, $154 million and $146 million, respectively.

Originated on-balance sheet SBC loans had a weighted average coupon of 5.3% and a spread of 310 basis points. Additionally, credit metrics of newly originated loans remained sound, with average LTVs of 70%, debt service coverage ratios of 1.3 times and a debt yield of 7%. Gross premiums on Freddie Mac loans averaged 2%.

The growth of the SBC origination franchise is due to a few key factors. In the fixed rate program, the investor product is increasingly gaining acceptance in the broker community, and our control over the loan and the securitization structure provides sponsors with both flexibility and a fixed rate.

The bridge loan product benefited from increasing clarity in the market due to our ability to provide tailored solutions for lower middle-market clients. Additionally, the opening of new satellite has increased our national presence.

The Freddie Mac loan product benefited from market factors, including the FHA's announcement of favorable origination caps, resulting in Freddie Mac's 60 basis point rate reduction. The SBA segment continued to perform in the face of challenging industry trends.

Quarterly 7a originations totaled $48 million, representing a 6% year-over-year decline, which compares favorably with market declines of 8%. Average coupons remained consistent quarter over quarter at prime plus 2.20%, and average loan sale premiums increased to 11%.

We believe the industry slowdown to be in part due to a strong economy, which encourages banks to provide financing to small businesses without the benefit of a government guarantee. In addition, small business demand for loans may be weaker due to increased retained earnings from the tax cuts.

Going forward, rising costs from tariffs and potentially slower economic growth may cause lenders to reduce nonguaranteed lending to small businesses, which in turn should benefit ReadyCap. The loan acquisitions added an additional $70 million of SBC loans to the balance sheet.

These loans were sourced from an ongoing strategy of collapsing legacy SBC deals and have a weighted average coupon of 6.1%, a weighted average duration of four years and were priced to a mid-teens levered yield.

We continued expanding our modest exposure to accretive, small balance real estate investments with the purchase of an $8 million stake in a Class A office complex in Dallas, Texas currently undergoing a repositioning. The mortgage banking segment recorded record volumes.

Supported by an attractive rate environment, GMFS originated over $650 million, 60% of which was purchased volume. Increased production from all channels was supported by increased margins ranging from 20 to 30 basis points. Increased CPRs in the loan servicing book were mitigated by retention rates of over 25%.

Mortgage activity in our balance sheet are indicative of our continued focus on delivering earnings via recurring net interest and servicing income. 69% of the quarter's investment activity was in the form of portfolio loans, which have increased our loan portfolio 9% to $3.5 billion.

In contrast to the potential emerging credit issues in the large balance commercial real estate lending market, we are confident in the credit strength of our small balance portfolio and continue to see minimal delinquencies.

Weighted average LTVs remained low at 59%, and we believe the diversity of the portfolio in terms of geography, collateral and single asset concentration provides superior stability for our shareholders. Now in terms of funding the business, we will continue to benefit from our ability to source low-cost financing.

The $58 million, seven-year senior unsecured note raised in July was our primary funding source for the quarter's investment activities. We believe based on our increased scale and execution that we will continue to drive down funding costs in the upcoming months. We're in the process of executing three securitizations.

First, we plan to price a $430 million fixed rate commercial mortgage-backed securities deal this week, which, based on initial pricing discovery, should result in a high-teens levered ROE. Second, pending regulatory approval, we anticipate closing our second SBA 7a securitization by the end of the first quarter 2020.

Third is our fourth transitional loan CLO targeted for the first quarter of 2020. On all deals, we expect to both increase advance rates and lower our cost of funds. Finally, we continue to enhance our warehouse facilities.

We have added an additional $200 million of capacity to fund expected growth and improve cost of funds 20 basis points on our fixed rate and bridge facility. Since our introduction to the public markets three years ago, we've increased our scale, growing equity by over 50%, increasing enterprise value by over 120% and doubling our loan portfolio.

This growth has been supported by origination and acquisition activity of over $5 billion, the successful securitization of $3.7 billion over 13 transactions and the continued optimization of our capital structure.

Further, credit is due to the hard-working employees for their continued establishment of the Ready Capital brand, the development of processes to efficiently service our clients and the creation of loan products that meet the needs of both investors and owners of small balance commercial properties.

Looking forward, we plan to further leverage operating efficiencies to pursue growth organically and with tactical acquisitions. First, we expect to close a significant portion of the $900 million SBC pipeline in the fourth quarter. In our SBC portfolio lending segments, the close and money-up pipeline equals $365 million.

In our gain on sales segment, the total close and money-up pipeline equals $316 million. Additionally, the acquisition pipeline remains healthy at $250 million.

Second, our entry into the European small balance commercial markets will commence with the purchase of a $60 million loan portfolio of transitional loans located in Ireland, which is projected to close in the next two weeks and includes a forward flow agreement expected to generate up to $100 million annually.

Third, we continue to explore the addition of lending platforms that expand our product offerings to service the small balance commercial environment. As previously announced, we recently acquired Knight Capital, a company focused on providing unsecured working capital loans to small businesses.

In addition to being accretive to go-forward earnings per share, we expect Knight's technological innovations to increase operating efficiencies in other business lines and Knight's lead generation platform to increase our volume in the SBA business. Finally, as discussed previously, expanding our agency platform remains a top priority.

We have made significant headway toward increasing our capabilities and anticipate having more concrete plans to share with the market in the upcoming months. And before turning it over to Andrew, I'd like to offer a few thoughts on the bridge lending sector and our exposure to interest rate movements.

The influx of private lenders on top of the public commercial mortgage REITs largely focused on large balance transitional loans, that is, those over $25 million, has started to manifest late-cycle behavior from a credit and pricing perspective.

In terms of pricing, most transitional lenders make three-year loans with 24 months' minimum interest, that is, if a borrower prepays in month 12, they owe an additional 12 months' interest. We note that many loans are now being made with only 12 months' minimum interest.

This is evident in higher-than-modeled prepayment rates on commercial real estate CLOs, which increases financing costs from deleveraging. Now in terms of credit, we're seeing an increasing number of sponsors failing to meet business plans at maturity only to be bailed out by another transitional lender.

This would masquerade maturity defaults, which we believe to be increasing industry-wide as lenders moved into higher-risk sectors with greater execution risk in their business plans. Additionally, some lenders are offering equity takeout of loans only a year into a business plan.

To date, these trends have not impacted our small balance transitional loan market, and we remain disciplined from a credit perspective, evident in less than a 1% 60-day-plus delinquency ratio for our bridge portfolio. Now in terms of interest rate exposure, 51% of our portfolio is floating rate.

The majority of these are our originated bridge product, which are originated with LIBOR floor. Currently, the weighted average floor was a 20 basis point premium to LIBOR. In our fixed rate portfolio, we mitigate our pipeline risk by issuing LOIs with rate floors equal to current swap rates plus a spread.

During warehouse periods, we use interest rate swaps to mitigate significant changes in fixed rate loan fair values, as well as to lock in our cost of funds. In certain circumstances, we may use short-term repo on longer-duration assets as a source of liquidity. And in these situations, we also apply hedges to mitigate future movements in rates.

So with that, I'll now hand it off to Andrew to discuss our financial results..

Thanks Tom. On a GAAP basis, earnings for the quarter were $0.27 per share. Core earnings for the quarter were $0.40 per share, marking a return to quarterly dividend coverage. The biggest difference between GAAP and core earnings was a $0.13 per share decline in the fair value of our residential mortgage servicing rights portfolio.

The quarter-over-quarter growth in core earnings was attributable to increases of $2.7 million in interest income; a 56% improvement in net mortgage banking income; and an $800,000 increase in gain-on-sale revenue.

This growth was partially offset by additional interest expense due to higher warehouse balances, a reduction in income from unconsolidated joint ventures and a rise in variable costs related to growing production.

Key balance sheet items included a 9% growth in the loan portfolio, an increase in total service UPB to $9.7 billion and the addition of equity investments, as Tom mentioned previously. Increases in liabilities relate to secured borrowings on loans scheduled for securitization and the $58 million bond issuance completed in July.

Increases in accumulated other comprehensive losses relate to mark-to-market hedge movements sustained on the fixed rate portfolio. Of the $4.3 million loss in the quarter, $2.3 million was subsequently recovered in October. The net realized effect of hedge losses will be amortized into net income over the life of the pending fixed rate CMBS deal.

Turning to the earnings deck. Slide 3 sets forth key items and metrics for the quarter. Of note are the record quarterly origination volumes in both our SBC origination and residential mortgage banking segment and the growth in our loan portfolio to $3.5 billion. Slide 4 details the composition of RC's return on equity.

Core ROE improved 100 basis points to 9.8%, marking continued progress to a sustainable 10% core ROE. Top line levered returns rose 200 basis points to 17.7% due to increased gains from the sale of Freddie Mac multifamily originations, incremental revenue on mortgage banking activities and an increased leverage.

This was partially offset by 80 basis points of additional operating costs due to variable expenses to support rising volume as well as incrementally higher loan servicing costs associated with the growth in the loan portfolio.

We continue to make progress in liquidating the legacy Owens portfolio and estimate the current drag on earnings to be 100 basis points. Slide 5 summarizes our SBC investment activity over the previous five quarters, with further details on current quarter activity provided on Slide 6, each of which include acquisition activity.

Although not one of the five channels experienced record quarterly volume, the relative strength of the combined SBC origination channel is encouraging. As Tom discussed, the SBA business experienced a slight decline in the quarter, but we remain confident about closing the year on a high note, with $27 million funded in October.

Slide 7 covers our SBC origination segment. The 90 basis points improvement in gross levered yield was due to $1.2 million in incremental gain-on-sale revenue. Additionally, portfolio growth totaled 13%, and the percentage of 30-plus day delinquent loans remains low. Slide 8 summarizes the activities of our SBA segment.

Gross levered yields remain high at almost 39%, driven by the continued strength of loan sale premiums and attractive margins. Slide 9 highlights information on our acquisition segment. RC continues to benefit from the stable double-digit levered yield provided by the loan portfolio.

Portfolio performance remains resilient with 98% of the population fully performing and weighted average coupons above 6%. Acquisitions in October have had Q3 totals, and we expect remaining activity in the quarter to be robust. Slide 10 highlights the activities of our residential mortgage business.

Mortgage banking activities supported by decreasing rates experienced record levels. Margins increased 20 to 30 basis points across all channels. And the retail channel, which typically has a 40 basis point premium, accounted for over 50% of the volume.

Prepayments in the servicing portfolio were partially offset by an increase in retention and the 27% growth in production. Slide 11 details the current performance of our various securitizations. Performance across all originated product types is strong, with minimal delinquencies. Slide 12 summarizes the diversity of our loan portfolio.

With an average loan size under $750,000 and no single position representing more than 1.3%, the loan portfolio is varied across both location and collateral type. The next few slides discuss RC's capital structure, leverage and warehouse facilities.

As Tom mentioned, we have several securitizations in the pipeline, and the increase in our recourse leverage ratio is due to an increase in loans currently on warehouse. We expect this ratio to revert to historical norms with the completion of the mentioned deals.

Before turning it over to Tom for final thoughts, I would like to quickly touch on the upcoming implementation of CECL. We are currently working through the adoption of CECL and are in the process of assessing various implementation concepts and questions across each of our product types.

Although I can't address specifics on where we expect to land, we are prepared from a systems control and methodology standpoint. Given a track record of minimal losses on our originated products, we are being thoughtful about ensuring historical loss reference data is comparable to our loan portfolio.

We plan on providing a more detailed update on the next earnings call. With that, I will turn it over to Tom for closing remarks..

Thanks Andrew. This quarter represents continued efforts at Ready Capital to provide our investors with superior risk-adjusted returns. We're beginning to see the effects of operating leverage afforded through increased scale and anticipate a positive conclusion to 2019.

We are encouraged by the various growth opportunities mentioned earlier and look forward to the continued evolution of our business. Thank you for joining us this morning and for your continued support of Ready Capital. So with that, operator, we'll now open it up for questions..

[Operator Instructions] Our first question today comes from Steve Delaney from JMP Securities..

So we saw book value down 1% in the quarter, not a - not shocking, for sure, with the rate moves. You mentioned the hedges on the fixed rate portfolio pending securitization, and that makes sense.

I'm going to assume that you also had a negative fair value mark on the MSRs but could not see on Page 10 exactly how that netted out in terms of the fair value figure quarter-to-quarter.

Do you have that figure handy in terms of your MSR fair value mark in the third quarter?.

Sure. The MSR markdown gross of tax is $7.5 million. Applying the tax - 25% tax rate to that will get to the net effect..

Sure. And 45 million shares, so that's a meaningful number stand - on a stand-alone basis and pretty significant, represents kind of - and rates are back up now. So I think we're probably looking better here now in the fourth quarter.

And my second - last question is, the big jump in one quarter in the Freddie Mac business, I mean, essentially 100% increase compared to what you had the first two quarters of the year.

Can you just talk about - and it was interesting, your comments about the caps and the fact that Freddie and Fannie backed off in August? I'm kind of surprised that they were - that you saw a positive benefit from that kind of higher rate quotes.

But more importantly, looking forward, Tom, if you could comment, is this - the Freddie business, is this a stand-alone specialized team that you have focused on that product? And is growth a matter of simply recruiting going forward?.

Yes. Steve, so just - that's a good question. Just to - first answer I'll just make is a market observation regarding the reduction in pricing, and this is observing market behavior. But basically, there was - it was a bit of a positive surprise in D.C.

when the FHFA published this year's caps, which gave - essentially increased it to $100 billion each until 2020 for 5 quarters forward to the end of 2021, but they had a provision whereby they scrap the exceptions, the exceptions for affordable, et cetera. And they said affordable has to be 37.5% of the....

Yes, the total cap.

So it kind of makes your small balance, almost by definition, is affordable, isn't it?.

Correct. Yes. It was an exception. Now it's part of that 37.5%. So the agencies will tend to price those products a little bit more aggressively at the margin to meet that cap. So that's a tailwind for us. And then, of course, they put threw green loans in the Potomac. We weren't in that space in any case. So that's one market observation.

And then - but what we were seeing before the - before that, we saw it also with just from hearing them from our loan officers on Fannie. They were increasing rates to reduce the caps because they were hitting them for this calendar year, 2019.

So then when they saw the positive caps, it was - they changed pricing a little bit more aggressively to reflect the fact that they were no longer constrained. So that was a market-based observation. And then in terms of how we were looking at that business, we're one of 11-or-so SBL lenders on the Freddie side.

We'll do - and roughly $0.5 billion this year. And we're looking to expand into other agency products, as we've discussed. And so for us, it's a very - it's a good niche. It's a good fit with our conventional products as we can offer competitive multifamily rates versus banks for kind of A-rated sponsors.

And so we're going to continue to grow that business through - organically through, essentially, hiring loan officers in high geo tier markets. Remember, we have a risk overlay system where we rank markets in the U.S. 1 to 5.

And where we see high-growth in multifamily, we'll hire loan officers in targeted areas to continue to expand that business organically and then, as we said before, look at potential acquisitions to expand the license across different agencies in terms of Fannie and FHA..

Our next question comes from Jade Rahmani from KBW..

I was wondering if you could give some thoughts around the broader economic outlook.

With such a granular asset base across so many markets as well as waterfalls, broader credit expertise, are you seeing signs of slower economic activity at the business level? Any deterioration in performance in the small business segment that is notable?.

large balance commercial, small balance commercial and small businesses..

In commercial real estate credit, historically, around 45% of loan defaults are driven by maturity default. And everyone says this has been such a benign credit cycle, but that's because we haven't really hit the 10-year anniversaries of some of the most competitive years.

Are you expecting a notable pickup in maturity defaults next year? And is there an offense strategy given Waterfall's credit expertise in which Ready Capital would be able to acquire assets at discounts in such a situation?.

Yes. I mean, I think our focus at - we have a very large - in the external manager, Waterfall, we have a very large investment in staff around the purchase of nonperforming commercial real estate loans, with a focus on small balance commercial.

The predecessor funds and Ready Cap itself after the credit crisis purchased roughly $5 billion of these loans in - from community banks and worked out maybe 6,000 units over that period of time. Where we see an opportunity is maybe not so much the maturity default, some of the large balance CMBS and what have you.

For us, the opportunity set is around an emerging bubble that we - I shouldn't use - emerging credit issues we see in the transitional loan market. We're a small - our average balance is roughly, in our transitional business, is roughly 5 million.

So we're in the lower middle market, where there's a lot less competition, but we're definitely starting to see especially idiosyncratic maturity defaults on business plans that have - are not being met.

And because of the large, rampant competition in that market, we're seeing those maturity - those bridge loans that otherwise would have been a maturity default are being refied by another bridge lender, maybe with a change in sponsor or a business plan.

So long-winded way of saying that where we see an opportunity for us is to buy transitional loans that we believe over the next year or two, and if we hit a recession, even more so will be an area of opportunity and less so to large balance commercial loans..

As you look at the multiple business lines, would you say that the residential mortgage business is the area that's exhibiting the most strength?.

Yes. The Baton Rouge GMFS, they're a star, if you will, in terms of the efficiency of their business, in terms of being a variable cost provider there. They're about - in terms of purchase volume, they - you could see this quarter where most people are having 70% refi, they were 60% purchase.

So they're very focused on a less - if you will, lower beta to the rates as far as that focus on purchase. And obviously, there's a very strong housing demand in their market. So we see them - they had a record quarter in their history in the last quarter. And if you look at their number, they retain MSRs as hedged against production.

They've now maintained a very good strong balance between the natural movements in the MSRs and the outperformance in production during periods when the 10-year treasury has rallied. So yes. So they're a leader in their market, very efficient and good, accretive to earnings..

Jade, I may add that, that strength continued through October, where October volumes reached a new monthly record, $230 million. So we expect sort of continued strength from that business line..

Our next question comes from Tim Hayes from B. Riley FBR..

Congrats on a strong quarter. My first one, can you just touch on your capital needs right now given the robust pipeline and the Knight acquisition, which it does seem a little small, but I guess, we don't know exactly what the capital commitment was there? You have a bunch of securitizations in the pipeline and plenty of capacity on your facilities.

But just wondering how you think about equity at this point given where your leverage is today and all these capital transactions you have planned..

Yes, Tim, we're going to - historically, we've found accretive ways to grow the equity base of our business. And we're going to continue to search out the opportunities. With that being said, I think we are focused on the long-term growth of the business.

And so we're - we'll consider all options for increasing our capital base given the investment pipeline that we have that we consider to be beneficial for our shareholders in the long run..

And then just on the Knight Capital acquisition.

Would you be able to give us a little bit more color on the purchase price, what the cash commitment was and then what you expect annual volumes to be in 2020 and what the earnings accretion expected is?.

Sure. So the total upfront consideration in the deal was $27.8 million. Of that, $17.5 million was paid in cash. There is an earn-out component that's tied to certain earnings benchmarks that start with a floor equal to Ready Capital's cost of equity capital. We expect - it's a rather small transaction for us, Tim.

So it's less than 4% of our total equity. But we do expect them to be contributing to EPS sort of accretion on the margins in 2020 and then growth from there. This year, we expect them to originate close to $250 million of loans, and that should increase marginally in 2020 as well..

And then just on the Owens portfolio. I know you made some brief comments there.

But what percentage of the REO portfolio still remains? And what's your expected time line to get through that? And as we head into ski season, do you anticipate pace of sales to pick up?.

Yes. 60% of it is still on balance sheet. That's mainly consisting of the larger properties out in Tahoe. We made some progress in those properties. So two more condos sold in the third quarter, so six remain. The retail component of that complex is now leased out. So there's a build-out in process. We expect the tenants to be in there in early 2020.

And each of the properties, meaning the land is now being actively marketed. So we would expect - our goal is to have those off balance sheet by the end of the second quarter of 2020..

Our next question comes from Scott Valentin from Compass Point..

Tom, you mentioned Dallas, I think. Did you guys purchase building in Dallas? Is that what I - I'm sorry if I missed any reference, Dallas, $8 million, I think..

Yes, that's right. With a small balance equity and small balance property..

And then for Europe, you mentioned Ireland, I guess, is where you're starting. In terms of longer-term plans, I guess you'll branch out from there.

Can you maybe give some more idea of where you see that going over time?.

Yes. The market, we have a - Waterfall, the external managers, had a presence in Europe for about four years, and it's very focused on a few jurisdictions. I would say, obviously, the U.K. and Ireland and Spain is a strong market.

And this is - I'm referencing small balance commercial or, what they call over there, SME, small and medium-sized enterprise lending. Italy as well. So what we see there is there, from a cycle standpoint in their housing markets and multifamily, they're about four or five years behind the U.S.

And you're seeing an emergence of the - what we call fix and flip here, which is basically a market for purchasing homes or smaller commercial properties for repositioning and rental. So we had worked with this company for a couple of years through our London team.

And now we're looking to set up - buy an initial portfolio and set up a floor arrangement, which would be financed through term bank lines of credit, nonrecourse and/or, ultimately, securitization in the form of a CRE collateralized loan obligation similar to what we're doing here. But the risk/reward metrics are relatively strong.

And at this point, we're in the middle of due diligence on the final pool. Obviously, we're very conservative, and I don't see how that wash comes out. But this will be our initial foray into the market. And in terms of guidance on percentage of NAV.

We look - the European opportunity right now is probably a slightly higher ROE than here in the U.S., maybe a couple of hundred, 100, 200 basis points. We'd look to maybe allocate over time 10% of our NAV to Europe to start..

And then just - I was looking at Page 16 for the - just looking at gross yield for the portfolio. The SBC portfolio looked like it dropped about 50 basis points linked quarter. And then looking at the debt cost, that was down about 30 basis points linked quarter. Just wondering, in terms of trajectory, I assume there's still pressure on yields.

And then just on the debt cost side, it sounded like maybe there's a chance to lower the debt cost a little bit as you securitize in the fourth quarter.

Yes. So the gross yields are moving as rates went down. 51% of that portfolio there is floating. As Tom mentioned, we do have LIBOR floors there. So as that moves further, the spread should increase. Then - and you're right.

As we complete the fixed rate CMBS deal in the next week or two as well as our transitional CLO in the first quarter, both of those will come with improved debt costs. So that should move down as well..

Our next question comes from Stephen Laws from Raymond James..

Tom, I wanted to follow-up on - I believe you covered it with Tim's questions on Owens Realty. But I think if I heard you correctly with my notes, you should have that resolved by or you think you'll have it off balance sheet by middle of 2020.

Will that capital be redeployed? Should we assume that the 100 basis point ROE drag you mentioned will be eliminated by then, and we'll see a benefit of plus 100 bps on the ROE in the second half of next year?.

That's our goal. So our other core business lines have been running at ROEs significantly higher than where the total Owens on portfolio has been performing. And so as that capital rolls off and is incrementally reinvested in our core business lines, we expect that 100 basis points drag to diminish..

And covered a lot, and I may have missed this, I apologize if so, but it looks like the SBA portfolio, the 30-day delinquencies basically cut in half to about 1.4% after running just under 3% for the last nine months.

Can you talk about the improvement there? And what's driving that?.

Sorry, just for clarification, you talked about in the SBC segment or in the SBA segment?.

Well, SBA dropped 50 bps and is down from 9% six months ago. So I'd love for you to hit on both, but I was specifically talking about the SBC that cut an app on Page 7 of your investor presentation..

Sure. So several of the delinquent loans we mentioned on the Q2 earnings call were paid in full. And there haven't - we haven't seen any migration of existing launch into delinquency status. So that's the improvement there. And then on the SBA side, the majority of the delinquencies continue to be attached to the legacy CIT portfolio we purchased.

So we're now working through some of the tail associated with that pool. And as those loans get resolved, we should see delinquencies continue to go down there..

And then lastly, on the SBA 7a premiums on sales. We've moved back up. It's been relatively flat right here at around 11% the last two quarters. But looking back, it seems like we've seen a dip in Q4 each year.

Is there something seasonal going on with that, that we should anticipate in the fourth quarter? Is that just a function of a small sample set and not having enough data set - data points in the market? But can you talk about your outlook for SBA 7a premiums here going forward?.

Yes. I just have to make one observation. There's definitely a seasonality aspect to - there tends to be more pooling in sales at year-end, which - with fixed demand reduces the - from the - most of these are bought by community banks for liquidity purposes, and they have a little bit more spread compression or premium compression at quarter-end.

But we have our chief operating officer, Gary Taylor, here.

Maybe, Gary, do you have any additional observations?.

No. I think that's a big part of it is people like to be out of the market kind of by mid-December. So sales and the appetite to buy guaranteed portions kind of trail off toward the end of the year..

Yes, so you might see maybe a point at most impact, which is seasonal. But that's more than somewhat - it's little more than offset by higher volume because you tend to see also a lot of seasonal increase in demand for year-end acquisitions purchased by small businesses.

So it's kind of the net-net is a positive because even if you have a small one point reduction in the premium, you have, let's say, a 10%-plus pickup in volume, it's still a profitable quarter..

Yes, and we certainly saw that a year ago, exactly that. So great. I appreciate the color..

Our next question comes from Christopher Nolan from Ladenburg Thalmann..

Are you still targeting a 10% to 11% core ROE that you guys discussed last quarter?.

Yes, that is our target. We are at 9.8% this quarter. We expect Q4 to be in line or above with that. So as we've stated, historically, a 10% quarter-over-quarter consistent ROE is our goal..

Andrew, given the comments in terms of - or Owens would add about 100 bps to the ROE going forward, so should we look at hitting an 11% ROE in the second half of 2020?.

Yes, I certainly think that's obtainable. It's going to depend on volumes staying where they're at, a rebound in our SBA business. But I think 11% by the end of 2020 is certainly obtainable..

Our next question comes from Crispin Love from Sandler O'Neill..

I have a follow-up from a previous question on the strength in the residential mortgage originations that we saw in the third quarter. I was wondering if you guys could talk a little about what you're seeing so far in the fourth quarter.

I think the most recent MBA forecast number is calling for about 4% sequential total origination growth with strength in refi and a little bit of softening in purchase. So I was just wondering if that 4% is a good starting point that you would expect - or if you'd expect that to be stronger or weaker in the fourth quarter..

I guess what I'll say about that is October volume was $230 million, which is a monthly record for GMFS. So certainly, the quarter is off to a strong start. Given the $230 million and where we ended up in Q3, that 4%, I think, is within the range of what we're seeing..

And then also, there's a press release that you put out in mid-September announcing the closing of $270 million worth of bridge loans. And this is a - this was a number that was meaningfully higher than around $100 million that we had seen in prior press releases.

So was that large increase rate driven? Or is there anything else to cause - sorry, by the timing that made up of or anything else?.

Yes. So the bridge team puts out marketing teasers to inform their constituents. So that volume number that was put out was across and a couple of months across quarters. So yes, I think as you've seen the bridge volume continues to grow year over year, we're going to have substantial growth in that business line.

And as Tom mentioned earlier in the call, we really think that the Ready Capital brand and the understanding of what we do here is becoming further cemented in the marketplace, which is certainly increasing volumes..

Yes. And just as a market observation. We're continuing to see a lot more of the sponsors going downstream to small balance properties because of the rampant competition in the market for investor properties in, call it, $25 million and up.

And so we're seeing - whereas you're seeing a retraction demand and more aggressive underwriting, for example, moving into any - a boutique hotel in a not-so-great location and trying to reposition that. Those are the sort of - these kind of higher-risk transactions we're seeing in that market.

So that a lot of what we're seeing in our market is the bigger guys coming downstream to less risky products. Let's say, some of the sponsor who's familiar with $25 million-plus properties moving to a $15 million property. So that's - we're benefiting from that in the context of the overall competitive landscape in the transitional loan market.

So I think, Andrew, what, there's over 200 private funds at this point, and you have the five large commercial mortgage REITs, five or six. So we just - we see a handful of competitors in our bridge space, and we're very comfortable with the growth in that sector going into 2020..

And our next question is a follow-up from Jade Rahmani from KBW..

You mentioned you're looking at other business lines.

Can you give any color on the types of things you're looking to do? Are they expansions of your existing businesses? Or are there new products that would complement the Ready Capital platform?.

It's the latter. We're sticking to our knitting, which is small balance commercial. So we're looking for adjacent products that enhance the kind of these little vertical offering in the existing product line.

So for example, the Knight action enables us now to offer unsecured business loans, working capital loans to small businesses, some of which may be graduating at some point to a 7a loan, where they go from $1 million in sales, $2 million in sales and they want to buy their building.

So that's a good example of an adjacent product that enhances the existing product line. In the small balance commercial space, we're looking at, obviously, moving into other agency licenses like Fannie or FHA. So that's an example of where we target acquisitions there.

And thirdly, geographic expansion, we have - obviously, we're actively looking at a transaction in Ireland. We've also looked at Canada. There's a number of opportunities there. So I think non-U.S. expansion is the third area.

But those are - and then beyond that, I would say other close products like fix and flip or some residential products which are more residential but commercial in nature, those are a possibility. And the other thing I should mention is that, for example, in the SBA business, we're looking to expand into another U.S. government program, the U.S.

dairy....

DA..

The USDA, where we've submitted an application which - for those loans. They're very similar to the SBA but a little bit larger and same model where you have - you originate a large loan, you securitize about 75%, 80% of it and at a premium. And so those are the kind of businesses.

Kind of those 4 silos are how we're looking at growing the underlying specialty finance business in the small balance space..

On the Knight Capital side, do they provide factoring financing of inventory or receivables? And can you give any color around the duration and kind of risk profile of those types of loans that are unsecured?.

Sure. This is Gary Taylor. So they are not a traditional factor. They purchase future receivables. So the tenor of their loans - well, their purchases is about nine months is the term..

And what about the credit risk or historic credit performance?.

Yes. Sure. So obviously, their factor rates are much higher than our typical coupon. So average factor's 1.4%. With that comes increased charge-off rates, which is - have historically run around 15%. The combination of that higher factor and the higher charge-off rate gets to their sort of top line return of somewhere in the mid-20..

You mentioned the deal is accretive. Can you give any, I don't know, indication of magnitude, also how much in revenue they produce? And in terms of the financing of it, it seems that it was nearly all stock.

Just how much was the cash component? And what drove the decision to issue equity?.

Sure. So the cash component was $17.5 million, and the stock component was $10.3 million, so certainly larger on the cash side. The issuance of shares were decided to align all parties to the future performance of the company.

And then in terms of EPS accretion going forward, it's going to range anywhere from, I think, 5% to 10% accretive to EPS over time. It's going to take a little while to get them fully implemented and for the benefit on the operating efficiency side to fully roll out to our other operating segments.

So I would expect that accretion to happen sort of later in the year in 2020..

So you're talking about that relative to this quarter, right, which is $1.60 annualized? So 5% of that would be $0.08, so $0.08 to $0.16.

And you'd start to see those benefits in the latter part of 2020?.

Yes. I think that that's right. I think it's going to be closer to that 5% market..

And what's their annual revenue production?.

So anticipated revenue in 2020 is roughly $10 million of EBITDA..

$10 million of EBITDA.

Do they use any financing against their lending?.

They do. They have a facility against their outstanding receivables..

[Operator Instructions] And at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks..

Well, thank you, everybody. We've had a strong quarter, and we appreciate the continued support and look forward to speaking again after the fourth quarter..

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for joining today’s presentation. You may now disconnect your lines..